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Lauren Gaspar: Good morning, everyone, and welcome to Schwab's 2025 Fall Business Update, broadcasting live from our Westlake headquarters. This is Lauren Gaspar, Managing Director of Investor Relations, and I am joined by President and CEO, Rick Wurster and CFO, Mike Verdeschi. Hopefully, everyone has had an opportunity to review our strong results for the third quarter were released about an hour ago. The team is looking forward to sharing additional insights into those results, along with the broader strategic and financial update as we head into the final chapter of 2025. As always, let's quickly hit on the typical housekeeping items. The slides for the business update will be posted to their usual spot on the IR website at the conclusion of today's prepared remarks. Q&A remains structured as one question, no follow-ups. And please, let's try to avoid the multilayered questions disguised as one. This will allow us to address as many questions as possible during our time together. As always, please don't hesitate to reach out to your friendly IR team with any follow-up questions after today's business update. And last but certainly not least, everyone's favorite part of these business updates, the forward-looking statements page. Given the importance of these statements, I would like to break from tradition and read them out loud in their entirety. Just kidding, but seriously, they are important. So do take a look at them and remember that outcomes can differ from expectations, so please keep in touch with our disclosures. And now it is my pleasure to turn it over to Rick to start us off. Richard Wurster: Thank you, Lauren, and thanks, everyone, for joining us for our fall business update. Our Through Clients' Eyes strategy continues to drive growth on all fronts. In the third quarter, clients opened up 1.1 million new brokerage accounts and trusted Schwab at approximately $138 billion in core net new assets. Year-to-date, we've attracted nearly $356 billion in core NNA. Clients are deepening their relationships with us by conducting more of their financial lives here, as seen by our record wealth and lending flows. Daily average trades remained above $7 million for the third consecutive quarter, and margin balances reached a record $97.2 billion. With engaged clients, a supportive market and strong execution, we delivered another quarter of record results with 27% year-over-year revenue growth and 70% year-over-year adjusted earnings growth. And we returned excess capital in multiple forms. As we head into the final stretch of 2025, we are playing offense with ongoing investments that will continue to drive profitable growth through the cycle. Equity markets reached all-time highs in the third quarter and investor sentiment landed in bold territory. We are here to support investors through market cycles and make a difference in their financial lives. This quarter, I visited 19 of our branches across the country, several of our Schwab Wealth Advisory offices and met with multiple dozens of our RIA clients. Broadly speaking, our clients are happy because markets are up. Client wealth is at all-time high, and they are asking us how to protect it, pass it along and grow it. And this is when they turn to Schwab. We provide exceptional service platforms and advice in the channel of our clients' choice. In the third quarter, we supported nearly 570 million digital logins, 7 million calls, 36% growth in interactions with our research content and thousands of interactions in our 400 branches in local communities across our country and overseas. We are here for clients when, where and how they need us. Our Through Clients' Eyes strategy, combined with our diversified business model and ongoing investments in client experiences and capabilities is powering growth on all fronts with clients across our solutions and on all financial measures. Starting with client growth, investors opened more than 1 million new brokerage accounts, and we attracted in core net new assets in the third quarter, a 44% increase over the last year. We said we'd make progress in getting back to our historic organic growth range. And as you can see, we've made substantial progress on our path to 5%. We believe we are positioned incredibly well in the 2 fastest-growing areas of the market. Through the cycle, we remain confident in our ability to grow at levels consistent with our historic range. This quarter, our strong NNA was helped by the market environment, improvement with legacy Ameritrade clients and high client satisfaction and engagement. We're continuing to deepen relationships with former Ameritrade clients who have been positive contributors to NNA throughout 2025. While they have not yet reached the organic growth rate levels we see among legacy Schwab clients, CPS scores among former Ameritrade clients have improved 11 points this year. Turning to our solutions growth. Clients are deepening their Schwab relationships by conducting more of their financial lives with us across our wealth, lending and trading solutions. Managed investing net flows increased 40% year-over-year with 30% of flows from legacy Ameritrade clients. Schwab Wealth Advisory, our flagship wealth offer achieved another quarter of record flows and continues to delight clients with a record Client Promoter Score of 85. Bank lending balances are up 24% overall with PAL balances reaching record levels. Traders continue to turn to us for our world-class offer, thinkorswim adoption among Schwab legacy clients has increased 98% over last year. We're also here for our clients who are looking for crypto exposure. Visits to our digital assets content on schwab.com are up 92% year-over-year, and Schwab has approximately a 20% share of the spot crypto ETP market. We know that our clients who have allocated a small portion of their portfolios in spot crypto at other firms are eager to bring those assets to Schwab. We remain on track to launch spot crypto in the first half of 2026, starting with Bitcoin and Ethereum. We'll watch this offer to Schwab way with a powerful combination of education, research, risk management and the service clients expect all at great value. Our offer will allow clients to access crypto directly alongside their existing investments and our banking capabilities, which will be a strong differentiator. Our financials are the third dimension of growth, and we delivered record results this quarter. Net revenues increased 27% year-over-year to a new quarterly record and we delivered record quarterly adjusted earnings per share of $1.31. As we look to the future, we're confident in our ability to continue driving growth on all fronts and across a range of environments and I'll spend the next few minutes highlighting why. One, we are in a strong competitive position. We serve 45 million client accounts and $11.59 trillion in assets, making us #1 among peers who report on that metric. We are #1 in RIA custodial assets and we're #1 in retail trading as measured by daily average trades with no close second. We continue to receive recognition from respected third parties because we stand apart by putting clients financial well-being at the forefront of every decision. Our no trade-offs approach offers an unmatched breadth of capabilities, education, research and service with a combination of industry-leading digital experiences and deep client relationships to help clients achieve their desired outcome. Two, our business fundamentals are healthy. We look at this across a few dimensions, First, clients are highly engaged with both Schwab and the markets. Total client interactions within our branches on chat, e-mail and on the phones are up 19% year-over-year. And we exceeded 500 million digital client logins across mobile and web for the third consecutive quarter. Daily average trades remained above $7 million during the quarter and clients have increased their use of margin to record levels, up 33% over last year. Second, we're delivering world-class service. We're entering the phones in less than 30 seconds on average and more than 75% of questions are answered without the need to transfer the call. And third, most importantly, clients are happy. Overall satisfaction scores for our service organization are at an all-time high of 88%. Client Promoter Scores for IS and AS are at record levels, meaning we are delivering for clients when and where they need us. It's important to remember that for 50 years, we have championed our investors' financial goals and done everything we can to make clients better off in their financial life. Three, we're attracting a diverse range of clients. We're continuing to attract and serve RIAs of all sizes and our Advisor Services business is thriving. In our Retail business, we are attracting and serving investors of all ages, and we see significant engagement from younger clients. When we think about our mission and the opportunity to get more Americans invested, it is encouraging that industry research shows Gen Z is 45% more likely to start investing by the age of 21 as compared to Millennials. And we see these trends playing out among our client base. This year, nearly 1/3 of new-to-firm retail households at Schwab are Gen Zers, investors between the ages of 13 and 28. One of the reasons they're turning to Schwab is because we're meeting them in the channels where they turn for information about investing. We know they learn about finances primarily through social media and family. Their top online resource is YouTube, and we're the #1 financial services firm on YouTube by followers. And younger investors at Schwab are highly engaged in building their wealth over the long term. In fact, 1/3 of retail households who created a financial plan within the last 2 years are under the age of 40. While client assets are more concentrated among older generations today, the average age of our clients continues to get younger. Finally, a growing portion of new to firm households are traders. Traders of all ages and experienced levels are coming to Schwab, including younger traders. Younger traders are turning to us because they recognize the potential that trading has in helping build wealth over time. And they're turning to Schwab because we have the platforms, tools, education, coaching, expertise and service they need to help them succeed, a combination that cannot find anywhere else. Finally, we remain committed to our 4 strategic focus areas to meet the evolving needs of our clients. At the start of the year, I laid out our priorities: growth, scale and efficiency, the brilliant basics and our people. I'll spend just a few minutes sharing highlights on progress we've made. Our first focus area is driving growth by deepening relationships with our clients. I'll highlight just a few ways we're delivering on this priority. In our Advisor Services business, we're deepening relationships with that 16,000 RIA firms we serve by building a broader support ecosystem that extends beyond custody alone to add value for RIAs. We've grown our lending support, alternatives capability and expanded our institutional no transaction fee mutual fund platform to include funds from nearly 60 managers with no transaction fees for clients. We also launched Advisor ProDirect, which helps breakaway advisers on their path to independence. Finally, we supported the largest adviser transition in the history of our industry by welcoming OpenArc to our platform in September. In our retail business, we're expanding our branch footprint and hiring financial consultants and wealth consultants to serve even more of our higher net worth clients. These investments are important because we know that clients who have an FC relationship have higher CPS scores, while also bringing in more than 2.5x the NNA and engaging more in our trading, wealth and banking solutions. We're investing in deepening relationships within clients and enhancing how we support their financial life. We've enhanced Schwab Wealth Advisory adding a discretionary offer. We've launched alternatives. We've invested in tax, trust and estate capabilities, and we've added more experts to support more clients. Within our banking offer, our budget asset line experience continues to lead the industry with cycle times of about 1 day and clients can now borrow against most managed investing assets they hold at Schwab, meaning they can borrow more. And we're continuing to invest in our trader experience. Our second focus area is creating value with scale and efficiency. These initiatives, which are primarily centered within service, operations and technology are a win for clients and are also helping enable us to keep our cost to serve clients low so that we can reinvest in our growth. We're using AI to supercharge our professionals through capabilities like our Schwab Knowledge Assistant and the rollout of our service AI assistant, which helps our client-facing professionals create post call summaries and notes, among other capabilities. These efforts will help our reps serve clients more efficiently. We've also made progress on improving status notifications to clients and removing more paper from our system, reducing not in good order errors and saving time for our clients and professionals. Our third focus area is delivering on the brilliant basics. At the heart of it, this means being there for clients when and where they need us and delighting them in every interaction they have with us. It means our systems are available and experiences are easy. One measure of this is our Client Easy Scores, which are near all-time highs. 94% for our retail client service organization and 93% ease of doing business score for Advisor Services. Finally, our finance team has done a great job of enhancing our approach to managing our balance sheet. Last but not least, the fourth focus area is investing in our people. We couldn't do what we do without 32,000 employees working together united by a single mission. We're continuing to invest in our people and culture to retain and attract the best talent in the industry. To wrap up, we've sustained positive momentum through 2025 and are continuing to deliver growth on all fronts. We are looking towards the future from a position of strength continuing to play offense to power profitable growth over the long term. With that, I'll turn it over to Mike to dive into details on our financial results. Michael Verdeschi: Thank you, Rick, and good morning, everyone. Schwab delivered strong third quarter results across all fronts, highlighting our momentum as we continue to meet the evolving needs of individual investors and independent advisers. The combination of our firms focused execution across key strategic objectives and favorable macro tailwinds yielded record results. We saw another step-up in our organic client growth trends during the period and client engagement across our broad suite of products and solutions also remained robust. This sustained momentum translated into record revenue and earnings for the quarter, including year-over-year revenue growth of 27% to $6.1 billion, adjusted pretax margins exceeding 51% and adjusted earnings per share of $1.31, an increase of 70% versus 3Q '24. Client cash levels continue to reflect normal behavior, inclusive of organic growth, seasonality and strong client engagement as equity markets reached record levels. We made further progress in reducing supplemental borrowings, which ended the quarter at $14.8 billion or just within the upper bound of our business as usual range. We also returned meaningful excess capital via common stock repurchases. Inclusive of these actions, our capital ratios stayed relatively flat versus the second quarter finishing 3Q slightly above our target range. Now let's unpack some of the key drivers influencing these record 3Q results before sharing our perspectives on the final chapter of 2025. Revenue increased 27% year-over-year to a record $6.1 billion for 3Q, the fourth consecutive quarter of double-digit year-over-year growth across all major line items. Our further reduction in supplemental borrowings at the banks, client loan growth and another strong quarter for securities lending activity helped expand net interest margin empowered a 37% increase in net interest revenue versus 3Q '24. Strong equity markets, healthy asset gathering and sustained client interest in Schwab's wealth and asset management offerings, drove 13% year-over-year growth in asset management and administration fees to a record $1.7 billion. Trading revenue was up 25% versus 3Q '24 as our leading retail trading platform facilitated another robust quarter of activity including 7.4 million daily average trades and approximately $6 trillion of gross notional value traded across equities, ETFs and mutual funds. Bank deposit account fees moved higher year-over-year due to an improved net yield as lower-yielding fixed-rate obligations continue to mature and converted into the floating rate bucket. September marked an inflection point for the BDA as we transition into the new $60 billion to $90 billion operating range for the remainder of the agreement and we gained the flexibility to move balances between the BDA and our balance sheet. During the third quarter, we transferred $3 billion worth of balances to Schwab to accelerate the paydown of bank supplemental borrowings. Turning to expenses. Adjusted expenses for the quarter were up 5% versus 3Q '24 as we continue to make ongoing investments to support sustainable growth including opening new branches and hiring financial consultants, supported very strong and sustained client engagement across our broad suite of modern wealth solutions and seek to further unlock incremental efficiencies across our business. Further progress in reducing high-cost borrowings at the banks, equity market strength and sustained trading volumes drove regular top line growth. In conjunction with balanced expense management, Schwab's adjusted pretax profit margin reached 51.3%. Quarterly adjusted earnings per share equaled a record $1.31, a year-over-year increase of 70%. Note that 3Q EPS included a $0.03 benefit related to state tax matters. With the majority of this benefit realized in 3Q '25, we expect our corporate tax rate to remain around the 23% to 24% zone in future periods. Moving on to our balance sheet. We supported our clients as their needs evolve against a shifting backdrop. Client demand for our lending solutions increased during the quarter. Outstanding PAL balances grew to $23.4 billion, representing a year-over-year increase of 37%. Client margin loan balances rose to $97.2 billion at quarter end, up 16% versus year-end 2024, reflecting rising equity markets and improved investor sentiment and certain tactical client trading activities, such as long/short strategies. Transactional sweep cash trends continue to reflect normal client behavior. Following modest outflows during July and August related to typical seasonality and client net buying activity, we saw $19 billion of cash inflows in September to bring the quarter end balance to $425.6 billion, which represents a quarter-over-quarter increase of $13.5 billion or approximately 3%. This sequential building cash, along with the use of investment portfolio proceeds and balances transferred from the BDA allow us to further reduce high-cost funding at the banks. We'd expect normal cash behavior to continue in 4Q including typical seasonality, such as adviser payments in October and the December cash build. Staying on high-cost bank funding for a moment, we made great progress during the third quarter, reducing supplemental funding balances by another $13 billion, bringing outstanding balances down to $14.8 billion or approximately 85% below the peak in May 2023. This level is just inside the upper bound of our business as usual range of approximately $5 billion to $15 billion, which aligns with our long-term diversified funding profile. While outstanding balances may come down further and move around this range over time, we'll continue to support client loan needs and begin to focus more on new security purchases versus paydown activities. Our capital levels finished the quarter slightly above the upper bound of the firm's adjusted Tier 1 leverage objective of 6.75% to 7%. The quarter-over-quarter build was primarily driven by earnings and the continued pull to par of unrealized marks. The ratio also reflects our repurchases of common shares for $2.7 billion, bringing year-to-date total capital return across all forms to $8.5 billion. Looking ahead, we will continue to prioritize maintaining capital to support the needs of our clients and the growth of the franchise, while returning excess capital in multiple forms as part of our through-the-cycle financial growth story. Turning to our full year 2025 scenario. During the summer business update in July, we provided an updated financial scenario informed by several inputs, including a mid-July forward interest rate curve calling for 225 basis point cuts to the Fed funds target rate. Equity market appreciation of roughly 9% for the full year and client trading volume that represented a slight pullback from levels observed during the first half of the year. Moving forward to today, the interest rate curve now calls for a total of 325 basis point cuts during 2025 versus a previous expectation for only 2 cuts. Markets continue to move higher during the third quarter and client trading remains robust. However, the last couple of weeks remind us the environment can shift quickly. So in terms of the remainder of the year, we are likely to see various puts and takes as both rates and the broader markets evolve with the macroeconomic backdrop. So far in October, we continue to see good engagement from clients, which can increase revenue as well as volume-related expenses. Assuming this engagement persists, we could see a lift in earnings of around 2% or a bit better relative to the upper end of the financial scenario range we shared back at the July business update. In terms of next year, we are still working through our annual planning process, but we expect to keep building upon our 2025 momentum. And like most years, we will need to navigate in an evolving macroeconomic environment including potential shifts in sentiment and engagement levels. We remain confident in our ability to continue balancing the investments necessary to support the needs of our clients while delivering on our near-term financial objectives, such as top line growth and positive operating leverage across a range of environments. So please stay tuned, and we'll come back to you with a more detailed 2026 financial scenario in January. In closing, as we approach the final months of 2025, we are excited with our progress to date. Momentum with clients continue to strengthen as they entrust us with an increasing amount of their assets and execute our broad suite of solutions, including wealth, trading, asset management and banking. Schwab's diversified model, along with record equity markets and strong client engagement have positioned us to deliver record financial results for the full year. While that is certainly a great position to be in, obviously, our time horizon extends beyond a single year. We remain relentlessly focused on maintaining the strength of our diversified model with the ability to efficiently serve the needs of individual investors and the independent advisers who serve them through a range of environments. And with that, let's move on to Q&A. Lauren, back to you. Lauren Gaspar: Thanks, Mike. Operator, can you please walk everyone through the instructions for the Q&A session? Operator: [Operator Instructions] Our first question come from Ben Budish with Barclays. Benjamin Budish: Rick, you talked a little bit about the Advisor business in your prepared comments. I was wondering if you could unpack the recent trends a little bit more. It seems like from some of your other publicly traded peers, they're calling out a bit of a slowdown environment across the industry, maybe since April the kind of volatility events we've seen, your results seem to be bucking that trend. So could you talk a little bit about what's going well more recently. To what extent is the NNA growth in that channel coming from existing advisers versus kind of net new firms to Schwab? Maybe talk a little bit about your engagement an activity with sort of legacy Ameritrade advisers that are now part of Schwab. Help us understand a little bit what's going on there? Richard Wurster: Ben, thanks for the question. Our Advisor business is really thriving and growing at an accelerated rate. We've seen NNA pick up substantially in our Advisor business this year versus last year. And I think it's a combination of things. Number one, I think we're executing and delivering for clients as strongly as we ever have. And part of that is having gone through the integration with Ameritrade, where we picked up some capabilities, integrated them into Schwab's already strong offering and put them together. And so I think we had some clients, particularly Ameritrade clients and others who during the transition, we're wondering how it's going to play out. And now they've had the chance to see how strong the combined offering is and they're loving it. And so we're winning on all fronts as it relates to advisers. And I'm not surprised that's resulting in others growing more slowly, because our metrics like transfer of asset ratios and things like that are up meaningfully over last year, meaning we're winning more and more this year. You asked about what's driving it. We see it across every dimension. We look at growth in a few different fronts. First, growth from existing clients of advisers that we already work with. Existing advisers that bring on new business and win new business at the direct towards us, and then new advisers that transition to us. And across every one of those dimensions, we've seen an acceleration. In particular, among advisers converting to us and choosing independents and choosing to be with Schwab and why wouldn't they? I think our offer is far and away the best in the industry, and that's -- I think that's reflected in the NNA that you're seeing. Operator: Our next question comes from Alex Blostein with Goldman Sachs. Alexander Blostein: I was hoping you guys could expand on dynamics you're seeing in sort of core deposits, really nice build over the course of the quarter. And more importantly, as you think about the trajectory of interest rates and sort of sensitivity to trajectory of core deposits on the back of that, how are you thinking of that over the next couple of quarters here? Because obviously, it's a pretty important component to the overall earnings growth profile. Michael Verdeschi: Alex, thank you for the question. As we've said, we've looked at deposits this year, and we're seeing really that normal environment play out. In that normal environment means you're seeing us attract deposits just from the core growth, of course, where -- as we're growing net new assets, a component of that is going to be in cash. We typically see seasonality, of course, as well. And so that's played out from quarter-to-quarter. And then, of course, client sentiment plays a big part in that as well, where early in the year, you saw a more pronounced selling and then subsequent months, cash going back into the market as clients began to continue to engage and invest. From here, the path of rates, if you look at the forwards is, of course, rates heading lower. We tend to pick up cash in that environment, how much remains to be seen. But we feel really good about what we've seen this year. Cash still operating in that normal environment, again, with an ability to pick up cash as rates begin to trend lower from here. So we think that will be supportive of continued strong earnings as we go into next year and conduct activity throughout the year. Operator: Our next question comes from Ken Worthington with JPMorgan. Kenneth Worthington: Are you looking at crypto as a driver of near-term profit? Or is crypto really about bringing in the next generation of future Schwab investors? And to what extent is aggressive pricing below the level of competitors like Coinbase and Robinhood, a factor that you're using to drive crypto clients to Schwab? Richard Wurster: Ken, great to hear from you, and thanks for the question. First, we're winning in crypto today. Our clients are highly engaged. Our traffic on our crypto site has gone up 90% year-over-year. Our clients own 20% of the crypto exchange traded product in the industry. And so most of our clients, we find are not using coins to transact on the blockchain most are wanting to get invested in the price change of crypto. And they feel very comfortable doing that in ETFs with a company they really trust. And so that's why we're seeing what we're seeing in crypto. That said, we do want to launch spot crypto and I hear from clients all the time, that, hey, I've been a longtime Schwab client. I've got 99% of my assets with you, but I've got a little account over it, a digital native firm where I keep my crypto. And I can't wait until I can bring it back to Schwab. And we're excited -- we're incredibly excited about that. In terms of both profitability or using it kind of to attract the next generation, I would say both to that. And here's why I would say that is the spreads at the moment and the amount of money that these digitally native firms are making in crypto are enormous. And you can see it in the revenue on client assets of some of the digital and native public firms. And so there's room, I think, to be both aggressive on price and to deliver great value and generate a profit for the firm. So I think that's how I would think about it. In terms of attracting the next generation, Ken, I want to be really clear. Crypto will be great for clients and will certainly appeal to young investors, but we are absolutely brushing it with young investors today. One in 3 of our new-to-firm household numbers, which are really strong new to firm numbers are under the age of 24. 1/3 are Gen Zers under the age of 28 and they're not just engaging with us in trading. They're engaging with us across the board. They're responsible for a lot of the financial planning conversations that we've had. They'll come in and want to consolidate loans into a pledged asset line balance, so they can pay off their student debt. They'll talk to us about how to buy house in the future. These are clients that really want to be investors for the long term and want our help navigating it. And no one can compete with us as it relates to delivering for the young investor. I have 1,000 colleagues that wake up every day that are former trading professionals that answer the phones for any investors that want advice and expertise on how to trade. We put on 35 hours a week of live content for our investors about how to learn, how to trade, how to learn how to invest. The power of things like compounding. And the engagement in those types of things is off the charts. So it's just -- I think what we can offer the young investor in terms of the support, the service the education and, of course, the leading platform with thinkorswim and our digital capabilities, I think, is unmatched and that's why we're having so much success with young investors. I think crypto will be additive, but we're already winning with them. Operator: Our next question comes from Brennan Hawken with Bank of Montreal. Brennan Hawken: Now that we have the wholesale funding back in the normal operating range, Mike, as you called it, we saw some BDA movement as you identified in between the cash buckets. How are you thinking about redeployment and reinvestment? Should we be thinking that securities will be -- the likely target? And kind of what level of duration would you expect? Or is the floating rate bucket on the BDA side attractive as a capital-light option? Michael Verdeschi: Thank you for the question. So yes, we're happy with the progress we've made in the pay down. We could see a little bit more reduction in that supplemental borrowing balance. But you're right, as we have now cash coming in, we will deploy that into, of course, meeting our client borrowing needs. We've seen good momentum in lending, and we will continue to deploy funds, of course, to support that need. We, of course, have the opportunity then as well to invest in securities. And that's with new cash, but also as we see the securities portfolio maturing, we'll reinvest those proceeds, and keep in mind, those yields on the existing securities are under 2%, so we'll get a nice lift on that. You asked about the duration. I've talked about this before, where the average duration for the portfolio probably be in that 2- to 4-year range. That will give you some sense of where the overall duration will be. That will be a function of how we look at the liability side of the balance sheet and the composition of deposits. You can have certain investments that are shorter than that 2 to 4 years, some that could be longer. Certainly, agency mortgages will extend a little bit beyond that, but we could buy very short-dated treasuries as well. But we're going to maintain that 2- to 4-year duration. In terms of the BDA, this is -- it's something that gives us a tremendous amount of flexibility. In terms of size, it's $60 billion to $90 billion, the range that we operate in, but it also allows us to manage across our risk types efficiently, and that means capital, liquidity and our interest rate risk profile. So as you saw us do less in the third quarter, we moved funds from the BDA onto our balance sheet and use those proceeds to pay down supplemental borrowings. But of course, we have the flexibility to place proceeds into the BDA and that could help us with our interest rate risk management profile where we could either place it at a floating rate or if we wanted to match off some of our deposits, we could also place in at a fixed rate. And of course, as we've talked about before, if we wanted to free up some capital, we could also place some funds into the BDA with that consideration in mind as well. But I think from here, we're in really good position, continue to meet the needs of clients in terms of their borrowing needs, while also investing in securities in that 2- to 4-year duration, which will give us a very nice lift in earnings as well. Operator: Our next question comes from Dan Fannon with Jefferies. Daniel Fannon: Rick, I wanted to follow up on just the Ameritrade customer. You mentioned that growth is improving, but that's still where you want it to be. So I was hoping you could put some numbers around that and or think about the journey and where you think -- how long it will take to get them to the appropriate growth rates you are expecting? Richard Wurster: Yes. Thanks for the question, Dan. I think we have continued upside with our Ameritrade clients. If you look at over the last 18, 24 months, they've gone from being net negative contributors to NNA to being net positive. Not yet at the level that we see from legacy Schwab clients, but I think that's just a matter of time, and the reason I believe that's just a matter of time is that -- a couple of things. When we measure their client satisfaction scores relative to Schwab clients, is it legacy Schwab clients? And they've gone up dramatically over the last 12 months, but even more so if you look over the last couple of years. So that's really encouraging. I also -- when I get the chance to be in our branches and talk about how our Ameritrade clients are doing or talk to them. They've gone from being frustrated that they got moved to another firm without being asked and trying to figure out how to navigate a completely somewhat new platform to them and a different experience to saying, I don't know how I lived without Schwab while when I was at Ameritrade, we have so much more here. And we see that because they're engaging in banking, they're engaging in wealth. I think they account for 30-ish percent of all our record well flows that we're seeing. They're engaging in all kinds of activities that didn't have access to at Ameritrade. So I am bullish our ability to get them to the level of NNA growth that we see from Schwab clients. And I'm hopeful that the progress we've seen and going from negative to 0 to now positive, there's still a few percentage gap between Schwab and legacy Ameritrade, but I'm confident in the coming months that we'll continue to make progress in closing that. I couldn't be more enthusiastic about what we're seeing from our Ameritrade clients and how we're showing up and delivering for them. Operator: Our next question comes from Brian Bedell with Deutsche Bank. Brian Bedell: Maybe, Mike, just back on the guidance for the rest of the year. Any color on the revenue and expense components of that? Obviously, things are trending much better than initially expected. So I just wanted to see if you were able to offer a range? Or how much you think we could be beating that 18.5% to 19.5%. And then similar on expense, obviously, that would bring higher expenses, of course. But would we still be in that range? Or are you targeting a specific margin target? And then I guess any color on 4Q NIM and NII, if we think NII can expand at least in 4Q given the balances are growing nicely? Michael Verdeschi: Brian, thanks for the question. A lot packed in there. So as you know, we provide the scenario twice a year, meaning that we give you a preliminary scenario in January. We updated it in July. What we wanted to do today is really just give you the direction of travel. As we've been saying, we've seen outstanding client engagement. The macro environment has been favorable. And so I wanted to give you the direction of travel where I mentioned earnings, again, relative to that July updated scenario, the top end of that range implied EPS, up 2% or a bit better. And so you will see a lift in earnings is what we're expecting. The components, yes, a lift in revenue. We're not going to update the range, as I mentioned, a lift in expenses as well. Again, this is volume related, therefore, variable expense. And where we updated the scenario in July, we gave that 5.25% top end of that expense range. So we'll be up against that or a bit above perhaps that will just depend on the client engagement and volumes. But again, keep in mind that is going to be seeing a revenue on the other side in terms of the transactions and overall earnings accretive. What pretax profit margin, the way I think about it is that's a result of a very well balanced approach to how we manage our financials. The more we see clients engage with us across our suite of products, we see good revenue diversification coming out of that. And of course, with our expenses, we take a balanced approach. We're making resources available for growth, but we're also investing in efficiency. And that supports durable earnings across a range of environments. And the pretax profit margin is really an output of the way we manage that balanced approach with revenue diversification and expenses. And so you asked about net interest margin were up this quarter. Again, keep in mind that we now have 3 cuts at least that's what the market is indicating for the full year. So we expect to still be into the 2.80s for net interest margin to close out the fourth quarter. And again, we'll come back to you in January with the 2026 scenario at that time. Again, based on what we see today, rates are going to be around that 3% range to end the year. We feel really good about the ability to continue to drive our earnings in a range of environments even in that lower rate environment. On the NIM side, we talked about asset sensitivity before. And while we have some asset sensitivity. Keep in mind, we were proactive in cutting out roughly 1/3 of that net interest revenue sensitivity. And as I mentioned earlier on this call, as rates head lower, we tend to pick up cash. And so that will be a nice offset as will be the reinvestment of securities. So even in that lower rate environment despite the asset sensitivity, I expect some meaningful offset to the impact of lower rates and the impact it would have on NIM. So we feel really good heading into 2026. Operator: Our next question comes from Bill Katz with TD Cowen. William Katz: It seems like there's a significant inflection in the business here now that you're done sort of paying down the -- predominantly done paying down the high cost. Your organic growth is great. Cash is building a little bit. So how should we think about the interplay between interest earning asset growth and capital return, clearly bought back a ton of stock this quarter off to a good start relative to the $20 billion. Just trying to think through where you are strategically thinking about driving the balance sheet growth versus maybe more sustained capital return to investors? Michael Verdeschi: Thank you. This year, yes, as we have talked about with the paydown of supplemental borrowings, interest-earning assets, probably coming down modestly. Now that we've paid down the vast majority of those borrowings. As I said earlier, we'll probably pay down a little bit more there. You're likely to see us in the lower end of that supplemental borrowing range that I provided earlier. Over the course of next year, I think it will be more about the growth of our client borrowing needs. So we've seen good momentum in lending in the range of environments, we would expect that to continue. But again, I think that would be reasonably modest growth of interest-earning assets. Again, we'll come back to you with a scenario that's more specific. But on the capital side, we also feel very good in this environment where we've been -- over the course of the year, we've been able to return capital across our framework. And as we've said before, that's an important part of our financial story. We're generating very good earnings that's building capital for us. And so we continue to be in a very flexible position to generate good earnings to meet the needs of our clients while being able to return capital in multiple forms. So we think we're in a very good position. Operator: Our next question comes from Kyle Voigt with KBW. Kyle Voigt: Maybe just regarding the strong Pledged Asset Line growth. Just wondering if you could comment on what inning you think you are in, in terms of penetrating your existing client base there. And I think you effectively began to hedge some of those loans in the fixed. Can you just give us an update on how that trended in 3Q and how to think about future hedging as those balances continue to grow strongly from here? Richard Wurster: Thanks for the question, Kyle. Yes, we've seen good momentum in PAL. As we've talked about before, we've made that experience very easy for clients to engage in that product, we've seen a good lift. We expect continued engagement in that product. Again, this is something that we're going to be responding to client needs. In terms of penetration, when you look at our bank lending activity, it's relatively low penetration. So we do think there is good upside that we could experience there. So we are looking forward to that. Yes, we have hedged some of those PAL balances. That just gives us another tool for how we match our assets and liabilities. Typically, we've invested in securities as a way of matching. But again, using these interest rate swaps against our underlying assets and liabilities just creates another flexible tool to manage that interest rate risk profile. As those balances grow, that continues to give us flexibility. But we'll also look to broaden out how we think about those hedges. Are there other underlying assets, floating rate assets, for example, that we could utilize. So all of this is with the intent of building additional flexibility in how we manage our balance sheet. So again, this is a win-win. We're meeting our client needs. We think there's more upside there. But also we're ensuring that we're building ourselves flexibility in how we manage the balance sheet and drive efficiency and good financial outcomes. Operator: Our next question comes from Devin Ryan with Citizens. Devin Ryan: Rick and Mike, a question on retail investor engagement. Obviously, you're seeing great results here, and they're clearly highly invested right now with low transactional cash, debts are elevated. Margin balances are at a record. At the same time, a number of other ratios aren't stretched. And so a question we've been getting a fair amount recently is whether we're kind of in an extended level for retail investor engagement or if this is something normal. So I just love to get some thoughts there. Richard Wurster: Devin, it's a good question. Daily average trades are definitely up above what they were when you look back 12 or 18 months ago, it used to be $5.8 million or $6 million was a good month and now we're running at $7.5 million as being pretty normal. So clients are definitely more engaged. I think there's some structural elements to that and also some sort of market environment with a real strong bull market now that's gone on for a couple of years. You've got some topics that are of great interest to investors like AI and crypto and I think that's driving engagement. So it's hard to know whether this level of engagement will persist or grow. I do think that I would call out, though, that I believe our investor base is -- tends to trade in any environment. These aren't new investors who came in and got excited about the entertainment of investing. These are investors that do research that invest thoughtfully and are engaged in markets and they oftentimes are countercyclical traders. And we've actually seen our traders do what we've called sell the rip and buy the dip. And so they've been very active on updates selling and then when they get a little down move, they've been back in buying. And so I think that -- I think our engagement is likely to be more sustainable, perhaps than some others. But the overall market environment, I think will also play a role in how engaged clients are. Operator: Our next question comes from Michael Cyprys with Morgan Stanley. Michael Cyprys: I just wanted to ask a bigger picture question on tokenization. Just curious how you're thinking about in a potential future world where investors build access portfolios and long-term investments through the blockchain curious what risks and opportunities might that present for Schwab and for the industry? What steps might you take over the next year? Imagine it could be a major cost efficiency on lock on one side. But then if there are tokenized substitutes for deposits with atomic settlement, what implications could this have for transactional sweep cash as well as revenue monetization and competitive dynamics? Richard Wurster: Yes. Thanks for the question. First thing I'd say is for 50 years, it's been our mission to help investors get invested and to help them achieve their financial goals and dreams. So if we find an investors want to hold securities on the blockchain and that brings more investors into investing, then we're going to find a way to offer clients the opportunity to hold their securities on the blockchain and hold them as tokens if that's what they would -- if that's the way they would like to do it. Second, I believe there's tokenization is more likely in some asset classes than others. It's -- I think the public equity market is incredibly efficient. The customer protection rules make a lot of sense. The spreads are very tight. Going to tokenization doesn't solve a lot of problems for public equity investors and introduces a number of complications and risks that make the pros and cons, I think, somewhat questionable. So it's hard for me to see that taking off. So if it does, again, we're going to offer it and be ready to -- I think it's more likely to be perhaps in some fixed income markets where you could see tokenization in private markets and collectibles and areas like that. But we'll see, and we're open to any environment. We want our investors to be able to hold securities the way they want to hold securities. On your question about what it means for our economics, I think there's puts and takes on that one. I mean if you look at the tokenization markets today and the public equities that have been tokenized and the trades that have been done, not that we would necessarily do this, but they've been done at incredibly wide spreads that are inefficient for the end trader, but there's more money to be made for the intermediary in that situation. Now we're always going to give clients great execution, but there's definitely a put there. On the take side, maybe it's incrementally easier to move cash. I don't think it's overly hard to click 1 button at Schwab today and move your money from sweep into a purchase money fund. And not only that, we proactively remind you to do that when we see large balances in your account and when you log into schwab.com, it's very often the first thing you see is move your cash. So there's not many barriers to doing that today. It might be incrementally easier on the blockchain because you could do it instantaneously. So it's possible there's a shift there. But I think there's going to be puts and takes on the blockchain. And if clients want to participate and hold securities that way, we certainly will -- we will accommodate that and are working towards that. And our crypto launch is different than some other -- how some others are going about it. Others, I think, are taking approach of basically introducing a client to a digitally native firm and making the introduction and then the assets are custody there. We're building the books and records and capabilities so that we can custody assets. And we're doing that because we're taking a long-term view of this so that we can participate things like the blockchain and tokenization over time and offer that to our clients. So -- that's a long-winded answer probably, but those are my top of mind thoughts on tokenization. Lauren Gaspar: Okay. Operator, I think we have time for one final question before we wrap up. Operator: Our final question will come from David Smith with Truist Securities. David Smith: Staying on the vein of crypto and tokenization. You said you're on track to launch spot crypto in the first half of next year. Are there any meaningful external constraints like regulatory clarity or anything like that, that you're still waiting at this point? Or is everything now just based on your own internal decision-making and ensuring that everything is built out fully to your standards and ready to handle the size and potential volume of your own client base? Richard Wurster: Thanks for the question. At this point, it's in our hands, certainly, up until about 4 months ago, the regulatory environment made it challenging, which is why you don't see any banks in crypto today. And instead, you see banks announcing plans that they will be in crypto in coming months and quarters and years. But that's a result of the change in the regulatory environment. So I don't think that's standing in our way. What takes time is all the stuff I talked about. We want to build this for the long term. We want to do it thoughtfully. We want to be able to have our own books and records and things like that. That is a completely new build, and we've got a group of technologists working on that. And of course, we're going to want to roll it out in the right way and have people pilot it and test it and roll it out to a small group of clients and a large group of clients. So all those things take time. I think we're moving quite rapidly given the expansiveness of which we're thinking about it and the way we're building for the long term, but there's nothing from a regulatory standpoint, standing in our way. And with that, we will wrap up. Thanks so much for your engagement today. We love the opportunity to be on the phone and have a chance to speak with all of you. I'll leave you with 3 takeaways. First, we are delivering growth on all fronts: attracting assets and growing accounts from new and existing clients, increasing utilization of our wealth banking and trading solutions, and delivering record financial results. Two, we anticipate year-over-year revenue and earnings expansion to finish 2025. And three, we think the future is incredibly bright. We are well positioned to deliver profitable growth through the cycle. Most importantly, as we do so, we are making a real difference in the lives of millions of investors, and we're energized by the opportunity we have to empower even more Americans to take control of their financial futures. We are in an incredible position to serve our clients and help them meet their financial goals. Thanks again, and thanks for joining today.
Operator: Good morning, ladies and gentlemen. Welcome to the third quarter results teleconference for travelers. We ask that you hold all questions until the completion of formal remarks, at which time you will be given instructions for the question and answer session. As a reminder, this conference is being recorded on October 16th, 2025. At this time, I would like to turn the conference over to Miss Abbe Goldstein, Senior Vice President of Investor Relations. Miss Goldstein, you may begin. Abbe Goldstein: Thank you. Good morning and welcome to Travelers discussion of our third quarter 2020 results. We released our press release, financial supplement, and webcast presentation earlier this morning. All of these materials can be found on our website at travelers. Com under the investors section. Speaking today will be Alan Schnitzer chairman and CEO Dan Frey CFO and our three segment presidents. Greg Toczydlowski of Business Insurance, Jeff Klenk of Bond and Specialty Insurance, and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take questions before I turn the call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward looking statements. The company cautions investors that any forward looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10-Q and 10-Ks filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials available in the Investors section on our website. And now I'd like to turn the call over to Alan Schnitzer. Alan Schnitzer: Thank you, Abby. Good morning, everyone, and thank you for joining us today. We are pleased to report excellent third-quarter results. We earned core income of $1.9 billion or $8.14 per diluted share. Our return on equity for the quarter was 22.6%, bringing our core return on equity for the trailing twelve months to 18.7%. Very strong underwriting results and higher investment income drove the bottom line. Underwriting income of $1.4 billion pretax more than doubled compared to the prior year quarter, benefiting from both the lower level of catastrophe losses and higher underlying underwriting income. The underlying result was driven by higher net earned premiums and an underlying combined ratio that improved 1.7 points to an exceptional 83.9%. Underwriting income was higher in all three segments. Our high-quality investment portfolio also continued to perform well, generating after-tax net investment income of $850 million for the quarter, up 15%, driven by strong and reliable returns from our growing fixed income portfolio. Our underwriting and investment results, together with our strong balance sheet, enabled us to return almost $900 million of capital to shareholders during the quarter, including $628 million of share repurchases. At the same time, we continue to make strategic investments in our business. Even after this deployment of capital, adjusted book value per share was up 15% compared to a year ago. With strong results over the past year and a particularly light cat quarter, we have a higher than usual level of excess capital and liquidity. Consequently, we anticipate a higher level of share repurchase over the next couple of quarters. Dan will have more to say about that in a minute. Turning to the top line, we grew net written premiums to $11.5 billion in the quarter. In business insurance, we grew net written premiums by 3% to $5.7 billion, led by 4% growth in our domestic business. Excluding the property line, we grew domestic net written premiums in the segment by more than 6%. The declining premium volume in property continues to be a large account dynamic. In fact, we grew property in both middle market and small commercial. We've seen this dynamic in the large property market before, and we won't compromise our underwriting discipline. Over time, particularly as catastrophic events inevitably unfold, the value of that discipline and the cost to those who abandon it will become unmistakable. Renewal premium and change in business insurance was 7.1%, driven by continued historically high RPC in our middle market and select business businesses. Excluding the property line, renewal premium change in the segment was a very strong 9%, and renewal rate change was a very strong 6.7%. Greg will share additional detail by line. Retention in the segment was 85%. Given the high quality of the book, we were very pleased with that result. In Bond and Specialty Insurance, we grew net written premiums to $1.1 billion with higher renewal premium change and continued strong retention of 87% in our high-quality management liability business. Net written premiums in our market-leading surety business remained strong. In personal insurance, written premiums were $4.7 billion with strong renewal premium change in our homeowners business. You'll hear more shortly from Greg, Jeff, and Michael about our segment results. As we head toward the end of the year, our planning for 2026 is well underway. As always, that process involves assessing the environment ahead. There are uncertainties out there: economic, political, geopolitical, not to mention the loss environment. We are very confident that we're built and very well positioned for whatever lies ahead. We're operating from a position of considerable strength. Profitability is strong, reflecting our leading underwriting expertise and the operating leverage we've built through a sustained focus on productivity and efficiency. Our competitive advantages have never been stronger or more relevant. Strong underwriting is the flywheel that sets everything in motion. Our premium growth at attractive margins has generated strong cash flow, which enables us to make strategic investments in our business, return excess capital to shareholders, and grow our investment portfolio. Since 2016, we have successfully invested $13 billion in technology, returned more than $20 billion of excess capital to our shareholders, and grown our investment portfolio by nearly 50% to more than $100 billion. Scale matters, increasingly so. We have the scale to win in an environment where technology and AI will continue to segment the marketplace. We have a track record of identifying the right strategic priorities and driving value from them. You can see that in the 300 basis point reduction we've achieved in our expense ratio since 2016, even while we were significantly increasing our overall technology spend. Importantly, our size gives us the data to power AI, creating a virtuous cycle: better insights, better decisions, better outcomes, more resources to invest. For example, our long-time focus on organizing and curating data has given us access to more than 65 billion clean data points from decades of history across multiple business lines. We leverage that to sharpen our underwriting and shape our claim strategies. With the vast majority of our business in North America, we hold a leading position in the largest and most stable insurance market in the world, an advantage that insulates us from much of the risk arising from the economic instability and geopolitical uncertainty around the globe. Our fortress balance sheet and exceptional cash flow provide us with the financial strength to invest consistently in the business regardless of the external conditions. Our financial strength also enables us to manage comfortably through large loss events like the January California wildfires. When it comes to the loss environment, from weather volatility to the impact of social inflation on casualty lines, no one is better positioned. Diversification provides powerful protection. In fact, our business mix produces a consolidated loss ratio that's actually less volatile than the loss ratio of our least volatile segment. That's the power of a balanced and diversified portfolio. Equally important is our demonstrated ability to confront the loss environment head-on. We have the data, the analytics, and the discipline to establish reserves and loss picks appropriately and generally ahead of the market. That matters because until you have an accurate view of the loss environment, your risk selection, underwriting, and claim strategies are all operating with the wrong inputs. Since our early identification of the acceleration of social inflation in 2019, we've grown the business and delivered significantly improved margins. Getting an accurate and timely view of the loss environment isn't just about the balance sheet. It's foundational to running the business effectively. Our internally managed investment portfolio was another source of strength. Our disciplined focus on achieving appropriate risk-adjusted returns has served us exceptionally well through various markets, especially during periods of market turmoil. More than 90% of our portfolio is in fixed income with an average credit rating of AA. We're highly selective. We don't reach for yield. We hold the vast majority of our fixed income securities to maturity. And we carefully coordinate the duration of our assets and liabilities. The track record speaks for itself. Our default rates during the most challenging environments over the past two decades were a fraction of industry averages. This consistency comes from a world-class investment team, with extraordinary tenure and a shared long-term perspective. In short, the franchise we've built, the capabilities we've developed, and our depth of expertise create advantages that are durable across operating environments. Before I wrap up, I'll share that we're just back from one of the industry's premier conferences, where we had the opportunity to meet with dozens of our key agents and brokers, who collectively represent a substantial amount of our business. We left as convinced as ever that our position with the independent distribution channel is an unmatched strategic advantage. We heard clearly that our strategic investments are resonating and that looking ahead, we're focused on the right priorities to extend that advantage. I want to acknowledge and thank all of our distribution partners. I also want to reiterate our unwavering commitment to being an indispensable partner for them and the undeniable choice for their customers. To sum it up, we're very well positioned and very optimistic about the road ahead. And with that, I'm pleased to turn the call over to Dan. Dan Frey: Thank you, Alan. In the third quarter, we once again delivered excellent financial results on a consolidated basis and in each of our three segments. Core income for the quarter of $1.9 billion resulted in core return on equity of 22.6%, reflecting both excellent underwriting results and strong investment income. We generated higher levels of written premium and earned premium while delivering excellent combined ratios on both a reported and underlying basis. At 83.9%, the underlying combined ratio marked its fourth consecutive quarter below 85. The combination of higher premiums and the excellent underlying combined ratio led to an 18% increase in after-tax underlying underwriting income, which surpassed $1 billion for the fifth consecutive quarter. The expense ratio for the third quarter was 28.6%, bringing the year-to-date expense ratio to 28.5%. We continue to expect an expense ratio of around 28% for the full year 2025 and expect to manage to that level again in 2026. Catastrophe losses in the quarter were fairly benign at $42 million pretax, consisting mainly of tornado hail events in the Central United States. Turning to prior year reserve development, we had total net favorable development of $22 million pretax. In Business Insurance, the annual asbestos review resulted in a charge of $277 million. Excluding asbestos, business insurance had net favorable PYD of $152 million driven by continued favorability in workers' comp. In Bond and Specialty, net favorable PYD was $43 million pretax with favorability in Fidelity and Surety. Personal insurance had net favorable PYD of $104 million pretax driven by favorability in auto. After-tax net investment income of $850 million increased by 15% from the prior year quarter. Fixed maturity NII was again the driver of the increase, reflecting both the benefit of higher invested assets and higher average yields. Returns in the non-fixed income portfolio were also up from the prior year quarter. During the quarter, we grew our investment portfolio by approximately $4 billion. Our outlook for fixed income NII, including earnings from short-term securities, has increased from the outlook we provided a quarter ago. And we now expect approximately $810 million after tax in the fourth quarter. For 2026, we expect more than $3.3 billion, with quarterly figures starting at around $810 million in Q1 and growing to around $885 million in Q4. New money rates as of September 30 are roughly 70 to 75 basis points above the yield embedded in the portfolio. Turning to capital management. Operating cash flows for the quarter were a new record at $4.2 billion, and we ended the quarter with holding company liquidity of approximately $2.8 billion. Interest rates decreased during the quarter, and as a result, our net unrealized investment loss decreased from $3 billion after tax at June 30 to $2 billion after tax at September 30. Adjusted book value per share, which excludes net unrealized investment gains and losses, was $150.55 at quarter end, up 8% from year end and up 15% from a year ago. Also of note for Q3, we issued $1.25 billion of debt back in July, with $500 million of ten-year notes and $750 million of thirty-year notes. This was simply ordinary course capital management, maintaining a debt-to-capital ratio in our target range as we continue to grow the business. Sticking with the theme of capital management, we returned $878 million of our capital to shareholders this quarter, comprising share repurchases of $628 million and dividends of $250 million. As Alan shared, our very strong earnings over the past year have provided us with an elevated level of capital and liquidity well in excess of what we had planned to use for investment and to support continued growth. As a result, we expect to increase the level of share repurchases in the fourth quarter to roughly $1.3 billion. Also, keep in mind that we previously shared our plan to deploy about $700 million from the sale of our Canadian operations, expected to close in early 2026, for additional share repurchases as well. So if we look across the three-quarter period from Q3 2025 through Q1 2026, our repurchases in Q3 combined with our current outlook for the next two quarters has us repurchasing a total of somewhere around $3.5 billion worth of our stock. Using the average share price over the past thirty days for purchases during the next two quarters, that would result in a reduction of our outstanding share count of about 5% in the nine-month period. Of course, the actual amount and timing of repurchases will depend on a number of factors, including the timing of the closing of the transaction in Canada, actual quarterly earnings, and other factors we disclose in our SEC filings. Recapping our results, Q3 was another quarter of excellent underwriting profitability on both an underlying and as-reported basis, and another quarter of rising net investment income. These strong fundamentals delivered core return on equity of 22.6% for the quarter and 18.7% on a trailing twelve-month basis, and position us very well to continue delivering strong results in the future. And now for a discussion of results in Business Insurance, I'll turn the call over to Greg. Greg Toczydlowski: Thanks, Dan. Business Insurance had a very strong quarter, delivering a record third-quarter segment income of $907 million and an all-in combined ratio of 92.9%. The quarter reflected relatively benign catastrophes and the continued strong contribution from our exceptional underlying underwriting results. This quarter's underlying combined ratio of 88.3% marked the twelfth consecutive quarter where we've produced an underlying combined ratio below 90%. We're pleased that our ongoing strategic investments have contributed to this sustained level of profitability. In particular, through meaningful advancements in data and analytics, we continue to advance our underwriting tools. One specific highlight is the development and utilization of sophisticated models that derive risk characteristics, refine technical pricing, and summarize historical and modeled loss experience, all of which is provided to our underwriters at the point of sale. Moving to the top line, our net written premiums increased to an all-time third-quarter high of $5.7 billion. We grew our leading middle market and select businesses by 7% and 4%, respectively. These two markets make up 70% of the net written premiums in business insurance. We saw a decline in net written premiums in National Property and Other, which, as you heard from Alan, reflects our disciplined execution in terms of risk selection, pricing, and terms and conditions. As for production across the segment, pricing remained attractive with renewal premium change just over 7%. Renewal premium change remains strong in select and middle market. From a line of business perspective, renewal premium change was positive in all lines, double digits in umbrella, CMP, and auto, and up from the second quarter or stable in all lines other than property. As you heard from Alan, excluding the property line, renewal premium change in this segment was 9%. Retention remained excellent at 85%, and new business of $673 million was about flat to a very strong prior year level. We're very pleased with these production results and particularly our field's execution for our proven segmentation strategy. Across the book, pricing and retention results this quarter reflect excellent execution, aligning price, terms, and conditions with environmental trends for each lot. As for the individual businesses, in select, renewal premium change of 10.8% was about flat with the second quarter. Retention ticked up as expected as we near completion of our targeted CMP risk return optimization efforts. And lastly, for Select, we generated new business of $134 million, up 3% over the prior year. As we've mentioned previously, we've made meaningful strategic investments in this market in both product and user experience. Our new BOP and auto products have been well received in the market, and we're pleased that the industry-leading segmentation contained in both products is contributing to profitable growth. We're also very pleased with the success of Travis, our digital experience platform for our distribution partners. As we continue our strategic rollout, Travis is already producing over 1 million transactions annually. In our core middle market business, renewal premium change of 8.3% was also about flat sequentially from the second quarter. Price increases remain broad-based as we achieved higher prices on more than three-quarters of our middle market accounts. And at the same time, the granular execution was excellent, with meaningful spread from our best-performing accounts to our lower-performing accounts. We're pleased that retention of 88% remained exceptional given the level of price increases we achieved. And finally, new business of $391 million was our highest ever third-quarter result and up 7% over the prior year. We're pleased with the new business risk selection and strength of pricing and overall with the combination of strong returns and customer growth in middle market. On a strategic note for middle market, we continue to enhance our industry-leading underwriting workstation with models that assess new business opportunities for risk characteristics with the propensity to produce the highest level of lifetime profitability. This information helps our field organization focus on the highest priority opportunities, resulting in a greater likelihood of success in winning more accounts that contribute to strong margins. To sum up, Business Insurance had another terrific quarter. We're pleased with our execution in driving strong financial and production results while continuing to invest in the business for long-term profitable growth. With that, I'll turn the call over to Jeff. Jeffrey Klenk: Thanks, Greg. Bond and Specialty delivered very strong third-quarter results. We generated segment income of $250 million and an outstanding combined ratio of 81.6%, nearly one point better than the prior year quarter. The strong underlying combined ratio of 85.8% drove very attractive returns in the segment. Turning to the top line, we grew net written premiums in the quarter to $1.1 billion. In our high-quality domestic management liability business, renewal premium change improved to 3.7% while retention remained strong at 87%. These results reflect our intentional and segmented initiatives to improve pricing in certain lines, with a focus on employment practices liability, cyber, and public company D&O. We're pleased with the strong underlying pricing segmentation achieved by our outstanding field organization on both renewal and new business, enabled by our advanced analytics and sophisticated pricing models. New business was lower than in 2024, as Corvus production was reflected as new business in the prior year quarter and is now mostly reflected as renewal premium. Comparisons to prior year new business levels will be similarly impacted for the remainder of the year. Outside of the Corvus impact, we're pleased with early returns on multiple tech and operational investments we've made to drive account growth. For example, in our private and nonprofit business, we're leveraging predictive analytics and AI to enhance our customer segmentation and sales effectiveness. We're pleased that these initiatives drove a 40% increase in new lines of business sold to existing customers as compared to the prior year quarter. Turning to our market-leading surety business, where production can be lumpy based on the timing of bonded construction projects, net written premiums remain strong relative to the record high quarter in the prior year. This reflects our customers' continued confidence in our industry-leading surety expertise and value-added service offerings, as well as benefits from digital investments we've made to enhance distribution experiences in our small commercial surety business. So we're pleased to have once again delivered strong results this quarter, driven by our continued underwriting and risk management diligence, excellent execution by our field organization, and the benefits of our market-leading competitive advantages. And with that, I'll turn the call over to Mike. Michael Klein: Thanks, Jeff, and good morning, everyone. In Personal Insurance, we delivered third-quarter segment income of $807 million, an excellent result that reflects the continued impact of our disciplined approach to selecting, pricing, and managing risks. The combined ratio of 81.3% improved 11 points relative to the prior year quarter, driven primarily by lower catastrophe losses and a lower underlying combined ratio. The underlying combined ratio of 77.7% was five points better compared to the prior year quarter, driven by continued improvement in both homeowners and other and auto. Net written premiums of $4.7 billion in the third quarter reflect our continued focus on improving profitability in homeowners while seeking growth in auto as we execute our strategies to deliver appropriate risk-adjusted returns across the portfolio. The ceded premium impact of the enhanced personal insurance excess of loss reinsurance program we announced last quarter reduced net written premium growth in the quarter by one point as the full year's worth of ceded premium was booked in the third quarter. In auto, the third-quarter combined ratio was very strong at 84.9%, reflecting lower catastrophe losses, a strong underlying combined ratio, and favorable net prior year development. The underlying combined ratio of 88.3% improved by 2.9 points compared to the prior year quarter. The improvement was driven by favorable loss experience in bodily injury and, to a lesser extent, vehicle coverages. Similar to last year's third-quarter result, this quarter's underlying combined ratio included a two-point benefit related to the re-estimation of prior quarters and the current year. The year-to-date underlying combined ratio was also 88.3%, reflecting sustained profitability in an auto book that is larger than it was five years ago, both in terms of premium dollars and policy count. Looking ahead to 2025, it's important to remember that the fourth-quarter auto underlying loss ratio has historically been six to seven points above the average for the first three quarters because of winter weather and holiday driving. In Homeowners and Other, the third-quarter combined ratio of 78% improved by 13.5 points compared to the prior year quarter, primarily because of lower catastrophe losses and improvement in the underlying combined ratio. Net prior year development was favorable but lower compared to the prior year. The underlying combined ratio of 68% improved by almost 6.5 points compared to the prior year quarter. The year-over-year favorability in homeowners was primarily related to the benefit of earned pricing, as well as favorable non-catastrophe weather. Overall, these outstanding results reflect favorable weather conditions throughout the third quarter, along with our actions to manage exposures in high catastrophe risk geographies to help optimize risk and reward. Turning to production, we're making progress in positioning our diversified portfolio to deliver long-term profitable growth. While our production results don't quite show it yet, we're confident that the actions we're taking will build momentum toward this objective. In domestic auto, retention of 82% remained consistent with recent quarters. Renewal premium change of 3.9% continued to moderate and will continue to decline in the fourth quarter, reflective of improved profitability and our focus on generating growth. Auto new business premium was up year over year for the fourth consecutive quarter, as new business momentum continued in states less impacted by our property actions. In Homeowners and Other, retention of 84% remained relatively consistent with recent quarters. Renewal premium change remained strong at 18%, as we continue to align replacement costs with insured values. We expect RPC to remain elevated in the fourth quarter and then drop into single digits beginning in early 2026 as values will have largely aligned with replacement costs. We continued to execute actions to reduce exposure and manage volatility in high-risk catastrophe geographies in the quarter, causing further declines in property new business premium and policies in force. Most of our property actions will be completed by the end of the year, at which point the downward pressure on both property and auto growth should begin to moderate. As we conclude this year and head into 2026, we're focused on building momentum toward generating profitable growth. To that end, we have a range of actions currently or soon to be in market, including the following: adjusting pricing, appetite, terms, and conditions to better reflect improved profitability in both Auto and Home; removing temporary binding restrictions and winding down some of our property new non-renewal actions in certain geographies; appointing new agents and partnering with existing agents to consolidate books of business; continuing to modernize our specialty products and platforms; and investing in artificial intelligence and digitization to deliver better experiences for our agents and customers. These messages resonate as we share them in the marketplace, reinforcing our commitment to being the undeniable choice for consumers and an indispensable partner for our agents. To sum up, we delivered terrific segment income as our team continued to invest in capabilities and deliver value to customers and agents. These results position us well to build on a long track of profitably growing our business over time. Now I'll turn the call back over to Abby. Abbe Goldstein: Thanks, Michael. And with that, we're ready to open up for Q&A. Operator: Thank you. We will now begin the question and answer session. Your first question today comes from the line of Gregory Peters from Raymond James. Gregory Peters: Well, good morning, everyone. Boy, you're producing great bottom line results. Kind of surprising the stock's down as much as it is on the open. I think it's probably a reflection of the top line. And I know you spoke in detail about the different headwinds that you're facing, whether it's in business insurance, the property, Corvus and Bond and Specialty, or the underwriting actions in personal insurance that have affected your top line. When you go beyond the balance of this year and you start thinking at 26%, 27%, what does the Travelers business model look like in terms of top line growth on a consolidated basis? And how are you thinking about them? Alan Schnitzer: Hey, good morning, Greg. It's Alan. Thanks for the thoughts and the question. So we're not going to give outlook on the top line, as you can imagine. But clearly, we understand that in order to meet our objective of delivering industry-leading return on equity over time, we need to grow over time. So it's a priority for us. And if you look back over the last couple of years, we've been very successful with that. In our, you know, we, as you noted by segment, we've talked about what's driving the results this quarter. But I guess what I would say is we are very confident that we've got the right value proposition. We're investing in the right capabilities to make sure we're positioned to grow this business. So we feel very good about the execution in the quarter. We feel very good about what we've accomplished in recent periods, and we feel very good about the outlook. Gregory Peters: Okay. The other I seem to ask this like every other quarter on the technology front, but you keep bringing it up, talked about the digital initiative you have going on in business insurance. Talk about some of the stuff going on in personal insurance. I think one of your peers came out earlier in the third quarter and talked about the potential of artificial intelligence to deliver human resource savings and headcount reductions over time of maybe up to 20%. I'm just curious if we can just go back to, I know you've got best use case on technology and AI, but go back to how you're thinking about this in the three to five-year period in terms of what it might mean to your expense ratio? Alan Schnitzer: Yes. So Greg, I'll tell you, we are very bullish on AI, and we're leaning into it. You know, we're spending, you know, more than a billion dollars a year on technology. A lot of that is focused on AI. We expect significant benefits from it. And I think we've got a long track record, as I said in my prepared remarks, of identifying the right strategic initiatives and driving value from them. We're not going to tell you what our plan is for the expense ratio beyond next year, but I'll also tell you that more than our focus is on the expense ratio, it's on creating operating leverage. And that's what gives us the flexibility to deploy those gains however we want to deploy them. And so maybe it'll be efficiency, maybe it'll be productivity, but we are very bullish about the opportunity for investments that we have underway. We're very bullish about the data we have to fuel the AI. And think that it'll make a big difference in the years to come. Gregory Peters: Got it. Thanks for the answers. Operator: Thank you. Your next question comes from the line of David Motemaden from Evercore. Your line is open. David Motemaden: Hey, thanks. Good morning. I had a question. You gave the RPC and rate ex property. I was wondering, that's a new disclosure. Wondering if you can just talk about what that was last quarter versus this quarter and then maybe zooming in specifically in business insurance. What do you guys see in property pricing outside of national property this quarter? Greg Toczydlowski: Yes, certainly. Well, on the first one, David, it is a metric that we're not going to give every quarter, and we're not going to go back and give that. We offered it up this quarter just to give you some color and let you know how much property the leverage it had on the pricing for this particular quarter. As we've shared with you, the large property has definitely been a market where typically leads in terms of when softening may happen, and it certainly has been the case over the last couple of quarters. In the select and middle market, to directly answer your question, we continue to get positive price increases there. But it's certainly, we're feeling some deceleration. But again, certainly still seeing positive increases. David Motemaden: Got it. Thank you. And then maybe this is just sort of related to your answer there. But on business insurance premium growth by market. So it's good to see the tick up in select year over year and national accounts, you know, sort of we know the story there. But I'm surprised we saw the deceleration in growth in middle market. I was hoping you could just impact that a little bit. Is that just sort of the property dynamics you just mentioned? Greg Toczydlowski: Yes. And if you're looking at overall quarter of middle market, I think you're reading that wrong. The quarter alone was up for middle market 7% relative to year to date of five. David Motemaden: Got it. Yeah. No, I was just looking at the because I know 1Q had the reinsurance dynamic. So I was just comparing it to 2Q, the 10 decelerating to seven. That's what I was looking at there. But, no, appreciate the answer. Operator: Your next question comes from the line of Mike Zaremski from BMO. Your line is open. Michael Zaremski: Great. My first question is on the loss cost trend line. I know it's not easy pinning a broad brush, but if we look at kind of your reserve release trend line, loss ratio trend line, we're also adding IBNR. But a lot of good things going on. Curious if your view on loss cost inflation has changed at all or directionally, is it the I feel like you've only raised it over recent years. Over long periods of time. It flattening out? Thanks. Dan Frey: Hey, Mike, it's Dan. So another quarter of net favorable PYD despite the asbestos charge. I don't really think you can put a trend on PYD. Really what matters for us is in aggregate across the enterprise is that favorable or unfavorable, and we've got now a very long track record of generally having that favorable. As it relates to loss trend, we haven't explicitly commented on loss trend for a while because we think it's just too narrow a way to look at the business in terms of what's pure rate versus what's some blended number of loss trend, but it hasn't moved dramatically in recent periods. Alan's talked about that in prior quarters. We do take a look at it every quarter. Some lines do move up a little bit. Some lines do move down a little bit over time. But it's been pretty stable for a while now. Mike, there was nothing in the quarter that particularly surprised us when it comes to loss activity. Michael Zaremski: Okay, great. And my follow-up is honing in on the home segment. Maybe you need a comment on auto too since there's a lot of bundle in there. But if we look at the RPC trends, they remain very high on I'm assuming there's terms and conditions changes that you're incorporating in kind of those double-digit RPC increases. But the last few years haven't been great for you all in the industry. Consensus kind of has you guys pegged at a 95 combined ratio for the foreseeable future in home. If you can kind of remind us what do we expect RPC to eventually fall? Are those terms and conditions changes going to help? Is 95% the right combined ratio that you guys are targeting given how profitable auto is? Thanks. Michael Klein: Sure. Thanks, Mike. It's Michael. So just to unpack the RPC part of your question for starters, as I mentioned in my prepared remarks, RPC remains elevated. Again, it's rate and exposure, right? So RPC remains elevated largely because we're raising insured limits to keep up with rising replacement costs. And my point about RPC dropping to single digits in 2026 is we'll have largely caught up in getting replacement costs in line with insured values. And so the change in RPC as we head into 2026 will really be those the premium impact from increasing coverage A, the dwelling limits on property coming back to more normal levels. Yes, baked into RPC is also a reflection of a number of the other actions we're taking on the book. I think increasing deductibles, particularly across the Midwest, think different strategies around targeted limits on how big a coverage A we're going to write in some hail-prone geographies, other things like that are all rolled into that figure. And again, I think it's just reflective of the actions that we're taking to improve the profitability of that book. As respect to target combined ratio, we're not going to really disclose the target combined ratio by line. We are certainly encouraged by the progress we've made, particularly in improving the underlying combined ratio in property. It's down period to period, quarter over quarter for something like the last ten or eleven quarters in a row. So it's demonstrative of the progress that we're making there. And again, continue to be pleased with our progress there. Operator: Your next question comes from the line of Meyer Shields from KBW. Your line is open. Meyer Shields: Great, thanks. Good morning. I don't know if this is a question for Alan or Greg, but is there really a disentangling the how much of a property premium decline in BI is from nonrenewed business as opposed to accepting lower rates because you still have adequacy? Alan Schnitzer: Meyer, I don't think we're gonna unpack that. Certainly not right here right now. I don't think we're gonna get into that level of detail. And I honestly, we don't have that level of data at our fingertips right now. Meyer Shields: Okay. Fair enough. Also, to talk a little bit, Michael talked about, I guess, book rolls in personal lines. Does that involve any changes to agency commissions? Or what other tools are you using to encourage that? Michael Klein: Sure, Meyer. Thanks for the question. Yes. So typically, and again, book growth consolidations in the personal lines space are pretty much standard operating procedure. We had stepped away from them. The reason I mentioned it is because we had stepped away from them as we were working to improve profitability. And I think it's an important point to recognize that we're back actively engaged in the marketplace in those conversations with agents looking for situations where their book of business may be disrupted for one reason or another. It is fairly typical in a book consolidation scenario to offer enhanced commission on that book roll for the first term as that business comes over. Operator: Your next question comes from the line of Tracey Banque from Wolfe Research. Your line is open. Tracey Banque: Good morning. My first question is for Mike. I'm curious what you're seeing that's driving favorable loss experience in bodily injury. And, to a lesser extent, vehicle coverages? Michael Klein: Tracy. Thanks for the question. I mean, really is a combination of favorable frequency in both bodily injury and physical damage losses, as well as continued moderation in severity again really across coverages. Tracey Banque: Got it. And a follow-up on Dan's comment about elevated level of capital liquidity. Driven by your earnings that's well in excess of your investment needed to growth. As you know, capital is a big focus for me. And I've really not seen so much excess capital for the entire sector. Is it fair to assume that your excess capital position surpasses the buyback targets you shared and could we expect concurrent deployment of capital on the technology side and or M and A. Dan Frey: Yes, Tracy, it's Dan. So I think I understand the question. So I guess I'd start by saying, look, there's no change at all to what has been now our long-standing capital management philosophy, which is we've got a business that's generating terrific margins. We generate a lot of capital. We generate more than we need just to support the growth of the business. First objective for that excess capital is going to be to find a way to deploy it and generate a return. And so we'll make all the technology investments that we think we can and should make. Always be open to M and A, open to any opportunity to generate returns on an excess capital. Once we've exhausted all those opportunities, then it's not our capital, it's the shareholders we're going to give it back through dividends and buybacks. Tracey Banque: Got it. Thank you. Operator: Your next question comes from the line of Robert Cox from Goldman Sachs. Your line is open. Robert Cox: Hey, thanks. Good morning. Yes, just wanted to go back to the removal of the growth restrictions. It looks like a couple of parts of the business, CMP, within Select and then also in homeowners you give us a sense of how much business is being unlocked for growth here? And if easing those can result in a noticeable uplift in growth? Greg Toczydlowski: Robert, this is Greg. I'll start off and then Michael can talk about the PI. We've been talking about the select mix optimization for some time now. And as we begin to finalize some of those actions, you saw a slight tick up in our retention. We're not really going to quantify what that means for overall growth, but that was the reason that we pointed out the slight pickup in retention. Michael Klein: Yeah. And Robert, Michael, up here on the personal lines side. I think the important point to note in terms of the impact on growth in personal insurance as we relax those property restrictions as our goal is to leverage that property capacity to write package business. And so if you my suggestion, if you want to sort of dimensionalize it, is just look back historically at retention in new business levels in property and in auto. You can see that retention remains depressed right now given the actions we're taking. Again, the property actions depressed retention in both lines. And you can see particularly in property the new business levels are pretty significantly depressed relative to what they've run historically. And so those levers, I think, would give you a way to kind of dimensionalize it. Robert Cox: Okay, great. Thanks for the color there. And then I just wanted to follow-up on the business insurance underlying loss ratio. When you think about the margin improvements during this year, are we seeing improved picks in casualty at all? Or is the improvement year to date largely been a shift lower in some of the shorter tail exposures? Dan Frey: Hey, Rob, it's Dan. Look, I think if you look at the improvement in you're talking about business insurance specifically, right? Robert Cox: Yes. Is that correct? Dan Frey: Yes. I think the single biggest factor we'd say in terms of that sort of 50 basis point improvement on a year-to-date basis has been the continued benefit of earned price. So in the casualty lines especially, and we've talked about this a couple of times, we're continuing to include some provision for a level of uncertainty in those lines that we think is going to serve us well in the long term as opposed to taking those picks down the improvement in the loss ratio. You have other things that impact every quarter too. Mix will change a little bit. But headline number the main driver of the improvement year over year has been the continued benefit of earned price. Robert Cox: Thank you. Operator: Your next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is open. Elyse Greenspan: Hi, good morning. I guess I want to stick there with business insurance. So if we look I guess, just specifically at the underlying loss ratio that was stable year over year in the Q3. So I'm not sure if there were certain pushes and pulls that you want to point out specific to the third quarter or if maybe this quarter rate you know, earned rate, you know, got close to trend and that's kind of what we're seeing in the numbers. And just how do we think from here, you know, just given, you know, slowing pricing, which I know is mostly driven by fiber property, do we think about just the underlying loss ratio and BI? Should we think about that starting to deteriorate as rate gets closer to trend? Dan Frey: Yeah. Good morning, Elyse. Let's just start with where the margins are in business. I mean, they are pretty spectacular margins. And I don't think we're to parse out that level of detail. We're certainly not going to get into what the outlook for margins is. But I'll tell you at these margins, we really like the margins and we really like the business that we're putting on the books at these margins. Elyse Greenspan: Okay. And then I guess, you know, my second question would be, I guess, maybe shifting to personal auto. Have you guys did you guys see any impact of tariffs at all in the quarter, whether it was September relative to July and August? And how are you guys currently thinking about a potential impact of tariffs on the margins in that business? Michael Klein: Sure Elyse, it's Michael. Thanks for the question. I would say we haven't seen a ton of impact to date from tariffs. But our results for the third quarter do include a small impact from tariffs. That said, it's well below the single-digit severity numbers that we discussed a couple of quarters ago. There certainly is the potential for that impact to grow the longer tariffs remain in effect. As you know, it's a very fluid situation. Tariff changes weekly, daily, fairly frequently. So predicting is challenging, but we are keeping a very close eye on it. To your point, there are some external industries that show some moderate increases. Others look largely unaffected. So we're going to continue to closely monitor it. But there is a little bit of a provision in the third quarter results for tariff increases, but it's not yet at the level that we had potentially forecast. And just to be clear, Michael, correct me if I'm wrong, we've got a provision in there because we expected that we might see it. We're not really seeing it in any meaningful way. Michael Klein: Yes. It's significant. Again, we're seeing it on the margins, and so we booked the provision for it. But again, well below the mid-single-digit level that we had described before. Elyse Greenspan: Thank you. Operator: Your next question comes from the line of Paul Newsome from Piper Sandler. Your line is open. Paul Newsome: Good morning. Yesterday, Progressive gave us a little unpleasant news about their poor charge. Just curious if that is something that you've looked at yourself and I'm also curious about the accounting related to these kinds of things. I know that orders not unique. There are other states that have restrictions on proper on profitability. Just curious about how you account for that as well. Michael Klein: Sure, Paul. It's Michael. I'll start with sort of response on the overall situation. Maybe Dan can chime in on accounting. The Florida excess profit provision and the statute isn't actually a new thing. It's sort of standard operating procedure in Florida. It's actually fairly infrequent that people have to return premiums given the statute. What I would say about our business in Florida is we're pleased with our auto business in Florida. But we don't expect to need to make a return of premium to policyholders in Florida due to excess profits for the 2023 to 2025 accident year period for which we would make the filing in 2026. The other thing I would say is given the size of our business in Florida, think of our Florida auto business less than 10% of our PI auto business. Think of the Florida PI auto business 1.5% of Travelers' overall premium. I mean, it's just not going to be a significant issue for the organization even if we were to need to make a return of premium, which we don't anticipate. Dan Frey: Then Paul, it's Dan. With regard to the accounting, I guess I'm going to not give a definitive answer. And one of the reasons I won't give a definitive answer is if you go back to COVID, when we and some of our peer companies returned premium because frequency and losses declined so rapidly, so quickly, not every company accounted for that the same way. So we had a view of how that should be accounting for. That's what we reflected in our results. Other peer companies had slightly different view of how that should be accounted for. And reflected it differently in their results, by which I mean some companies took that as an expense, some companies took that as a return to premium. And as Michael said, since we've not had to deal with the Florida excess profit issue, we haven't done a real deep dive on how we think it would come through the P and L. But most importantly, I think as Michael said, we ever had it, we wouldn't expect it to be much of an impact on our consolidated results in any event. Paul Newsome: Great. That's super helpful. That's all I had. Appreciate it. Operator: Your next question comes from the line of Josh Shanker from Bank of America. Your line is open. Josh Shanker: Yes. Very much for taking my question here at the end. I was trying to understand a little bit about the retention effective retention numbers that you give in the back of the supplement about auto and home. Your retention bottomed, I guess, about three quarters ago. And it's ticked up, but you're still losing more of cars or more policies than you were before. Is that a projected retention based on where you're pricing the business today, or have you already seen retention bottom and it's improving here? Dan Frey: Josh, it's Dan. So retention is a way that we try to give you color relative to what's the change in net written premium. So a couple of things we know definitively. We know definitively at any point in time how many policies are enforced. We give you that number. We know definitively at any point in time how much premium made it into the ledger. We give you that number. Production statistics like retention, renewal premium change, new business, are all in the disclosure say. They're all subject to actuarial estimate of what do we think the ultimate retention is going to be. Because you could start on day one of a policy and look like you'd retained all of them, but we know that there's some peer period of those that are going to cancel early in the term and either go somewhere else or drop their insurance. So it's very challenging to do, I think, you're trying to do at a very specific level and go A plus B equals C. Production statistics are really color around what's happening with the top line. And I'm sorry, can't give you a more helpful answer than that. Josh Shanker: If I look back at 3Q 2024, is that a more because now you have all that data. Is that a more accurate representation of what you know to have happened over the past year? Dan Frey: Production statistics do get updated. So if you went back in true in business insurance, true in personal insurance, if you looked at historical quarters, you could almost do a triangle of what was retention as originally reported because it's an estimate. We true those up as time goes on. Josh Shanker: And can you confidently say, and I'll leave it at this, that retention has improved from where it was a year ago, or it's still not certain? Dan Frey: I think we're pretty confident in saying that retention has improved from where it was a year ago. Josh Shanker: Okay. Thank you. Operator: Your next question comes from the line of Alex Scott from Barclays. Your line is open. Alex Scott: Hey, thanks. First one I have is on commercial auto and general liability. Just noticing, you know, those are, you know, sort of the lines where net written premium is growing more and was just interested in if that's more a reflection of, you know, the rate's obviously different there than maybe some of the other lines where there's pressure. But, you know, is there anything about the commercial auto product launch and some of the things you're doing that are actually causing you to lean into businesses a little more? Greg Toczydlowski: Hey, Alex. This is Greg. You know, just to get the second part of your question, we did roll out a new automobile product across all business insurance that includes select and middle market that would roll up into the aggregate commercial auto numbers. So we do think that that's our most sophisticated product in auto that we brought into the marketplace. So that helps us from a segmentation point of view. But we've been very thoughtful around our growth in commercial auto. The thrust of what you're seeing there in premium deltas really is based on renewal premium change. And that's why I gave you some of that color in my prepared comments at a product line level. Alex Scott: Got it. Okay. That's helpful. And over in personal lines, I mean, the appetite you've been pretty clear on in that should help on the growth front. Is there anything from just a marketing spend kind of standpoint and thinking through the expense ratio that we should be aware of is you think through ramping up growth? Michael Klein: Sure, Alex. It's Michael. I would say that on the margins, we have increased our marketing spend in personal insurance largely in support of our direct-to-consumer business. But it's a very different ballgame for us than marketing spend other places. Our direct-to-consumer business is less than 10% of our overall business. So we are on the margin increasing marketing spend there to drive more growth. But it doesn't have a dramatic impact on the overall financial results of the business. Alex Scott: Got it. Thank you. Operator: And we have time for one more question. And that question comes from the line of Ryan Tunis from Cantor. Your line is open. Ryan Tunis: I just had a question, just one on in business insurance, just on incurred loss. But I guess it's, in national property, we don't trend losses like we do or property for that matter. We trend losses like we do with other stuff, but certainly are still attritional losses on that line. I guess I'm just curious if those attritional losses have run better or worse or in line with your expectations so far this year? Thanks. Dan Frey: Hey, Ryan, it's Dan. I think the quarter results are really strong. Weather was generally leaning towards favorable, including in business insurance. If you're wondering about whether it's so significant that we would say this isn't really a clean jump-off point for business insurance and you'd make some big adjustment, we would say no sort of inside of the normal realm of variability from quarter to quarter, but leaning towards the favorable. Operator: And we have reached the end of our question and answer session. I will now turn the call back over to Abby Goldstein for closing remarks. Abbe Goldstein: Thanks, everyone, for joining us today. And as always, please follow up with Investor Relations if you have any other questions. Have a good day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to Marsh & McLennan Companies, Inc.'s Earnings Conference Call. Today's call is being recorded. Third quarter 2025 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmcclellan.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-Ks, all of which are available on the Marsh & McLennan Companies, Inc. website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. If you have a question, please press 11 on your touch-tone phone. If you wish to be removed from the queue, please press 11 again. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press 11 on your touch-tone phone. I'll now turn this over to John Doyle, President and CEO of Marsh & McLennan Companies, Inc. John Doyle: Thanks, Andrew. Good morning, and thank you for joining us to discuss our third quarter results reported earlier today. I'm John Doyle, President and CEO of Marsh & McLennan Companies, Inc. On the call with me is Mark McGivney, our CFO, and the CEOs of our businesses: Martin South of Marsh, Dean Klisura of Guy Carpenter, Pat Tomlinson of Mercer, and Nick Studer of Oliver Wyman. Also with us this morning is Jay Gelb, Head of Investor Relations. Marsh & McLennan Companies, Inc. had a solid third quarter. As we said coming into the year, we anticipated impacts from a changing macro environment, and our performance continues to track with our expectations. Overall, we grew revenue 11% in the quarter, reflecting continued momentum in our business and contributions from an active year of acquisitions in 2024. Underlying revenue increased 4% for the quarter, reflecting the impact of lower fiduciary interest income, declining P&C pricing, and economic uncertainty affecting our clients, especially in the U.S. Adjusted operating income increased 13% from a year ago. Our adjusted operating margin increased 30 basis points compared to 2024, and adjusted EPS grew 11%. Earlier this week, we announced that we will change our brand in January from Marsh & McLennan Companies, Inc. to Marsh. Also in January, our stock ticker symbol on the New York Stock Exchange will change from MMC to MRSH. Our businesses will adopt the Marsh brand after a transition period. We also introduced Business and Client Services, or BCS. This unit brings together our operations and technology teams from across the company under Paul Beswick, our Chief Information and Operations Officer. Our new brand strategy, the creation of BCS, and the efficiencies we expect to gain are core parts of a new program we call Thrive. Thrive will also include automation efforts and workforce actions to optimize our scale and specialization. The program is designed to deliver greater value to clients, accelerate growth, and improve efficiency. The efficiencies we gained through the program will support investments in talent and technology. As we increasingly deploy AI, we can deliver even greater value for clients and colleagues. Thrive will also help us continue to expand margins. Let me take a moment to comment on our brand strategy. Marsh will be our new brand and represent our vision to be the most impactful professional services firm in the world. This change will increase our visibility, strengthen our value proposition, and support our business strategy. The Marsh brand is highly regarded and has the broadest global reach among our businesses. Today, Marsh stands for excellence in risk advising and insurance broking. Going forward, the new Marsh will represent the full value of our offerings in risk strategy and people. Turning to BCS, our company has a long history of innovation, which has been an important factor in our success for over 150 years. We continue to innovate in the AI era, having invested in large language models for more than two years. And while the full impact of AI is still emerging, we are seeing an increase in opportunities from our use cases. We are focused on developing tools that boost colleague productivity to better support our clients. For example, Len.ai, our proprietary Gen.ai tool for colleagues, responds to about 1,000,000 inquiries per week, fueling efficiency and automation. We are also rolling out new market-facing AI tools, including most recently, AIDA. This is Mercer's proprietary AI-powered assistant within the Talent All Access portal, which is a global intelligence platform supporting HR decision-making. And prior to AIDA, we introduced Centrisk, our AI-enabled supply chain risk assessment platform. We have a vast data set as the global leader in risk strategy and people, and BCS will accelerate our efforts to extract valuable insights through AI and analytics. This enables us to better serve our clients, empower our colleagues, and increase our efficiency. Over the next three years, we expect Thrive will generate approximately $400 million in savings, with a portion being reinvested to drive additional growth. We will incur around $500 million in charges to achieve these savings. Now I'd like to take a moment to talk about talent in the insurance and reinsurance markets. This is a people business, and we have an unmatched depth of talent with over 90,000 colleagues. And we love to compete because it makes us better. Colleague mobility is good for our industry and has served us well because we are an employer of choice, with a strong colleague value proposition. Our colleagues can be their best at our company because they work with the top talent in our industry, they manage meaningful client issues, and they have access to market-leading analytics and technology. We make a point of differentiating ourselves through a collaborative team-based model. This is reflected in strong colleague retention and excellent engagement scores. A few competitors have engaged in unlawful and unethical hiring practices and encourage talent to violate their covenants as a deliberate strategy to build their businesses. In these cases, I believe it's important to call out this behavior and to protect our rights. It's also the right thing to do to sustain the trust that we've built with our clients over a long time. Turning to insurance and reinsurance market conditions, we continue to see a competitive market characterized by slower growth from an uneven economy, stronger carrier ROEs, and continued decreases in overall rates, particularly in property reinsurance and property cat reinsurance. According to the 4% in the third quarter driven by property, this follows a 4% decline in 2025. As a reminder, our index skews the large account business. Overall, rates were down in the U.S. by 1%, Canada was down 3%, the UK, EMEA, Latin America, and Asia were all down mid-single digits, and Pacific was down by double digits. Global casualty rates increased 3% with U.S. excess casualty up 16%, reflecting continued pressure in the liability environment. Workers' compensation decreased by 5%. Global property rates decreased by 8% year over year, compared with a 7% decline last quarter. Global financial and professional liability rates were down 5% while cyber decreased 6%. In reinsurance, the market remains resilient. It has responded to an extended period of elevated natural catastrophe losses, as well as ongoing geopolitical and macroeconomic uncertainty. Dedicated reinsurance capital is projected to reach approximately $650 billion by year-end 2025. With ample capacity, increased competition is driving reinsurers to look for profitable ways to deploy capacity. The cap on market is on pace for a record year of issuance, with over 60 new bonds in the first nine months, generating approximately $17.5 billion of limit. In casualty reinsurance, renewals were largely stable with sufficient capacity. This outcome reflects underwriting actions of primary carriers and increased reinsurer appetite. Across both insurance and reinsurance, we advise our clients on proactive strategies that reflect the risk environment and market conditions, and of course tailored to their tolerance for volatility. Today, we see decreasing property casualty prices, but also a growing cost of risk. Over time, this trend is unsustainable. With that being said, barring significant changes in large loss activity, as well as the broader macro environment, we anticipate insurance and reinsurance market conditions seen so far this year will likely continue in 2026. Now let me turn to our third quarter financial performance and outlook, which Mark will cover in more detail. Consolidated revenue increased 11% to $6.4 billion and grew 4% on an underlying basis with 3% growth in RIS and 5% growth in consulting. Marsh was up 4%. Guy Carpenter grew 5%. Mercer 3%, and Oliver Wyman was up 8%. We had adjusted operating income growth of 13% and we generated adjusted EPS in the quarter of $1.85, which was up 11% from a year ago. We also repurchased $400 million of our stock in the quarter. Turning to our outlook for 2025, we continue to expect to deliver mid-single-digit underlying revenue growth, solid growth in adjusted EPS, and our eighteenth consecutive year of reported margin expansion. Of course, this outlook is based on conditions today, and the economic backdrop could turn out to be materially different than our assumptions. In summary, we're pleased with our year-to-date performance in a complex environment. Thrive will amplify our value proposition for clients across all our businesses, and it creates opportunities to invest in talent, growth, AI, and our new brands. Our capabilities are unique, and there is strong demand for our advice and solutions. We've earned our leadership position in our markets through 154 years of innovation and growth. Our disciplined approach to investing for the future while delivering results in the near term remains a guiding principle for our planning and capital allocation. Our announcements today and earlier this week align with this philosophy. With that, I'll hand the discussion over to Mark for a more detailed review of our results. Mark McGivney: Thank you, John, and good morning. Our third quarter results were solid, reflecting our strong position in execution despite a more challenging environment. Consolidated revenue increased 11% to $6.4 billion with underlying growth of 4%, which came despite a headwind from fiduciary interest income. Operating income was $1.2 billion and adjusted operating income was $1.4 billion, up 13%. Our adjusted operating margin increased 30 basis points to 22.7%. GAAP EPS was $1.51 and adjusted EPS was $1.85, up 11% over last year. For the first nine months of 2025, underlying revenue growth was 4%, adjusted operating income grew 11% to $5.7 billion. Our adjusted operating margin increased 20 basis points and adjusted EPS increased 9% to $7.63. Looking at Risk and Insurance Services, third quarter revenue was $3.9 billion, up 13% from a year ago, or 3% on an underlying basis. Operating income in RIS was $750 million. Adjusted operating income was $965 million, up 13% over last year. The adjusted operating margin was 24.7%. For the first nine months of the year, revenue in RIS was $13.3 billion with underlying growth of 4%. Adjusted operating income increased 12% to $4.4 billion and adjusted operating margin was 33.3%. At Marsh, revenue in the quarter was $3.4 billion, up 16% from a year ago or 4% on an underlying basis. The 16% growth at Marsh is impressive and reflects the contribution from McGriff where integration continues to go well. In U.S. and Canada, underlying growth was 3% for the quarter, reflecting good new business growth overall and continued momentum in MMA. International underlying growth remains solid at 5% with EMEA up 5%, Asia Pacific up 6%, and Latin America up 3%. First nine months of the year, Marsh's revenue was $10.7 billion with underlying growth of 5%. U.S. and Canada grew 4%, and international was up 6%. Guy Carpenter's revenue in the quarter was $398 million, up 5% from a year ago on both a GAAP and underlying basis. Growth remained solid despite softer reinsurance market conditions and came on top of 7% underlying growth in the third quarter of last year. For the first nine months of the year, Guy Carpenter generated $2.3 billion of revenues and 5% underlying growth. In the Consulting segment, third quarter revenue was $2.5 billion, up 9% or 5% on an underlying basis. Consulting operating income was $501 million and adjusted operating income was $545 million, up 11%. Our adjusted operating margin in consulting was 22.1%, up 40 basis points from a year ago. For the first nine months, consulting revenue was $7.2 billion, reflecting underlying growth of 4%. Adjusted operating income increased 9% to $1.5 billion and the adjusted operating margin increased 50 basis points to 21.2%. Mercer's revenue was $1.6 billion in the quarter, up 9% or 3% on an underlying basis. Health grew 6%, reflecting continued strong growth across all regions. Wealth was up 3%, led by investment management. Our assets under management were $683 billion at the end of the third quarter, up 2% sequentially and up 25% compared to the third quarter of last year. Year-over-year growth was driven by our acquisitions of Cardano and C Corp, positive net flows, and the impact of capital markets. Career was flat year over year on an underlying basis, reflecting continued softness in project-related work in the U.S. and Canada, offset by sustained demand in international and good growth in our workforce. For the first nine months of the year, revenue at Mercer was $4.6 billion with 3% underlying growth. Oliver Wyman's revenue in the third quarter was $886 million, up 9% or 8% on an underlying basis, reflecting growth in each of our regions. The third quarter benefited from favorable timing, so we expect moderating growth at Oliver Wyman in the fourth quarter. For the first nine months of the year, revenue at Oliver Wyman was $2.6 billion, an increase of 5% on an underlying basis. Fiduciary interest income was $109 million in the quarter, down $29 million compared to the third quarter last year, reflecting lower interest rates. Looking ahead to the fourth quarter, based on the current environment, we expect fiduciary interest income will be approximately $85 million. Foreign exchange had a de minimis impact on adjusted EPS in the third quarter. Based on current rates, we anticipate FX will be a $0.04 benefit to adjusted EPS in the fourth quarter. Turning to our Thrive program, as John mentioned, we are excited about this significant new step in the evolution of our firm, which should enable us to continue to deliver exceptional results while we invest for sustained growth. We began executing the program in the third quarter and expect to generate $400 million of total savings, a portion of which will be reinvested for growth. Although we will see a modest benefit in the fourth quarter, the vast majority of the savings will be realized over the next three years. We expect to incur approximately $500 million of charges to generate savings. The majority of savings will result from efficiencies created by BCS, with a significant portion coming from further optimization of our global operating model. We have mature capability centers in locations around the world, and our plans over the next three years will accelerate this journey. Today, we have over 19,000 colleagues in cost-effective locations across BCS and our global functions. Through this program, we expect to further optimize our model by shifting more work to these locations. In addition, we're excited about the possibilities of AI-enabled enhancements in client service, insights, and efficiency. As we look to take our AI journey from experimentation at scale to business, a substantial portion of the work in BCS will be driving savings through efficiency in process and automation, including through the use of AI. This will also be an area where we increase investment. These initiatives in BCS are closely linked. In order to capitalize on the full value of emerging technology, we need to concentrate more of our operations work in locations with scale. A critical enabling step in this journey is combining the distributed operations across our businesses into a single team. We also anticipate significant savings by continuing to streamline our organization. We have a long track record of executing for efficiency and have consistently demonstrated our ability to drive near-term results while investing for sustained growth. The Thrive program will enable us to continue to invest while we drive earnings and margins higher. Total noteworthy items in the third quarter were $136 million and included charges related to McGriff as well as restructuring costs associated with Thrive. Interest expense in the third quarter was $237 million, up from $154 million in the third quarter of 2024. Based on our current forecast, we expect interest expense will be approximately $235 million in the fourth quarter. Our adjusted effective tax rate in the third quarter was 24.8%. This compares with 26.8% in the third quarter last year. Excluding discrete items, our adjusted effective tax rate was approximately 25.5%. We continue to expect an adjusted effective tax rate of between 25-26% in 2025, excluding discrete items. Turning to capital management and our balance sheet, we ended the quarter with total debt of $19.6 billion. Our next scheduled debt maturity is in 2026 when $600 million of senior notes mature. Our cash position at the end of the third quarter was $2.5 billion. Uses of cash in the quarter totaled $1 billion and included $445 million for dividends, $200 million for acquisitions, and $400 million for share repurchases. For the first nine months, uses of cash totaled $2.6 billion and included $1.3 billion for dividends, $366 million for acquisitions, and $1 billion for share repurchases. We continue to expect to deploy approximately $4.5 billion of capital in 2025 across dividends, acquisitions, and share repurchases. The ultimate level of share repurchase will depend on how our M&A pipeline develops. For the full year, we continue to expect mid-single-digit underlying revenue growth, margin expansion, and solid growth in adjusted EPS. Note that this outlook is based on conditions today, and the economic backdrop could be materially different than our assumptions. Overall, we are pleased with our third quarter and year-to-date results and are excited about the opportunity that our new brand and Thrive will bring. With that, I'm happy to turn it back to John. John Doyle: Thank you, Mark. Andrew, we are ready to begin Q&A. Operator: Certainly. We will now begin the question and answer session. If you have a question, please press 11 on your touch-tone phone. If you wish to be removed from the queue, please press 11 again. If you're using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press 11 on your touch-tone phone. And in the interest of addressing questions from as many participants as possible, we ask that participants limit themselves to one question and one follow-up question. John Doyle: One moment, please. Operator: Our first question comes from the line of Greg Peters with Raymond James. Good morning, everyone. Greg Peters: I'd like to, for the first question, focus on the comment during the call and in your branding press release about the lower growth environment. John, I know you mentioned that you expect mid-single-digit growth this year. Do you think with the government shutdown and the uncertainty that we might be on this glide path to low to mid-single-digit as we look out over the next 24-36 months, especially in the face of a more challenging pricing environment from property casualty? John Doyle: Yes. Good morning, Greg, and thank you for the question. I wasn't trying to project into 2026 or 2027. Of course, every year comes with its different opportunities and different challenges. But as we guided earlier this year, we knew there would be some pressures from the macro environment and P&C-related pricing pressures. We guided to mid-single-digit underlying revenue growth. I like how we're positioned. I am very excited about Thrive and what that can mean for our growth over time. And so, we're confident in our ability to execute across different economic cycles and different P&C cycles. We have a playbook and again a real track record of doing it. So, we'll see what next year brings and we'll guide to our thoughts at that point. It feels like a pretty uneven economy to me. For sure, that's kind of what our data suggests. But we're not pessimistic about growth. We like our position. We've been reshaping the mix of business and the company over a long period of time and focused on being a better growth company. Do you have a follow-up, Greg? Greg Peters: Yes, I do. Of course. In one of the previous announcements from your company, I think the company announced its intention to start a wholesale business. Maybe you could spend a minute and talk about what you're thinking about that. Is it just for internal related opportunities, or do you think you might branch that off and do other work with other retailers and other organizations as well? John Doyle: Were you talking about MMA or more broadly or either? Greg Peters: MMA, the MMA London wholesale. John Doyle: Yeah. Well, actually, let me address it kind of more broadly. Maybe I'll start with that and then get to MMA. We're not looking to build a third-party wholesale business here. We have exceptional specialty talent inside of this company, the market-leading specialty talent. And we just don't want to be outsourcing an important part of our value proposition when it's not necessary. Some E&S markets require us to go through a wholesale broker to access them. So, we'll build some of that capability. And where we need access and in very unique circumstances, we need capability. We'll use third-party wholesalers. We do that today. And they serve us and our clients well. As it relates to MMA, yes, we've created a new desk in London. Reed Davis, the CEO of McGriff, is working with Lizzie Howe in London. We have just absolutely top specialty talent in the London market, of course. I've been there for a long, long time serving our clients and serving Marsh clients globally, but particularly in the U.S. We bring a lot of risk that originates in the U.S. that we bring to the London market. So when we were coming together with the team at McGriff, we saw an opportunity to bring in some of that business from third-party wholesalers. And so again, it's an important part of what Reed is focused on. So it's a revenue synergy for us at McGriff, and we're excited about those possibilities in 2026. So thank you, Greg. Andrew, next question. Operator: Our next question comes from the line of Mike Zaremski with BMO. Mike Zaremski: Hey, great. Good morning. Thanks for the details on the Thrive expense program. Just the math, $500 million of costs for $400 million of savings, that's I think that's a really good ratio versus many of your peers and maybe even you all historically. So is there maybe you can you know, usually, like, there's more cost for the savings ratio. Any kind of things you can unpack on why you're going to get so much savings for that level of cost? And then also on historically, how much have you reinvested into the business on the savings? I know you mentioned you're going to reinvest some as well. John Doyle: Yeah. Thanks, Mike, for the question and for taking note of the program details. But maybe I'll have Mark talk a little bit about the cost estimates and charge estimates at this point. Mark McGivney: Sure. Hi, Mike. So, Mike, as you pointed out, we've got a pretty good track record in terms of payback in these programs. And as I described, this is a lot of continuation of work that we've been doing. I talked about we've got a meaningful amount of low-cost location penetration today, and this is extending it. So a lot of the costs are just associated with severance and just the cost associated with transitioning work and other things we're doing just to simplify the organization. So we've got a pretty high degree of confidence in the savings and charges, although over time these estimates might move a little bit. But yeah, we're going to get good payback on the investment that we're making. John Doyle: And the majority will go to earnings. And as I said earlier, there's some reinvestment, but as demonstrated before, we generate a lot of value out of these programs. And we expect the majority of the savings is going to flow through to the bottom line. Mike Zaremski: Okay. Great. My quick follow-up is honing in on organic in the U.S., probably on the RIS side. John, your prepared remarks, you talked again about economic uncertainty, especially in the U.S. You mentioned some unlawful and unethical business practices. You talked about pricing likely decelerating a bit. So I guess it would be are you kind of telling us we should be kind of expecting at least the U.S. side of organic to be kind of running along the current trend line for the first in the near term? John Doyle: You know, look. I guess, you know, first, you know, the talent headlines, you know, over the summer, nearly 95,000 people. Right? It's more than 90,000 people, $25 billion in revenue annualized for, you know, sort of for the company overall. You know, not a material impact at all. As it relates to the U.S., we're seeing a bit of hesitancy from our larger clients, you know, in the U.S. You know, like to think certainly as you know, some of the possible tail risk scenarios around trade and the economy begin to come in a little bit that, you know, and I think you're beginning to see it a bit with obviously the pickup in the M&A market, you know, that things will clear up. But there's still a lot obviously out in the macro economy. There's still a lot to settle out from a trade perspective. But overall, I'm very pleased with our growth. I mean, we had 11% growth in the quarter. I think Marsh's GAAP growth was 16%, right? So absolutely terrific. Yeah. 4% growth at Marsh, 5% year to date. Again, all the pricing pressures and other challenges in the economy, I feel good about that. And I know we're positioned well and we're executing well in the market. Thank you, Mike. Andrew, next question, please. Operator: Our next question comes from the line of Jimmy Bhullar with JPMorgan. Jimmy Bhullar: Hey, good morning. So first, just had a question on maybe start with Oliver Wyman. I think everybody's been assuming that there would be a slowdown there given economic uncertainty and geopolitical issues. But the business continues to perform well. So maybe talk a little bit about the pipeline that you're seeing there and do you feel that you could continue this level of growth despite the environment? John Doyle: Yeah. Thanks, Jimmy. Again, given all the uncertainty, we're quite pleased with the growth at Oliver Wyman to date this year. And obviously, we had a very, very strong quarter. Mark talked a bit about the timing flattering the third quarter a bit. But we have an outstanding team at OW. It is a complex operating environment for our clients, and in many cases, they're looking for a team at OW to help them navigate it. So Nick, maybe I'll ask you to talk a little bit about what you see in the demand funnel and pipeline. Nick Studer: Thank you, John. Thank you, Jimmy. Yeah, best quarterly growth in six quarters, but I would point out the comp was a one. And as Mark said, we did benefit from some favorable timing on things like success fees. So I do think we expect moderating growth in the fourth quarter. But overall, we're pleased and we think we're executing well. What is generally a slower market. As Mark indicated, we grew across all of our regions, fastest growth in Asia, but The Americas grew pretty well. And some of that is fueled by work on performance transformation, both top line and bottom line efficiency work, which tends to be, you know, a little bit countercyclical. From a practice perspective, our consumer telecoms and technology practice, which we newly brought together at the beginning of the year, is growing very, very strongly. Our insurance and asset management practice alongside our actuarial practice, I've talked about a lot on these calls, working really well together, continuing very high growth. They keep up at this rate. They're becoming a real juggernaut. And our transportation and advanced industrials practice also went into double digits. On the capability side, customer innovation and growth, interestingly. It's, you know, see work in restructuring. We see work in finance risk. Also see work in customer innovation and growth growing well. And I think some of that really rests on the work we're doing in our quotient platform around AI. I'm sure we'll talk about that maybe later on the call. But you know, we're helping a lot of clients think through how to both enhance their capabilities and reduce costs driven by AI. And our sort of, you know, how do you increase your AI quotient as a client is how we came up with our quotient name, and that's how we go to market on AI. All of which is looking pretty good. And then just for the pipeline, sales continue at a decent rate. We go up and down every quarter, every month. But I'm pretty optimistic going through the rest of the year and into next year. Terrific, Nick. Thank you. Jimmy, do you have a follow-up? Jimmy Bhullar: Jimmy, are you there? Maybe we lost Jimmy. Pardon me. G I s checking me. What? Oh, there he is. I'm here. Yeah. Along similar lines, maybe on Marsh and MMA, is the environment for your business improving a little bit given the uptick in capital markets, M&A, IPOs? Or is that not enough of a tailwind to where investors would see that in your reported results over the next few quarters? John Doyle: We definitely saw an uptick in M&A activity in the quarter that was certainly helpful to growth in the quarter. Our middle market businesses, MMA, but not just in the United States, but all over the world are performing a bit better. Growth up market or excuse me, growth in the middle market is better than growth up market. And so, you know, we feel good about, you know, how we've deployed capital and have invested in our capabilities and our exposure to markets. But MMA had a good quarter of growth and we expect that that will continue. Thanks, Jimmy. Andrew, next question, please. Operator: Our next question comes from the line of David Motemaden with Evercore ISI. David Motemaden: Hey, thanks. Good morning. Just had a question on the Thrive program. And you know, thinking through some of the, you know, the $400 million of gross saves and how you're thinking about whatever portion of that you're going to reinvest. I guess I'm thinking how are you thinking about how you what you will be reinvesting in. You know, I think some of your peers have been a little bit more front-footed on adding talent. You mentioned, John, in your prepared remarks, some noise with your existing talent base. You guys have been prolific in the past on adding talent. Is you know, we haven't heard much on that front. Especially given McGriff. But is that something where you guys think about adding talent heading into next year using some of the gross cost saves associated with the Thrive program? John Doyle: Yes. You know, that's where the investment will come. The investment will also be in accelerating our AI journey as well. You know, we continue to invest in talent both organically and inorganically. You know, it doesn't necessarily generate the headlines that you see through the tactics that others use. But we've continued to invest in 2025. Thrive is all about growth. I'm excited about David, I'm excited about Thrive and all the components of it. It's, by the way, not a strategic shift for us. Nor is it about organizational or structural changes. You know, we're always looking to improve. And our vision to be that most impactful professional services firm in the world, all these changes that we announced this week support that. We're very proud of our legacy brands for sure. We have the opportunity to build a new Marsh and simplify our story to show up in the market in a better-connected way. Talked about the complexity of the environment today. We didn't do this for today. But I think the timing of it, given the complex operating environment, is great. We're going to showcase the unique attributes of the firm, the breadth of capability we have, the depth of our talent. I talked about data. Part of what we're investing in is we've got a new data leader across the firm. We've got some exciting new tools around data ingestion that will accelerate our already market-leading analytics. Adding all this to a culture that is, as I said in my prepared remarks, team-based and client-first, I'm really excited about it. BCS, Paul Beswick, who's an important, really critical leader in our company, bringing together ops and tech under his leadership and working with the business leaders that you know well from this call. It's all about leveraging the best technology and automation across our businesses. And as Mark talked about in his remarks, optimizing that operating model. So we see a lot of possibility there. It will allow for more efficient CapEx across the company. And so a lot for us to dig into and, you know, we're excited about how that accelerates our growth over time. David Motemaden: Great. Thanks. And then just a follow-up and just on Marsh in the U.S. and Canada. I guess it feels like things are pretty stable economically, at least. You know, I had thought the economy kind of ticked up a little bit in 3Q. I think pricing maybe a little worse. M&A a little bit of a tailwind. The comp was the same. Can you just help me think through, like, what was causing the deceleration in organic in the U.S. and Canada this quarter? Is it some of that talent stuff that's really just coming through a little bit? I know it's not, like, a huge impact on the entire company, but specifically within that business. John Doyle: Yeah. You know, again, for the company overall, it's not an impact at all. I think we had 4% growth at Marsh in the quarter. We have 5% year to date given the pricing pressure. It doesn't feel like an economy that is better than ninety days ago. It feels quite uneven. And we'll see obviously what happens. I think you saw a softening of labor markets in the quarter. And so it's quite uneven out there. I think again, upmarket, which is where we see more softness in growth. We have clients on average that have been a bit more defensive in this environment. And so that's okay. As I talked about, you know, as well as trying to highlight while pricing may be down and the economy may be slowing and interest rates may be declining, the cost of risk, whether it's the economy's exposure to extreme weather, rapidly rising cost of liability in some markets including here in the U.S., healthcare costs. Those are big pressure points. Those are all increasing at a rate much higher than GDP. And it's good for our business over time. It may not be good for the overall U.S. economy, but that's a different story. But the demand for our services and helping clients navigate those issues will be quite resilient. I'm very confident in that. Thank you, David. Andrew, next question. Operator: Our next question comes from the line of Rob Cox with Goldman Sachs. Rob Cox: Hey, thanks. Good morning. I just wanted to ask about the international versus the U.S. It seems like pricing is sort of decelerating in a lot of geographies, but I was curious if you're more sensitive to pricing in certain geographies versus others. John Doyle: Yeah. It's a good question. I'll ask Martin to comment on it a bit, Rob. There's no question, it's a competitive market. In my prepared remarks, I talked about insurance ROEs being quite strong and as a result, insurers are looking to grow and they're looking to grow in an economy that's, you know, again, uneven and perhaps softening in a few places. Again, time, price will have to catch up with the growth and risk. But I'd also note before I hand it off to Martin to talk about markets around the world, you know, we're really working with our clients about thinking medium to longer term. Again, there's a mismatch between price today and loss cost inflation. And I think the earlier that our clients can get ahead of that and manage proactively, you know, they'll be better positioned when, you know, when markets do turn. But Martin, maybe you could talk about rates overall around the world. Martin South: Well, I'll just put it in context of our international growth, which I was very pleased with during the quarter. It was 5% on top of 7% in 3Q 2024, and underlying growth year to date is 6%. Asia Pacific growing 6% in the quarter and 5% year to date. And really strong performance there from Japan and Korea where we've been investing and see great opportunities for us to play a bigger role in the market there. EMEA grew 57% year to date. With really interesting country growth in The United Emirates, Saudi, India, France, Spain, all growing in nearly double digits. Latin America grew 3% on top of 8% in 3Q 2024, slightly impacted by eighteen-month policies in 3Q 2024. But year to date, Latin America grew 5%. So in the course, it saw strong double-digit new business growth, capital markets growth across international, credit specialties, and cyber, very strong growth. So we're very well positioned, confident in our strategy, a lot of market share and opportunity for us to take. You're right. The rates are slightly more down in this national. So then outlier, I think, is The Pacific down 11%. For the second quarter in a row. But we have a lot of share to take great positions in our marketplace and not overwhelmingly does rates play through to our revenue at all. Thanks, Martin. Rob, do you have a follow-up? Rob Cox: Yes, and thanks for all the color there. I just wanted to follow-up on the Thrive program. Clearly, there's a lot of growth ambitions underlying the Thrive program in addition to the savings. But I'm curious if you think this program combined with the environment over the next couple of years gives you guys an opportunity to expand margins at an above-average rate, or is this more like this helps in the context of potentially slowing organic to deliver similar levels of margin expansion as the past? John Doyle: Okay. I think the challenge in your question is what is the average margin expansion? Right? But look, yeah, we all know we're operating in a lower growth environment for sure, at least in 2025. You know, we'll again talk about 2026 in January when we meet in about ninety days. But there's no question. Thrive will help support margin expansion into the future. And, you know, we're excited about some of the things we've learned already as, you know, Paul has worked with the teams from each of the businesses in bringing them together and really leveraging the best technology, the best solutions. Mark talked about talent, moving talent to our capability centers that are lower cost. And again, as we continue to deploy AI in our workflow, I'm very excited about possibilities around that. And you know, we've got eighteen consecutive years of margin expansion when we round out this year. So we've got a track record, you know, through economic and, you know, P&C cycles to continue to deliver. So again, Thrive will be an important element and an important part of our focus as a leadership team over the course of the next couple of years. So thank you, Rob. Andrew, next question? Operator: Our next question comes from the line of Brian Meredith with UBS. Brian Meredith: Yes, thanks. John, couple first here. First, I wonder if you could talk a little bit about the insurance brokerage M&A environment right now. Given we're kind of in the softening market, are you seeing bid-ask spreads continue to narrow? And then maybe on that as well, we're kind of almost a year into the McGriff. Do you still have appetite and willingness to do, call it, larger scale M&A at this point? John Doyle: Yes. Thanks, Brian. So by the way, just a quick update on McGriff. You know, everything's moving according to plan. Continue to be incredibly excited. I mean, this is a passionate, talented group of people coming together within our MMA operation. And, you know, as I mentioned before, you know, Reed Davis working with Dave and Matt Stadler on some, you know, really important opportunities for us as a company. So, you know, very, very pleased about that. You know, do we have the appetite and ability to do a larger scale deal? Absolutely. I think it's more likely that we'll continue our string of pearls approach to the market. But again, you know, we work hard at examining all possibilities and it's not just about getting bigger, of course. It's about getting better and finding the right fit, you know, fits for us on a cultural basis. And so we remain very active in the market. We've done a bunch of small deals this year. It was a quiet quarter in the third quarter, but again, we're working on a number of different possibilities and we'll continue to do that. In terms of the bid-ask spread given the slower growth environment, you know, maybe the bid-ask spread might be widening, Brian, is kind of what comes to mind at least in, you know, a couple of conversations, you know, that we've had. And not just in insurance brokerage, I think in the MGA market as well, you know, I'm seeing some dynamics there emerge. So anyway, I think PE buyers seem to be maybe more willing to pay a higher multiple than some strategic. At least that's what, you know, I'm taking for the moment. So anyway, hope that's helpful, Brian. Brian Meredith: Yep. Yep. Follow-up. Very helpful. Yeah. Absolutely. Yeah. Just back on the McGriff, you know, we're going to see it, I guess, partially inorganic in the fourth quarter. What does organic look like at right now? And is it similar to what's going on in the Marsh U.S./Canada business? Better or worse? John Doyle: Yeah. We won't report separately on McGriff's organic or for that matter, MMAs either. It's an important part of our U.S. business. So but it's a huge part of our U.S. business, you know, with MMA now more than $5 billion in annualized revenue. What we see every time we do a deal pretty much is slowing organic in the first couple of quarters, two, three quarters. You know, it's a lot for people to digest. You know, system changes, even broader changes. Right? New laptops, you know, all of this kind of stuff. Some cases, real estate changes. So, you know, our folks can be a bit our new folks can be a bit distracted during that period of time. You know, that's what we've seen, you know, with McGriff as well. But we expect it to be a really important contributor to MMA as we go forward. And as Martin and I both mentioned, you know, MMA had a, you know, really good quarter in the third quarter. And we expect that to continue. So we feel great about how we're positioned in the middle market in the United States. So thank you, Brian. Andrew, next question, please. Operator: Our next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: Hi, thanks. Good morning. My first question, I guess, just given your commentary on market conditions, this year persisting into next year, and I think you were also just talking about the slowing economy as well. Does this mean just from a high-level perspective that, you know, the organic revenue target for next year just feels like it should it would probably be similar to this year, right, mid-single-digit, I know, in the past. It's been mid-single-digit or greater. I'm just trying to think about just your view. It seems like if we think about everything kind of staying the same that the guidance would be consistent this year to next year. John Doyle: Good morning, Elyse. Again, we'll talk about 2026 in ninety days. We thought this year was quite prudent. When you go back to 2024, our guidance was mid-single digits or better. And as we were doing planning this time, you know, twelve months ago, you know, looking at a likely softening insurance and reinsurance market, looking at likely impacts from fiduciary income, likely softening the economy. And again, remember, we're coming out of an unusual period of growth and all the stimulus and in markets all over the world coming out of a pandemic. To us, it was quite prudent. I think we caught a little bit of criticism for it, particularly throughout the first quarter, but to guide to mid-single digits underlying revenue growth. And so, you know, we're doing all that work right now for next year. As it relates to insurance markets and reinsurance markets, again, it'll be a year again with more than $100 billion of insured cat again this year. Pretty quiet third quarter. I suspect you'll see some of that in the underwriter underwriting results, you know, that are released over the course of the next few weeks. But, you know, and there's still obviously a quarter to play, but, you know, it looks to us like, you know, January 1 in reinsurance and, you know, it's likely to look like, you know, it did entering about twelve months ago. So anyway, that's what we see at the moment. But again, we'll give you a broader update. And a lot's happening in the world too, right? So things continue to evolve. It's a very dynamic and complex environment. Do you have a follow-up, Elyse? Elyse Greenspan: Yeah. I guess my second question, just going back to the rebranding of the company. And I know, you know, the Thrive program outlined today, I guess, in conjunction with that looks as a way to drive incremental revenue. With getting rid of some of the other brands away from Marsh, is this are you trying to drive, you know, more cross-sell, say, between Marsh and Mercer? Because I always thought just in general, the cross-sells were not, you know, super large there. And I'm just trying to think about how that angle fits into, you know, the rebranding that you guys are outlining. John Doyle: Yeah. Thanks. I don't like the way you say get rid of the We love our legacy brands. We're quite proud of them and what they've represented in the market. The reason, by the way, there's a transition period of 2026 is to make sure that we transition the equity in those brands, you know, in Guy Carpenter, in Mercer into the new Marsh brand. We're going to build a new Marsh brand. And what that's about, it's not about cross-selling per se. We cross-sold before and, you know, we actually cross-sell quite a bit. You know, it's an important part of how we show up today. But it's not about a cross-sell program. But it is about simplifying our story, showing up in a more connected way to our clients. Too many markets aren't aware of the breadth of capability that we have, some of the unique attributes of our firm, the depth of talent, again, the vast data set, market-leading analytics, and building that brand in the market and showcasing our talent and our culture. The team-based approach that we take. Excited about what that can mean for our colleagues. We're excited about what that means for our clients. And we're excited about what that means for shareholders. And so, you know, it's obviously a decision we didn't take lightly. We've been working towards this for several years. Right? I mean, we've aligned our a common purpose inside of the company, a common colleague value proposition. We brought together the operations and technology teams. And we have a joined-up strategy. I can tell you it was a celebration in the building here over the course of the last couple of days. Our colleagues are excited about it. You know, they see the possibilities in the future. And so, you know, we look forward to delivering for, you know, for our key stakeholders. Andrew, next question, please. Operator: Our next question comes from the line of Alex Scott with Barclays. Alex Scott: Hi. Thanks for taking it. I wanted to come back to the Thrive program. And I guess the question I have is around how it affects your potential appetite for M&A and just how you're viewing your ability to probably invest more than maybe some of the more fragmented areas of insurance brokerage and whether this could allow you to accelerate consolidation over the next handful of years. John Doyle: No. You know, Alex, I'm not sure I see it as a meaningful impact. I mean, you know, we have had technology teams or, excuse me, operations teams in each of the businesses. Our M&A activity from time to time crosses businesses, you know, particularly at Marsh and Mercer, but for the most part or actually, I should say Marsh and Guy Carpenter too from time to time. But for the most part, you know, they're within each one of those the four businesses. So as I said before, we continue to be very active in the market. We're more likely to continue to do smaller to mid-sized deals that make us better in markets that were underpenetrated. We're looking for businesses that are well-led, have strong growth fundamentals, and are a good cultural fit for us. And we've been really successful at building value in that way. So we're going to continue to get at it. Do you have a follow-up, Alex? Alex Scott: Yeah, I do. I think earlier you mentioned middle market. You're seeing better growth. I mean, it sounds like the pricing in particular is probably holding up better there. I'm just interested in your views on what you're seeing in the large market, maybe why it's not going down into the middle market or upper middle market. You know, how you expect that to progress into 2026? John Doyle: Yeah. Look. We're, you know, as I said earlier, very excited about how we're positioned in the middle market. We've got more exposure to that market segment globally. It can be a bit uneven country to country, but globally now we have more exposure. We've learned a lot from building out the MMA business over the last fifteen years. And how we can perform effectively in that market segment. And at a high level, we bring real scale benefits to, I don't want to oversimplify it, but in many cases, you've got a lot of relationship selling during the day. And while we're good at that, we can also bring, you know, great analytics, great specialty capabilities, a global reach that is unique in those markets. And so we continue to be excited about that. We bring all those things in the, you know, in the large account, you know, market as well. You know, we're higher penetrated there. So it's about finding new ways to advise clients. We didn't talk about AI a lot on the call, but, you know, Centrisk, a great example, right? Where, you know, really helping clients think through supply chain risk and exposure to global trade negotiations, right? So an example of innovation that we bring to, you know, a market that we penetrate well. Thank you, Alex. I appreciate that. Andrew, I think it's time to wrap up. I want to thank everybody for joining us on the call this morning. In closing, I want to thank our colleagues for their hard work and dedication. I also want to thank our clients for their confidence and trust in our teams. And I want to thank you all very much for taking the time to join. We look forward to speaking to you again in about ninety days. Operator: This concludes today's program. You may now disconnect. John Doyle: Thank you, Andrew.
Operator: Good morning and welcome to the 2025 Third Quarter Earnings Conference Call hosted by The Bank of New York Mellon Corporation. At this time, all participants are in a listen-only mode. Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without The Bank of New York Mellon Corporation's consent. I will now turn the call over to Marius Merz, The Bank of New York Mellon Corporation's Head of Investor Relations. Please go ahead. Marius Merz: Good morning, everyone, and welcome to our third quarter earnings call. I'm here with Robin Vince, our Chief Executive Officer, and Dermot McDonogh, our Chief Financial Officer. As always, we will reference the quarterly update presentation, which can be found on the Investor Relations page of our website at bnymellon.com. And I'll note that our remarks will contain forward-looking statements and non-GAAP measures. Actual results may differ materially from those projected in the forward-looking statements. Information about these statements and non-GAAP measures is available in the earnings press release, financial supplement, and quarterly update presentation, all of which can be found on the Investor Relations page of our website. Forward-looking statements made on this call speak only as of today, October 16, 2025, and will not be updated. With that, I will turn it over to Robin. Robin Vince: Thanks, Marius. Good morning, everyone, and thank you for joining us. Let me start with a few highlights before Dermot takes you through our financials for the quarter in greater detail. As summarized on Page two of our quarterly update presentation, The Bank of New York Mellon Corporation reported another quarter of strong results. Record revenue of $5.1 billion was up 9% year over year. We saw broad-based strength, including double-digit revenue growth across the platforms that make up our Security Services and Market and Wealth Services segments, and we drove approximately 500 basis points of positive operating leverage. Our pretax margin improved to 36%, and we generated a return on tangible common equity of 26%. Taken together, we reported earnings per share of $1.88, up 25% year over year. The third quarter presented a largely constructive operating environment. Despite a cooling labor market and inflation lingering above the Federal Reserve's 2% target, the U.S. economy remained resilient. Equity markets continued to climb, credit spreads remained tight, and the Fed ultimately resumed rate cuts. Across our platforms, we saw solid growth in client balances as well as robust trading, clearing, and settlement activity. While the finalization of U.S. tax legislation and the prospect of deregulation are positives for the economic outlook, uncertainty and multiple tail risks remain. Geopolitical conditions, trade policies, fiscal deficits around the world, and the sustainability of enthusiastic markets, to name a few. Against this backdrop, we continue to execute on our mission of reimagining The Bank of New York Mellon Corporation. This includes our two core transformation programs: a new commercial model and our platforms operating model. Both are continuing to show results, and both have a lot of runway ahead. We recently reached the one-year anniversary of the new commercial model. Year one was about bringing the company together, aligning our teams, and proving that when we show up as one The Bank of New York Mellon Corporation, we can win. Now we are raising the bar. The next phase of our commercial model is about embedding the habits of operating as one The Bank of New York Mellon Corporation into our daily rhythms and shifting from just connecting the dots to also delivering integrated solutions with pace and scale. We were pleased to announce several wins in the third quarter that demonstrate how The Bank of New York Mellon Corporation is powering growth for our clients, both long-standing and new. Franklin Templeton, a client for nearly three decades, expanded its relationship with The Bank of New York Mellon Corporation to provide a full suite of asset servicing and FX capabilities for its U.S.-listed ETF products, tapping our market-leading platform to support one of its fastest-growing businesses. And TIAA, which has had a twenty-year relationship with The Bank of New York Mellon Corporation Pershing, yesterday announced that they have selected our Wove platform as the unified wealth solution across TIAA Wealth Management's broker-dealer, investment advisor, and bank custody businesses. Our early commitment to the digital asset space, paired with the principles of safety, scalability, and innovation that have defined The Bank of New York Mellon Corporation for centuries, now positions us to support the growing institutional adoption of digital asset products. In just one example from this past quarter, Open Eden, a leading platform for the tokenization of real-world assets headquartered in Singapore, appointed The Bank of New York Mellon Corporation as investment manager and primary custodian for the underlying assets of its flagship tokenized U.S. Treasury Bills Fund. As global capital markets move toward an always-on operating model, blockchain technology and digital asset adoption are becoming important enablers. In a meaningful step toward enhancing the utility of money market fund shares, we announced a collaborative initiative with Goldman Sachs to maintain on blockchain technology a mirror record of customers' ownership of select money market funds live and available through our Liquidity Direct platform. This includes a new token-enabled share class of our own The Bank of New York Mellon Corporation Investments, Dreyfus Treasury Securities Cash Management Fund. We are encouraged by developments in the U.S. regulatory environment that will further enable tokenized products and allow us to support clients as they consider moving to a more on-chain financial world. All of this product innovation, combined with our Commercial Model 2.0, is allowing us to be more for our clients and drive higher and more sustainable organic growth in the years to come. Turning to another one of our transformations, the ongoing transition into our platforms operating model. More than 70% of employees are now working in the model, and we expect to complete the remaining transition over the course of the next year. It is still early days, but we continue to gather meaningful proof points of benefits. For example, faster client onboarding, more automated delivery of complex NAVs, and more modern billing processes. Our progress in the model is creating real capacity to invest in growth, to innovate for clients, and to power our culture. Our experience has been that it takes twelve to eighteen months after the initial activation of a platform for teams to start realizing the full benefits of this new way of working. That means that while we will be entirely operational in the new model by the fall of next year, we don't expect to see the full benefits of these new operating rhythms until early 2028. As we continue making steady progress on both of our two transformations, as well as the broader reimagining of our company, we are always focused on what's next. A prime example of this is how we are embracing the power and benefits of AI. This past quarter, we announced a collaboration with Carnegie Mellon in Pittsburgh to create the The Bank of New York Mellon Corporation AI Lab at CMU. By bringing together CMU's academic leadership and The Bank of New York Mellon Corporation's market expertise, we will advance AI research, responsible governance, and deployment. At The Bank of New York Mellon Corporation, AI is for everyone, everywhere, and for everything. The investments we've made have been focused on creating the foundation to go faster, but adoption success is ultimately driven by culture. By putting AI in the hands of everyone at The Bank of New York Mellon Corporation, we intend to develop fluency and create capacity for our people to focus on higher-value work. This translates to how we show up for our clients and innovate more broadly. Last month, we launched the next version of The Bank of New York Mellon Corporation's AI platform, ELISA 2.0, smarter, faster, and easier to use. Across the company, our people are working together to embed AI solutions into our workflows. By the end of the third quarter, we had 117 AI solutions in production. That is an increase of 75% compared to the prior quarter. And it includes agents that help identify new business leads, write code, automate payment processing, accelerate client onboarding, and increase automation of reconciliations. We are also leveraging AgenTiC AI to deploy digital employees. Over 100 of them are already working side by side with our people on tasks such as payment validations and code repairs. We believe our AI opportunity is significant, and we are pursuing it with urgency. Before I hand it over to Dermot, I want to close by acknowledging the tremendous work of our people. As I visit our offices around the world and spend time with our teams, the excitement and drive within the company are palpable. It is our people and culture that propel us forward on our mission to unlock The Bank of New York Mellon Corporation's full potential for our clients and our shareholders. We are executing with purpose, powering our culture to run our company better so that we can be more for our clients. We have a lot of work ahead of us, but the clear signs of progress, both in terms of our reported financials and the leading indicators for future success across the company, give us confidence that the strategy is working. With that, over to you, Dermot. Dermot McDonogh: Thank you, Robin, and good morning, everyone. I'll start with our consolidated financial results for the third quarter on Page three of the presentation. Total revenue of $5.1 billion was up 9% year over year. Fee revenue was up 7%. That included 10% growth in investment services fees from our Security Services and Marketing and Wealth Services segment, driven by net new business, higher client activity, and market values. Investment management and performance fees were down 2%, reflecting the mix of AUM flows, the adjustment for certain rebates we discussed in prior quarters, and lower performance fees, partially offset by higher market values and the favorable impact of a weaker U.S. Dollar. While not on the page, I will note that firm-wide AUCA of $57.8 trillion were up 11% year over year, reflecting client inflows and higher market values. Assets under management of $2.1 trillion were flat year over year, reflecting higher market values offset by cumulative net outflows. Foreign exchange revenue was down 5% year over year, reflecting the impact of corporate treasury activity, partially offset by growth in client activity. Investment and other revenue was $28 million in the quarter, including a $12 million disposal gain. Net interest income of $1.2 billion was up 18% year over year, driven by continued reinvestment of maturing investment securities at higher yields as well as balance sheet growth, partially offset by changes in deposit mix. Provision for credit losses was a benefit of $7 million in the quarter, primarily driven by changes in the macroeconomic forecast, partially offset by higher reserves related to commercial real estate exposure. Expenses of $3.2 billion were up 4% year over year, both on a reported and an adjusted basis. The variance, excluding notable items, reflects higher investments, employee merit increases, higher revenue-related expenses, and the unfavorable impact of the weaker dollar, partially offset by efficiency savings. Taken together, we reported earnings per share of $1.88, up 25% year over year. Excluding the impact of notable items, earnings per share were $1.91, up 26% year over year. Our reported pretax margin was 36%, and our return on tangible common equity was 26% in the quarter. Turning to capital and liquidity on Page four. Our Tier one leverage ratio for the third quarter was 6.1%, unchanged from the prior quarter. Our CET1 ratio was 11.7%, up from 11.5% in the prior quarter, reflecting capital generated through earnings, a net increase in accumulated other comprehensive income, partially offset by capital returns through common stock repurchases and dividends. Risk-weighted assets were up 1% sequentially. Over the course of the third quarter, we returned approximately $1.2 billion of capital to our common shareholders, resulting in a 92% total payout ratio year to date. With regards to liquidity, the consolidated liquidity coverage ratio was 112%, flat sequentially. And the consolidated net stable funding ratio was 130%, compared to 131% in the prior quarter. Next, net interest income and balance sheet trends on page five. Net interest income of $1.2 billion was up 18% year over year and up 3% quarter over quarter. Sequentially, net interest income increased due to reinvestment of maturing securities at higher yields, partially offset by changes in deposit mix. Average deposit balances were flat sequentially as the typical seasonal decline over the summer was offset by idiosyncratic client balances related to CLO activity and M&A escrows. Non-interest-bearing deposits grew by 3%, and interest-bearing deposits were down by 1% quarter over quarter. Accordingly, average interest-earning assets were also flat sequentially. Cash and reverse repo balances decreased by 2%, loans increased by 2%, and investment securities balances increased by 1% quarter over quarter. Turning to our business segments. Starting on page six. Security Services reported total revenue of $2.5 billion, up 11% year over year. Total investment services fees were also up 11% year over year. In asset servicing, investment services fees increased by 12%, representing strong year-over-year growth driven by higher client activity and market values. As we support our clients in building their businesses on the strength of our platforms, we are also benefiting from secular growth in attractive markets. In the third quarter, our ETF AUCA outperformed market growth and increased by 35% year over year, driven by higher market values, client inflows, and net new business. And alternatives, 12% year over year, with particular strength in our private markets segment. It is also worth highlighting that almost half of all Asset Servicing wins in the quarter represented multiline of business solutions, underscoring the growing effectiveness of our One The Bank of New York Mellon Corporation strategy and the enablement through our new commercial model. In Issuer Services, investment services fees were up 10%, primarily driven by strong client activity in depository receipts. Across the segment, foreign exchange revenue was up 4% year over year, on the back of higher client volumes. Net interest income for the segment was up 10% year over year. Segment expenses of $1.7 billion were up 6% year over year, driven by higher investments, severance, revenue-related expenses, and employee merit increases, partially offset by efficiency savings. Security Services reported pretax income of $806 million, up 26% year over year, and a pretax margin of 33%. Onto Markets and Wealth Services on Page seven. In our Markets and Wealth Services segment, we reported total revenue of $1.8 billion, up 14% year over year. Total investment services fees were up 9% year over year. In Pershing, investment services fees were up 7%, reflecting higher market values and client activity. Net new assets were $3 billion in the quarter, driven by inflows from existing and new clients, partially offset by the deconversion of business lost in the prior year. Going forward, we expect net new asset growth to reaccelerate as we completed this previously disclosed deconversion in the third quarter. In Clearance and Collateral Management, investment services fees were up 12%, driven by broad-based growth in collateral management balances and clearance volumes. Average collateral balances increased 14% year over year, growth from both existing and new clients. And in Treasury Services, investment services fees were up 7%, primarily reflecting net new business. Net interest income for the segment was up 26% year over year. Segment expenses of $895 million were up 7% year over year, driven by higher investments, employee merit increases, and higher revenue-related expenses, partially offset by efficiency savings. Taken together, our Markets and Wealth Services segment reported pretax income of $875 million, up 24% year over year, and a pretax margin of 50%. Turning to Investment and Wealth Management on Page eight. Our Investment and Wealth Management segment reported total revenue of $824 million, down 3% year over year. Investment management fees were down 1% year over year, driven by the mix of AUM flows and the adjustment for certain rebates, partially offset by the impact of higher market values and the weaker dollar. Segment expenses of $640 million were down 5% year over year, driven by lower revenue-related expenses and efficiency savings, partially offset by employee merit increases, higher investments, and the unfavorable impact of the weaker dollar. Investment and Wealth Management reported pretax income of $184 million, up 5% year over year, and our pretax margin expanded to 22%. As I mentioned earlier, assets under management of $2.1 trillion were flat year over year. In the third quarter, we saw $33 billion of net outflows from long-term strategies, $34 billion of net inflows into cash. Wealth management client assets of $348 billion increased by 5% year over year, primarily driven by higher market values, partially offset by cumulative net outflows. Reflecting on our Investment and Wealth Management segment for a moment. Under new leadership over the past year, we have begun taking important steps to reorganize, streamline operations, and start enabling the business to leverage The Bank of New York Mellon Corporation's broader portfolio of platforms. Additionally, we have started bolstering the team with a number of strategic hires and internal moves to further strengthen product, distribution, and client coverage expertise. Along the way, we are being mindful of protecting the unique investment processes of our individual investment firms. While we are still in the very early stages of unlocking the growth opportunities associated with investment and wealth management, security services, and Pershing truly pulling in the same direction, we are encouraged by the progress over the past few months. Page nine shows the results of the Other segment. For this segment, I'll just note that the year-over-year decrease in revenue was primarily driven by higher net securities losses, and the sequential increase primarily reflects gains realized on the sale of real estate. For the remainder of the year, I'll close with our financial outlook. On the back of a strong third quarter, we expect net interest income in the fourth quarter to be approximately flat sequentially, which would ultimately result in full-year 2025 net interest income to be up 12% year over year. We continue to expect expenses, excluding notable items, for the full year to be up approximately 3% year over year. We currently project our effective tax rate for the fourth quarter to be approximately 21%, which would bring our effective tax rate for the full year into a range of 21% to 22%. And finally, we expect to continue returning capital at a pace that is consistent with a total payout ratio of 90% to 100% for the full year 2025. To conclude, our results reflect the disciplined execution and collective effort of our teams around the world. We're encouraged by our progress and remain focused on delivering consistent long-term value for our clients and shareholders. With that, operator, can you please open the line for questions? Operator: We'll take our first question from Mike Mayo with Wells Fargo Securities. Mike Mayo: Hi. My question is how much of this growth year over year would you attribute to actions that you've taken versus just a generally good market backdrop? And I recognize that you have One The Bank of New York Mellon Corporation, is now the new commercial model. Recognize that your platform operating model, you said it's 70% done. Also recognize that you had ELISA 1.0. So you have a lot of initiatives taking place. So sure you can claim some credit, but probably not all credit. And it's probably going to be a quarter at some point where markets tank and things don't look as good. So how much is due to what you're doing and how much is due to the market? Dermot McDonogh: Hey, Mike. Good morning. It's Dermot here. So let's reflect on the past several quarters and in both Robin and I's prepared remarks, the intersection of the commercial model and the platform operating model really kind of positioned the company in a much better way than previously to take advantage of the market opportunities when the markets are constructive, and they have been constructive for the last few quarters. And now we're in a position to be able to take advantage of that. So that's point I think that's important point number one. That hasn't always previously been the case when markets have been constructive and The Bank of New York Mellon Corporation have been able to take advantage of that. The second thing I would say, with the one-year anniversary of the commercial model and a multiyear phased approach to the platform operating model, now being able to stitch together solutions for our clients and do that cross-selling thing that we've talked about in prior quarters but now you can see it in execution. And in the prepared remarks, we talked about the wins in asset servicing this quarter, nearly half of them were due to us being in a position to be able to sell multi-line of business solutions to the existing clients of asset servicing. So when you take a step back and look at that 7% fee growth, it's a mixture of organic growth, higher market levels, and then FX. So it's all of the above, and the proportion of each one is pretty balanced, I would say. So very pleased about how we've been able to drive organic growth for the company, particularly this year. Mike, I'm going to just add a couple of quick things on top of that because we talked about nine months ago about this concept of beta and megatrends and the fact that you're right, the backdrop of the market has been very constructive. But what we've done is we've gradually repositioned and evolved the company to be able to take more advantage of that backdrop. And as Dermot mentioned that, but it really is worth a quick click into it because this diversified set of platforms and the way in which we've been emphasizing the growth in some of them is important. Remember, our businesses collectively fire on different cylinders. So equity markets up, good for some businesses. Fixed income markets up, good for different businesses. Transaction volumes up, good for other businesses. Capital markets activity up, good for other businesses. The execution and clearing and settlement volume type of activity under the hood, GDP growth, which is more correlated to our payments and treasury services business, and of course increasingly software and services. And so this orientation of ourselves to be more diversified, more platforms oriented is a very definitive strategy in order to be able to make more money in more different types of markets over time. And the de-risking of the balance sheet, you can see that in the consistency of NII is part of it. And just to give you a couple of facts around it, you're fond of our trust bank businesses. And if you define for a second asset servicing investments and wealth, as that core of the Trust Bank businesses, which I think most people would think is the case, that now represents less than 40% of the company's pretax income. Now those businesses have been growing, we love them, but the non-trust bank more platform-like businesses, corporate trust, depository receipts, treasury, clearing, collateral management, Pershing, pretty long list. They now represent about two-thirds of the pretax income of the company. And that's up from three years ago when it was only 55%. So everything's growing. The trust businesses are growing. The non-trust businesses are growing faster. They have higher margin, and we're positioning ourselves for more different types of environments with a more diversified platform. Mike Mayo: All right. Thank you. Operator: We'll move to our next question from Glenn Schorr with Evercore ISI. Your line is now open. Glenn Schorr: Hi, thanks. Thanks a lot. So great question on NII and the reposition you talked about. So 18% this quarter, you call this next quarter will be up 12% year on year. We've had a couple of rate cuts, a couple more coming forward. Can you expand a little bit more about derisking the balance sheet and how you've changed your approach towards interest rate risk management as we head into this potentially lower rate backdrop? Thank you. Dermot McDonogh: Good morning, Glenn. Thanks for the question. So I would say, look, I said this to Robin earlier in the week when we were preparing for this call. When I was going through it with what we now kind of fondly call the tripod within the firm, which is Leida, who runs our deposit platform, Tiffany, who's our Treasurer, and Jason, who is our CIO. The sophistication and the investment that we've made over the last three years in our tools and our risk management and how we analyze, run scenarios, talk to all the different businesses to predict where deposits will be, just gives us a real confidence around the baseline and strength. And look, our balance sheet is very clean. It's very liquid. And we talk a lot about the $1.7 trillion liquidity funnel that we have. So every day when we come in, we see this funnel, and we can see where we can help clients maximize the return on their cash and at the same time kind of optimize our kind of deposit mix and where we are. And I think the reason for the strength in NII this quarter was really around that in my prepared remarks. And if you reflect back on, I talked about it on the Q2 call, we kind of said Q3 was going to be a tough comp given last year in terms of there was a lot of activity. This year, we did see some seasonal decline in deposits. But that was more than offset by a pickup in, as Robin said in the answer to the last question, capital markets activity, strong activity in the CLO space, and we're able to serve clients in a very differentiated way. Then there's a nice bit of M&A activity, and we have a nice M&A escrow business we're able to serve our clients in that space too. And so that drives fees. And then it also drives healthy deposits, which can attract NII for us. And so going forward from here, I kind of said some of that activity will moderate into Q4, which kind of I kind of give the prediction that our base case is that we expected the balances for the balance of the year to be kind of flat sequentially. Glenn Schorr: Thanks, Rob. Thanks, Dermot. Robin Vince: Great. Thank you, Glenn. Operator: We'll move to our next question from Brennan Hawken with Bank of Montreal. Brennan Hawken: Good morning. Thanks for taking my questions. Dermot, you just touched on this a little bit. With the point around M&A escrow business. But we've been in sort of capital markets for a while, and we're starting to see M&A announcements of IPO activity, which generally bodes well for securities lifting. What early trends have you seen on the back of that? And how should we be thinking about modeling those revenue lines if the capital markets environment remains? Dermot McDonogh: So you broke up a little bit on the question. So could you just repeat it again? So the capital markets activity has to which aspect of our business, sorry? Brennan Hawken: Yes. Sorry about that, Dermot. Securities lending? Securities lending part, like we've seen hard to borrow. Start to pick up on the back of M&A merger arb, IPO activity, and the like. So was curious about how we would think about what that impact could be on securities lending going forward? Dermot McDonogh: So like we haven't seen like on that specific one, we haven't seen anything a note change in that or there is nothing that I would kind of bring to your attention that we kind of see as a step function change that I would highlight as it relates to kind of forward potential for us in that business. But as you'll know, we are the world's largest agency lenders. So we expect that and very nice business for us. We're very focused on it. But there's nothing there for me to highlight to you on this call. Robin Vince: Yes. And I would just add to that, Brennan, that it's a good business. It's an important business, but its greatest value is actually adjacent to our broader collateral management franchise because it's the lending, but it's also the reinvest. It's also our new product Collateral One, which adds in the broader collateral management globally to the whole mix. And so, become one-stop shopping for clients across all of these different components. If they do securities lending with us, some of these other things become particularly attractive. But I think the heart of your question, which is around capital markets activity and how it drives us is actually more to the corporate trust platforms as you referred, it's depository receipts, it's debt capital markets, its markets overall. And while the lending activity is part of it, I would say in the grand scheme of our capital markets footprint, it's a smaller part of it. Brennan Hawken: Got it. Thanks for that color. I appreciate it. And Dermot, you spoke to the fact that the offboarding, I believe you said, was finished. So within Wealth, just a couple of questions. DARTs for Pershing was a little soft. Was that it looked a little bit more pronounced than typical summer slowdown. So maybe if there was any color around that. And then you also landed a nice Wove win recently with the TIAA wealth management business. I'm certainly familiar with TIAA's Management business, but could you help us understand the size of the wealth business? And what we could expect from that? Dermot McDonogh: So look, on Wove, we've signed over 50 clients onto the platform now. We're very pleased and proud of the TIAA announcement. It's been a lot of discussion with us, very important client, as Robin said. They've been with us for a long time, and we're happy to be able to serve them in a new and differentiated way. And I think when you take a step back, and look at Pershing overall as a business, this over the last twelve months, we've had this deconversion. Over the prior twelve months, we had the First Republic conversion. So as a general matter, there's been kind of noise flowing through the results. And sometimes we don't see the underlying performance of the business because of the deconversions. But I would say, overall, this year, Pershing has performed well for us. Q2 had high levels of activity, and I would say the DARTs were high because of all the activity that we saw in terms of client behavior around Liberation Day, and then Q3 kind of being a seasonally quieter business. And look, when we take a step back and we'll think about Pershing, and it's a $3 trillion AUM business, within the wealth tech sector space, and you see new entrants into it. And we like competition, and the fact that new entrants are coming in kind of allows us to show what we have to offer clients. So a, we're excited about the business. We're excited about the growth potential. And we're now with the deconversion behind us, we expect growth in net new assets to reaccelerate for the balance of the year. Brennan Hawken: Excellent. Thank you for taking my questions. Operator: We'll take our next question from David Smith with Truist Securities. David Smith: Hey, good morning. You mentioned some potential turbulence and headwinds in the money market ecosystem. Coming up right now with the rise of stablecoins on the one hand, coming amidst the backdrop of falling rates. You think either of these could put pressure on fee rates? Is this an area of the fund space that has seen less pressure than equities and fixed income over the last decade or two? Robin Vince: David, I would not describe what's been happening as turbulence. I would regard it as frankly as opportunity. You're right, the money market funds have reached record levels as essentially rounding to $8 trillion, making new highs pretty much each quarter. And we're in that business, but we're in that business from lots of different angles. I think it's worth reflecting on it for a second because we're there with our Dreyfus money market fund. It's a large fund. Again rounding call it $450 billion. That's a significant part. But then we're also participating with our liquidity business. We're participating with our collateral businesses. We're participating with our custody businesses. We're with our trustee businesses. And so this is another example of an industry which we touch very broadly across all of our different platforms. Now there's an evolution, and we're talking about on-chain capabilities for money market funds. I don't view that as turbulence for them. I view that as an evolution. And the question is, do we have platforms that can serve that technological evolution? The answer is yes, because of our investment in digital assets. And so our ability to help manage that transition from traditional money market funds to a more digital asset money market fund is something that we've clearly set out that we can do. And that's not dissimilar to the mutual funds to ETF to separate accounts evolution of market structure. It's not threatening when market structures evolve unless you can't catch the next evolution. And so we've invested to be able to catch it. Now, on top of that, we now have stablecoins. You're right, they can be a competitor to a money market fund, but they're very similar to a money market fund. Essentially, it's a collection of high-quality assets, but they have the additional feature of mobility. And we are in the mobility business because we have our treasury services businesses. We have our clearing businesses, we have our collateral management businesses. And so being in the transaction mobility business actually gives us a new feature that doesn't exist for money market funds because they aren't mobile assets. So we're quite excited about this evolution. And again, this is the philosophy of our strategy is to say, where are the megatrends, and are we set up with our platforms to be able to capitalize on that evolution that we invested properly and critically do we have the breadth of range of services that allow us to touch those evolutions from multiple perspectives. David Smith: Thank you. And then Dermot, I think you said that almost half of the servicing wins in the quarter were multiline of business solutions. Can you help us frame how that compares to 2024 to the first half of this year? Dermot McDonogh: So I don't have a crisp number for it because over time, we're kind of as with the commercial model being a year old, we're building out the to be able to track that more and more. So going forward, we'll be more sophisticated in how we communicate these metrics to you. But so we started to track it this year, and we didn't go back last year or the year before and track it back then because it's a lot of manual work to do going back in time. But the trend is there, and we just see the cross-selling. And as we've both talked about a number of times, the bringing together of the firm under the commercial leadership of Katinka is really driving a very powerful transformation. And so it's just we're more connected. And so that's what I would say. David Smith: Just directionally, would you say it's somewhat higher or a lot higher? It's hard to really put a frame on it? Dermot McDonogh: I would say it's higher, yes. Much higher is probably too strong, but I would say it's meaningfully higher. In terms of when we talked about last year, we had WisdomTree, which we sold four lines of business to one client. And this year, we're kind of seeing more and more of the WisdomTree type solutions being delivered to existing clients, whereas last year, WisdomTree was a new, new client. So we're delivering more to existing clients, which is a core part of the strategy. David Smith: Thank you. Operator: Our next question comes from Alex Blostein with Goldman Sachs. Alex Blostein: Thank you. Hey, Robin. Hi, Dermot. Good morning. I wanted to ask you guys about operating leverage over time. Obviously, really strong progress this year, continued in the third quarter. And obviously acknowledge the fact that margin expansion is both a function of revenues and expense controls and efficiencies. But as you look out and you sort of point into a lot of the efficiency gains, from the platforms will come through, towards maybe the '27 and 2028, plus you've got a variety of AI efficiencies underway as well. So as you think about firm-wide margin in this kind of mid-30s year to date and as you think about the forward opportunity set, you guys think this could land, understanding that you might not want to set a firm target on this call, but helpful just to kind of hear your thoughts on how you would frame. Dermot McDonogh: Okay. So there were a few questions rolled up into that one. So when we kind of take a reflection and if you're going to go back, actually and you kind of timestamp it from the Goldman Conference of Fall Conference of 2022 to now. Over the last nearly three years, we've consistently delivered positive operating leverage and in some cases have outperformed. And so I think this is our fifth or sixth quarter of consistent positive operating leverage that we've delivered. And so this really is kind of I kind of go back to this whole notion of the flywheel of the three pillars that Robin has laid out in terms of be more for clients, run our company better, and power our culture. You get 50,000 people kind of working in harmony and pulling together, to deliver on that. That is what is really creating the outperformance. And so we're very pleased and each quarter is just another sign of steady execution. And so it is a flywheel of momentum that's powered by culture. And so if you kind of take we studied all the peer group over the last fifteen years, and we kind of said, what's been the average positive operating leverage of the firm. And so that best in class was 150 basis points positive operating leverage. So over the last three years, we've kind of consistently beaten that. But internally, we feel like and somewhat we're still in early innings. And Robin wrote his first shareholder letter, he was taking the decade-long view of what our strategy was going to be. So if you take the decade view, we're three years into that. So I would say relatively early innings all the things that we're doing. And when you take the two transformation projects that we both double-clicked on, commercial model, platform operating model, we really haven't talked about what we want to do in the product and innovation space, and we've recently hired Carlin Weinberg to kind of stand up and lead that business. So we expect Carlin to have the same success as has had over the last couple of years. And we really haven't factored in the opportunities both in growth and in efficiency that AI is going to bring to the firm over time. So we will be quite optimistic about our ability to deliver these kinds of returns into the future. Alex Blostein: Great. That's very helpful. My second or the follow-up question rather just to clean up around NII. I believe in the past, you guys sort of talked about that internally you're sort of trying to focus on '26 and try to neutralize the balance sheet to sort of headwinds from lower interest rates. Just curious if that's still the case. And if you think about Q4 guide, is that a reasonable jumping-off point for NII for all of 2026? Again assuming you guys can succeed at keeping NIM roughly flat? Dermot McDonogh: So I think we're quite pleased last year in terms of how we set up the balance sheet for this year. In terms of what we call the Jackson Hole pivot. And so we did a lot of work over the summer months of 2024 to kind of deliver the results that you're now seeing in 2025. And so we've replicated that thinking in that model and that kind of proactive repositioning of the balance sheet for 2026. So we've done a lot of work and we've done a lot of positioning. And so to your specific, the latter part of your question, I would say Q4 is a good jumping-off point as a base case for 2026. Alex Blostein: Awesome. Thanks so much. Operator: We'll take our next question from Ken Usdin with Autonomous. Ken Usdin: I just wanted to ask, it's more of a longer term but obviously so many announcements out of the crypto and the stablecoin space in terms of new products and new offerings from both The Bank of New York Mellon Corporation and the industry. And just wondering how you're starting to think about what's the TAM there from a revenue perspective for The Bank of New York Mellon Corporation? Like what is the opportunity set? We see it in terms of the notionals out there in the marketplace, but how does that convert into revenue for BK? Where would you expect it to come through? And is there any perspective on like how quick when that starts to show? Robin Vince: Sure, Ken. Look, we're playing the long game on assets. We started this journey really about three years ago seeing it as a potentially interesting technology. Clearly, it had some very excited fans right at that stage, but it's built and become I think a bit more mainstream accepted as a technology. We saw the promise of the technology. Look, we've been in the technology evolution business for a long time. We still have some of our ledgers which were quill and ink back in the day, then it was printing, and then it was computers. And now we see this as a promise for certain types of assets and certain types of transactions as being a new way of being able to record improving the mobility of assets, improving the efficiency of recording transactions, etcetera, etcetera. So we see that promise of that technology we've invested accordingly and it's quite broad because yes, it's stablecoins, but yes, it's digital asset custody. We can custody. We're the first U.S. GSIB to be able to natively custody Bitcoin and other digital assets. And then it's also this whole mobility conversation that we've talked about, which we think is quite exciting. And so it is more than stablecoins, but we are a big supporter of the stablecoin ecosystem. And interestingly having really lent into this ecosystem earlier on, we became a real go-to partner for many of these firms for our traditional services, because they were like hey, The Bank of New York Mellon Corporation, you get it. And let's do we need all of these traditional services. We need capabilities around agency and custody and on-ramps and off-ramps asset management in order to be able to provide those services. So we've really attached ourselves to those clients. And now we're participating in the next evolution. We're in the rails business, we're in the financial markets enablement business, global capital markets, and there are a variety of different things. You combine our clearing capabilities, collateral capabilities, our mobility capabilities in money movements together, that is able to help stablecoin prospects be able to go faster. And so it's a very interesting space. It's very early days. This is a multiyear thing. But we're positioned for optionality is the way that I would describe it. Ken Usdin: Okay, got it. All right. And then a follow-up on the expense side. Alex asked earlier about operating leverage. I just want to confirm, so like 3% full-year expense growth implies more of like a 2% year over year in the fourth quarter. And I'm not suggesting that, that means that you're there's a lot of variability quarter to quarter in terms of how you grow expenses. But just is the platforming starting to help at all in terms of either allowing you to have more gross saves underneath that you can even better control the overall growth rate of expenses as you contemplate leverage? And I know you've said earlier in the year that revenues are better, it's always a good time to spend. So just directional thoughts on how to think about underlying expense growth? Thanks. Dermot McDonogh: So I wouldn't say I said exactly what you just said there. I think given the markets are more constructive, we I wouldn't be an advocate of spending for the sake of spending because revenues are up. Like hopefully that we've earned the credibility of all of you that over the last few years, we're very good stewards of both our capital and our expense base. And we're disciplined in how we allocate our expense budget. So I think with the backdrop being more constructive this year, we've accelerated some investments. And with the change in administration, and everything going on in the digital asset space, we've brought forward some of our investments that previously might have fallen below the line. So we've scaled and gone faster in some of those areas. Importantly, what I would say is, this year we went into the year thinking that we were going to generate about $500 million of efficiency throughout the firm. In terms of running the company better, and we've redeployed that $500 million into growth investments. And we just had our Board here this year this week, and they were kind of always asking the question, are we investing enough? With the market where it is today, should we be doing more? So as we go into the kind of planning season for 2026 and beyond, we're taking a very broad-based look on how we can drive positive operating leverage into the future, which is our North Star, and generate savings while at the same time deploying. But specifically, on your question of feel good about the guide of 3% which in the context of the last three years just kind of 2022 was up 8%, 2023 was 2.7%, last year was roughly flat and this year guided at the start 1% to 2% and now the backdrop of revenue-related expenses a couple of other initiatives that we've embarked upon, we revised our guide up middle of the year to around 3%, and we feel very good about where that is. And overall, think given where we are in inflation, etcetera, etcetera and the CapEx associated with AI, we feel very good about what we've managed to accomplish this year. Ken Usdin: Thanks, Dermot. Operator: We'll move to our next question from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: Good morning. I just had a couple of follow-up questions, Robin. I think going back to the digital assets piece, appreciating still early days, but would you say if the move towards on-chain tokenization picks up is it disruptive from revenue margins for The Bank of New York Mellon Corporation? Accretive or just a client retention tool where you are more likely to retain the clients who want to move? I'm just wondering in that spectrum, is it a bigger risk factor or is it a tangible revenue opportunity tied to this? Robin Vince: There's certainly tangible revenue opportunity and of course like any market structure change or new technology comes along, there's disruption risk if you stick your head in the sand and do nothing about it. And sort of wish it to be away or ignore it. And I think that's true and has been true over generations of changes in financial markets. And so we view this as a change in circumstance for certain types of assets and for certain types of activity. Probably more suited for some things than others. Remember, take something like loans as an example, Loans are pretty clunky. We're a big loan administrator. We provide huge solutions to CLOs and to other market participants for the loans business. If you just look at it as part of our $15 trillion worth of corporate trustee, they're a pretty clunky instrument to actually manage in the post-trade space. They're quite bespoke, customized, there's a lot of servicing associated with them. And so to be able to see digital assets tokenization come along we actually see opportunities for greater efficiency in markets like that. It's going to be hard, not impossible, but it's going to be hard in a traditional equity, traditional clean government bond to be able to create a whole lot more efficiency. That's probably where digital assets create more mobility 24/7 types of liquidity. So it's either going to make markets more efficient, which we kind of like because we're such a scale player or it can open up new opportunities to be able to trade certain assets 24/7 to be able to convert from collateral into individual securities into individual cash all over the course of seconds in the middle of the night, that's pretty exciting. And that mobility, increased mobilization because we are in the transaction business as well, not just in the storage business, we see opportunities to benefit from that. So look, we're eyes wide open on this. There could be places in our business where margins can be pressured on the revenue side by certain things, but then there are also opportunities on the revenue side. And we think on the efficiency side, there's plenty to participate. But this is about culture, it's about attitude, it's about investing. We've hired our first product and innovation Chief Product and Innovation Officer in the form of Carolyn Weinberg. She's a deep expert in the space. In digital assets. She's done significant things in this space for other companies in her past. And so now she's here and she's innovating for us. So I would say net net pretty excited about it, but also eyes wide open about the fact that we've changed got to get it right. Ebrahim Poonawala: Got it. That's helpful. And I guess just a separate question. Very narrowly on how you're thinking about share buybacks, I mean, an asset-light model. Do you care about the dilution buybacks have on book value at these levels? Or is any of sort of when we think about just from a valuation perspective, is that influencing your appetite for buying back stock or it still relatively unchanged today versus a year ago? Dermot McDonogh: So I would say broadly the latter relatively unchanged compared to a year ago. We started out the year guiding plus or minus 100%. Look, hasn't been the year I think that most market participants thought it would be in January. And we tend to run on the conservative side of things. So you will you see it at 92%. That's really borne out of more of a conservative bias to running at the higher end of our Tier one leverage ratio given the market turbulence, the geopolitics, etcetera, etcetera. But we kind of and I think I said in my prepared remarks that we will be in the 90% to 100% for the full year. And just as a broader matter, you pointed it out, Ebrahim, a capital-light business model. And if we don't see opportunities to deploy in excess of our cost of capital, we will return it to shareholders as they would expect. Robin Vince: And look, Ebrahim, when we look at our business, and talked about this all across the call in our prepared remarks and the Q and A. We're excited about the journey that we're on. We have yes, we're a year into the commercial model. Yes, we're a year away from finishing the just the implementation of platform's operating model, but twelve to eighteen months after that is when we'd expect to be having the run rate benefits of that. We're right at the beginning of the AI journey, but we see a lot of runway. So for us, we sit here internally and we're pleased of course with the progress of the company. We're pleased with the stock price. But when we look at the runway it doesn't feel to us like it's the type of environment where you'd say, oh my goodness, we should stop buying back and it's overpriced. It doesn't feel like that to us. And so this feels like an opportunity for runway. So we certainly don't feel like we've reached the end of the road. Ebrahim Poonawala: Very clear. Thank you, both. Operator: We'll take our next question from Betsy Graseck with Morgan Stanley. Betsy Graseck: Hi, good morning. Good morning, Betsy. Hello, can you hear me? Okay. Thank you. So Robin, is that because like how many more years of positive operating leverage do you anticipate you're going to be to deliver here? Maybe that's part of what you're seeing in the outlook for the stock price versus what's what the market is seeing. And so that would be helpful to understand, especially given the fact part of your operating leverage has been delivered by headcount reduction and clearly, at this pace, can't go on for forever obviously. So a little bit of color would be helpful. Robin Vince: Well, the good news is there's a big difference between forever and for a long time. So we see look, the short answer is when we look at the inputs and we used to talk about this a year or two ago, when we didn't have any outputs at that time to be able to talk to you all about. So we only talked to you about the inputs, but we tried to be very transparent with what those inputs were. Now we can talk about the outputs, because we've got delivery and value that's coming out of all of the work that our teams have been doing over the past three years. But we still talk about the inputs for exactly this reason because we want to try to give you all the transparency on the fact that we've still putting a lot of new things in and there's still a lot of runway associated with the value that's going to come out of those. The commercial model is a great example, which is why we keep reiterating it. It's only one year of maturity. And when you look at the combination of how you bring all of our sales folks together new rhythms, embedding them in the company, plus the fact that we've got this full breadth that I answered to Mike's first question. All of these different platforms and the nature of them, we feel that as that matures, there's a lot of runway on sales. Platform's operating model is not just an efficiency play as we've told you before, it is very much a creating an increased speed and agility to be able to deliver for clients as well. And if you add twelve to eighteen months, to something that we won't have finished implementing until towards the end of next year. You get into 2028 before you actually would expect to have the full run rate Agility benefits operating type rhythms, which then allows us to go be going full speed in terms of the technology, the processes and the reimagining of things because platforms is very much a means to an end. So, we look all of that. We look at the broadening out. We look at the fact that we've improved by about 10% the contribution of pretax income from platforms businesses, which are naturally higher in margin than the rest of the company, that's accretive. Investments in wealth, hasn't really kicked in yet to the margin party. So there's opportunity there and Dermot talked about that in his prepared remarks. So we look around and as Dermot said earlier on, we've taken a decade view of this right from the beginning. We're only at year three we've got all of these inputs. And so for us, we sit here and I think our team sit here kind of excited about the fact that we feel like we're still early innings and we're just getting going. So we're that's sort of where we sit right now and that's how it feels in the company. Again, just talking about the inputs that in theory are meant to create and so far attract record is that we've been able to do this, create the outputs of the future. Betsy Graseck: And then just follow-up question here is on Stablecoin. Do you plan on issuing a The Bank of New York Mellon Corporation stablecoin? Robin Vince: So we're not going to get into very specific situations about our future products. But I would just pull you back to the broader comment, Betsy, which is we are in the infrastructure capital markets enablement business. We're in the rails business. We partner with stablecoins. We enable other people's stablecoins. And that's really the heart of our strategy to enable our clients with their transition into these ecosystems. We support the biggest stablecoin issuers today. There are many people are interested in launching stablecoins. We really have the complete set of services to be able to power them. And what I would expect to see over time is participants who are wanting to do their own versions of using stablecoins internally to be able to companies, but they won't have the scale or the interest in creating all the infrastructure. And so they're going to turn to other stablecoin providers and they're going to turn to partners to be able to power their own use of those things. And I think that's the sweet spot of how we think about the business opportunity. Betsy Graseck: Okay. So if there is an opportunity for The Bank of New York Mellon Corporation specific stablecoin, you'd execute on it. But if it if not, no. It is for us, it's about enabling the stablecoin ecosystem and the way in which I think we're going to be able to best do that is provide the capabilities for Stablecoins to be able to thrive and help other people be able to make their Stablecoin thrive. Now there may be a lot of things that we have to build right up to the point of is it a BK stablecoin. So you could imagine a world where other people's stablecoins might be running on rails and capabilities that we provide or we might be helping existing stablecoin issuers to be able to insert their products into other people's ecosystems. Is this connection across cash collateral, the mobility of money, and then the infrastructure and capital markets. That's how I would think about it. But I'm not definitively answering your question because we'll remain agile to these questions over time. Betsy Graseck: Thank you. Operator: And our final question comes from the line of Gerard Cassidy with RBC. Gerard Cassidy: Hi, Robin. Hi, Dermot. Robin, you talked about the business wins on TIAA CREF and then Franklin Templeton. Can you share with us since those are such long-term relationships, was it more cross-selling because of the new policy or the new structure you have is showing success and that's why you made those wins? Or was it new products that they had to they've created and they came to you to help offer those products to their customers with you as a partner? Robin Vince: I think one of the things I don't view this as cross-selling Gerard. What I view it as is for a long time, The Bank of New York Mellon Corporation has had a series of perfectly good products and they've operated in a very separate and we would say siloed way, where they were delivering in a very vertical way, single product, to a client and that was how the client knew us. But we recognized very early on in our journey that delivering more of the things that we already do to the clients that we already have was going to be a huge opportunity. Now that's a big lift because it required the clients to better understand who we were and to understand what we had. Many of our own salespeople did not understand what we had. And so the whole retooling that's come along with the commercial model to be able to equip our sales teams and therefore our clients with knowledge about our company so that they can actually dip in to our businesses and be able to use more of the things that we have. That's a big opportunity. Now the second opportunity, which is very related to that is that it so happens that the many things that we have are quite related to each other. So if you're a clearing client, you might well be interested in collateral. If you're a U. Clearing client, you might well be interested in international clearing. If you do those things with us, you might be interested in some of our other transaction services. You might be interested in treasury services. And so there's a natural adjacency where all of our products and services really are pretty adjacent to each other. So they fit well together. So that's created a depth for those clients who now understand us because the salespeople have been able to equip them with that knowledge and then they see all these things we're doing that look at it and they say, gosh, I should do that with you and that with you because if I do both of them together, it's going to be good for me. I'm going to get more value. Then you layer on top the product innovation, which is we're making the products better and more capable. The examples that we just talked about with digital assets, but AI is very powerful in this regard as well. And then the constant innovation, launching new products, launching new features and making the products individually better. And then the secret further source is we bond them together. So there are some of our products and services that if you actually do them together, one plus one equals three in terms of a capability for the client. Then you add on to that the bigger new innovations, things like Wove, but also things like digital assets, then you recognize that there are more clients in the world and so we're covering clients. We've talked about this in the context of private markets. New growing client ecosystems, new clients and there were no stablecoin clients a few years ago. Digital asset clients, but now we're earning money from those new industries. And so these are the megatrends tuning into them, helping to be part of that journey. So collectively, this is the generating the growth. And it's why in answer to earlier questions, there's a linkage between our organic growth and our capturing of these megatrends that are going on in the market that make it so much more interesting than just is the market up, is the market down. That used to be the way that used to dictate the way that The Bank of New York Mellon Corporation would go. We don't believe that's the case anymore. Gerard Cassidy: On what you just said, Have you guys created a scorecard with your top 100 or top 200 clients and where you are in that journey of giving them those all those different options? As part of that answer, when what percentage of those clients are at an optimal mix where you've where they really are firing on all eight cylinders? Robin Vince: Okay. So you'd expect to hear this from the CEO. None of them are at the optimal mix because all of them can do more with us. But we have quite a few clients who do several of these different businesses. You mentioned eight. In fact, we were having a conversation at our board with a client. We regularly bring in our external perspectives including client perspectives to our board. And we had a client who I was sitting next to talking about our businesses and their perception of us and they actually do eight products with us coincidentally. But I'll give you one stat because I think this is a good one and it kind of goes to the heart of your question. We have a lot more dashboards. We didn't really used to have them. We didn't used to have sales plans and targets and all of that stuff. And that's what I talked about in my prepared remarks about embedding the rhythms of our commercial model into the daily activities of the company because that's the discipline and the relentless execution to make it all happen as opposed to just wishing it be so. But the number of clients who buy three or more of our services is up 40% over the past two years. That's probably a pretty good indication of our direction of travel. Gerard Cassidy: No, it is. And then just last question. Obviously, you guys have plenty of excess capital. Dermot, you talked about returning 90% to 100% of earnings in buybacks and dividends. I think in 2024, you announced the Archer deal. What about inorganic opportunities? Is there any area within your organization that you'd like to enhance with possibly an acquisition? Thank you. Robin Vince: Thanks, Gerard. Look, so it's interesting. We're very open to M&A. We said it before. We're open-minded to inorganic things if they can accelerate what we're doing, derisk us in some way and we recognize it can be a powerful tool in the toolkit for sure. And so we look at opportunities, we've got a team that assesses things constantly. It's a new rhythm for us versus past. As you know, we did the Archer transaction. That was a good stretching of an exercise exercising of that muscle, so that we know we can do it. But we are focused on the discipline here. We have to have great alignment with our strategic priorities. We'd have to have a good cultural fit and of course great financial returns, which will make it the bar for it pretty high. But as you've heard really throughout this call, our organic transformation is working. And we're really seeing the results from it and we still feel that we're in the early innings of that opportunity. And therefore, with that runway, we just feel no pressure whatsoever around M&A. We're open to it. We can be opportunistic. But the momentum we have and the runway that we have to create value near medium and long term means that we're in this wonderful position where we are focused with that as our real strategic focus right now. Gerard Cassidy: Thank you. Operator: Thank you. And with that, that does conclude our question and answer session for today. I would now like to hand the call back over to Robin for any additional or closing remarks. Robin Vince: Thank you, operator, and thanks, everyone, for your time today. We appreciate your interest in The Bank of New York Mellon Corporation. If you have any follow-up questions, please reach out to Marius and the IR team. Be well. Operator: Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on The Bank of New York Mellon Corporation Investor Relations website at 12 p.m. Eastern Time today. Have a great day.
Operator: Welcome to the U.S. Bancorp third Quarter 2020 earnings conference call. I'll now turn the conference over to George Anderson, Director of Investor Relations of you. For U.S. Bancorp. George Anderson: Thank you. Jean-Louis, and good morning, everyone. Joining me today in Minneapolis is our chief executive officer, Gunjan Kedia and vice chair and CFO, John Stern. In a moment, Gunjan and John will reference a slide presentation together with their prepared remarks. A copy of the presentation, our press release and all supplemental consolidated schedules are available on our website at U.S. Bancorp. Com. Please note that any forward looking statements made during today's call are subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. These factors are described on page two of today's earnings presentation in our press release and in reports filed with the SEC. Following our prepared remarks, Gunjan and John will be happy to answer your questions. I will now turn the call over to Gunjan. Gunjan Kedia: Thank you George and good morning everyone. If I could please turn your attention to slide three. In the third quarter, we reported earnings per share of $1.22. An increase of 18.4% year over year. Our Net revenue of $7.3 billion was a quarterly record, reflecting both strong momentum across our fee businesses and improved spread income. This quarter we generated a very meaningful 530 basis points of positive operating leverage, a return on average assets of 1.17%, and a net interest margin of 2.75%. John will provide more details on our financial performance in his opening remarks. Importantly, we are making strong progress against each of our three strategic priorities for our company. We are generating organic growth through distinctive interconnected solutions. We are maintaining our expense discipline through sustainable process automation, and we are executing on our payments transformation with greater focus and strategic investments. As we manage the bank for the long run, through both positive and uncertain times, our highly diversified balance sheet and foundational risk management capabilities delivered improved credit quality and stronger capital and liquidity levels this quarter. Moving to Slide four, fee income diversification is a key source of strength for the company. On the left, you will see that fee revenue grew at 9.5% on a year-over-year basis, reflecting broad-based strength across our payments, institutional, and consumer businesses. Notably, interest rate movements this quarter supported a meaningful acceleration in select capital markets and mortgage revenues. On the right, we highlight five key businesses that have demonstrated strong year-over-year growth and that we believe present a favorable growth outlook. Collectively, these businesses represented approximately two-thirds of our total fee revenue this quarter. Turning to slide five, we spotlight one additional business: Impact Finance. With the Union Bank acquisition, we bolstered our platform, bringing improved tax credit syndication capabilities, new talent, and increased access to the California market. Currently reported within the other revenue, Impact Finance has grown at a 17% CAGR from 2021 to 2024 and is an important mission-driven capability that is core to our fee income portfolio. Over the next several years, we anticipate additional growth from a pull-forward of activity tied to some recent executive orders and expect revenue trends across our environmental finance, affordable housing, and community finance solutions to remain robust. In addition, the business also supports a net tax benefit to the company, which we believe will continue to be a meaningful driver of bottom-line EPS growth. Slide six showcases our growing consumer franchise and long-term deposit strategy. Our deposit base is highly diversified across clients, geographies, and products, providing strength and stability through the cycle. We are actively working to increase our share of consumer deposits with interconnected products like BankSmartly, branch and client center expansions, partnerships, and enhanced marketing and analytical capabilities. Consumer deposits now represent over 52% of total average deposits, up nearly two points from 2023. Moving to Slide seven, our expense discipline over the last two years and execution on Ford's signature productivity programs have resulted in improved organic growth and greater operational efficiencies. As you can see on the left, the outcomes of our efforts have been quite successful, as we have seen steady improvement to both the efficiency ratio and positive operating leverage as adjusted. Turning to Slide eight, our payments transformation remains a key strategic priority for our company. As the charts on the left show, we have seen steady improvement and more consistent year-over-year fee growth over the last several quarters across both our traditional card issuing and merchant processing businesses. We are looking forward to providing a deeper dive into our payments transformation and strategy at an upcoming industry conference in the fall. Let me now turn the call over to John. John C. Stern: Thank you, Gunjan, and good morning, everyone. This is a very strong quarter for us, highlighted by core underlying business momentum and accelerating growth as we made meaningful progress toward our medium-term financial targets. If you turn to Slide nine, I'll start with highlights for the quarter followed by a discussion of third-quarter earnings trends. As Gunjan mentioned, we reported earnings per common share of $1.22 and achieved record net revenue of $7.3 billion this quarter. Revenue growth versus prior periods benefited from improved spread income driven by enhancements we've made to our portfolio mix, as well as broad-based fee growth as we deepen client relationships across the franchise. Elevated deposit flows at the end of the quarter in support of more robust client activity and seasonality in our Corporate Trust business resulted in ending assets of $695 billion. As expected, nearly all key credit quality metrics, including non-performing assets and net charge-offs, improved both sequentially and on a year-over-year basis. As of September 30, our tangible book value per share increased 12.7% on a year-over-year basis. Slide 10 provides key performance metrics. As the slide illustrates, each of our key profitability and efficiency ratios improved this quarter, highlighted by a return on average assets of 1.17% and a return on tangible common equity of 18.6%. Over the last two years, we have increased our tangible common equity approximately 30% while continuing to deliver a high teens ROTCE on steadily improving earnings growth. Notably, we also delivered an improved efficiency ratio of 57.2% and a net interest margin of 2.75% this quarter. Our sequential margin expansion of nine basis points was driven by fixed asset repricing, strong card and commercial loan growth, as well as strategic balance sheet actions we took in the second quarter. We continue to expect net interest margin expansion in the medium term. Slide 11 provides a balance sheet summary. Total average deposits increased 1.8% linked quarter to $512 billion as we continued to emphasize growth in relationship-based deposits. Our percentage of non-interest-bearing to total deposits remained stable at approximately 16%. Average loans totaled $379 billion, up 0.2% from the prior quarter. Adjusting for loan sales last quarter, our underlying growth rate was 1% linked quarter and 2.8% on a year-over-year basis. Loan yields increased to 5.97%, an eight basis point improvement linked quarter. As we continue to strategically remix our balance sheet with a greater proportion of commercial and credit card loan balances, increased both commercial and credit card loans 9.5% and 4.3% respectively on a year-over-year basis. Given the current industry focus on non-depository financial institution lending, we included a slide in the appendix of our presentation to provide additional transparency on this loan category. As you will observe, this is a highly diversified portfolio with a balanced and broad composition of borrowers that is underpinned by our proven underwriting capabilities and strong collateral and structural protections. Finally, as it relates to the balance sheet, the ending balance in our investment portfolio as of September 30 was $171 billion and had an average yield of 3.26%, an eight basis point improvement sequentially driven by the strategic actions we took last quarter and fixed asset repricing. Turning to slide 12, net interest income on a fully taxable equivalent basis totaled $4.25 billion, an increase of 4.2% on a linked quarter basis. Slide 13 highlights trends in noninterest income. Total non-interest income was approximately $3.08 billion. Excluding security losses, total fee revenue increased 9.5% on a year-over-year basis, driven by new business momentum and broad-based growth across our fee businesses. Turning to Slide 14, non-interest expense totaled approximately $4.2 billion as we continue to prudently manage our expense base. Slide 15 highlights our improving credit quality performance despite ongoing macroeconomic uncertainty. Our ratio of non-performing assets to loans and other real estate was 0.43% at September 30, an improvement of one basis point linked quarter and six basis points year over year. This quarter, our net charge-off ratio of 0.56% improved three basis points sequentially and four basis points year over year. Turning to slide 16, as of September 30, common equity Tier one capital as a percentage of risk-weighted assets was 10.9%, a 20 basis point increase linked quarter. Including AOCI, our CET1 ratio improved to 9.2%. At the top of slide 17, we provide a comparison of third-quarter results to our previous guidance. This quarter, both net interest income and fee revenues exceeded our expectations, while non-interest expense was in line with previous guidance, which drove meaningful positive operating leverage for the quarter. Let me now provide our forward-looking guidance. In the fourth quarter, we expect net interest income on a fully taxable equivalent basis to be relatively stable to our third-quarter level of $4.25 billion. Total fee revenue is expected to be approximately $3 billion. Total non-interest expense is expected to increase between 11.5% sequentially. We expect to deliver positive operating leverage of 200 basis points or more on an adjusted basis. Turning to slide 18, we are now operating within all of our medium-term target ranges, one year removed from our 2024 Investor Day, and remain confident in our ability to build on these results over time. Let me now hand it back to Gunjan for closing remarks. Gunjan Kedia: Thank you, John. Third-quarter results show that we are beginning to hit our stride on execution. We remain focused on delivering growth, productivity, returns, and strong risk management both in favorable and uncertain economic environments. Let me just close by extending my deep gratitude to our clients and shareholders. Our results reflect the power of our strategy, the strength of our franchise, and the dedication of our teams across this organization. We appreciate your trust and your partnership. With that, we will now open the call for your questions. Thank you. Operator: Your first question comes from the line of John McDonald of Truist Securities. Your line is open. John McDonald: Hi, good morning. I'll start off with a question for John, just on the outlook. John, what are you seeing for net interest margin trend in the fourth quarter? Can you give us some puts and takes on your outlook for net interest income to be relatively flattish in the fourth quarter? John C. Stern: Sure. Good morning, John. Maybe stepping back just to the third quarter, we had a lot of favorable items this quarter that will continue to be sustainable. We had strong fixed asset repricing. We had a healthy mix favorability both on the loan side of the equation as well as on the liability side. Of course, we had the strategic actions that we talked about last quarter that ended up being favorable as well. Looking forward, if I think about the fourth quarter, we talked about relative stability and we have the favorable items still being a tailwind in terms of repricing and mix. However, we have credit card favorability this quarter that is seasonal to a certain extent and that will reverse in some capacity. And so when I think about the quarter, there's obviously some risks and there's some opportunities. I would say that we're biased to the upside both in terms of net interest income and net margin from versus our flat guidance because I just see more opportunity than I do risk. But we'll see how the quarter plays out, but that's where we're at right now. John McDonald: Okay. And then just following up on that, looking a little further out, what are some of the drivers you have for net interest margin expansion next year in the context of maybe a few rate cuts? And do you still think that you could get towards 3% in 2027? John C. Stern: We definitely see a path of net interest margin expansion getting to that 3% level in 2027. The drivers are going to be the ones that we've talked about in the past. We have fixed asset repricing that is quite mechanical. We've talked about the $3 billion of investment portfolio and the $5 billion to $7 billion of loans that reprice. We still have mix that we have in our control in terms of leaning more into card and commercial type of loans that are helping. And so I think of those things as having somewhere in that two to three basis points of embedded lift from a net interest margin standpoint. The third component is really going to be on the deposit side and the mix and pricing of that, and that will depend a little bit. The speed in which we gain to that 3% margin is going to depend on the curve. It depends on deposit competition and how we execute really on DDA and checking and all those sorts of accounts that we need to grow. So we definitely see a path for 3% in 2027, but some of those macro environments might impact the speed in which we get there. John McDonald: Okay. John C. Stern: You bet. Operator: Your next question comes from the line of John Pancari of Evercore. Your line is open. John Pancari: Good morning. On the positive operating leverage, it came in particularly solid this quarter, and you're clearly confident in the 200 basis points plus expectation for 2025. Could you give us just a little more color in terms of your confidence in that front or in that pace as you look into 2026, just given some of the investments that you're looking at, but also conversely some of the momentum you're clearly seeing on the revenue side? Could we see positive operating leverage exceed that 200 plus range as we look out? John C. Stern: So thanks, John. In terms of our guidance, of course, we've been signaling over 200 basis points of operating leverage this year, and we've been achieving that. Obviously, we had a lot of strength this quarter, and we continue to expect that in the fourth quarter. As we think about '26, we haven't provided formal guidance there. We're going in the middle of our planning process, of course. But I think you can kind of see the key drivers here. You can think about net interest income having a good growth trajectory as we think about all the different items I just talked about. The fees, we continue to expect that mid-single-digit type of growth in our expenses. We've been able to manage quite prudently, so we expect to shave meaningful positive operating leverage next year. Gunjan Kedia: And John, I'll just add this is Gunjan. We are very confident in our expense management disciplines because our four signature programs have runway still to go. And the revenue outlook is positive. It does depend on the fee mix. As you know, we are very focused on improving our fee mix, and that tends to attract more expense, which we are very glad to do. So that's the range. But the business model lends itself to meaningful positive operating leverage for next year. Just a matter of level. John Pancari: Okay, got it. Got it. And then on the fee side, also some clear momentum there. Some pretty good upside this quarter. And as you mentioned in your prepared remarks, you're certainly seeing some of the momentum follow through in terms of your key drivers and then your payments space as well. I mean, I guess, the payment side, can you give us a little more color in terms of the drivers of the growth that you're seeing there and your confidence in that mid-single-digit expectation? And is there anything from the standpoint of customer acquisition or the benefits of the investments that you've made that you'd call out here as being key drivers to seems to be a more sustainable consistency around your fee performance as of late? Gunjan Kedia: Thank you. We are feeling very confident in the broad-based strength of the fees. And let me just share two things, and then I'll get to the specifics on payments. We have made a lot of progress over the last twelve months on creating an operating model that creates interconnectivity between our product sets. So the fees are lifting each other. Our relationship teams, our sales and marketing efforts are multi-product, the product design is multi-product. And all of that is leading to a measurable lift in the effectiveness of marketing dollars. So that gives us some real shift in the trajectory here. What we track internally on payments, for example, is new card acquisitions that we can measure today that have grown nicely from past trends, and it takes twelve to eighteen months for that revenue to catch up. We are also seeing material strength in sold but not installed business on businesses like CPS and merchants. So all of that leads us to have confidence in our mid-single-digit fee guidance across the whole portfolio and payments overall. With upside over time as we gain momentum. John Pancari: And that upside, that would bode well for 2026, I assume there, Gunjan? Above that mid-single-digit level possibly? John C. Stern: Well, we've talked about mid-single-digit in the payment complex, and that's what our objective is with upside. So I think that's where our starting point is. We'll have more detail, obviously, as we think about that in the next call, but mid-single-digit is a good place to start to the plus. Gunjan Kedia: I do also want to just reiterate that there is a lot of curiosity around payments. And in the fall, we are going to bring a deep dive on the merchant business and the card issuing businesses. So I look forward to more dialogue there. John Pancari: Got it. Okay. Thank you. Appreciate it. Operator: Your next question comes from the line of Ken Usdin of Autonomous Research. Your line is open. Ken Usdin: Hi, thanks. Good morning. I just wanted to follow-up on the payments point and just ask you to dive in a little bit more. 3% year over year is not far from mid-single-digit, but that corporate piece is still comping negative and credit and debit is still three-ish. So I just want to if you can kind of give us some of the moving parts of the drivers now and when across the lines, where do you expect it to inflect? John C. Stern: Sure. So your question regarding on the corporate payment side of the house, that has seen negative year-over-year prints the last couple of quarters. The drivers of that are really on the government side of the equation as well as corporate T and E. So you could think of government spend as about 15% of this line item. Corporate Corporatini is kind of about the same thing, and those have had some headwinds in those particular areas. Gunjan mentioned uninstalled revenue and strong pipelines. That is certainly the case, and we expect to see some online versions of that coming on into the fourth quarter. And so we do expect improving trends in our year-on-year outlook on corporate payments. And merchants have had some strong quarters given success in our key verticals that we've been talking about, as well as some of the embedded finance and tech-led type of strategies. And card, as Gunjan mentioned, the marketing and account growth we see is very encouraging. So those are kind of the items that I talked about from a payment standpoint. Gunjan Kedia: I can add just a line on the debit card where the growth is really about growing your entire consumer franchise, and we are very laser-focused on that and see a lot of upside over time with interconnected products between card and the consumer bank. So as we see momentum in the showed you some data on consumer deposits that was a very favorable set of trends over the last two years. And that creates momentum in the total number of clients and usage of the bank accounts and the debit card revenue line. So we should expect that to come. But the real payment strategy is focused on the card issuing and the merchant businesses that the vast majority of our payments business. And of course, CPS is a very attractive business, and we are expecting those trends to reverse in due course here. Ken Usdin: Great. One follow-up just related to consumer. It's great to see the card loss rate come back down now at 3.73 in the third quarter. Are we starting to see that maturation of the portfolio and kind of where do you expect to see that card loss rate go going forward, assuming a reasonably stable economy from here? Thanks. John C. Stern: Yes. Our view on credit right now is favorable. We see strong spend trends and credit trends, particularly the vast majority of our book is 720 or greater. The spend levels have been very good. The loss rates, as you mentioned, have come down meaningfully this quarter. There's some seasonality there, but for certain, our 2025 loss rate on card will be less than our loss rate in 2024. So there's some good momentum there. As we get into 2026, we'll likely update you there. But we don't see anything that gives us any concern in this area. And so it's been a strong result. Ken Usdin: Thanks, John. Operator: Your next question comes from the line of Ebrahim Poonawala of Bank of America. Your line is open. Ebrahim Poonawala: Hey, good morning. Gunjan Kedia: Good morning. Ebrahim Poonawala: I just wanted to as we think about NII margin, think deposit growth and pricing matters. I think, Gunjan, in your opening remarks, you talked about the bank smartly, partnerships, branches, like all of those from an outside looking in, it's just very hard to figure out whether these are sticky deposits, lower-cost deposits. If you don't mind spending some time on just the client acquisition that's happening through these channels and how we should think about either the magnitude of growth they can drive as we look out the next couple of years and the cost structure of these deposits. Gunjan Kedia: Let me start and then John will add on. So the consumer clients and the consumer deposits, as you pointed out, are both sticky and favorably priced according to the total portfolio. And we think about our deposits in three big categories. The consumer deposits, which includes our wealth franchise and our wholesale deposits that you're very familiar with. And then we have a large trust business that is quite a unique property. Our ability to drive fee business growth is very helped by the balance sheet presence we have on the wholesale and the trust side. And the pricing there is quite dynamic. So the consumer and our focus on improving the of consumer deposits is all about creating stickiness and better funding costs. These clients also then feed enormous growth in other businesses. So we very steadily see a client that might start with us on a core checking account or a core savings account then deepens with credit card, deepens with wealth, and deepens even on the small business side. So those are the strategies across all of the levers that you point out. And I'll add to it digital acquisitions with marketing, we have really stepped up in terms of our investments and our capabilities there as well. That's sort of the story on deposits and the consumer franchise and John, you'll add something on. John C. Stern: Yes. Couple of things I would just add is we feel very good about where the deposit portfolio shaped out this quarter. We saw very strong growth in both consumer as well as on the commercial side of the equation. Our desire, as Gunjan just to reiterate what she said, our growth is really to on deposits is to grow where it matters and where it's conducive to supporting fee growth. And so we think about Smartly, you mentioned that product, Ebrahim, for us, we are highly encouraged because it is a product that has three times as much multi-products attached to that client when they open up this product. That and of itself, we know that has more stickiness to it. It brings in a new type of client into the bank, which is from a credit card standpoint about half of the cards that open up are new relationships that we have to the bank, which is very encouraging. And so and then on the commercial side of the house, we saw a lot of growth on the deposit side across all sorts of different areas, including treasury management and the investments we've been making in that business over the last couple of years really starting to come to fruition. We saw a lot of growth in investment services this quarter. There's just a lot of business activity and so we gained a lot of deposits as there's just a lot of investments moving around and so we house those deposits while that is occurring. So all this activity that occurs is really beneficial to us. And for that reason, we saw benefits to our fee categories as you saw this quarter. And it's really all interconnected, which is what the point of what Gunjan was saying earlier in the call. Ebrahim Poonawala: Got it. That's helpful. And I guess maybe going back to the margin discussion, John, so you've talked about it was pretty good expansion this quarter. Talked about the 3%. I'm just wondering as we think through that the journey from 2.75% to three is there a point where there's a pretty material inflection outside of like the back book repricing everything that you talked about. I'm just wondering, is there a chance you could hit 3% by this time next year by the fourth quarter? Is it just very steady state or are they going to be big step ups in the progress towards that 3% NIM? John C. Stern: Sure. So I won't repeat everything I said on the drivers. But to your point on the speed in which you get there, I'll point out that the curve from a SOFR versus five-year treasury is still quite inverted. And so a speed up if you will margin could be the Fed is programmatically cutting. The curve is more upward sloping on that part of the curve and that could really help boost the speed in which net interest margin improves. The other sides on the asset side are going to be a little bit more mechanical and more embedded in how we move forward. But it's really going to be that the macro that's going to drive the speed in which we get there. Ebrahim Poonawala: Got it. Thank you. Operator: Your next question comes from the line of Michael Mayo of Wells Fargo. Your line is open. Michael Mayo: Hi. I don't know if we put this in the category of the Loch Ness Monster, Bermuda Triangle, and the contents of NDFI, but I'm sure many appreciate your detailing of NDFI. But that's not really the way you run the business by NDFI. So I guess it's just connecting regulatory reporting with your business lines. But since you did disclose that, can you just give us a little bit more color? You say that credit quality is higher on NDFI than your core C and I portfolio, which is interesting. NDFI is 12% of the total loan book. Like, where would that have been, say, you know, five or ten years ago? And any loans that you're not pursuing. I mean, the key to good credit quality is choosing to say no. A lot. Thank you. John C. Stern: Sure, Mike. Thanks. I think we've the slide is in there because there's just been a lot of interest in the industry. You're right. I mean, there's a it's a very broad and just set of businesses within there. Obviously, as you know, mortgage warehouse lending and subscription lines and auto ABS are very different items. Just wanted to show that sort of categories that we have. I think the point that what we're trying to make is that our risk disciplines and how we think about the diversification of this book, is something that we spend a lot of time on. And it's not just the category for the category's sake. It's just the way we operate in terms of our credit culture. So we think about the multiple ways that there's repayment. We think about how fees are over collateralized. We think about the data that is needed to look through on some of these structures and things like that and the risk limits embedded in there. And ultimately, we know these clients a lot over many years. Many of these clients we've been servicing in many different products over a vast number of years. And in terms of the growth that we've seen, I don't have a number for you in terms of five or ten years, but it obviously has grown pretty substantially over the last several years. But we're very comfortable with it because we again, we know the clients. Gunjan Kedia: And we'd add that these are broad relationships on the fee side in addition to the loan book, and that's just client selection there. Michael Mayo: And my other question is, where would you say you choose to say no a little bit more often than not? In other words, you could have faster loan growth, any bank could. Is there are there any areas where you say, hey, let's pay more attention to this? John C. Stern: Sure. We have that conversation all the time on credit committees and things of that variety. We're talking about line items that and single counterparty limits and things of that variety in a number of different things. We're careful about certain areas that are have that when we look through have more leverage and things of that variety. We want to make sure we understand it. It's all on the credit profile and the client selection is very important. We're servicing a number of the different large players here that are very known to the market, and we feel very comfortable about the book. Michael Mayo: Alright. Thank you. Operator: Your next question comes from the line of Saul Martinez of HSBC. Your line is open. Saul Martinez: Hey, good morning. Just wanted to quickly follow-up on the fourth quarter net interest income outlook being stable. I get that there is a bias to the upside. But John, you did mention that there are some upside sources and there are some risks. And I think you mentioned credit card favorability in 3Q and some other risks. But I'm not sure I understand because you're just elaborate a little bit on what the card favorability dynamics are and what the other downside risks are? And what are you assuming there for rates in the fourth quarter? And how are you thinking about the rate backdrop in 2026? Are you working with forward curve, which I think has five cuts in it, which presumably would be good? For you. But just any color on how you're thinking about the rate backdrop next year and also is it what are you assuming for the fourth quarter? How is it influencing your guidance at all? John C. Stern: Sure. Let me go with the assumptions first. Think that's a good place to start on your questions. From a curve and from a rate perspective, we do include two cuts this year. We also have two more cuts in 2026. So maybe we're a little bit late relative to the market in terms of cuts, but that obviously always shifts. We do have longer-term yields, pick on the ten-year treasury as an example, more in the April, 4.5% range for the 2026 year. And so as I think about the fourth quarter to get to the more specifics of what you were talking about, we have a lot of upside in terms of the things that have been working for us in the past in terms of fixed asset repricing. The mix is obviously going to be very favorable for us. I think about the things that are going the other way, for the fourth quarter, we did have meaningful pickup in credit card yield this quarter. There were fees that we picked up as well as just strength in that area. Some of that is seasonality. Expect that to reverse in the fourth quarter just given the trends that we are observing. But all in all, as we put together these things, there's obviously a lot of moving especially in the fourth quarter. But I'll reiterate that we see more opportunity than we do risk. As it's embedded into our call. Gunjan Kedia: And so I'll add that the fourth quarter credit card dynamics are very seasonal and expected. It's the holiday season dynamics. So we expect that. There's nothing unique about what we are seeing in that book just at this time. It's just the holiday season changes the dynamics there a little bit. Saul Martinez: Okay. Okay, that's helpful. And then maybe the it's surprising positively spread, I guess, by the size of the sustainable finance business and the growth you've seen there, and it is a pretty big part of the other income line. I just wanted to make sure I understood. You are expecting continued growth as you see a pull forward of some of this activity. And from current levels? And if that is the case, I guess, what is it I guess, what do you mean for the other income line? Because it that has been moving higher, I guess, know it could jump around quarter to quarter, but is that should we be thinking that line is going to move higher as well as this business continues to grow? John C. Stern: Yes. Our view is that the impact this impact finance impact finance line item will and increase. We've had, as we saw on the slide, a 17% increase. We expect this to be a high single-digit type of business over the medium term. There's not I mean there may be some pull forward given some of the legislative moves and things of that variety. But we see the momentum in the business. They've been gaining market share. It's an area that the team has had a lot of focus on. And you look about renewable energy tax credits and you look at low-income housing and things of that variety. These are areas that we and new market tax credits, we're number one in terms of that market share. And so we've been building our capabilities here and we've been the additional tailwinds have been the some of the administrative or the legislative areas that have helped this year as well. Gunjan Kedia: And Sol, you're right, it's quite a large business today. It started out in the other category and we've had some questions from all of you on sort of what really is there. So we wanted to highlight a part of the business that's actually very core to what we do. It's ingrained in day-to-day sort of running of the businesses. But it has become quite sizable also because of Union Bank. Union Bank acquisition for us is about three years old now and we are just beginning to realize the revenue benefits of some of that client base and the presence in California. And this business is a good example of sort of what a good strong presence in California can do to certain line items. So very attractive business for us. A long, long-standing business which just has become quite large now. Saul Martinez: Great. That's very helpful. Thank you. Operator: Next question comes from the line of Gerard Cassidy of RBC Capital Markets. Your line is open. Gerard Cassidy: Good morning, Gunjan. Good morning, John. Gunjan Kedia: Good morning. John C. Stern: Good morning. Gerard Cassidy: Can you guys share with us obviously, there's a lot of talk about Stablecoin and the impact it may have on the payments business. And can you share with us how you're getting out in front of it and what you're doing to prepare yourselves for the stablecoin activity eventually coming into payments business? Gunjan Kedia: Yes. Good morning, Gerard. So we are working on stablecoins in two very distinct areas. The first is around the capital markets and investments part of it. Where the business model is very clear and it's very favorable to us. So this is custody and safekeeping of the custody collateral underlying stablecoins or custody and safekeeping of cryptocurrency assets. These are products that we introduced sometime back have reintroduced with the shift in the supervisory environment. And are quite confident in our ability to just provide those products. The other side is stablecoins as a payment rail. Where the client demand is more muted although there are a lot of discussions. And there our efforts are twofold. One is to just be ready to onboard and offboard a stablecoin into the banking system and we are working on that in conjunction with the industry consortiums. And then the second is just being ready to provide stablecoin services as a payment vehicle. Should that market take off within our client base. So we expect to pilot some stablecoin transactions yet this year with the with some partnerships in the market. I'm also we're also very aware that we have a unique franchise in Elon where we provide credit card payment services to 1,200 banks smaller banks on a white label service. So this is also a question that we'll get from our smaller bank base. So we are just studying that market and being ready for if it takes off. But the real momentum from revenues and a clear business case and an economic model is on the custody and investment side. So it's a multi-dimensional field that's moving very fast. We've just announced some organizational changes to stay current with the industry as it evolves and more to come there. Gerard Cassidy: Very good. Thank you. And then can you remind us when you look out over the next twelve or twenty-four months, as your CET1 ratio with the AOCI included, continues to grow. Your views of returning capital to shareholders for years U.S. Bancorp consistently returned 75% to 80% of earnings. Can you kind of refresh our memories on what you think the long-term return will be to shareholders? John C. Stern: Sure. Gerard, it's John here. So we're obviously continuing to build our capital base. Would consider that we're in the final lap, if you will, of building out our capital. We were at eight point four couple of years ago. You'll recall we're at 10.9 now. We gave you the number with included in AOCI and where we're attempting to get into. Obviously, we are looking to increase that amount. It may not be this quarter, but as we look into 2026, we certainly have a feel that the glide path will be there to increase our pace and get to that 75% area that we that had mentioned on the slide that you'll see there. We're very much committed to that. And so that along with the things we have to balance things like loan growth and things like that will take it quarter by quarter, but that gives you kind of high level how we're thinking about. Gerard Cassidy: Great. Thank you. And Gunjan, thank you for bringing Mark to for the details about payments. We appreciate it. Thank you. Gunjan Kedia: Thank you, Gerard. Mark and Kotny. So Kotny will present on the card issuing business, which is sort of a big part of our business and Mark will join you for MPS. So look forward to that. Thank you. Operator: Your next question comes from the line of Erika Najarian of UBS. Line is open. Erika Najarian: Hi. Just a few cleanup questions, if I may. Just first, I wanted to clarify, John, you said the fixed asset reprice is two to three basis points of embedded lift. I just wanted to clarify if that embedded lift is a per quarter statement. And also, as we think about fixed asset pricing, is that more tethered to the belly of the curve or the ten-year range that you mentioned 04/25, $4.50? John C. Stern: Sure. So yes, just to be clear, let me and thank you for allowing me to clarify. When I had said the two to three basis points, I was referring to mix as well as fixed asset repricing that we have on a quarterly basis. So think of that as an embedded quarterly type of improvement that should be happening. As we know every quarter there can be movements in balance sheet that can alter net interest margin and we don't always manage Net interest margin is an output, but directionally obviously we want that to improve and things of that variety. And then in terms of the mix or excuse me the repricing and where we focus on, it's more the belly of the curve is probably more appropriate. The five-year treasury I think is always a good to look at and obviously spreads where those are at whether it's mortgage spreads or credit spreads just in general. So those are the items that I look at. Erika Najarian: Thank you. And my second question is for Gunjan. The stock is clearly reacting favorably today. You had a nice beat to consensus really on the revenue side, and it's really the revenue side, you know, that's driving the positive operating leverage this quarter. As you think forward, how are you balancing some of the embedded momentum that you have been talking about on this call that you're going to continue to talk about in Boston in a few weeks versus what seems to be you know, a lot of questions and, you know, pressure on larger teams in terms of questions on scale and having a, you know, relatively short inorganic growth window in this under this current administration. Gunjan Kedia: Erica, good morning and thank you for the question. When I stepped into my role now six months back, we had very clearly articulated three priorities. And they were connected to each other. Most urgent from a sequencing and timing standpoint was expenses. It was our was very real there. We had finished embedding Union Bank. We had finished all of the work we were doing to restore our capital positions. And it was appropriate to bring the efficiency ratio back to what the business model requires it to be, which is mid to high 50s. Having done that, we exceeded what we wanted to do from the efficiency ratio and positive operating leverage standpoint. And released a fair amount of investment to invest in organic growth. And you're beginning to see that show up now. And you'll see payments show up sequentially a little bit behind that just because the sales cycles and the revenue models take time. That's why we talk about leading indicators. It's less a matter of balancing between them, but one fueling the other with the ultimate goal being EPS growth that is also accompanied by very high attractive returns. And you'll know John pointed out that we have increased our we have maintained an increase our return on tangible capital very, very specific. So going forward, you'll see the growth side of the equation become more present in our strategies. First with all of the fee businesses, our evolution to a more attractive asset side with more leaning in on C and I and credit loans and on deposits more attractive balance sheet leaning in on the consumer side. So you see NII growth and you see fee growth and then you're going to start seeing the strategies for payments. So we are feeling very good about the momentum organically over time and certainly see very real opportunity and quite a lot of runway on organic growth for us. Erika Najarian: And just to clarify, Gunjan, given how you answered that question, USB is focused and obviously, like John said, you're sort in the final phase of rebuilding capital. Your focus is inward and not outward in terms of bank acquisitions. Just wanna be clear that that's the message that you're giving us. Gunjan Kedia: Our focus is very much on organic growth. Operator: Thank you. Your next question comes from the line of Betsy Graseck of Morgan Stanley. Your line is open. Betsy Graseck: Hi, good morning. I just wanted to circle back to the discussion earlier on the impact financing and the implication for tax rate. Gunjan, I think you mentioned that will be leaning into this effort that you have and that as you do lean into it, it should have some impacts on tax. Could you help us understand how much and over what kind of timeframe is this? And I bring it up relative to the slide 32 that talks about key assumptions for medium term include current tax policy, and I wasn't sure if current tax meant current tax rate or the expectation for tax rate to come down as you increase Impact Finance. John C. Stern: Sure, Betsy. So I think when I think about the Impact Finance components from a the tax benefit that we've received is likely not going to change much from where we sit today. So there's probably a three or so plus or minus point benefit to us in our tax rate that has been there for some time and will continue. The growth that we're talking about here in the fee side is related to transferability, and syndications and things of that variety where we have been very good, where the tax policy changes have allowed that market to flourish with more freedom. And I think that is what we're that is where we have our ability to grow and where do we get to see more fee revenues that I've been talking about there in terms of our assumed growth rate. So that's really where it's at in the tax rate will continue that favorability as we mentioned on the tax rate as well. Betsy Graseck: Okay. So right now it's about 3% benefit to tax rate and even with increasing this business you expect it to hover in that range? John C. Stern: That's exactly right. Betsy Graseck: Okay. Thank you. Operator: Your next question comes from the line of Chris McGrady of KBW. Your line is open. Chris McGrady: Great. Good morning, everybody. Looking at Slide 19, I guess 18, 19 together, the building upon medium-term targets comment. Several larger banks have either put out revised targets or hinted at targets this quarter. I guess my question is given that you're more or less there, is that something that we might think is on the horizon? Over the near to intermediate term? John C. Stern: Thanks, Chris. I appreciate the question. Obviously, we're pleased to be where we're operating here in terms of where we sit in terms of our medium-term targets. There is nothing formal, but you'll note in my prepared comments about how while we're pleased, this isn't the end we to improve and that's really what our focus is. So there's no change to any of the medium-term targets. We think those are appropriate and right, but we do expect improvement of ourselves over time. Chris McGrady: Okay. And then John, if I could just push I guess what would it take for you to revisit them? Is it just staying here for a bit of time and the operating environment staying good? Or what would specifically need to change? John C. Stern: Yes, think it would be those two things that you just mentioned. I mean, it's that the operating environment improves our execution exceeds even our own expectations and then those are going to be triggers that we look to. Gunjan Kedia: I would just add, we need to just consistently stay in the range and then start hitting the upper end of each range and then we'll think about changing the ranges. Chris McGrady: Okay, great. Thank you. Operator: Your next question comes from the line of Matt O'Connor of Deutsche Bank. Your line is open. Matt O'Connor: Good morning. Just a quick clarification. You talked about assuming slightly higher rates in the forward curve in 2026. If the forward curve plays out versus your rate assumptions without the direction positive or negative for your net interest margin? John C. Stern: Yes. I think as I mentioned, we have four cuts in our forecast think the market's a little bit wider than that. So if the forward is actually transpire then that would be a net benefit. I think our longer-term rates are probably a little bit more higher than where forwards are at this point. And so we would need to see a little bit more improvement there to get additional benefit on the fixed accessory pricing. So it's a little bit of a mix on balance it's about equal, I would say. Matt O'Connor: Okay. So positive on the short end, back on the long end and when you put all together, they're about the same? John C. Stern: Exactly. Matt O'Connor: Okay. Alright. Thank you. Operator: Your next question comes from the line of Vivek Juneja of JPMorgan. Your line is open. Vivek Juneja: Thank you. Given that one of the big picture questions have been asked in this in the realm of some cleanup. John, I have a question for you. What is included in your other earning assets where the yield went up 300 basis points linked quarter with an interest income increase of $100 million, which is over 60% of the increase in your NII linked quarter. And the yield is almost 8%. It's higher than any other asset on the balance sheet. What drove that? And how sustainable is that, John? John C. Stern: Sure. Thank you. So we have to look at that line item along with the short-term liability line item. And so those two things have a little bit more of a have a gross up of yield. And so if I step back and what's going on, we've increased our capacity and ability in the capital market space on tri-party repo and our volumes have picked up quite a bit. We do have the ability to net those balances. So the balance sheet is smaller to your point about $1 billion or so on that particular line item. And but we keep the grossed up amount on the yield and so that differential is going to show up in those two line items. If you net those things out there's really no meaningful change to NII or net interest margin. You just have to look at two of those items together. You'll note that short-term borrowings dropped about $7 billion. That wasn't really repo related. That's about again about that $1 billion. Most of it was just short-term borrowings that we had used the prior quarter. Given the asset sales that we had and we had obviously strong deposit growth. So we could just reduce that balance there. Vivek Juneja: Okay. Thanks. And another one for either of you. Your C and I NPLs were up 30% linked quarter. Any color on what you're seeing, which industry sectors what's the lost content like? Any color on that? John C. Stern: Sure. So a couple things. Know, it's obviously there's some things that can be lumpy from time to time. We do have some exposure to First Brands. It's not material to our financials as it's already contemplated in the reserve, but that partially explains the rise in commercial NPAs. That you referenced. Vivek Juneja: And have you taken any kind of a loss or provision therefore for FirstPans? And in what And in what form was that exposure to First Brands, John? John C. Stern: It's just our secured borrowings that we have with them and it's already any of the losses contemplated in our reserve already within the provision. Vivek Juneja: And are other similar structures like this that we should be worrying about given I would presume that the first brand stuff showed up under your NDFI? John C. Stern: No. This is on the bank side of the equation. And no, the answer is no. There's we haven't seen a lot of strength in the commercial side of the equation as well as on the retail side as we talked about with cards. We continue to look to see if there's are things and we just are not seeing it. Vivek Juneja: Gunjan, for you, what are you thinking of doing differently? Because first brands is obviously a big surprise for the market. Gunjan Kedia: I don't think we'll do anything differently. We have very, very strong underwriting capability. I mean, you have a large book, you have one or two issues, you have to be very appropriately reserved for it, which we are. You have to be diligent to learn lessons from it, and we have a lot of confidence in the quality of the credit book and our underwriting process. So I'm not sure there's anything to be done differently but be very but to remain very vigilant and rely on your strong traditional underwriting strength. Vivek Juneja: Okay. Thank you both. Operator: Your next question comes from the line of Scott Siefers of Piper Sandler. Your line is open. Scott Siefers: Thanks, guys. Good morning. I think most have been asked and answered, but maybe, John, know we've had a little noise in the loan growth this year with some of the actions you took earlier in the year. Are we kind of at a point where we could expect to start to see more visible momentum? Know you saw some modest end of period growth in the aggregate, but just curious on your thoughts from here and what you're seeing in terms of overall demand? John C. Stern: Scott, just to clarify, you talking about in the period, were you talking about there or loans or you're just just in general? Scott Siefers: No, no, Loans. Loans specifically. John C. Stern: Got it. Okay. Yeah. So I think we had an opportunity in the second quarter as we had already talked about. And so I think that was something that we found attractive and acted on. It's obviously given us a benefit here in the third quarter. I don't see anything in particular on the horizon for that. But obviously, you're always looking at opportunities as they come about. And so it's just something that we keep a pulse on. But we're focused obviously on the organic side, growing accounts, making sure leaning into growth with our clients and that sort of thing. Scott Siefers: Got you. Okay. Think that actually does it. So thank you very much. John C. Stern: Thank you, Scott. Operator: We have a follow-up question from the line of Ebrahim Poonawala of Bank of America. Your line is open. Ebrahim, perhaps your line is on mute. There are no further questions at this time. Mr. Anderson, I turn the call back over to you. George Andersen: Thank you, Gianluibouvy, and thank you to everyone who joined our call this morning. Please contact the Investor Relations department if you have any follow-up questions. Now disconnect the call. Operator: This concludes today's call. You may now disconnect.
Operator: Good day, and welcome to the Snap-on Incorporated Third Quarter Results Conference Call. Should you need assistance, after today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Sara Verbsky, Vice President of Investor Relations. Please go ahead. Sara Verbsky: Thank you, Bailey, and good morning, everyone. We appreciate you joining us today as we review Snap-on's third quarter results, which are detailed in our press release issued earlier this morning. We have on the call Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the Webcast viewer as well as on our website, snapon.com, under the Investors section. These slides will be archived on our website along with the transcript of today's call. Any statements made during this call relative to management's expectations, estimates, or beliefs or that otherwise discuss management's or the company's outlook, plans, or projections are forward-looking statements, and results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, this presentation includes non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk. Nick? Nick Pinchuk: Thanks, Sara. Morning, everyone. Well, we believe our third quarter demonstrated encouraging momentum, continuing our progress. Moving upward against one of the most challenging environments of our time, wars, inflation, and tariffs. Moving upward against the tides of seasonality, and upward amidst the variability that always accompanies the late summer. The quarter showed that the resilience of our markets, the momentum of our program, the advantage of our strategy, making in the markets where we sell, and of our structure, the flexibility provided by our 15 factories in the US, have driven us forward. We believe it will serve us well for some time. As we proceed today, I'll start with the highlights for our quarter. I'll provide my perspectives on the results, on our markets, and on the path ahead. And then Aldo will give you a detailed review of the financials. My thoughts regarding the past three months are that without question or qualification, our results are once again encouraging. Fortified by the progress along our run rates for both growth and improvement. It was another quarter bearing witness to our building traction amidst the uncertainty and headwinds of today. You can see it in third quarter sales of $1,190,800,000. We're up 3.8% from the $1,147,000,000 recorded last year. Excluding $9,000,000 in favorable foreign currency translation, organic sales increased by 3%. In this third quarter, sales were up sequentially over the second quarter results, again, against normal seasonality, and we believe it offers substantial evidence of ongoing momentum. The operating income margin was 23.4%. Now that includes a 190 basis points from a recent legal settlement. So excluding that legal item, OI margin was 21.5%, down 50 basis points, 20 of which were due to unfavorable currency. But 21.5% is still at a strong level and represents our second highest third quarter ever despite the turbulence. For financial services, Finco OI of $68,900,000 was down from the $71,700,000 last year. And a number that when combined with our APCO results, resulted in an OI margin of 26.9%. EPS was $5.02, $4.71 excluding the 31¢ from the one-time legal benefit, representing the highest ever for a third quarter. And overcoming a $0.09 impact from higher pension amortization costs. So those are the overall results. We think they're pretty good. Now let's take a view of the markets. During the third quarter, the auto repair market remained favorable. Displaying a continuing need and a rising complexity. Miles driven keeps growing, people move even in difficult times. And they're holding on to their vehicles longer, requiring more upkeep. The car park keeps aging. It's now averaging nearly 12.8 years. In other words, people need repairs with solid regularity and the range of vehicle models needing work just keeps expanding. And the vehicles keep getting more complex every day. The ever-expanding array of drivetrains, motors, neural networks of sensors, multiple systems, a melding of hardware and software to control a growing range of functions. It all marks the trajectory of modern vehicles. It's an environment of constantly rising repair challenges. In short, vehicle repairs never had a more promising future. And you could see it in the industry metrics. Spending on repairs, up double digits. Tech counts rising. Wages continuing their upward march and keeping with the increasing skill required to keep the world mobile so the techs are cash rich. But they're also confidence poor. Certain of their value, but uncertain about the environment. They still want new tools that make the work easier, but they remain reluctant to commit to paying for big-ticket items with long-term financing. But in the turbulence, our strategy of pivoting toward faster payback items is taking hold. And it's making gains. Automotive repair is a great business. Essential to our society and always advancing. Snap-on's well-positioned for success with our short chains and ability to redirect manufacturing, capitalizing on opportunities and challenges as they arise. Now let's speak of the other side of vehicle repair where repair systems and information or the RS and I group operates. Repair shop owners and managers know they have to upgrade to keep pace with increasing complexity and to keep driving productivity. Technicians need to wade through more possibilities than ever to find the right fix, and RS and I can put them right on target. With our innovative hardware and powerful software, proprietary database, offering faster, more accurate ways to navigate the thousands of repair procedures that confront techs in a modern shop. It's a changing market in which dealerships and independents need to have the equipment and the specialty tools for tackling the advanced vehicles rolling into their garages. As we go forward, the momentum just keeps building. And you can see it in the RS and I results. For the critical industries, now this is the area where we have the largest global footprint. Operating across geographies and in multiple currencies. The rapid-fire policies out of Washington and the headwinds politically and economically across the globe have clouded the prospects. Many of the players have adopted a wait-and-see approach. Wanting the dust to settle for tariffs and for various other arenas before charting a course. Fearful that the wind will suddenly change again and leave them embarrassed or disadvantaged. But despite the continuing reticence, our order book keeps growing. In fact, despite everything, customers have started to commit, and we saw a nice and very profitable growth in the quarter. Critical industries offer a great opportunity for our customized products that will drive productivity, and though still attenuated, some of that potential is starting to shine through. So overall, our markets offer attractive opportunities. The ever-changing landscape does dampen some of the possibilities, but our operations again this quarter enabled by our broad and innovative product line, our distinctive and meaningful brand, and our committed, capable, and battle-tested team displayed unmistakable momentum. Overcoming uncertainty, and taking advantage of abundant opportunity. That's the mark. Well, let's talk about the books. In C and I, third quarter sales reached $367,700,000, which compared to the $365,700,000 of last year. The quarter's volume included $4,800,000 of favorable currency translation, and an organic sales decrease of 0.8%. From an earnings perspective, C and I's operating margin was 15.6%, a decrease year over year of 110 basis points with 30 basis points of that coming from unfavorable currency. Gross margins were robust at 40.9%, down 30 basis points. But that variance is pretty much explained by the unfavorable currency. And it's a level that clearly demonstrates our resistance to the impact of the tariffs. Results were mixed across the business units, with the organic sales decrease primarily due to reductions in the Asia Pacific business. Reflecting the quick relocation of the supply chains away from that reach. Gains in critical industries and in specialty torque were the offset. Critical industries in particular showed strength in the aviation, heavy-duty, and natural resources sectors, demonstrating that criticality can overcome the uncertainty of the changing trade policy and will continue to do so. Precision torque also continues to be a spark. The appetite for accurate measurement continues to rise. When the cost of failure is high, even a slight deviation is a problem, and operators want confirmed precision. Our production facility in Carol Stream, Illinois knows it firsthand. And in the quarter, it launched the all-new TAC two torque and angle click wrench. It's built for the task of securing essential components like hydraulic fittings on heavy-duty equipment and natural resources or agricultural applications. Places where downtime in a remote area can be catastrophic. The TAC two offers a fast-charging cradle, making sure that the tool is always powered and at the ready. Without the weight and thickness of other tools that utilize onboard batteries. The wrench is also accompanied with an electronic module that communicates the torque value actually applied, allowing confirmation that the proper spec has been achieved and providing documentation for later review. And finally, heavy-duty equipment contains considerable variation in fastener geometries. Our new unit features a unique mechanism that accommodates over 200 different adapters, enabling the device to physically address the wide range of fasteners used across different pieces of equipment. It consolidates dozens of tools into one model. The TAC two. A new level of flexibility, connectivity, and ease of use and the customers love it. Also with C and I is our power tools operation, which in the back half of the quarter, launched our new 14.4 volt, 3/8 inch x 2 long cordless ratchet. Now this baby hit the techs right between the eyes. Manufactured in our Murphy, North Carolina plant, it's in a league of its own. A best-in-class 80 foot-pounds of torque and a best-in-class 13-inch neck, 50% longer than any other offering. I mean, this tool reaches farther into tight areas, applying greater power at the point of work. Everybody's talking about it. It speeds up repair. And it's already a hit million-dollar product. Well, that's C and I, critical industries and torque leading the way forward, leveraging customer connections to solve the critical and navigating the turbulence in international markets. Now let's move to the tools. Sales volume up organically 1% increased activity in the international network and slightly higher sales in the US. Notably, the volume's also up sequentially from the second quarter. An unusual pattern we believe demonstrates that the group has momentum and continuing momentum going forward. The group's operating margin was a strong 21.7% up 10 basis points from 2024. And that was overcoming a 10 basis point impact from unfavorable currency. Now the third quarter is where we hold our annual Snap-on Franchisee Conference, or SFC as we call it. This year's event was in Orlando. Nearly 9,000 people attended. Franchisees, yes, and of course, the Snap-on team. It was a weekend filled with hands-on training, transaction interactions with our expansive product offerings, and some great fun. With a cavalcade of 155 buses transferring the on-crew to Disney's Hollywood Studios to celebrate a 105th anniversary. It's quite a week. The Product Expo Floor was our largest ever. Spanning 185,000 square feet, well over three football fields. Where our entire portfolio of products was on display in real work situations. A new feature this year that enables franchisees to witness firsthand the Snap-on difference in solving typical repairs. It was another memorable SFC. One filled with inspiration, education, great new products, and friendships. Reinforcing the unique and special bond we have with our franchisees. The atmosphere and the outlook of the franchisees were extremely confident and positive. I've talked to many of them since then. And they left pumped, ready to hit the road and apply the lessons learned. And the icing on the cake. SFC orders were up nicely. Increasing over last year by mid-single digits. A 100% new products were on display at the conference, new innovative offerings derived from our customer connection insight we gained directly in the workplace, faster payback products like our S 6,750 millimeter socket forged in the Milwaukee plant. You see a traditional unit, can't easily install. Cylinder head bolts on Ford 6.7 liter power stroke engines used on their range of trucks from F 250 and above. That sophisticated power plant requires a precise seven-step torquing procedure that reaches nearly 300 foot-pounds. And here's the brow. A normal socket is quite challenged to handle such force, and many a socket has been damaged trying to apply the power needed. On top of which they're too big to avoid nearby obstacles. Completing the job with the standard tools often requires component disassembly to clear the way. So our engineers acting on a customer connection, designed a purpose-built socket. Increasing the wall thickness by 32% to withstand the extreme force and reducing the height for a more compact device, creating more access and higher durability in the same package. Snap-on customer connection and innovation. Making a difficult task easier, faster, and safer. But Milwaukee did more. The plant just released the all-new coal forged hot green plier. Funny name. I know, I know. But it's a real-time saver. When removing or reinstalling upholstery to access sensors, heating or cooling elements, and wires located within the vehicle seats. See, we don't always realize but complexity is not just under the hood or in the drivetrain. It cuts all over the chassis. The new pliers are built to remove and install high-grain retention clips, keeping the seat cover tight, providing a factory appearance repair, and doing it with increased safety. The new tool makes a difficult but everyday task quite simple. And I'll tell you, the receptionists are baffled. And in our Elkmont, Alabama plant, local engineers addressed the customer connection observed when with techs using small pocket screwdrivers. To pry small components apart, separate terminal connectors, or remove seals. Well, screwdrivers are not meant for those jobs. It's quite unsafe, and you know, can lead to some pretty nasty cuts. So the Elkmont team developed a three-piece pocket pry bar set. Just over five inches long, small enough for those post-quarter, but tough jobs. This bundle made that common but difficult work much easier and safer. It was a lot of the techs oversubscribed. It was really a brilliant view by the Elkmont guys. Powering tools, the tools group pivot. Quick payback products from all over our American factories made the group's quarter. Big hits, continuing momentum, driving sequential growth, and offering the strong levels of third-quarter profitability. We like the Tools Group performance in the quarter. And innovative new products forged the path. Now RS and I, sales of $464,800,000 in the third quarter were up as reported, 10% with an organic improvement of 8.9%. Higher activity with OEM dealerships and increased sales of diagnostics and repair information products led the way. Operating earnings for RS and I of $141,200,000 in the period included a benefit of $22,000,000 from the legal settlement. And compared to the $107,300,000 in 2024. The operating margin for the quarter at RS and I was 30.4%. 25.6% as adjusted to exclude the legal effect, still up 20 basis points from last year. And overcoming 30 basis points of unfavorable currency. The RS and I quarter was marked by some strong performances. In hardware and software. Sales and diagnostic repair information to repair shop owners and managers rose high single digits. The new Triton handheld had a strong quarter. Its brighter screen, enhanced lab scope, and powerful intelligent diagnostic powered by billions of repair records make it popular with franchisees, and increasingly, essential for advanced techs. At the same time, our sales to OEM dealerships grew by double digits. Snap-on is fast becoming the partner of choice for assisting automaker programs aimed at supporting new models of recalls. And that operation turned in a, I would call, a gangbusters performance in a quarter. We have great confidence in our RS and I business. Our customers and industry partners share the same belief. And it was demonstrated as PTEN Magazine announced its esteemed 2025 innovation awards and its people choice awards. RS and I was well represented with the Apollo Plus fast track intelligent diagnostic platform. The Yosem cam aligner for heavy-duty trucks, and Mitchell one's JobView software. All recognized as winners in both designations. RS and I also captured single awards for its diagnostic thermal imager, its BK 5,700 Borskoe, and for its ProCut x 19 cordless rotor matching system. That's a mouthful. In fact, collectively, the corporation was honored with a total of 25 PTEN awards across the 56 possible categories. We believe it's a true testament to our competitive advantage and product across the corporation. But back to our RS and I. We're quite positive about RS and I's possibilities with repair shop owners and managers. As the vehicle industry evolves, and the quarter supports that confidence. I mean, 8.9% of organic growth with higher margins, Boom. Shakalaka. RS and I did good. So those are the highlights of our quarter. Progress against big volatility and uncertainty. Against seasonality, and against the variability of the third quarters. C and I, the power of our customized kits, punching through reticence in critical industries, withstanding the Asia Pacific supply chain disruption, Tools Group, great products, competent franchisees, strong sequential momentum. The pivot continuing with traction. Profitability remaining strong. RS and I, organic sales, up 8.9% Strong gains with both OEM dealerships and with independent repair shops. Great new and decorated products, both hardware and software. Powered by our proprietary parent diagnostic data. All enabling technicians to make complex repairs easier. And it showed the numbers. And the overall corporation sales up 3.8%, as reported 3% organically. Gross margins, 50.9%. Resilient and resistant. Holding firm in times of unprecedented sourcing turbulence. OI percentage, 23.4%. 21.5% excluding the legal benefit, still very strong. And among the highest ever for a third quarter. It was an encouraging quarter. Now I'll turn the call over to Aldo. Aldo? Aldo Pagliari: Thanks, Nick. Our consolidated operating results for the third quarter are summarized on Slide six. Net sales of $1,190,800,000 in the quarter represent an increase of 3.8% from 2024 levels, reflecting a 3% organic sales gain and $9,000,000 of favorable foreign currency translation. Sales in our automotive repair markets were up, led by the strength in our repair systems and information group, which included solid gains in OEM dealership and independent repair shop owners and managers as well as higher sales of diagnostic products for our franchise of Amgen. Within the industrial sector, our C and I group sales to critical industry customers increased in the quarter, but those gains were more than offset by continued weakness in the export activities of our Asia Pacific operation. Consolidated gross margin of 50.9% improved sequentially from 50.5% in the second quarter and compared to 51.2% in the third quarter last year. The year-over-year decline of 30 basis points primarily reflected 20 basis points of unfavorable foreign currency effects. While Snap-on is relatively advantaged in the current tariff environment, generally manufacturing products in the markets where they are sold, our costs can be affected by trade policies. In the third quarter, the impact of tariffs was largely offset by the higher sales volumes and benefits from the company's RCI initiatives. With respect to the unfavorable foreign currency effects similar to last quarter, although to a lesser degree, Snap-on incurred negative transaction impacts associated with the year-over-year strengthening of the Swedish krona, the euro, and the US dollar. As a reminder, Snap-on has factories in Sweden serving both the C and I and the RS and I groups that export throughout Europe and into the United States as well as into emerging markets. Operating expenses as a percentage of net sales of 27.5% compared to 20.2% last year. In the quarter, as noted in our press release, operating expenses included a $22,000,000 benefit from the settlement of a legal matter. The 170 basis point improvement in the operating expense ratio is primarily due to the 190 basis point benefit from the legal settlement, which was partially offset by higher brand building and promotional investments as we celebrated our 105th anniversary. Operating earnings before financial services of $28,500,000 in the quarter including the benefit from the legal settlement compared to $252,400,000 in 2024. As a percentage of net sales, operating margin before financial services, of 23.4% including a 190 basis point benefit from the legal settlement compared to 22% reported last year. Financial services revenue of $101,100,000 in the third quarter compared to $100,400,000 last year while operating earnings were $68,900,000 compared to $71,700,000 in 2024. Consolidated operating earnings of $347,400,000 were includes the legal benefit compared to $324,100,000 last year. As a percentage of revenues, the operating earnings margin of 26.9%, including the legal settlement, compared to 26% in 2024. Our third quarter effective income tax rate was 22.6% in 2025, and 22.9% in 2024. Net earnings of $265,400,000 or $5.02 per diluted share, including a $16,200,000 or $0.31 per diluted share after-tax benefit from the legal settlement. Compared to $251,100,000 or $4.07 per diluted share in 2024. In addition to the benefit from the legal settlement, when comparing the quarter's EPS with the third quarter of the prior year, diluted earnings per share also included approximately $0.09 per share of increased year-over-year non-service net periodic pension expenses. Primarily from higher amortization of actuarial losses. Now let's turn to our segment results for the quarter. Starting with the C and I group on Slide seven. Sales of $367,700,000 compared to $365,700,000 last year, reflecting an eight-tenths of a percent organic sales decline, which was more than offset by $4,800,000 of favorable foreign currency translation. The organic decrease includes a mid-single-digit reduction in the segment's Asia Pacific business partially offset by low single-digit gains with customers in critical industries and in the specialty torque operation. Overall, the organic sales decline largely reflects a reduction in certain cross-border sourcing activities in the current trade situation. Which was offset by improving demand from our critical industry customers, including the United States and international aviation. As well as technical education. Sales for the US military were down year over year. However, order activity has been increasing. Despite the uncertain timing of funding for some government-related projects. Gross margin of 40.9% in the third quarter compared to 41.2% in 2024. This decline was due to 30 basis points of unfavorable foreign currency effects. In the quarter, higher material and other costs were offset by increased sales in the higher gross margin critical industry sectors and by savings from the segment's RCI initiatives. Operating expenses as a percentage of sales of 25.3% in the quarter compared to 24.5% last year. Largely reflecting the impact of lower sales in the Asia Pacific business as well as increased personnel and other costs. Operating earnings for the C and I segment of $57,500,000 compared to $61,000,000 in 2024. The operating margin of 15.6% improved sequentially from 13.5% in the second quarter. And compared to 16.7% last year. Turning now to slide eight. Sales in the Snap-on Tools Group of $56,000,000 compared to $500,500,000 a year ago. Reflecting a 1% organic gain and $600,000 of favorable foreign currency translation. The organic increase reflects a low single-digit rise in the segment's international operations and slightly higher sales in the US business. During the quarter, we believe the introduction of new products like the next-generation Triton Diagnostics platform combined with our ongoing pivot to shorter payback items, was successful in overcoming continuing uncertainty and the confidence of technician customers in the current environment. Gross margin declined 50 basis points to 46.8% in the quarter, from 47.3% last year, mostly due to a year-over-year shift in product mix. Operating expenses as a percentage of sales improved 60 basis points to 25.1% in the quarter from 25.7% in 2024, largely reflecting the higher sales volume. Operating earnings for the Snap-on Tools Group of $109,900,000 compared to $108,300,000 in 2024. The operating margin of 21.7% improved 10 basis points from last year. Turning to the RS and I group. Shown on Slide nine, Sales of $464,800,000 rose 42.1 compared to 2024 levels, reflecting an 8.9% organic sales increase and $4,000,000 of favorable foreign currency translation. The organic gain includes a strong double-digit increase in activity, with OEM dealerships and a high single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers. These gains more than offset a low single-digit decline in sales of undercar equipment including collision repair products. Gross margin declined 40 basis points to 47% from 47.4% last year. Primarily reflecting increased sales of lower gross margin products, higher material and other costs, and 20 basis points of unfavorable foreign currency effects. Partially offset by savings from our CI initiatives. Operating expenses for the RS and I group in the quarter included a $22,000,000 benefit from the previously mentioned legal settlement. Operating expenses as a percentage of net sales improved 540 basis points from last year primarily due to a 480 basis point benefit from the settlement. As well as from the higher sales volumes. Operating earnings of $141,200,000 including the $22,000,000 legal benefit compared to $107,300,000 last year. The operating margin of 30.4% including the 480 basis point benefit compared to 25.4% reported in 2024. Now turning to Slide 10. Revenue from financial services of $101,100,000 compared to $104,000,000 last year. Financial Services operating earnings of $68,900,000 compared to $71,700,000 in 2024. Financial services expenses of $32,200,000 compared to $28,700,000 last year. The increase is primarily due to $2,500,000 of higher provisions for credit losses. As well as a rise in personnel and other costs. As a percentage of the average financial services portfolio, expenses were 1.3% in 2025, and 1.1% in 2024. In 2025 and 2024, the average yield on finance receivables was 17.7%, while the average yield on contract receivables was 9.1%. Total loan originations of $274,100,000 in the third quarter represented a decrease of $13,900,000 or 4.8% from 2024 levels, including a 4.9% decline in extended credit originations. The reduction in extended credit originations mostly reflects continued lower sales of discretionary big-ticket items such as tool storage units. Moving to slide 11, Our quarter-end balance sheet includes approximately $2,500,000,000 of gross financing receivables with $2,200,000,000 from our US operation. For extended credit or finance receivables, the US sixty-day plus delinquency rate of 2% is up 10 basis points from 2024 and also reflects a typical seasonal increase from the rate reported last quarter. Trailing twelve-month net losses for the overall extended credit portfolio of $71,400,000 represented 3.59% of outstandings at quarter-end. We believe these portfolio performance metrics remain relatively balanced, considering the current environment. Now turning to slide 12. Cash provided by operating activities of $277,900,000 in the quarter compared to $274,200,000 last year. Net cash used by investing activities of $21,000,000 mostly reflected capital expenditures of $19,900,000. Net cash used by financing activities of $180,900,000 included cash dividends of $111,500,000 and the repurchase of 250,000 shares of common stock for $82,000,000 under our existing share repurchase programs. As of quarter-end, we had remaining availability to repurchase up to an additional $3,600,000 of common stock under our existing authorizations. Turning to Slide 13. Trade and other accounts receivable of $925,700,000 included $25,100,000 of foreign currency translation, $17,700,000 from the legal settlement, and a greater mix of sales with longer payment terms. This represented an increase of $110,100,000 from 2024 year-end. Day sales outstanding of seventy-one days compared to sixty-two days at year-end 2024. Inventories increased by $81,100,000 from 2024 year-end, primarily due to $38,900,000 of currency translation, improving demand trends, and some investment intended to mitigate supply chain uncertainties. On a trailing twelve-month basis, inventory turns of 2.3 compared to 2.4 at year-end 2024. Our quarter-end cash position of $1,534,100,000 compared to $1,360,500,000 at the end of 2024. In addition to our existing cash and expected cash flows from operations, we have more than $900,000,000 available under our credit facilities. There were no amounts borrowed or outstanding under the credit facilities during the year. Nor was any commercial paper issued or outstanding in the year. That concludes my remarks on our third quarter performance. And now I'll review a few outlook items for 2025. With respect to corporate cost, we currently believe that expenses will approximate $27,000,000. Additionally, as recognized in the previous March 2025, we expect to incur approximately $6,000,000 pretax in the fourth quarter of increased non-service pension costs largely due to higher amortization of actuarial losses. These non-cash costs are recorded below operating earnings as part of other income and deduction expense net. On our statement of earnings. We'll have about $0.09 per diluted share negative effect on EPS in 2025. We expect that capital expenditures for the year will approximate $100,000,000. And following our assessment of the One Big Beautiful Bill Act, during the third quarter, we continue to anticipate that our full-year 2025 effective income tax rate will be in a range of 22 to 23%. Finally, in 2025, our fiscal year will contain fifty-three weeks of operating results with the additional week occurring at the end of the fourth quarter. This occurs every five or six years and historically it has not had a significant effect on our full-year or fourth-quarter total revenues and net earnings. I'll now turn the call back to Nick for his closing thoughts. Nick? Nick Pinchuk: Thanks, Aldo. That's our third quarter. It was encouraging. And, you know, marked with words like resilience, momentum, and advantage. It represents meaningful progress. Progress clearly won against some unprecedented turbulence. Gains captured against the headwinds of seasonality and increases against the variability of the late summer period. As such, we believe we leave the quarter more confident and stronger than when we entered. The pivoted and tools group is building traction. The potential for critical industries and specialty torque is breaking through. Our expansion with repair shop owners and managers continues to rise and our advantage in strategy and structure, which fortifies our resistance to tariffs, demonstrates its efficacy. And you can see it reflected in the groups and the numbers. C and I, year-over-year gains realized in sequential improvements demonstrated fueled by progress in critical industries and precision torque, gross margin holding firm in a time of trial. The Tools Group, another positive quarter. OI margin up building holding to strong levels, OI margin up and holding to strong levels. Momentum continued. Sequential growth displayed the pivot to quicker payback items strength RS and I, continuing expansion with repair shop owners and managers. 8.9% organic growth, gains in hardware and software, and yet another strong performance in OI margins. And it all came together for an encouraging overall performance. Sales for the corporation were up organically 3% with sequential gains. Gross margins. A powerful 50.9%, down 30 basis points. But primarily due to currency. OI margins of 23.4% or 21.5% excluding the legal action, the second highest ever third quarter. And an EPS of $5.02. $4.71 excluding legal the highest ever third quarter. In a very turbulent time. As we go forward, we proceed with confidence because we believe our markets will remain robust. And Snap-on will benefit from our advantages in strategy, making in the markets where we sell, and structure, enabled by the flexibility of our factory array. And products. We make work easier and more reliable, and everybody knows this. And brand. Snap-on really is the outward sign of pride and dignity for working men and women. An advantage in people. Our team is skilled, battle-tested, committed, and always aims high. We believe this combination of advantages will propel our corporation to even stronger performance as we proceed through 2025, and well beyond. Now before I turn the call over to the operator, I'll speak directly with our franchisees and associates. I know many of you are listening. We've spoken today of momentum, of performance, and of new highs. Know that all of that has been created by your extraordinary effort in the past three months. For the success you've achieved this quarter, you have my congratulations. For the energy and skill I see you bring to the corporation every day. You have my admiration. And for your ongoing confidence and dedication to the future of our enterprise, you have my thanks. Now I'll turn the call over to the operator. Operator? Operator: Thank you. At this time, we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. Withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Christopher Glynn with Oppenheimer. Christopher Glynn: Wanted to dive into some of the businesses at RS and I for the diagnostics and repair systems. I think, five quarters of growth now. More consistency than I've seen in the past. You know, usually, it's been a little lumpier with new product splashes and then some lulls. So I don't know. Anything to read into this kind of consistency? Nick Pinchuk: I know. Well, I think we'd like to believe we've gotten the launches a little bit better. You said yourself TRITON was launched last quarter and had a good quarter last quarter. And this quarter, the other thing about it is this quarter, I think versus the prior quarter, we had pretty good performance on a sequential basis across the line. And this has been something that you kind of need. You can't just always depend on, you know, new launches. Although, as we go forward, you're gonna see more new launches happen in this year and things like that. You know, a launch would happen this year, so you get that in the but sort of the holy grail in diagnostics is to make hay with the launch, and then but not lose volume with the other business and that happened this quarter. So we feel kind of good about that. But we'll see how it goes going forward. We'd like to see that happen. And I think we're starting to get some understanding of how to promote both the launch and the existing platforms. Side by side. Christopher Glynn: Great. And then, yeah, just on the other two pieces, OEM, sounds like that kind of share accrual is kind of building on itself and has some legs. And then on the undercar, does that feel like that's stabilizing or still kinda firmly in a wall? Nick Pinchuk: Yeah. It looks like undercar, it looked like it stabilized this quarter. I mean, it was down. You know? And okay. We don't like that. And it was down a lot less than in past quarters, so it didn't hurt RS and I as much maybe. It wasn't as much of an offset. It part of the idea of the 8.9%. I mean, that may not be the highest quarter RS and I ever had, but in this kind of environment, I think it's supersonic. So that worked out pretty well. And some of it had to do with narrowing in that gap, and you've rightly said it. That the OEM, you know, the OEM business is both programs happening and share gain. We used to talk about lumpiness, and it still could be, business, but we have a share gain component on top of this, which tends to offset some. Christopher Glynn: Okay, great. And then C and I, didn't hear about your European tools, assuming it's kinda flattish. Does that feel pretty steady? Nick Pinchuk: Yeah. Do you know France? It gives me a headache. I think so. Christopher Glynn: Not personally. Nick Pinchuk: Yeah. You know what I mean? No. Look. I think the thing we're noticing is the grassroots in Europe are starting to display that, in fact, they have maybe for a couple quarters, displayed the same kind of uncertainty or reticence that you see in the United States. So you see a bifurcation in Europe where the I would call it maybe the, you know, transactional business with individuals. You know, the up and down the street business is kind of flattish, not so strong. But there's hay to be made in projects. Which is part of the success of critical industries in this quarter. Christopher Glynn: Great. Thank you. I'll pass along. Operator: Our next question is from David MacGregor with Longbow Research. David MacGregor: Yes. Good afternoon, Nick, Aldo, Sara. Good morning. Nick Pinchuk: Yes. I'm at a different time at a different time. David MacGregor: Right. You're right. Yeah. Yeah. I'm on the other side of the road. Greenland? Nick Pinchuk: I okay. I'm in Greece. Yeah. I wanted to ask about the sequentially strong volume and tie that back to maybe some of the investments you've made over the last couple of years in capacity. And I'm just wondering if that incremental capacity now gives you the ability to fulfill on the SFC orders a little faster. And if that's really what's driving this. And if so, how do we think about the margin improvement? And in April? Nick Pinchuk: I think you're right to point out that the capacity increases that we did over the last, you know, two and a half years has been helps you match better the ups and downs of the volume. But I think the SFC this year was not necessarily a component in the sequential improvement. Actually, I don't think it was at all. The sequential improvement really primarily affects our more effective pivoting that had certain products, one of which was diagnostics, but there were others like air conditioning, so on, that tended to push things forward. And so that's why we feel pretty good about that. And the SFC effect is beyond that sequential improvement. We do. I've made a lot of it in my remarks. And a sequential improvement really is, although is a pretty big deal for us because we don't see it very often, and we think it does indicate momentum. Going out after the SFC you're gonna see that play out. But the SFC had some great orders. But not many of them got in the third quarter, I think. You know? David MacGregor: Right. Do you feel like you maybe pulled forward a little from 4Q here, or should we expect, 4Q to be? Nick Pinchuk: No. No. I think so. I don't think so. I don't think so. I think SSC just. David MacGregor: Yeah. Go ahead. Nick Pinchuk: No. That's a good enough answer. I guess I'm just trying to, secondly, square or try to square, you know, the strength and unit volume with the 1% organic growth in Snap-on Tools, which suggests maybe price was down. How much of this is mix? How much of this is promotions? And will we see this again in 4Q? Nick Pinchuk: Wow. Look, I think some of it might be promotions. But, you know, let's put it this way. The margins were up pretty good. The margin was 21.7%, up 10 basis points. And the gross margin was down, I guess, 40 basis points. You know? But that was against 10 or 20 basis points of currency. So it wasn't a big fluctuation. I don't think that's a factor. I mean, the thing is the volume might be I don't know if I recognize so much that the volume was that high compared to the sales. But you know, in fact, I don't recognize that at all. I kinda just think it was a quarter that had always its variable mix. And it went through, had good profitability, and the US had increases, which it the second one in a row, and we're pretty positive about that. So I don't think we're worried so much about that situation. Certainly, we don't think the pricing is eroding. If just if you if we thought the price I mean, if the pricing was eroding, know, you'd see it grow smart. And we're not seeing anything like that. Okay. And, you know, if you if you if you yeah. Go ahead. David MacGregor: Go ahead. Go ahead. Please. Nick Pinchuk: Was just gonna say I was just gonna say, David, you know this you know this very well. One of the big kahunas in this quarter for the tools group was diagnostics. And it ain't one of the biggest margin businesses for the Snap-on Tools Group because it shares the margin with another one of our divisions, the diagnostic division. And still the gross margins held. David MacGregor: Yeah. Okay. Yeah. That's an interesting point. And then finally, just off the truck sales. You know, how you're feeling about, I know you've got good data on that. How would that have compared with the sell-in? Nick Pinchuk: The off-the-truck sales was a little bit higher than a little bit lower than the to-the-truck sales I think, though, it was you know, we see this all the time. It's within, I think, the range of variability that happens in those two businesses. They always seem to come out about the same in the year. Last year, for example, beyond the truck, off the truck was while it had variability from quarter to quarter was dead nuts, at the end of the quarter. Equal. So I think we kinda saw it. So there's nothing there that it's a little bit lower, but it's nothing that has us concerned about that. It's just within the margin of the usual variability. David MacGregor: So there's a little bit of restock going on. Is it your general sense that the franchisee are still pretty liquid? They've still got very good liquidity so that if 2026 ends up being a better year, they're in a good position to restock up in advance of that. Nick Pinchuk: Yeah. I think there's some of that. But I think, look, I think you know, I think this uncertainty thing has to be fixed. I think they're starting to catch some of the uncertainty. You know? And so I think that has to be fixed. And then when they get back, know, then they go back to their old levels. And I don't know. I don't know. But there is that possibility going out in the future at some time. But we're not looking for restocking to be a major push. We never really planned it that way. Sometimes it can affect the variability from quarter to quarter, but generally, I said, it all kind of evens out. David MacGregor: Got it. Thanks for your thoughts, Nick. Nick Pinchuk: Sure. Operator: Our next question comes from Scott Stember with ROTH Capital. Scott Stember: Good morning, and thanks for taking my questions. Nick Pinchuk: Morning, Scott. Scott Stember: Within tools, obviously, it sounds like diagnostics had the best performance. Could you maybe just flesh out how hand tools did? How power tools and tool storage just to give us a sense of how it broke up. Nick Pinchuk: Yeah. Tool storage didn't have an had another occluded quarter. You know, you can I guess you can see part of it? You see hints of that. Is there originations. What was originations down 4.9% in total for EC? And that's about the same as last quarter. So they were down both. You know? So tool storage wasn't that strong, and that's despite the fact that there were good sales of diagnostics. Hand tools did not have a great quarter. Which happens from time to time. So that wasn't very positive in the quarter. Diagnostics was up big. And then we had some good news in things like air conditioning and other smaller items from out of shop and techs. Power tools didn't have a great quarter except at the end of the quarter, when it introduced a new product, it had a gangbusters month. And so we felt pretty good about that. And so while power tools didn't contribute so much for that, overall, it really helped at the end of the quarter. With its new products. Once the franchisees saw those babies, they loved them. Scott Stember: Got it. And then on C and I, it sounds like particularly for things that are based on government funding, still some delays in orders, but you talked about the backlog of orders starting to build up again. Can you maybe just talk about that dynamic? Nick Pinchuk: Yeah. Look. I think what's happening here is you know, anybody's associated with resourcing, a re-change in the supply chains in a big way. If that's their primary focus, like general in the as you rightly based on on I think I might have said this. If I didn't, it was just by process of elimination. The military was down again, although not down as much as the prior quarter. Know a little bit better. But the other thing that is weaker was general industry. Is a big business for us. And what you're seeing, Scott, is that anybody who's got factories, I think, is sitting there saying, what the hell do I do? You know, because if you look at it, it may it seems to most people, like, the tariffs have settled down since liberation day. But Canada, Mexico, China, three of the top four sourcing partners or manufacturers in the United States, for general industry in the United States, they're still unsettled. There's no trade deals with those countries now, and they're pretty big numbers. They're deep double-digit numbers, as you saw, China just got threatened with another 100%. So those people in that sector are much tighter in keeping their powder dry. You're looking at other places, that was the sort of message, think, subliminal message I was trying to make. Places like aviation, if you're just talking about you know, maintaining airframes and education and other blades. Those things are pretty good. Natural resource is pretty good because they're not really worried about this reshoring. So that's what's happening in the big-ticket items in the United States. And if you go to Europe, there's not so much worry about the tariffs as much. And so projects are good business in Europe these days. Scott Stember: Great. And then just last question on the legal settlement. Can maybe just talk about that a little bit? Nick Pinchuk: Well, I think I've told you all I'm prepared to tell you. I think the legal settlement I think it's pretty clear. It pertains to the repair system information group. It did not it's not a follow-on or related to the prior legal settlements of the prior year. And so other than that, I don't think I'm gonna comment on it. I'll just let it lay out where it is. I think we have it pretty much all in this quarter. Scott Stember: Got it. Fair enough. Thanks again. Nick Pinchuk: Yep. Sure. Operator: Our next question comes from Bret Jordan with Jefferies. Please go ahead. Bret Jordan: Hey. Good morning, guys. Nick Pinchuk: Morning. Bret Jordan: Could you talk about the cadence of the tool sales off the truck in the quarter? Mechanic feeling I guess you've always talked about the or recently talked about their but is that reasonably stable or was there any notable trend in the quarter? Nick Pinchuk: I don't think there's any notable trend in the quarter. I mean, it's hard look, Bret, for us, the third quarter is so normally so squarely. That we can't find any trend in there because we've got the SFC at the back. And so you don't know how people will order because a lot of new tools or hundreds of new tools are at the SFC. And then the other problem is, of course, we punched through the franchisees to the technicians. And our franchisees sometimes take vacations around the SFC. And that can screw you up. So we don't have any good feel. All we have is windshield information, and my view is that there's still pretty uncertain. You know, this 100 plus tariffs on China couldn't have helped the certainty. I mean, I think it only makes it seem worse. Now they're not rightly they're not affected by that, but they're worried about the macro. I believe. We see the same kind of thing a little bit in Europe, emerging in Europe. But it's been pretty consistent when you talk to people. And part of the reason is like this. Is I think you've got a group of people who uniquely are at the bottom end of the credit scores. You know, they're subprime customers, but they have pretty reliable incomes. Based on the vehicle repair. But so therefore, they're making their money. But they don't have a lot of cushion. So if the world goes awry, they're worried they're in trouble. And so anything that thinks that there might be macro problems, think tends to worry them. We saw that a couple of times, particularly like in the great financial recession. This is the kind of thing they're worried about. So I don't see that getting better. Now the Middle East, was a kind of positive. We'll see how that plays out. Maybe things will get better because of that. Bret Jordan: I think it's a question given the inflationary environment and tariffs are tough to predict. But what do you see same SKU inflation, contributing to growth in '26? Yeah. Just from a pricing outlook standpoint. Nick Pinchuk: Yeah. I don't know. It didn't contribute much to us this time. You might say, pricing was like a you know, a percent or so. I don't know. I actually don't have a view with that because I think the tariffs muddle a lot of things. I don't know whether you call inflation I don't know if some guys are talking about I mean, GM was talking about $6,000,000,000 of tariffs. You know? And you got other players in our sector talking about big numbers in tariffs. So I don't know how they play out in pricing. We'll see. I think it's tough to predict that. I know that basic inflation like beef and milk and other things are up some. But I think people have kind of ingested that. That may play some small background. Thing. I think the big factor, though, I think, in the future will be what happens with tariffs across any particular industry. Bret Jordan: Right. But as you stood today, would a $100 wrench be a 105 and 20 just as materials and wage and everything else is sort of upward biased, or what do you what do you build on the model for that? Nick Pinchuk: Well, yeah, probably the one you have now won't be 105, but we'll have a new one by then that'll be a 110. Okay. Alright. That's my thing. I don't think 5% would be a large pricing for us. Look. We're already priced ahead of everybody else. I guess the question is if you're asking us what will we do if other people price, we'll do that on a product-by-product basis. That's the way we would adjust it. I don't but I don't see it's necessary raising our prices usually. Unless things change. I mean, so far, there hasn't been any huge expansion in the marketplace. Bret Jordan: Great. Thank you. Appreciate it. Operator: The next question comes from Luke Junk with Baird. Please go ahead. Luke Junk: Hey, Nick. Good morning. Nick Pinchuk: Morning. Luke Junk: Just wondering, anything interesting to call out within the SS orders. I think you said in the mid-single digits. I guess I'm thinking just hints of traction and big ticket in that number maybe. Continued diagnostics momentum, or just anything else. That you thought was interesting? Nick Pinchuk: No. I don't think we saw anything unusual in that regard. You know, I think the thing would be you know, I suppose just what I said that you know, they were they were up nicely. But, you know, I want to remind you that these are orders. Not sales. So it has to play out, and there can be cancellations and all that stuff. It's better to a poke in the eye with a sharp stick, of course, to have orders up. And you know, the orders this year I think, go out through December, and I think there was nice take up throughout that period of time. So we feel pretty good about it. But it has to play out. There's nothing special about mix in this situation. I think people well, I could say I think people thought hand tools sold pretty well. You know? And so that was our got orders pretty well, but it always does. Luke Junk: Got it. What about diagnostics growth? Within the tools group specifically? Just wondering if it might have been at or maybe even above that high single-digit growth rate that we saw within RS and IS, you know, storage is weak. Hand tools, not a power tools either. Seems like that was really the story of tools group this quarter. Is that fair, Nick? Nick Pinchuk: Yeah. Tools Group was at bigger growth than the other. But the RSI remember I said that the diagnostics and information diagnostics to independent repair owners and managers was up double digits in the quarter. That was in RSNI. So it was up double digits in RSNI, and the tools group was every bit as good as SAC. Luke Junk: Or more. Got it. And then last question for me, just, maybe if you could double click on the Asia Pacific business. Just kinda update us on what that business looks like today. I know there's a couple components of that and kind of the specific exposure you've got to those, supply chains being moved away. Nick Pinchuk: I will. I will. It's two pieces of business, of course. There's the you know, before you start breaking down by country, there is the internal business, which is pretty much exports, and there's the internal business. So internal business, dog food. Terrible. You know? Because we shift there. We try to adjust the supply chain. You know, selling in the markets actually wasn't too bad. So the Asia Pacific business in C and I, is, you know, not so good. That's why we called it out. That was mostly internal. I'm kind of proud of our Asian team because they pretty much China was up and India was up and then Southeast Asia was up. So they did a great job. In terms of catching up. And I don't know if you've been following things in China, but the economy there ain't so good. And India is always a basket case, and it's even though they say they're growing, it usually is difficult to determine what they're talking about. And the Thailand Prime Minister just got decapitated, not decapitated, but taken down for being on a phone call for with one of the Cambodian prime ministers criticizing her generals. And Korea just thought you know, had some problem with its prime ministers. So you see a lot of turbulence there, but our guys have done a good job overcoming. Luke Junk: I will leave it there. Thank you as always. Nick Pinchuk: Thanks. I'm sure. Operator: Our final question comes from Gary Prestopino from Barrington Research. Please go ahead. Gary Prestopino: Hi. Good morning all. Nick Pinchuk: Morning, Gary. Gary Prestopino: Aldo, what impacted FX have on EPS this quarter? Aldo Pagliari: It was $0.01 of negative news, Gary. Gary Prestopino: Okay. Thank you. And then regarding how well you did in the RSNI business with the dealerships, particularly OEM dealerships, are you seeing a movement here for these OEM dealerships to start increasing their capital equipment outlays, you know, after a couple of years of maybe not doing so or is this just does it just kinda go and, you know, kinda bunches up and down cycles on a quarterly basis? Nick Pinchuk: No. No. I think look. I think that's a pretty big question. I mean, there's a lot of segments, Gary, that even within the dealership business. But I generally think you're seeing a constant drumbeat in the dealerships and in the independent shops realizing that there's all these new features and benefits and powertrains that they have to adjust to. So you're seeing some of that. Now part of the reason why OEM is big this quarter is because you're also seeing a drumbeat of new models coming out. And I think this idea of pivoting from electric vehicles to internal combustion are gonna even keep that going. So and on top of that, we're gaining some share. So I think that particular business yeah, it's gonna have some variation from quarter to quarter in terms of what it sells. But I think it's pretty solid. I think that's a place where the economy is pretty strong. The people that people need to repair to maintain the mobility. People keep driving. The car park keeps aging. All those things. Drives business in that area. It you know, they won't be explosion or anything like that. But I think it's gonna be a good growth. We say we say that the RS and I business should grow and we say we should grow at 4 to 6%. In ordinary times, we say RS and I should be in the middle. Gary Prestopino: Okay. Sounds good. And then just lastly, getting back to the order rates coming out of the conference, and that doesn't you know, the translation in sales. Is there any you know, is there a correlation that you can look at? Or, I mean, is that all over the place? You know, one conference, you could have great orders, but then it doesn't translate into sales. And vice versa. Nick Pinchuk: That's right. That's what happens. I don't know. You know, I go down there, and every time they tell me, you know, it's a know, so orders were great or the orders are lousy to come back depressed or ecstatic, and many times, it doesn't play out that way, and in the fourth. This year, though, I think we've tried to guard against that. We tried to make the packages smaller so the cancellations would not which what the variability comes out of because people get down there and their eyes are too big for the stomach. But and I think, you know, you have good you certainly have good orders spread out into the fourth quarter. So I think that's pretty positive. Gary Prestopino: Well, did you come back depressed or ecstatic this year? Nick Pinchuk: I'm ecstatic. But, you know, I'm kind of a sucker for good news. Gary Prestopino: Okay. Thank you. Nick Pinchuk: Sure. Operator: That concludes our question and answer session. I would like to turn the conference back over to Sara Verbsky for any closing remarks. Sara Verbsky: Thank you all for joining us today. A replay of this call will be available shortly on snapon.com. As always, we appreciate your interest in Snap-on. Good day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Luke Wyse: Good morning. It's 09:30 in Dallas. We'd like to thank you for your interest in Triumph Financial, Inc. Thanks for joining us this morning to discuss our third quarter 2025 results. With that, let's get to business. Aaron's letter last evening outlined a quarter of continued execution on our revenue growth goals as well as the initial results of our push towards lean operations. There was a bit of noise this quarter related to our restructuring efforts, and we highlighted those nonrecurring portions of that in our commentary. There was a lot of positive momentum in the quarter through a very tough market, as evidenced by the continued revenue growth of our payments business. We plan to continue executing on our ability to grow revenue, expand operating margins, and improve shareholder returns in whatever market we face. That quarterly letter published last evening and our quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this conversation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. For details, please refer to the safe harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that safe harbor statement. With that, I'd like to turn the call over to Aaron for a kickoff and to welcome you to our Q&A. Aaron P. Graft: Thank you, Luke. Good morning, and welcome. This quarter's letter I think, is reflective of the evolution in our business that I've been talking about the last few quarters. A focus on revenue growth continues to be sure, but also demonstrating a commitment to operating margin expansion. I believe we made meaningful progress this quarter toward that end with our restructuring efforts, which will reduce our expense run rate and also in our revenue growth efforts as they continue to gain traction. Now one thing I'm happy to talk about on this call is the freight market, but I will not talk about it as an excuse. It is what it is. Must play the cards we're dealt, not explain how things would be better for us if our cards were better. Irrespective of what the freight market does, we expect revenue to go up and expenses to be flat at this time next year. We can't always control the offense we can play, but we can certainly control our defense. Now through the tech investments we've made, we have created a unique value proposition to the transportation market. We've also been able to realize efficiency in operations that when you couple them with the announced restructuring, allowed us to cut 5% of our expense base with the majority of those savings in the fourth quarter. This restructuring does more than that. It also organizes our go-to-market strategy around our customer verticals. Brokers, carriers, shippers, and factors. This realignment allows us to better serve our customers while creating operational leverage that supports margin expansion. We have called for 20% annual growth in transportation revenue and we intend to deliver. We also intend to drive margin expansion by becoming more efficient while growing revenue. Finally, I want to address TreeColor. We have included in our quarterly disclosures an update on our position in that credit that is based upon our review of the most up-to-date information available to us. At present, we believe we remain adequately secured in that credit. We remind investors that this is a highly fluid and evolving situation subject to ongoing legal proceedings. As such, we're unable to provide further detail or comment at this time beyond the information we provided to you in the letter. We will, of course, have further updates for investors in future periods as this matter progresses. With that, I'll welcome everyone to the call, and we'll open it up for questions. Operator: We will now move to our question and answer session. If you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. When you are called on, please unmute your line and ask your question. The first question is from Matthew Olney. Please unmute yourself and begin with your question. Matthew Covington Olney: Hey, thanks for taking my question, guys. Good morning. Luke Wyse: Morning, Matt. I wanted to start on the intelligence segment. You know, when do you expect to take the fully integrated product to market? Just trying to get some thoughts on what to expect from the intelligence segment in 2026. Thanks. Aaron P. Graft: Thanks for the question. I appreciate it. The fully integrated park product is actually in March right now as we speak. So, look, we've been part of the Triumph Financial, Inc. family for a hundred and sixty days. We've achieved quite a lot of things from integrating the legacy Triumph team, the green screens, and the ISO team. We've relaunched the brand. We've revamped our go-to-market strategy. And as your question, most importantly, we've integrated the products, which in my thirty years experience in this industry is unprecedented. There's plenty of examples of companies that have grown through acquisition and still haven't integrated the business or the brands in years. Right? So I'm very proud of that achievement. I'm pleased that the company gave us the opportunity to do that. And now we have that integrated product, and it's my job and the team's job to go out and win the market. Matthew Covington Olney: Okay. Appreciate the details there. And then if I move over to the factoring segment, it looks like the revenue growth has been in that mid-single digit to high digit over the last year. And I know you're investing a lot in that business from, you know, factoring as a service the increased automation, Any more color on what that revenue growth could look like next year within factoring? And, obviously, the macro is the unknown there. So just assume no change to the macro. Luke Wyse: Yeah, Matt. Thanks for that question. I target for growth is 20%, and we're looking in a variety of different ways. I mean, we're going to market right now with the most robust playbook that we ever have had. And I think it creates opportunities for us to drive revenue not only with our core factoring product, but with the bundled products that we have. So the opportunity not only in the large segment because we still see opportunities there through the fallen angels. People have come out of the banking environment. Into the factoring space, as well as continued consistent growth in our small carrier segment. Matthew Covington Olney: Thank you, guys. Luke Wyse: Thanks, Matt. Operator: The next question is from Tim Switzer at KBW. Please unmute yourself and begin with your question. Timothy Jeffrey Switzer: Hey, good morning. Luke Wyse: Morning, Tim. Hey. Good morning. Can you hear me? Aaron P. Graft: We can hear you fine. Timothy Jeffrey Switzer: Hey. Sorry about that. So C.H. Robinson jumped on board TPay a quarter or two ago. RxO just joined pretty recently. Can you help give us an idea of how much of their expected total volume is onboarded? Are they fully onboarded at this point? Was it all in the Q3 run rate, or what should we expect in terms of that ramp? Luke Wyse: Yes. In terms of their payments business, all of their payments volume is onboarded at this point. Timothy Jeffrey Switzer: Okay. It was all that top of that Tim, is just that the payments business is onboarded. I think the revenue growth opportunity in those partnerships, because it's not just a vendor relationship there. I mean, certainly, we're providing a vendor service in managing their payments, but in those instances, we're talking about a partnership. The revenue from those just beginning. That is not fully in the run rate. Timothy Jeffrey Switzer: Got you. Okay. And were they fully in the run rate for Q3 in terms of TPay volume? Aaron P. Graft: Well, the TPay volume was in but we have not charged them fully for the payment services yet. I think that's part of the arrangement. Payments volume. The payments volume is on ramping up the revenue associated with the payments volume. Timothy Jeffrey Switzer: I okay. And is the contract organized in a way that eventually they will be paying a 100% for every invoice? Aaron P. Graft: We don't ever, Tim, for any customer. We're never gonna speak about the details of their contract. Right? I think we told you in the letter I even saw where you did the analysis of what we charge on audit and payment. And as with any business, when you're dealing with large customers, there are you know, there are terms and contracts the timing difference between beginning the service and when they're paying their ultimate rates there's gonna be a lag in that, but we would never comment on a specific customer's contract. In pay do, but I'm that that's not that does not affect our analysis. What does affect our analysis is this will be the first full year in many years where growth in factoring has been a very high priority for us. You'll remember a couple years ago, we were limiting growth. That is no longer the case. Number two, the value proposition we are offering to the market. It's not just about and converting receivables into cash. It's about load pay and all the other things we do about instantly getting funded on weekends. No one else can do that. So even with a slow growth market, even with all the headwinds, my expectation is that factoring is gonna grow 20%, and we have a plan to go do that. In payments, you've already laid that out. You can see what great leadership Todd has delivered. The opportunities, once again, we have the infill opportunity of growing revenue with customers who we have delivered value to for many years. Second, we have the go-to-market opportunity. We have a very full pipeline and you will hear us announce new customers joining the payments network. And just those two things alone on a fee income basis, I've our payments business will grow. Inside of payments, you've got load pay, which doubled over last quarter, and we given you the number that a LinkedIn funded load pay account is $750. Of revenue. What I would tell you is that's what it is a seasoned account that's functioning primarily as a digital banking account. We have some accounts that are on an annualized basis closer to 4 and $5,000 because they're using the debit card significantly and the interchange fees, we've disclosed, are high. But more than that, as we alluded to here, using our intelligence product and the things in our value chain, we can turn load pay into more than just a digital banking account. We will turn it into a business companion. And if you do that, and we will be doing that in 2026, that $750 number is very light. On the revenue opportunity that we will achieve as we continue to grow that business. And finally, you come to intelligence, and Don said it perfectly. We chose maybe it wasn't it's not popular, but I believe it's the right thing to do. We took four months to fully integrate that acquisition, the ISO acquisition, and our legacy the data we generate. Again, the reinforcing power of the value chain, all of the data we touch in in in our audit and payments business, in order to give the market the most precise AI driven analysis to help brokers run their business. And now that she's equipped with that and the team is equipped with that, and that we have relationships with almost every broker in the industry, and I believe a very strong brand reputation of people who do what we say we will do, I have very high expectations that that $10,000,000 run rate is gonna grow in 2026. And so that's how I would put it all together for you is the value chain and all of these things reinforce one another. We have invested in our brand. To be people who deliver value to our customers and we're ready to go. No matter what the freight market does, we're gonna go take market share this year. We're gonna do it at a time while expanding our margins. Timothy Jeffrey Switzer: I appreciate that. I have a few more load pay questions, but I'll hop back in the queue for those. One thing I want to touch on now. So per the FMCSA, with proper enforcement, roughly 5% of drivers will exit the market over call it, the next year and a half. And in 2018, 5% of the drivers exited the market to an electronic logging device mandate. And spot rates skyrocket. I know we're in a different type of market and the capacity leaving the system through immigration reform won't be as sudden, but all else equal, how do you think immigration reform could impact average invoice prices? Aaron P. Graft: Yeah. I put this in the letter. You know, the FMCSA said that 3,800,000 they're 3,800,000 drivers. We would size the for hire market between one to 1,300,000 drivers. And know, interestingly, when you look at the breadth of our factoring business, we probably touch six to 7% of all trucks on the road. In the for hire market specifically. I have a firm conviction that the majority of people the nondomiciled CDLs, and people who did not go through the proper channels to be in a truck work in the for hire market. So if this ends up being enforced, it is going to cause more distortions in the for hire market and the smaller end of that market, then it will with large fleets or, obviously, company-owned trucking enterprises just because the way the vetting criteria works. I just wanna say, like, I've been in transportation now for thirteen, fourteen years. I've seen a lot. It is an immigrant-driven business, and I think that's fantastic. Right? We've watched people build successful companies. We've somewhat vilified these drivers but I'm not sure that they should be the villain in the story. Like, these people are also working very hard, but if you put those people in a truck and they are not trained, it's a danger to them, a danger to others. And if you have electronic logging devices that can be reset remotely from over and these drivers, you're just creating shadow capacity. And so if the government were to follow through on enforcing so that everyone has the opportunity to earn a fair living in trucking invoice prices would absolutely go up. And so we'll see. They've said they're you know, they they've said a lot of things. We'll see what they deliver on, and what we want is every trucker to thrive. That's our goal. I mean, spot market going up would be fantastic, but we run a long-term business here. We wanna see truckers be treated fairly and I mean, they're a huge part of our economy. They're driving 80,000-pound trucks on our highways. We wanna see every trucker thrive, and we wanna see well-trained, well-compensated, taking care of people driving those trucks. So you know, that's a little bit of a soapbox in the answer to your question, but repeat the answer I started with. I believe if that were to be enforced, you will see more distortion in the for hire market than you would in the overall market. So I hope that answers your question. Timothy Jeffrey Switzer: Yes. It did. Thank you. I'll hop back in the queue. Operator: The next question is from Gary Tenner at D. A. Davidson. Please unmute yourself. Gary Peter Tenner: Good morning. Morning, Gary. Gary? Aaron P. Graft: So I had a question about load pay. I know it's still fairly early on and then you added a lot of net new accounts this quarter. I'm curious about what you've seen so far in terms of retention or churn? I mean, the experience so far once an account is opened or a loan to the account is open has have they proven it to be fairly sticky in terms of ongoing utilization of the account and the product? Aaron P. Graft: Yes, they have. So we recognized early on that the account opening is just the first step. And it was really critical to get those accounts linked and funded to be used the way that they should be used for the client. And so a lot of work has gone into making sure that we establish those linkages. We're up around 70% of accounts getting linked very quickly after account opening. And then the funding follows when they actually have a load for which they're paid. So that results in a very high retention rate. It's also the thing that, of course, drives the opportunity for monetization early on. Gary Peter Tenner: I appreciate that. And then I do appreciate all the color you gave on the revenue side a few minutes ago. Just wanted to touch on the expense side. Obviously, with the reduction in force that you announced earlier in the quarter. Or earlier in the third quarter and your guide on fourth quarter expenses. Obviously a much greater focus on that side or that part of the P and L. Just as we're looking out into 2026, and maybe it's premature for any thoughts around this, but as you think about managing the expense part of things, you talked about focus on improved efficiency, ongoing into 2026. What kind of marker measuring sticks would you be thinking about for the expense side of the equation next year? William Bradley Voss: If you're if you look at the way that that that we've kinda framed our our fourth quarter at ninety-six and a half, and I think Aaron mentioned during the first during his opening comments that, we're looking to be right at about that level of quarter or a year from now. So what does that imply? That implies that throughout the course of 2026, we're going to have to find more ways to be efficient. And the expense reduction initiative that we announced recently is really the first outward outwardly evident step in that direction. But but we've we've got the same annual compensation and benefits resets that that will that we always see in the 2026. So there could be a little bit of upward pressure early in the year, but we are looking to continue to find ways to get more efficient across our entire platform throughout the year. It's not an overnight process, but it's something that we are committed to. Aaron P. Graft: And and, Gary, just to to look. You cover a lot of financial institutions and you know, in in the banking world, obviously, managing and efficiency initiatives, mean, a lot of go through cycles of doing these things. I just wanna be clear on, on something. So first of all, just to reiterate what Brad said, 96 and a half million is what we expect 2025 to be. 96 and a half million and or better is what we expect 2026 to be, and there'll be gyration in between there just like there's gyrations in revenue tied to the seasonality of our business. But as we're thinking about efficiencies, we wouldn't be sitting here telling you that we think we can drive 20% revenue growth if we were cutting off the very things that create value. I mean, for example, we this quarter, still invested a 110,000,000 in technology on our cost base. You know, a lot of people talk about JPMorgan is gonna spend 18,000,000,000. You know, if you were to do the math and and compare it, like, a relative basis, we still spend three to four times what they spend on our expense base on technology. And technology will continue to lead us forward. We will continue to enhance the products. The thing that's happened is that we have gotten to a level I mean, there's just been a tremendous amount of heavy lift to get us to where we are now. And we began that lift, frankly, in a market where we had such tailwinds that it was harder for people to see. And the conviction was to stay through that lift when those tailwinds turned into the longest set of headwinds anyone has seen since the deregulation of trucking in 1980. We are largely there, and you can take this proprietary dataset that we've created and you can use advances in AI and all the things we do to start to automate tasks internally without taking away from, your product roadmap or without taking away your your sales functions. I mean, we are out in the market. All the time with people. And so it's this is not a cost-cutting exercise. This is an efficiency and getting lean exercise and, frankly, figuring out how the five pieces of our value chain can work better together so we're not duplicating product development work in silos, but instead doing it as a cohesive unit. And so that's how we intend to get there. And we've been, hopefully, very explicit with you now on what our expectations of ourselves are to continue to grow revenue and hold expenses flat. So I hope that's helpful. Gary Peter Tenner: It is. I I missed your opening remarks, so I appreciate you flagging that. Operator: The next question is from Hal Goetsch at B. Riley. Please unmute yourself and begin with your question. Harold Lee Goetsch: Hey, good morning, everyone. Thank you for the detail. Aaron, I think you made a comment. You said we are not limiting growth in factoring anymore. And I was just curious to if you could explain a little bit more of that statement. And your target for 20% growth perhaps you guys could give us a color for like your your feel for a bridge of of the components of that or how much of that was just would just behave normal market lift if things got a little better? Maybe that's mid how much of it's really idiosyncratic to your strategies to gain share in that space? That'd be helpful to help us understand how you go from basically where you're at now, which is back to growth you know, three quarters in a row but maybe a target of 20% help us bridge that kind of the math there. As best you can. Sure. Thank you. Aaron P. Graft: So the first thing I'm not gonna talk about an improving freight market. I've talked about that three and a half years, and and have no idea. This may be the new normal forever. Who knows? But we're we're we're focused on what's in front of us. But a a couple things. And Tim and I have been in this business now, you know, for and seen a lot of things. So when the payments network began, right, we felt there was a need at at the beginning to really try to divide the world and so that you had our liquidity solutions, which is our factoring business you know, which is meeting the the working capital needs of carriers, And then, yeah, the payments network, which was gonna serve all the parties, including other factoring companies. Companies. And we've done that. I think we have 50 to 60 factoring companies who use the payments network who continue to use the payments network. And what we learned was there were gonna be people who were gonna use that functionality in the payments network whether we were growing factoring or whether we were holding factoring steady, and as we continue to focus on it's less about factoring I just wanna be super clear about this. It's about the customer. So you put the customer at the center of the universe and fact is one of several products. Equipment finance, insurance, load pay, that you wanna sell that customer to help their business. And so with a customer-centric viewpoint, we're gonna go where the customer leads us. We're not out there trying to reprice the fact industry or go after other factors. We don't think we need to do that. Frankly, factoring is a percentage of all invoices. Over the last ten years has grown. Because factoring has gotten more sophisticated and and as a result, more carriers use it and see it not just as a I need immediate liquidity, but literally as a business service, including the ability to lower their prices on fuel. I mean, in many cases, the fuel aggregation discount that a factor can provide more than offsets the revenue that customer pays in order to turn their invoice into cash. Right? So it's actually a net positive to their bottom line when they use our fuel card and get instantly paid versus just having collected that invoice in thirty days later without financing. And that's you know, why the industry grows. So putting the customer at the center, delivering the customer more more than just factory. I mean, if that's what they need, that's what they get. But we're delivering them a value chain of interlinked things that nobody else in the marketplace has all of those things. And we want truckers to thrive. We want owner operators to thrive. We want small fleets to thrive. We want large fleets to thrive, and we have a value proposition for each of them. And so if you run to that value proposition, with our market position, we believe we're gonna grow 20%, and we believe the market will continue to grow. And so, I don't know that the market will grow 20%, but our expectation of ourselves is to grow 20%. Harold Lee Goetsch: Thank you, Aaron. Sure. Operator: The next question is from Tim Switzer at KBW. Please unmute yourself and begin with your question. Timothy Jeffrey Switzer: Hey there. Thanks for taking my follow-ups. Mentioned there in your letter about some opportunities in the intelligence segment with shippers. And you mentioned about a a pilot program to achieve a critical mass of shipper data. Can you provide some color on how exactly you're achieving I guess, obtaining the shipper data and, like, how many shippers are you partnered with or any anything you can provide around that? Aaron P. Graft: Yeah. I'm gonna start this off, and then Don's gonna give you the detailed answer. But I would say we already make about $4,000,000,000 of payments for shippers in our payments business. So I mean, it's a pilot program that begins with a b, so that helps. This is not starting from ground zero. But, Don, what else would you say? Dawn Favier: You know, I would add to that that the ISO business has has already been supporting several shippers, throughout their we have about a dozen or so shippers that are already on the performance intelligence products. But what we're really talking about in this product, the pilot project, is combination of pricing and performance for shippers to help them benchmark themselves against the market. Our hypothesis is we need about 10 to 12 shippers or 10 sorry, 10 to 15 shippers or roughly $500,000,000 in freight under management as a data sample. And we're getting that data the same way that we have built our broker data sample is through direct submissions, from the shippers themselves through TMS integration on their book loads or paid invoices. Whatever the case may be. Timothy Jeffrey Switzer: Got it. Very helpful. And then real quick, are you guys able provide an update at all on that nonperforming equipment finance loan you purchased last quarter? And your your confidence being able to recover the $11,000,000 you charged off when you bought it? Aaron P. Graft: We feel just as good about that today as we did when we announced it. Timothy Jeffrey Switzer: Awesome. Good to hear. Thank you, guys. Operator: The next question is from Joe at Raymond James. Please unmute yourself and begin with your question. Joseph Peter Yanchunis: Hello again. Can you hear me? Aaron P. Graft: We got you, Joe. Fire away. Joseph Peter Yanchunis: Alright. So for starters, I understand LoadPay is a relatively new product. You have a massive distribution channel for this ever-evolving LoadPay. Are you firing at all cylinders right now trying to sign up new accounts? I know it looks like, you know, you're gonna hit your year-end account target. But given the vast number of owner-operator drivers on the road, you're barely scratching the surface on really penetrating this market. What's the biggest challenge right now in growing your LoadPay user base? Aaron P. Graft: I would start to say by saying that we are firing on multiple fronts, and we feel really good about that. So the multiple fronts that I'm referring to are sales through our broker partners, our own organic sales efforts, and then sales efforts that are occurring through our factoring business. All those are all three of those are contributing meaningfully to the totals. All three of those have the opportunity to scale further. And so yeah, I'm I'm I'm very comfortable that we're gonna continue to accelerate the growth in account openings you've seen so far. And you may be just scratching the surface right now, but it's not too far out where it's gonna be much deeper than that. Aaron P. Graft: And, Joe, here's what's don't miss this. I mean, to me, this is extremely important. So think of LoadPay as it now exists as something like Venmo with a debit card. Think of LoadPay where it will be in the first quarter of next year. As a bay a full-service banking account that is built with a bunch of specific enhancements for truckers. And then finally, think about LoadPay where it will be towards the end of 2026 as a full-on business companion with an embedded intelligence offering. Like, those are that's a radically different product that our customers will be consuming, than the five you know, 4,500 customers that we've currently added. So we do have a distribution network that I would argue is unrivaled. We touch almost every for hire trucker in The United States between our own factoring business and our payments business, So and and we have partnerships with some of the largest providers in freight. The product that people are consuming now, it's not a beta product. I mean, it's a real product, but it is getting better literally every quarter. And it's getting better because we have an embedded technology team that's doing great work. So yeah, I mean, firing on all cylinders, well, I I mean, I think, again, you have to answer that question of am I more concerned now about going from 4,800 customers to 10,000 customers? Sure. Like, that's important. But what's really important to me is completing that journey from Venmo to banking to banking beyond because I know that the per unit revenue from that is much higher, and my costs are not much higher because we already do these things inside of our value chain. So again, it's not just about distribution. It's also about product development. And we are well on our way. Joseph Peter Yanchunis: I appreciate that answer. I wanted to shift gears here. So it seems like factoring as a service is starting to gain momentum. You know, what level of transaction volume through factory as a service would you need to see in 2026 to view this initiative as a success? Aaron P. Graft: Look, for us doing factoring, whether it's for our first-party business, or for a third-party business, it's factoring. Like, what Tim and team do that the operational execution is the same. I'd really flip that question around to our partners and say, what do they seek to achieve? I mean, we are the platform that empowers them to grow. This is not our business in the sense that we control the marketing levers. And the growth engines. If I listen to what C. H. Robinson said has said publicly, if I think about what what I believe RXO and our future FAS partners wanna do, they want to monetize the payment experience. And more than that, genuinely more than that, they also wanna bind themselves closer with their carriers because they want carriers repeat business to thrive. And so it's their goals that are more important than mine. We have built a factory that can do factoring for ourselves and anyone else that needs it. And and so it's a success to us if it's a success to them. Joseph Peter Yanchunis: Okay. Appreciate that. Then just one last one for me. You guys have the new buyback in place. Just any commentary on how active you plan to be in the near term? Aaron P. Graft: Yeah. I mean, not gonna speak to the timing of that. Look. What we will what we can say is our intent is to use the buyback with you know, from earnings. Right? We are in the we are in the process of growing earnings. I can see that. And, you know, if the market gives us an opportunity and we can do it safely and soundly, we're you know, that that that's a not very nice tool to have in the toolkit. But we didn't announce this just because we intended to be out in the market tomorrow. We want that tool in our toolkit to, as just part of our overall capital planning strategy. Joseph Peter Yanchunis: Alright. I appreciate it. Thanks for taking my questions. Aaron P. Graft: For sure. Operator: The next question is from Matt Olney at Stephens. Please unmute yourself. Begin with your question. Matthew Covington Olney: Yeah. Thanks for taking the follow-up, guys. There was some commentary in the letter that certain types of non-transportation lending is no longer part of the core lending strategy. You just kinda clarify what is and what is not part of the core business? I'm just trying to appreciate how big of initiative this is to exit some of these non-transportation loans. And are you accelerating this after seeing the tri color, or are you just reiterating what you've said previously? Aaron P. Graft: I'm just reiterating what we said previously. Look. I think about there's two parts to the core business. There's the one we spend 90% of the time talking about, which is the transportation business. But there is also a very healthy underlying community bank. Right? If you look at our metrics, you look at the the financial performance of that bank, you look at our deposit quality, that's a that's core to our strategy, and the bank will always be core to our strategy. What we don't want to have happen is we don't need to be talking about community bank credits. Right? We need the community bank to be safe, sound, and and by and large, it does that. But, you know, in the past, as we sought to generate revenue to reinvest in the business, we've been in things like liquid credit where winding that business down. Right? And so I mean by that, Matt, is anything that's no long that that's not core when we're talking about the community bank self itself, to traditional community banking, I think you you're not gonna see expansion from us away from that. You're gonna see us retrench to that core as you see our transportation business continue to grow. Matthew Covington Olney: Okay. Appreciate that. And then on on Tricolor, it sounds like based off the letter you you work to confirm the location of the collateral and feel good about that. And with the borrower in bankruptcy, what's the next data point you expect to hear on this topic? I'm just trying to appreciate this could drag on for a while and then if the collateral is a depreciating asset, at what point do you look to monetize the collateral and start selling the inventory? Aaron P. Graft: Yeah. Based on the bankruptcy timeline, we're gonna know a lot more in three weeks. That's not to say we will necessarily be liquidating collateral that quickly. That you know, may take longer. But there are different segments of the collateral, and this is important to know. There may be portions of the collateral that we're able to liquidate right away because there's no question about the fact that that's our collateral. We should be able to move forward with that. If there are others who think they have claims on that collateral, then that's a process for the court to figure out. We feel really good about our position in that. And then, of course, we're gonna, you know, we're gonna let that let that happen. But the the liquidation could start, you know, soon and could extend on for a period of time. I don't think we'll be in this credit year from now, but it's hard to say anything for sure when you're talking about a bankruptcy of this size. Matthew Covington Olney: Okay. Thank you, guys. Aaron P. Graft: Sure. Operator: The next question is from Adam Meade. Please unmute yourself and begin with your question. Adam Meade: Hi. Good morning. Aaron P. Graft: Morning, Adam. Adam Meade: Question on maybe the medium to longer term competitive landscape. Now that you've proven the model and the ecosystem, where do you anticipate challenges from competition and how would you compete with Triumph Financial, Inc. if you were on the other side? Aaron P. Graft: Yeah. So if we think about the value chain, audit payments, liquidity solutions, digital banking plus, and intelligence, In some of those lines of business, we have almost no competitor. I mean, there's there's certain there's competition everywhere, but in other lines of business, like intelligence, it's there's three main providers. So look. If if if you're me, my LinkedIn feed my Twitter feed is filled with 400 factoring companies. We're the second largest. Like, just gotta figure out how to go to market. You gotta compete with us on cost of funds, you're gonna have to do more than just payday lending because that's not what we do. Right? We truly help truckers thrive and grow and have seen people start with one truck and have a 100 trucks, and it's an American success story. So you wanna compete with us there? That's I mean, I guess, arguably straightforward. You're gonna need the balance sheet to do it. If you wanna compete with us in the network, where you know, we touched 47% of all invoices and from a payments perspective and 64% of all invoices, then you're you know, from a the depth of when you add both audit and payments together, I mean, you're gonna have to create an interlinked solution. I guess the person who comes after us can do it way better than I've done. Right? It's it's taken six years and an amazing team to do this. Our compounded annual growth rate over six years is over a 100%, but it has been extremely hard. So if you wanna do that, you're gonna have to integrate. You you know, it's one thing again to create cool technology. It's a whole another thing integrate into legacy tar technology systems upon which a plethora of vendors use because nobody has a huge appetite right now to completely redo their tech stack. So, again, it's change management as much as technology innovation. And then finally, on intelligence. I mean, look. There's a well-known leader in that industry, and they're a great company. Right? And and they've been in a market dominant position for a long period of time. Our secret sauce in intelligence, if you wanna beat us, is you have to get more true transactional data than we have. And you can't it I don't see how you get there at the scale we have unless you have the payments network. Right? Because that automatically causes us to touch a significant portion of all transactions. So the veracity of our data I would already put against anyone in the world. Unquestionably, like, it's there. And the density of that data in both lanes and by by actual movement type. It's not just a a load. I mean, is it a hazmat load? Is it a team load? Is it a drop trailer load? Like, there's there's so many nuances under the surface of these invoices that you need to know. So if you wanna do that, you gotta find a way to get to the source of truth to a massive scale of data, and then you have to build the artificial intelligence-driven models that we've built that speak back to the broker and and and help brokers manage their margin. That's what we're trying. We're trying to help truckers thrive, brokers manage their margin, the whole thing work more efficiently. So that's why you come at things from a value chain. It's all interconnected together, and and you can't really piecemeal into what we do because if you look at that chart we put in the letter, we took each customer segment, and we showed you the things that those customers consume from us. You wanna go do audit for broker? That's great. Can you do payments? Can you do intelligence? Can you do liquidity solutions if they want supply chain finance? So we're not gonna sit on our heels. We're gonna continue innovating. We are going to continue to manage our business in a way that delivers value to our customers because you treat people the way you would wanna be treated. That's how you create long-term success. And then we benefit from six years of really hard work of building this network and integrating with almost every legacy provider out. So that's how we view our market position and we got we still got work to do. Adam Meade: Great. Thank you. On the capital allocation side, do you think about I guess, paying down some of the expensive sub debt or even the preferred stock versus share repurchases? William Bradley Voss: If you think about the the the way that our balance sheet is is structured from a, you know, from a various pieces of of capital, you know, We're pretty well in balance as we sit today with, you know, with tier one and two capital from a regulatory capital perspective. So I don't think that you're going to see us do things like retire sub debt or or the preferred stock in in the near term. I think we're pretty well in balance. Adam Meade: Okay. Just just finally on on the factoring side, in your letter you stated that the instant decisions for owner operators was 58 per percent versus 15 for the larger fleets. I guess, intuitively, I would have thought it would be the reverse. So maybe you can help me understand the dynamics there. Aaron P. Graft: Yeah. Adam, I can I can address that? When you look at how those different segments present information to us, it's done completely different. So the individual owner operator submits it at an invoice by invoice basis through our portal. When you take into consideration the large fleets, they do it in in large batch of data and images. And so it's it's natural that the large fleet submitting a batch is going to take is a different than the owner operator model or the small fleet the very small fleet model and so ingesting that is completely different. Our teams are working through it and we believe that we're gonna bring that number up. But currently, 15% is a good number, it's just not where we're going to be. That's not where our target is long term. The true fact is that the people that utilize Instant Decision the most are that is that small fleet. And when you look at the small fleet fleet and their need for capital, and our ability to provide that 24/7 using our LoadPay product, that is really where the rubber meets the road for us. Hopefully that answers your question. Adam Meade: It does. I really appreciate it. Thanks for your time. Aaron P. Graft: You're welcome. Operator: Just a reminder, if you would like to ask a please use the raise hand icon, which can be found at the bottom of your screen. When you are called on, please unmute your line and ask your question. Turn the call back to Aaron for closing remarks. Aaron P. Graft: Thank you for joining us this morning. We look forward to seeing you in about three months. Take care.
Operator: Good morning, and welcome to KeyCorp Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, KeyCorp Director of Investor Relations. Please go ahead. Brian Mauney: Good morning, everyone. I'd like to thank you for joining KeyCorp's third quarter 2025 earnings conference call. I am here with Chris Gorman, our Chairman and Chief Executive Officer, Clark Khayat, our Chief Financial Officer, and Mohit Ramani, our Chief Risk Officer. As usual, we will reference our earnings presentation slides which can be found in the Investor Relations section of the key.com website. At the back of the presentation, you will find our statement on forward-looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning's call. Actual results may differ materially from forward-looking statements and those statements speak only as of today, 10/16/2025, and will not be updated. With that, I will turn it over to Chris. Chris Gorman: Thank you, Brian, and good morning, everyone. Our third quarter results reflect the steady progress we continue to make in achieving higher levels of both profitability and returns. We reported earnings per share of 41¢. Additionally, return on assets surpassed 1%. Pre-provision net revenue was up $33 million quarter over quarter or 5%, marking the sixth straight quarter of improving PPNR. Revenues, adjusting for last year's securities portfolio repositioning, grew 17%. While revenues continue to increase as a result of our clearly defined net interest income tailwinds, we also continue to differentiate ourselves with respect to fee income, which was up high single digits compared to 2024, for both the quarter and on a year-to-date basis. Net interest income continues to benefit from strong business dynamics across both deposits and loans. Deposit balances were up while the cost of deposits was down this quarter. With respect to loans, we continue to remix the portfolio from low-yielding consumer mortgages into relationship C&I loans with healthy risk-adjusted returns. We achieved a 2.75% NIM in the quarter, reaching our year-end target one quarter ahead of schedule. Asset quality metrics continued to trend in a positive direction, with NPAs and criticized loans declining while net charge-offs were relatively stable. Our net charge-off ratio year-to-date is squarely within our full-year target range of 40 to 45 basis points. As it pertains to the two recent bankruptcies making headlines in the auto industry, we have no direct exposure. Finally, we continue to build upon our peer-leading capital ratios, with reported CET1 approaching 12% at quarter-end. This excess capital provides us with both flexibility and optionality as we move forward. Franchise momentum continues to accelerate. Relationship households and commercial clients both continue to grow at about 2% this year. In wealth, assets under management reached a record $68 billion. Additionally, sales production in our mass affluent segment also set a record this quarter. Since we launched this business in 2023, we have added 50,000 households, $3 billion of AUM, and over $6 billion of total client assets to Key. Commercial pipelines are higher, nearly double the levels from one year ago. Investment banking pipelines are also up meaningfully from prior periods, particularly our M&A pipeline, which has a multiplier effect as advisory assignments often drive additional ancillary business. We raised a robust $50 billion in capital on behalf of our clients in the third quarter, retaining 15% on our balance sheet. Assuming market conditions remain favorable, we would anticipate that our fourth quarter fees would be similar to last year's fourth quarter, which was one of our best quarters on record. We remain on track to deliver our second-best year in investment banking in our history. In commercial payments, fee-equivalent revenue continues to grow in the high single-digit range, reflecting our focus and commitment to helping our clients run their businesses better every day. As we enjoy this broad-based momentum, we continue to invest in relationship bankers, client advisers, and our technology platforms. We remain on track to increase our frontline staff by approximately 10% this year. We are already seeing good production volumes from many of these recent hires, and broadly expect to see payback from all of our hires over the next twelve to eighteen months. Before I turn it over to Clark, I want to briefly cover the medium-term targets that we disclosed a few weeks ago in our investor presentation that is available for you to review on our website. We believe we can achieve a return on tangible common equity of 15% or better on a run-rate basis by 2027. Let me outline the building blocks to achieving those returns. First of all, by improving NIM by another 50 basis points, to 3.25% or better, with half of it coming from the mechanical lift of fixed asset repricing, the rest coming from strong execution in our businesses by continuing to focus on primacy and generating relationship lending opportunities. Secondly, by continuing to compound our fee advantages, leveraging our proven ability to broaden and monetize client relationships. Third, by maintaining our expense discipline, including ongoing continuous improvement initiatives that are part of our DNA. And lastly, through share repurchases in the ordinary course of business that maintain our CET1 ratios at our current relatively high levels. To this end, consistent with my comments last quarter that we would crawl, walk, run when it comes to share buybacks, we expect to be back in the open market repurchasing approximately $100 million of common stock in the fourth quarter. To be clear, we believe the path to 15% has low execution risk, as we continue to deliver against our compelling organic growth plan. Given our current excess capital position, we could accelerate our trajectory and improve returns through incremental share repurchases and/or more balance sheet restructurings. The 15% should not be viewed as a final goal, but rather an important milestone on our journey to achieving higher levels of both sustainable profitability and returns for our shareholders. In summary, I am proud of our results this quarter, contributing to what will be a record revenue year in 2025. We are currently in the midst of our budget process, and we'll have more to say on 2026 at year-end. But with our strong trajectory and healthy pipelines, I believe we are well-positioned to drive another year of outsized revenue and earnings growth in 2026. With that, I'll turn it over to Clark to review the quarter's financial results in greater detail. Clark Khayat: Thanks, Chris. Starting on Slide five. Our third quarter results reflect strong performance and continued momentum across the company. As a reminder, last year's third quarter results were impacted by securities portfolio repositioning. As such, all comparisons are on an adjusted basis. Revenue was up 17% year over year, while expenses increased 7%. Tax equivalent net interest income was up 4% sequentially, primarily driven by commercial loan and low-cost client deposit growth. Noninterest income increased 8% year over year, again growing a little faster than expenses this quarter. Loan loss provision of $107 million included net charge-offs of $114 million or 42 basis points of average loans, offset by a modest reserve release primarily due to the reductions in NPAs and criticized loans this quarter. Tangible book value per share increased 4% sequentially and 14% year over year. Finally, we are pleased to have received a one-notch upgrade to both our long and short-term ratings from Fitch this quarter, with our senior unsecured debt now rated A minus. We also continue to maintain a positive outlook with Moody's. Moving to the balance sheet on slide six. Average loans increased by $5 billion sequentially, reflecting a 2% increase in C&I loans, and a modest increase in CRE loans, partially offset by planned runoff of about $600 million of low-yielding consumer loans. On a spot basis, C&I loans grew by $700 million led by new relationships to Key. Most of the growth came from the power and utility sector and in middle market broadly across sectors and regions. Line utilization decreased approximately 1% sequentially to 31%, driven largely by an increase in commitments to large corporate clients. Draws were roughly flat from the second quarter. In middle market, we saw utilization rates increase about 50 basis points. Turning to Slide seven. Average deposits grew 2% and period-end deposits grew 3% sequentially, primarily driven by growth with commercial clients. Average consumer deposits excluding CDs grew 1%. Average non-interest-bearing deposits grew 2% sequentially and remained stable at 19% of total deposits or 23% when adjusted for our hybrid accounts. Total deposit cost declined by two basis points to 1.97%. Our cumulative interest-bearing beta remained at about 55% through the third quarter, in line with up betas. We've been able to get a little more aggressive than we expected due to our lower loan-to-deposit ratio as we entered the year, the ongoing remixing of loans from consumer to commercial, which limits our incremental funding needs, and that the markets we operate in have to date generally remained pretty rational from a competition standpoint. Overall, interest-bearing funding costs declined by eight basis points, resulting in a cumulative interest-bearing funding beta of 74%. Slide eight provides drivers of NII and NIM this quarter. Tax equivalent NII was up 4% sequentially, primarily driven by continued balance sheet optimization effort. We grew relationship commercial loans at relatively stable spreads to the existing book, as well as low-cost client deposits while running off lower-yielding consumer loans and higher-cost long-term debt and other wholesale borrowing. NII also benefited from an additional day in the quarter. We achieved our year-end net interest margin goal a quarter early with NIM increasing nine basis points sequentially to 2.75%. I'll discuss our outlook shortly, but we currently expect NII and NIM to grow modestly in the fourth quarter off of the third quarter. Our balance sheet is positioned to be fairly neutral to additional Fed rate cuts in the short term. Turning to Slide nine, adjusted non-interest income increased 8% year over year and included a Visa-related settlement charge of approximately $8 million. Investment banking and debt placement fees were $184 million, an increase of 8% year over year. Year to date, investment banking and debt placement fees are up 15%. The strong quarter was driven by broad-based debt and equity capital markets activity. Middle market M&A volumes across the industry remain tepid. Although, as Chris mentioned, we began to see an encouraging pickup in strategic dialogue among our clients over the past month and our M&A pipelines are up materially from where they were last quarter. Trust and investment services income grew 7% year over year, reflecting higher market values and positive net flows. Assets under management reached a new record high of $68 billion. Commercial mortgage servicing fees were $73 million, remaining near historic highs. Our active special servicing balances remained elevated at over $11 billion, up 48% compared to the prior year. We would expect to see these fees decline in the fourth quarter to the $60 million to $65 million range, reflecting the impact of lower Fed funds rates and successful resolutions within our active special servicing book. Our service charges and corporate service fees increased roughly 124% year over year, respectively. The increase in service charges was largely driven by continued momentum in commercial payments, which overall grew fee-equivalent revenue at a high single-digit rate. Corporate services income is driven by loan and derivatives client activity. On Slide 10, third quarter non-interest expenses of $1.2 billion increased 2% from the prior quarter and 7% year over year. Year over year expense growth was primarily driven by higher personnel expense related to increases in headcount, mainly in the frontline producers that Chris mentioned, and higher incentive compensation attributable to the strong fee environment and the impact from Key's higher stock price. Non-personnel expenses rose modestly as we made an $8 million contribution to our charitable foundation during the quarter. Business services and professional fees and computer processing costs also rose slightly, reflecting technology-related investments. Consistent with our prior guidance, we expect expenses to increase again in the fourth quarter, reflecting continued hiring and technology investments, anticipated growth in noninterest income and client activity, and other year-end seasonality factors. As shown on slide 11, credit quality is relatively stable to improving. Net charge-offs were $114 million, an annualized 42 basis points of average loans. Year to date net charge-offs of 41 basis points are squarely within our full-year target range of 40 to 45 basis points. Nonperforming assets declined by 6% sequentially and the NPA ratio improved by three basis points to 63 basis points. Criticized loans declined by about another $200 million or 3%, sequentially. Turning to Slide 12, our CET1 ratio was 11.8% at quarter-end driven by net earnings generation. Our marked CET1 ratio, which includes unrealized AFS and pension losses, increased by about 30 basis points to 10.3%. We believe both ratios continue to be at or near the top of the peer group. Given our marked CET1 increasing comfortably above the top end of our target, we plan to be active in repurchasing roughly $100 million of our shares in the fourth quarter. And continue, as previously stated, in 2026. Moving to Slide 13, we are increasing our full-year and exit rate guidance following the strong third quarter results as we now have good line of sight in how the fourth quarter is shaping up. As a reminder, this guidance holds across a range of potential yield curve environments over the course of the fourth quarter. We now expect full-year net interest income growth of about 22%, at the high end of the previously guided 20% to 22% range. In conjunction, our fourth quarter exit rate NII should grow 13% or more compared to 2024. Assuming a fairly flat balance sheet in the fourth quarter compared to the third, this implies a fourth quarter NIM in the 2.75% to 2.8% range. We expect fees to grow between 5-6%. We believe we can land towards the higher end of this range, assuming we see some pull-through of our improved M&A pipelines prior to year-end as currently expected, and market conditions remain favorable. As we previously mentioned, we expect full-year expenses to fall within the middle of the range we provided at the beginning of the year, or approximately 4%. We expect our GAAP tax rate to come in around 22% in the fourth quarter. For the full year, we currently expect the GAAP and tax equivalent effective rates to land at approximately 21-22%, respectively, both toward the better end of the previously guided ranges. Our other guidance remains unchanged. In summary, subject to the usual macro caveats, we expect to maintain our strong momentum through the fourth quarter, which would result in record revenue in 2025, fee-based operating leverage of greater than 100 basis points, and north of 10% positive operating leverage overall. With that, I'll now turn the call back to the operator to provide instructions for the Q&A session. Operator: Thank you. If you would like to ask a question, please press star followed by 1. If your question has been answered or you wish to remove your question, please press star followed by 2. Again, to ask a question, press star 1. If you are using a speakerphone, please pick up your handset before asking your question. Our first question comes from the line of Manan Gosalia with Morgan Stanley. Manan, your line is now open. Manan Gosalia: Hi. Good morning, Chris, Clark. Good morning. Appreciate the timing and detail related to the 15% RoTCE goal and the 3.25% plus NIM targets. I guess a two-part question here. First, can you provide a little bit more detail on the drivers to get to that 15% plus roughly target? And second, you do have some peers who are targeting close to a 16 to 19% RoTCE over a similar time frame. Chris, I know you noted that 15% plus is not the final goal, but maybe help us understand why the RoTCE can't be higher in the medium term. Thanks. Clark Khayat: Sure. Hey, Manan. It's Clark. I'll take that. So first, just to reiterate what you just said, which is Chris's point that the 15% is a stop and not the destination. So I think that's an important element here. Let me get at both the ROTCE target we set out and I'll include in that the NIM since that's a big driver, obviously, of the numerator. And if we start there, you're talking about the NIM moving up about 50 basis points over that timeframe, that's meaningful moves. Obviously, we've started from a lower level than others and we're moving up nicely over the course of the last year. But if I look at that as a split between mechanical movement, fixed asset repricing, our securities book over time, in the swaps, and just as a note there, you'll see with forward starters coming on, something like $34 billion of swaps in the 3.8% to 3.9% range. So as rates come down, those will go from a slight negative carry today to a pretty strong benefit. So we feel very good about that position. And then that we think is about half of that gain, with the other half coming from continued strong organic activity. And I think that will be loan growth. We'll continue to focus on good strong commercial loan growth offsetting the runoff in consumers. So think about that as like a 2% pickup over time. We expect to continue to grow high-quality granular deposits, which we've been doing both in the commercial and the consumer space. And to manage the pricing on those deposits effectively. And I would say, a kind of 50s-ish beta over that timeframe not necessarily in any one quarter. But over that time frame is kind of what we would expect there. And I think those two pieces together get you to 50 basis points in that time frame. If you move to fees, we continue to see very strong growth across our high-priority fee capital markets, commercial payments, wealth, and commercial mortgage servicing. We would continue to invest in those and have. And so we expect that growth to continue through that timeframe. All of those, of course, have very strong ROTCEs and don't use up a lot of capital. So that benefits certainly the 15%. On the expense side, I think we have a pretty well-demonstrated ability to manage expenses effectively. We, of course, plan to continue doing that and using our continuous improvement activities to continue to fund meaningful and needed investments. Then on the provision side, feeling very good about credit quality and we think we'll continue to focus on high-quality borrowers where we can monetize those loans through our compelling seed platform. So all of that we think by that 2027 gets us a good portion of the way to the 15%. I would think about that in ROAs that are in line with or better than some peers, you know, north of 1.20% ROAs. So I think that's an important milestone for us as well. And then I think the second obvious piece here is the denominator, which is the capital base. As you are well aware, we have strong CET1 and marked CET1 today. In absolute and relative terms. And this analysis assumes we'll manage buybacks which as Chris said, we'll initiate again here in some size in the fourth quarter. To effectively our current marked levels, which are about 10.3. So maybe one or two additional comments here to just to frame this. And I think they're pretty important. So first, the 15% we see as low risk no real big swings in here. So this is running our business effectively. We're doing today. But we are high on the capital side, and we're gonna generate and are generating solid capital growth. So we have ample ability here to increase buybacks or to restructure to accelerate to our targeted balance sheet if that's what we need to do. Both of those speed up the 15% and they offer clear outperformance to that midterm milestone. We haven't decided sitting here today if we're going to pull those levers in addition to the buybacks we're already assuming, nor agree to which we would do it, if we choose to do it. So, again, we feel like it's a very good position to be in here. We could pull either or both of those levers deliver very strong returns on both the relative and absolute basis, and still be at or near the high end of our peer capital range. So just to dimension that, one more way, if we took our current mark capital at 10.3 we took that down to the peer level of 9.1, that would generate an additional 2% of our OTCE. So we can do that math. We can do that with continued solid business performance and some more aggressive capital management and could get comfortably past that 15 plus percent target. Chris Gorman: And just to add to Clark's point, our current long-term goal for return on tangible common equity is 16% to 19%. We haven't updated that but I can tell you that when we do, it won't look much different than 16 to 19. Manan Gosalia: Got it. That's great. I really appreciate the fulsome response here. I guess a quick follow-up given that NIM is a big driver here. As we think about that 3.25% plus NIM, how do you think about rate cuts and the yield curve? Do you need to see a specific level of steepness in the curve to get there? Clark Khayat: I don't think we do. I do think that kind of 50s-ish beta is the right way to think about it. And right now, that's just given the forward curve. Steepening might be true for most banks, but steepening obviously provides some additional benefit and we expect to see some of that coming through again in the forwards. A steeper curve said differently would, I think, benefit us more. But right now that really just relies on that kind of 50s-ish beta and the forward curve which does, again, have a little bit of steepening in it. Manan Gosalia: Got it. Thank you. Operator: Our next question comes from the line of Ebrahim Poonawala with Bank of America. Ebrahim, your line is now open. Ebrahim Poonawala: Good morning. Good morning. I guess hey, Chris. Just one quick question. First on bank M&A, we've seen some activity. I think there was some discussion around Key being involved in a recent transaction. And I think the concern that I've heard from investors is given your stock valuation the risk of significant tangible book dilution, and what that entails. And I think they'll just caution towards owning banks that are viewed as potential buyers of other banks. I would love for you to frame for us how you're thinking about bank M&A from a financial metrics perspective, and are you actively sort of just your appetite for doing with you? Thank you. Chris Gorman: Well, thank you for the question. This is a topic that I know has gotten some discussion probably more than is warranted. So let me start off with talking a little bit about what our strategic focus is. And I think Clark just did a really great job of walking everyone through the pieces and parts of the step up in our return on tangible common equity. That's what we can control. That's what we are focused on. Obviously, as we build up our return on tangible common equity, we will get a multiple and have a currency that will put us in a good position if we ever wanted to transact at some point. So our real focus is this huge organic opportunity that's right in front of us that we have to execute on. That's how we can create the greatest value for our shareholders. Specifically as it relates to bank M&A that's pretty far down the capital priorities. Now let me kinda walk everyone through what our capital priorities are. First is to support our clients. I mentioned that we have a backlog that's two times today what it was just one year ago. We're gonna use our capital for our clients. Secondly, we are gonna pursue tuck-in deals in support of our targeted scale strategy. Those are really fee-based capabilities, really knowledge workers. I think we have a really good track record of being able to buy these relatively small businesses and plug them in and integrate them. We're gonna continue to do that. Obviously, we'll support the dividend at $0.205 a share. We now have sort of turned the valve open on share repurchases. I think Clark did a nice job of walking through. We clearly have in front of us some opportunity to work on our balance sheet a bit as we use without, frankly, using a lot of capital. For example, we have about $14 billion of 2%. So that's an opportunity for us. And then as it pertains specifically to bank M&A, it's a really tight screen that we would look at. First, it has to be absolutely on strategy. And there's not many banks that would check that. Secondly, it has to be a bank that has a culture that we think we can integrate into ours. We have a unique culture because we have a unique business model. And as you know, Ebrahim, as leading the integration of First Niagara, I sort of know what's involved in that. And that's not easy. That's actually the hard part. Then lastly, and important for this group for sure, it would have to check the box on a variety of important financial metrics. Inclusive of tangible book value dilution. So that's just broadly how I'm thinking about our strategy and sort of where inorganic growth fits in. Thanks for the question. Ebrahim Poonawala: Got it. So sounds like unless someone gifted you a bank, the bar is extremely high for the deal. So thank you. Walking through that. Just on a separate question, Chris, you have a pretty good sense of just the capital markets, what's going on. Given the focus on this the exposure of banks to NDFIs, One, talk to us in terms of how you view the risk on your balance sheet. And the risk of the lack of visibility that the banks have when providing these warehouse facilities to nonbank providers. Chris Gorman: Yeah. So let me talk about what within our NDFI portfolio and why at least from a Key perspective, I don't think it's an issue. We have a business called SFL, which we've been in for twenty years, and we do a lot of the payments work. We do a lot of the securitization work. I don't think we've had a charge-off in twenty years. So my point is, the key for NDFI is for banks to be readily engaged with these borrowers and not just have a piece of paper that they put on the shelf. For example, in our bucket, you'd find REITs. Well, obviously, one of our best businesses is our real estate business, and we're constantly in touch with these folks around payments, capital raising, etcetera. So I think if I was sitting in your seat, one of the things that I'd be curiously interested in is what are the asset classes within the non-financial investment group. And then or non-depository, I beg your pardon, and then I'd wanna know how engaged the banks are day in day out with those borrowers. Clark, what would you add to that? Clark Khayat: So I think, you know, one, as you sort of hit NDFI, I think, is a fairly broad undefined category from a regulatory standpoint. So I think the important thing to know is it as Chris said, it's not one thing. It's a for us, a collection of businesses that don't necessarily align perfectly to those reg reports. But the more important thing is their businesses been in for a long time where we have very deep expertise. We generally apply our strong relationship strategy to that. And in many of these cases, we have what we refer to as targeted scale. We have real deep expertise a very targeted segment of clients, and we perform really well in those groups. Mohit Ramani: Yeah. For example, we have separate teams that deal with each and every part of the groups that we have. And this is Mo Ramani. One thing I might add too is I've reviewed the fuel files and structures and feel really good about where we sit. I've been chief credit officer twice in my career journey, so my ability to dig in on these structures is quite strong. We don't play in the more esoteric areas of NDFI. Again, if you think about, again, the REITs and you know, CLOs and things like that, I think that's pretty much down the fairway relative to risk appetite. And also, we have a strong portfolio management structure so we have a very advanced limit structure that prevents outside growth. So no area of the bank can grow to infinity. We do have very strong limits in place as well to control growth across portfolios. Thanks for that, Mo. Does that answer the question? Ebrahim Poonawala: Yep. That is helpful. Thanks for the wholesome response. Thank you. Operator: Our next question comes from the line of Brian Foran with Truist Securities. Brian, your line is now open. Brian Foran: Was gonna ask about credit, and I appreciate all the detail. I have to call out that you included charge-offs to the penny in the earnings release. So I'm impressed they counted that last $0.56. Maybe if I could shift to growth though. You know, it's interesting. If I look at your loan book, and the supplement, it's kinda like two halves. It's the C&I book growing nicely. It's now up 8% year over year. And everything else kind of summing to $50 billion and being down 7% year over year. As we sharpen our pencils over the next year or two, is there any help you can give in terms of like, is there a target size for some of these books, or is there a timing when you think new production starts outweighing some of the lower-yielding stuff rolling off and pay downs? Just how to think about the part of the book that's shrinking and what the end goal is there? Chris Gorman: Yes. So obviously, we can give you a lot of clarity on where we think the shrink is gonna come from because those are high-quality mortgages, principally to doctor and dentists that roll off. And based on the curve, we can give you great estimates of what we think is gonna roll off. In terms of what we're actually gonna put on our balance sheet because of our underwrite distribute model, that's a little harder because a lot of the capital that we raise, we actually place with others. But I can tell you, you know, I mentioned in my comments that our basically, our middle market C&I book, our backlog is two times what it was last year. One of the areas a few areas where I think you're gonna see a pickup. In the fourth quarter, we'll basically accelerate our C&I book by about $1 billion. And I think you'll see it continue to accelerate from there in 2026. The other areas where I think we'll get some benefit, one is transaction CRE. Right now, you can see that CRE is sort of coming into equilibrium. Also, Clark mentioned this in his comments. We have not had a lot of middle market M&A activity. We have very large pipelines, but we haven't had a lot coming out of the pipeline in spite of the fact that we had a strong investment banking and debt placement fees. It was not driven by M&A. That will help us in 2026. I continue to believe this tax bill is really important. This accelerated depreciation, I think, will bode well for growth. The other thing that obviously we haven't seen, if you look at our numbers, is utilization. Utilization actually ticked down. However, we feel good about that because the reason it ticked down was large commitments that we brought on new clients in our institutional bank, whereas in our middle market, we actually did have a lift in utilization. Does that help you? Brian Foran: That's awesome detail. It's good to hear the CRE book is starting to flip. I guess one follow-up, if I could ask it. When I look at mortgage, home equity, and other consumer, call it $30 billion right now or I guess, 30% of loans, any framing you'd give? Like, do you want that to eventually get to 20 before it stabilizes? 25? Any kind of bigger than a breadbasket sizing on where that will land? Chris Gorman: Yeah. We've always said we wanna have a balance. We need both consumer and we need commercial, which means first of all, we've got to replace some of the runoff. I think a couple areas where you'll see us replace the runoff, that's actually good for us because most of the yield on those mortgages that are running off are about 3.3% or so. You'll see us step up in terms of home mortgage. We obviously have a whole lot of customers that have a lot of equity in their homes. There's not a lot of houses that are trading. We have that business now. We're investing in some technology to have it be a better client experience. That's one area. The other business we have that is a really good business, but it's very dependent upon both the vintage of student loans and also the curve as our student loan refinance business. We think the curve we think interest rates have to come down another 100 to 150 basis points for that to really kick in. Brian Foran: That's great. Thank you so much. Chris Gorman: Sure. Thank you. Operator: Our next question comes from the line of Ryan Nash with Goldman Sachs. Ryan, your line is now open. Ryan Nash: Hey, thanks. Good morning, everyone. Chris Gorman: Hey, Ryan. Good morning. Ryan Nash: Chris or Clark, you know Chris, I think you talked about, you know, crawling before you walk on the buyback, and I think you highlighted $100 million in 4Q. I guess, just given how robust the capital levels are just talk a little bit of how you think about the pacing beyond 4Q? And I'm assuming if your targets work out and you sound like you have a high degree of confidence then, you probably believe the stock is gonna be a lot higher. So I guess, why not be more aggressive at this point given all the tailwinds that you have in front of you? Clark Khayat: Yep. Totally fair question. This is Clark. Ryan. Very fair question. I would say just from a timing standpoint, as we sit here today, just a couple things to consider. One, this is really the first time we've been comfortably above that 10% mark number, and we've sort of talked about running at the higher level. Amid some level of uncertainty. We are getting close to being in our dividend payout target range of 30-50%. So this quarter will be just a hair north of 50%. So we want to get that more squarely in. And then, you know, there is still a little bit of fraud uncertainty, although that feels like it is normalizing and stabilizing a little bit more. So I think your question's right. I think the point in highlighting the denominator and the flexibility around that in my walk on ROTC is exactly that. So that is a lever we can pull. We'll be a little bit more directive, I think, in the guidance call for '26 on exactly how much to expect. But I think that $100 million for the fourth quarter is likely gonna be the low level as we move forward, you know, subject to the normal macro caveat movements. Ryan Nash: And if I could just thanks for that, Clark. And if I could ask a follow-up to Brian's question, maybe to put a finer point on it. As you think about reaching these targeted levels, fifteen plus ROTCE and 3.25% plus NIM, do you think we get earning asset growth along the way? And what's the right way to think about earning asset growth? And related to that, you know, would you guys take action to accelerate the runoff of consumer loans so that you could start to return to net growth? For taking my questions. Chris Gorman: So a couple things. Obviously, the last part of your question is always an option, and we're always looking at all the pieces and parts. We could take action there. I also mentioned some CMOs and some CMBS that we could take action on. In terms of earning assets, I've always said you'll see us really grow our earning assets when the markets are in a little bit of dislocation because our job is really to serve our clients. Right now, we can do a better job of serving our clients basically by placing paper elsewhere because of our risk appetite vis a vis others. You'll see it grow. And I've also said that I think probably the right place for a bank our size going forward in terms of a loan-to-deposit ratio is probably mid-seventies, and we're obviously not there right now. Ryan Nash: Thank you. Operator: Our next question comes from the line of Erika Najarian with UBS. Erika, your line is now open. Erika Najarian: Yes. Thanks for taking my question. I just wanted to re-ask the question that Ebrahim put forth, and I'm sorry to keep beating a dead horse, but the stock's down two and a half percent. Clearly, it's not a two and a half percent down quarter and certainly not a down two and a half percent outlook given how you walk this through the ROTC. So I guess my question is, you know, Chris, we heard you loud and clear in terms of your priorities for capital. I think the concern, the specific concern that we are hearing from investors is your multiple. And, you know, in that obviously, there were some conjecture out in the market that you were a high bid for First Bank. But in that very tight screen that you talked about, how is, you know, pricing, you know, taken into account? How sensitive would you be in terms of book dilution? You know, you also went through the First Niagara deal, of course. How sensitive are you to book dilution? And maybe walk us through very plainly the opportunity to buy your bank at 1.37 times tangible book versus using that as currency given seller expectations? Chris Gorman: Yeah. Well, I think we've been pretty clear on this. The real focus, Erika, for us is to get our return on tangible common equity first up to 15 and then beyond it. And we also you mentioned buying our bank, we mentioned that we're gonna buy $100 million of our stock in this quarter. So that's exactly what we're doing. You can rest assured I am personally sensitive to tangible book value dilution. I was here when we announced the First Niagara deal, and I understand the extreme sensitivity on behalf of many investors with respect to tangible book value dilution. But, I think I've been pretty clear. Our focus from a strategic perspective is to drive our return on tangible common equity. Erika Najarian: That's helpful, Chris. Thank you. And just as a follow-up question to Clark, as you think about the potential for further balance sheet restructuring, what conditions would you be looking for in terms of the rate backdrop or if any other preconditions when thinking about that decision tree? Clark Khayat: Yeah. Thanks for the question, Erika. So I mean, probably not different than what we've said, which is our first goal is to really support clients. I think realistically, given the amount of capital we have over time, it's gonna be hard to deploy all of that further into organic client growth. So we will look at the right opportunistic moments potentially to either use capital for share repurchase or to do whether it's the CMOs or the mortgage loans, you know, think about how to monetize those differently. But, I mean, it's not again, it's not something we've spent an enormous amount of time to this point just given where our ratios were and our desire to get to the top end of that range, and to get our earnings back to our dividend payout ratio. But I think now that we're sort of getting to that area, you'll see us well, you won't see us. You should know we will be working harder on thinking through these scenarios and just understanding what our opportunities what our best opportunities are to deploy that capital. I do think it all assumes good constructive macro environment because obviously if that changes, we would have a different view on capital use. Erika Najarian: And just really quick follow-up. You mentioned the upgrade by Fitch and the positive outlook from Moody's. Does that have any impact in terms of how free you feel about making decisions on capital distribution or, you know, balance sheet restructuring going forward? Clark Khayat: Yes. I think I mean, one thing I'd say is we have done a lot of work, as you know, well reposition the balance sheet and to engage with a variety of constituents, including the rating agencies, they understand we're doing, why we're doing it, and what our intentions are. So to the extent we wanted to go down that path, we would probably we probably spend some time with them to make sure that we fully understand their reaction to those things because, you know, getting the rating is a lot of work. Keeping the rating is a lot of work, and that's very important to us. So I don't know that that would be the driver of the decision, but it's certainly an important input. Chris Gorman: One of the things that it does the upgrade does for us, Erika, is it enables us to bid on some conduit deals that tend to bring pretty significant escrow balance that otherwise we were not able to bid on. Clark Khayat: That's in our commercial real estate servicing book. Erika Najarian: Yep. Thank you for the extra question, and thank you. Operator: Our next question comes from the line of John Pancari with Evercore. John, your line is now open. John Pancari: Morning. Chris Gorman: Morning. John Pancari: Just on the expense side, particularly well contained this quarter and you're running around a 62% cash efficiency ratio now. This year, you're gonna put up pretty solid positive operating leverage given the revenue dynamic and the benefit to the margin. As you look into 2026 and you weigh the investments you're making, I mean, how should we think about a reasonable level of operating leverage as you look at the year end? And what related to that, what efficiency ratio was baked into your medium-term 15% royalty target? Clark Khayat: Yeah. So look, we've guided to being, you know, kind of 4% this year. I think in the medium to longer term, I would expect to be, you know, probably in the two to 3% range. We may be, you know, we'll guide you this in January, maybe a little bit higher next year still but, you know, not appreciably. But we expect to, you know, fully deliver positive operating leverage every year. I don't know that we've targeted exactly what that amount will be. This year, we had, you know, we promised fee operating leverage of 100 basis points. We feel confident we can deliver that or in excess of that. So, you know, we'll come back to you with expectations as we move forward. But, you know, obviously, the most valuable thing to driving your efficiency ratio down is more NII given that shows up with a zero efficiency ratio. As we continue to do that and drive towards NIMs, you know, north of three, then I think you will see that efficiency ratio to continue to come down over time. We haven't set again another target on that, but it would get closer and closer, I think, to the broad peer group. I will tell you we don't spend an enormous amount of time talking specifically about the efficiency ratio here. We're really trying to drive good organic growth against our strategic objectives here and get the ROTCE up. Frankly, the fee-based businesses are always to carry a little bit higher efficiency ratios. So we may run above the peer group over time, and I think we're comfortable with that given the mix of business. John Pancari: Okay, Clark. Thank you for that. And then on the, you know, on that 2026 margin and your expectation for about a 3.25% plus medium-term margin, when it comes to the rate backdrop, I, you know, I appreciate your color you gave that it's a forward curve. You're assuming that a steeper curve would be better in the fifties. Ballpark beta. Is there any other way you could help us with sensitivity? Around the level of Fed funds and a level of the ten year to help provide the guardrails around those expectations. I mean, we've seen a number of banks that have put out their targets here. And clearly, in the volatile rate environment, they're kind of easily shifting easily getting shifted off their targets. And what can you give us to give us confidence on that front? Clark Khayat: Yeah. Fair question. So one, I would say, we've been trying to drive to a relatively neutral rate position, and I think we have. To your question, if you unpack that, and you think about the short-term sensitivity and the midterm sensitivity and just candidly we generally are focused a little bit more on the five year than the ten year just because our investment portfolio duration is really more driven by the five year. We would view the short-term beta or the short-term rate sensitivity really around betas in the low forties. So given our swap position currently, given the floating rate nature of the book, which is obviously natural asset sensitivity, give us a deposit book we would view anything kind of at low forties to be pretty neutral to rate cuts and anything above that to be beneficial. So it's really about getting into the various deposit portfolios and managing those as effectively as we can. We have 55 data on the cuts to date. Don't think we expect that on the incremental. In fact, we expect the incremental this year to be closer to that low 40s to kind of neutralize it. But that remains to be seen. And then the longer term, that five-year rate is really about reinvestments in the portfolio, which we have a fair amount of that every quarter. So that's not the type of thing that I think really impacts say, '25. But as you go out through '26 and '27, consistently lower reinvestment rates I. E, a flatter curve would impact some of the returns on that over time. So the forward curve, which is, you know, generally demonstrating some steepness, gives us, I think, the benefit on that front end as well as some additional reinvestment juice. I think we have some ability to manage the flattening curve to a degree, but it really will depend on how severe the differences are from what the current forward looks like. John Pancari: Got it. Okay, Clark. Thanks for that color. Very helpful. Operator: Our next question comes from the line of Ken Usdin with Bernstein Society. Generale Group. Ken, your line is now open. Ken Usdin: Hi, guys. Good morning. Chris Gorman: Good morning, Ken. Ken Usdin: I just wanna ask a quick question. Thanks. Good morning. Know you talked about betas before, but I just want to ask you a little bit about deposit growth. And can continues to be driven, it looks like, in the commercial segment. Retail segment is still a little bit down. So just wondering like how how you're how you're managing to future deposit growth because obviously the commercial comes in with a little with a higher cost in your in your in your mix relative to you know, how you I guess I'm just trying to get at, like, how that informs, like, the NIM trajectory in terms of where you expect deposit growth to come from going forward? Thank you. Clark Khayat: Yes, good question. So maybe, like, just a little trip through history when we left the second quarter we had shared that we let a fair bit of commercial deposits leave in the quarter, excess deposits, because of rate competition. We thought we would get those back. We have. And that is for two reasons. One would be there is just more rational competition, I think, others backed off kind of high at Fed funds or higher level payment on commercial deposits. So given that those are more attractive rates, we brought some of those back, and then we've had good C&I loan growth, and that's driven new to key deposit growth on the commercial side. So, you know, feel very good about that, and that is kind of in line with what we expected. Overall, rates, despite the growth, came down one basis point. The overall rate. And that's a combination of solid pricing as expected, but also increase in non-interest bearing in that commercial book as well. And that's a reflection of both our commercial servicing business, escrows as well as those new to key clients that are bringing operating accounts with them. So think that's a very good mix. Also saw consumer come down a few basis points. And that's really that sort of static overall balance is really underneath a mix out of CDs into MMDAs. So we have purposely not been aggressive on CD rates. Relative to competition. We've had frankly, still pretty decent retention on those CDs, but we're seeing a lot more of that going to MMDAs, which we're very comfortable with. And we're getting better rates on those obviously. So we're seeing kind of static balances, but better mix from our standpoint. And that's what we would expect to see as we go forward in a down rate environment. I think that's just kind of a natural client behavior as well. And then obviously, in any particular quarter, you see more opportunity to raise commercial deposits because they come in chunkier bunches. I think over the time frame that we've been talking about, which is late twenty seven, you continue to see some opportunity to grow our consumer client base, whether it's just net household growth whether it's the mass affluent where we've seen $3 billion of deposits come in over the last two years, right? So I think there's definite avenues over the time frame we're talking about where our consumer business can continue to deliver really strong and high-quality deposit growth. Ken Usdin: Great color. Thanks for that. And one follow-up, you know, the Investment Bank, continues to do well, and seems like it's on track for improved fourth quarter. I just wanted to just ask you to just talk about the environment and any broadening you're seeing in terms of the various businesses in terms of the environment that we're that we're in where it seems to be, you know, an improving backdrop on the along the way? Chris Gorman: Yeah, Ken. It's Chris. I think where we're seeing improvement is there's obviously been a lot of transaction announcements, but it's really been larger deals. We're obviously a middle market bank. There hasn't been a whole lot of M&A volume within the middle market, and we really see that picking up. So that's an area that's picking up. And as everybody knows, the private equity firms have not been exiting much at all over the last three years. And you know, the inverse relationship between return on capital and holding period is real. And so I think that's gonna be a significant step up. Our goal in that business is to get it to a billion dollars in revenue. In 2021, we were nine forty or some such number, but that was obviously an outlier of a year. But I think with all the hiring we've done and what I think is pretty strong pipeline, I'm looking forward to what that business can do over the next few years. Clark Khayat: Might just add one other quick comment to the deposit point. As much as I know the world loves loan growth, this remixing opportunity the real benefit of that other than the pickup in yield is the reduced demand on new deposit balances. So we can be a little bit more discerning on which ones we take and at which price. I think that's valuable as long as we're in this position. And I just think that's a, you know, that's something that that we're seeing the benefit of. And then the second piece is we have continued to carry more cash than we intended to. That's a function of again, strong deposit growth in the quarter. And I think you will see us bring that down over time. That's not going to have a lot of NII impact, but it will help the NIM. Ken Usdin: K. Thanks again, Mark. Clark Khayat: Yep. Thank you. Operator: Our next question comes from the line of Scott Siefers with Piper Sandler. Scott, your line is now open. Scott Siefers: Thank you. Good morning, guys. Thanks for taking the question. Chris Gorman: Good morning, Scott. Scott Siefers: So hey. So, Chris, you guys have kinda leaned into hiring and investments, and you certainly had the revenue wherewithal to do so. What stage would you say you're at in terms of some of the hiring you've done? And those investments more broadly? I guess I'm sort of wondering if we've now seen most of the related expense lift kind of when we think about expense growth from here or things like, you know, magnitude of, fee-based operating leverage. And Clark, I know you touched on operating leverage a bit a couple of questions ago, but just how are you thinking about that stuff more broadly? Chris Gorman: Sure. So our goal again was to grow, by 10% the folks in our wealth business, specifically focusing on mass affluent. We are basically there on that one. As you look at our middle market, we've made huge progress. We're more than halfway there. As you look at our institutional bank, we're pretty far along there as well. And so what you're gonna see is over the next period of time, the actual upfront expense will start to wane. The important piece is although we've been fortunate, as I mentioned in my prepared remarks, we've been fortunate that some of these folks have hit the ground running a lot faster than we thought they would. For example, we hired a group out of Chicago and a group out of Los Angeles who's been particularly productive in our middle market. We would expect Scott, that there'd be basically twelve to eighteen month lag on these folks hitting full production stride. So expense still running out a bit, but we're getting the benefit going forward of these folks getting on the platform and being successful. Clark Khayat: I think the other piece there, Scott, is one, as we've said in the past, you know, we have a pretty good view on the right kind of compensation to return profile. And if it gets too heavy, we will back off to 10%. And we do expect folks to produce kind of this 12% to eighteen month timeframe. I think we've seen some of the teams we brought on outperform that pretty materially. But if we don't see that level of performance, there's also an opportunity to slow that down. Scott Siefers: Got it. Perfect. Thank you. And then one just really ticky tack one. I think Chris at the beginning, talked about fourth quarter twenty five fees being flat with the fourth quarter twenty four level. You were talking about total fees rather than just investment banking. Is that correct? Chris Gorman: No. I was actually talking about investment banking fees. And I think from memory, I think the fourth quarter of last year was $2.20 or something like that. So that'd be about a 20% lift, like, for Scott Siefers: Yeah. Okay. Perfect. No. That's great. I appreciate the clarification. Chris Gorman: K. Thanks. Operator: Our next question comes from the line of Gerard Cassidy with RBC. Gerard, your line is now open. Gerard Cassidy: Hi, Chris and Clark. Chris Gorman: Hey, Gerard. Good morning, Gerard. Gerard Cassidy: Chris, can you share with us a bigger if we stick step back for a moment for broader view question here. Obviously, you've been at the bank for a number of years. You share with us your experience right now with the bank regulators. We know it's changing, but, obviously, you've been on the front lines for a number of years. Can you maybe give us some color on what you're seeing and what that might mean not only your improved profitability going forward, but maybe the industry as well? Chris Gorman: Sure. I'd be happy to address that. I'm actually going to DC this evening. It's a remarkable change. And so kinda give everyone a historical perspective, from the global financial crisis, it became sort of a layering of regulation on regulation. And a lot of focus on process, a lot of focus on procedure, a lot of focus on documentation. And I've been really pleased with what has been a pretty dramatic change in that just a refocusing on safety and soundness. And safety and soundness, of course, is liquidity, capital, and earnings. And so we've really seen just a change in that regard. The other thing is the regulators are absolutely doing a do working on coordinating such that we have these exams that we can do concurrently as opposed to consecutively. And so getting rid of some of the duplication, which has a big dividend because think about cyber, for example. You know, we have a great cyber team. We invest a lot of money. I want our cyber team thinking about all the risks looking around the corner as opposed to preparing for exams, going through exams, and wrapping up exams. So it's been really encouraging to see the shift. Thanks for the question. Gerard Cassidy: Thank you. Thank you for the color. And then as a follow-up, this ties a little bit into Clark's comments about deposits. It started with the bigger banks, JPMorgan, Bank of America, but now Fifth Third, PNC or some of your peers that are building out branches as a way of, you know, strengthening their consumer banking. What's your guys' view of that type of organic growth? You talked earlier, Chris, about supporting organic growth. I think it was more to the commercial side where you're quite strong. But what about on the consumer side? And branches? Chris Gorman: Yeah. So there's no question that granular retail deposits are of paramount importance. So we have 943 branches, Gerard. And right now, we're upgrading many of those. We're also, you know, repositioning some, closing some, opening some. But it's I think the gating item for many banks going forward is gonna be the duration and the granularity of your retail deposit base. We are fortunate to have a very good retail deposit base, and you'll see us continue to invest to make sure that we not only maintain but grow that deposit base. Right now, I think in the last quarter, we grew our retail deposits by 2% since the financial crisis, we've grown them some number like 7% just hardcore retail deposits, and we're gonna continue to focus on that. Gerard Cassidy: Appreciate it. Thank you. Chris Gorman: Thank you. Operator: Our next question comes from the line of Chris McGratty with KBW. Chris, your line is now open. Chris McGratty: Great. Good morning, everybody. Chris, just a follow-up on the Investment Banking capital markets strategy. I think in the past, you've talked about seven verticals. I guess interested in kind of where you're leaning most heavily today. And if you were to use some capital to build it out, I guess, what specialties are you perhaps not where you need to be? Thank you. Chris Gorman: Sure. So right now, we're seeing thanks for the question. We're seeing just significant growth in terms of our backlogs. Are principally in the areas of energy. We've been a very early adopter of kinda what's going on with all the data centers. What's going on with renewable energy. And there's just a lot in that sector right now. The other area where there's a lot of activity is health care. And so we continue to invest in healthcare. What you'll probably see us do is, in our investments, is go deeper in the sectors that we're in. We'll probably also continue to invest in financial services because as you well know, financial services are becoming a bigger and bigger part of our economy. We have a business there, but there's an opportunity for us to continue to invest. And so those are the places where we're investing. Chris McGratty: Great. That's all I had. Thank you. Chris Gorman: Thank you, Chris. Operator: That will conclude the question and answer session. I will pass the call back over to Chris for closing remarks. Chris Gorman: Well, thank you. We appreciate everyone's interest in Key. Should you have additional questions please don't hesitate to reach out to Brian Mauney directly. Thank you, and have a good day. Goodbye. Operator: Ladies and gentlemen, this concludes the KeyCorp Third Quarter 2025 Earnings Conference Call. If you have additional questions, please contact the Investor Relations team. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to United Airlines Holdings' Earnings Conference Call for the Third Quarter of 2025. My name is Regina, and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I will now turn the presentation over to your host for today's call, Kristina Edwards, Managing Director of Investor Relations. Please go ahead. Kristina Munoz: Thanks, Regina. Good morning, everyone, and welcome to United's Third Quarter 2025 Earnings Conference Call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations, which are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call, and historical operational metrics will exclude pandemic years of 2020 to 2022. Please refer to the related definitions and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures at the end of our earnings release. Joining us on the call today to discuss our results and outlook are Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Mike Leskinen. We also have other members of the executive team on the line available for the Q&A. And now I'll put the call over to Scott. Scott Kirby: Thanks, Kristina, and good morning, everyone. For the last few years, we've talked about an industry that is transforming and the United Airlines is competitively positioned to win. For United, that's meant winning brand loyal customers. The third quarter is another data point that is consistent with the structural, permanent and irreversible changes is occurring in this industry. We delivered strong third quarter results despite macro volatility in the first 9 months of the year, and we now expect to grow earnings for the full year. The first 3 quarters of the year were an economic downturn for airlines at least and our ability to grow earnings in the face of the macro issues is proof that the brand [indiscernible] United next strategy is resilient in tough times and a clear proof point on our path to solid double-digit margins. What we've really proven is air travel is not a commodity. Our calls in the last few years, we spent a lot of time appropriately talking about the industry structure and making predictions about how that would play out in the future. We're now seeing those predictions come true and even though it's only the second or third inning, I think the general contours of how that is going to end or widely known and easy to forecast everyone at this point. And given that, I think it's time to shift the focus and talk about how United gets to double-digit margins even in the current industry environment. There are 2 points on the revenue side and likewise, 2 points on the cost side. On the revenue side, it starts with winning brand loyal customers. United is investing over $1 billion in customer product enhancements annually. And that investment is in all cabins and class of service. Every customer who flies United gets more value. For basic economy customers, we don't just offer them a competitively priced ticket. We offer them the best app and on-time flight power in every seat, seatback screens, a great loyalty program, just to name a few. For brand loyal customers, we -- all the benefits I just mentioned, plus expansive clubs, more seats upfront, better food, more extensive route network to exotic destinations around the globe, and a loyalty program that gives bigger rewards and a tremendous amount of utility for their miles. And most importantly, our people are our best asset, and they're delivering for all of our customers each and every day. We're in the people business and our people have done an amazing job of caring and providing friendly service that makes customers feel good and is the foundation of keeping them brand loyal. From basic economy all the way to the Polaris class, every United customer simply gets more value at United than what our competitors offer. And that's why they're brand loyal. It's also why we're winning more brand loyal customers every day, and it's the important competitive advantage that's giving us a generational lead versus most of the industry. We believe that winning brand loyal customer sets up our second revenue advantage, the potential to double the EBITDA from our loyalty program in the years to come. We're still in the pre-game warm-ups for taking the United loyalty program to another level. But in order to invest over $1 billion per year in incremental customer products and services, we had to find a different and better way to manage costs. Historically, airlines looking to reduce costs and focused on cutting customer-friendly amenities like food, because most of our expense is in areas we can't control, like union contracts, airport fees, fuel, et cetera, or by adding utilization flying late at night on off-peak days [indiscernible] slower times of the year. United is doing the exact opposite of that industry [ dogma ], namely investing more for the customer and focusing on flying at times that can be profitable instead of just trying to maximize aircraft utilization. And you can see it in our numbers. Our major cost focus at United is to drive real cost efficiencies through our use of technology that can also improve the customer experience. In public discussions, we tended to focus more on the app and customer-facing technology, but we're doing far more behind the scenes and we're the most cutting-edge technology airline in the world. Mike will give you some examples of these technology-driven savings that allow us to lower true CASM-ex. These technology investments are efficient for costs, but they also help us to run a more reliable operation for customers. And secondly, on costs, we have large gauge increases coming as both Boeing and Airbus get back to a better delivery cadence. This strategy is working and I expect us to add at least 1 point or more of margin each year normalized for any unusual macroeconomic activity up or down, which gets us to the low teen margins in this industry capacity environment. But as I said earlier, the industry restructuring, i.e., each airline focusing its capacity in markets where they can be profitable is only in the second or third inning. And as that process plays out, I expect that to add several more margin points to United, moving us up into the mid-teens margins. And as we deliver on that, I'd bet that our multiples move up meaningfully as well. I'll now turn it back to the team for a run through the quarter and our outlook. Brett Hart: Thank you, Scott, and good morning. This summer was the busiest in United's history. We surpassed 1 billion available seat miles in a single day and flew over 48 million customers in the quarter. Even with these volumes as well as significant summer weather disruptions and system-wide ATC challenges, our operation was resilient this quarter. The third quarter marked our lowest rate of cancellations for any third quarter in company history, and 6 of our 7 hubs ranked first or second for on-time departures. We continue to adapt under pressure and to maintain flexibility during irregular operations, preserving travel plans for more than 290,000 customers by managing delays rather than canceling flights for the use of [ connection sale ]. This is what drives the most value to our customers and helps build the brand loyalty we speak so much about. And our customer NPS score was up nearly 7% this summer versus summer 2024. This performance is a testament to the dedication of our United team. So thank you to each of you. At United, we remain focused on innovation and providing our teams with the most advanced tools in the industry to help them deliver their best every day. We are modernizing applications for employees that allows us to recover faster, scale support for customers, enabling better experiences even when things don't go as planned. We also continue to invest in our industry-leading digital customer experience with a new dedicated section and our mobile app focused on making tight connections smoother and more predictable for customers through real-time personalized tools and communication, driving further improvements in our customer experience and NPS scores. As we continue to take aircraft deliveries, we will also be growing our team. In 2026, we expect to hire over 2,000 pilots and over 3,200 new flight attendants. We are all proud of the fact that we continue to be a destination for great talent with over 27,000 applicants in just a few days for the most recent flight attendant posting. Regarding the negotiations with the AFA, we met with the mediator in mid-September, and our negotiation is scheduled for the end of October. We remain focused on getting our flight attendants, the best in the industry, the industry-leading contract they deserve. I want to thank Secretary, Duffy; Administrator, Bedford and the administration for their support and leadership on the improvement at Newark. We are pleased with the FAA's announcement that flights in Newark will be capped through October 2026 at 72 operations per hour, which better matches the capacity of the airport. The reduction in emissions, along with the continued focus on technology upgrades and ATC staffing further underpins our confidence in Newark's long-term outlook. Newark achieved its best ever on-time departure and Star D0 for any third quarter, clear proof that the investments being made are working. Yesterday, our first Starlink Equipped Boeing 737-800 took off from Newark following FAA certification last month. This marks a major milestone in our journey to deliver the fastest, most reliable and free for Mileage Plus members, WiFi in the skies. More than half of our regional flight now has StarLink successfully installed. We believe this superior in-flight experience will be truly game-changing as it expands across the remainder of our fleet by 2027. Thank you to the entire United team for your continued hard work and commitment to excellence this quarter. I will now hand it over to Andrew to provide an update on the revenue environment. Andrew Nocella: Thanks, Brett. United's top line revenues increased 2.6% to $15.2 billion in the quarter on a 7.2% increase in capacity. Consolidated TRASM for the quarter was down 4.3%. Domestic PRASM was down 3.3% in Q3 on 6.6% more capacity, premium cabins outperformed the main cabin once again. After a long stream of positive RASM in quarters, United's international flights in Q3 had PRASM down 7.1%. Global long-haul demand continues to spread both earlier and later in the year out of Q3 making those periods stronger, but trade we take any day. Premium revenues were up 6% year-over-year and PRASM for premium cabins outperformed the main cabin by 5 points. United had the company's all-time highest business revenue [indiscernible] during the week ended October 5 of the top 5 best weeks in our history, 3 of the remaining 4 occurred in September 2025. Leisure demand is also healthy as we head into Q4. Not unlike 2024, capacity and demand are simply better balanced in the last quarter of this year, particularly for global long-haul flying. We saw bookings inflect positive in early July, and industry revenues are expected to be positive year-over-year for all remaining months of 2025. We expect our consolidated RASM to meaningfully improve in Q4 year-over-year. International RASMs in Q4 will outperform domestic based on the current outlook. We also expect that Q4 will have United's best revenue quarter ever, but also have the highest absolute RASM of any quarter of 2025. As you can see by the stressed financials at many airlines, it is clear much of their domestic flying once again lost money in 2025, but also in the peak summer quarter. It is already beginning, but we believe more unprofitable industry flying will continue to be scaled back, although the timing remains uncertain. While the supply/demand imbalance did impact United's profits in the third quarter, we can report all 7 of our hubs who are profitable in the quarter. We, at United, remained focused on refinements we can make to the network and commercial strategies to build a stronger margin, particularly in the third quarter of each year. Two years ago, we focused on adjustments to our Q1 network deployment that led to nearly a 4-point improvement in pretax margins. And in 2026, we're going to take a similar approach to Q3. For most of recent prepandemic history, Q3 RASMs were consistent with Q2 and Q4, with the modest peaking of the capacity in Q3, where marginal RASM was greater than marginal CASM. However, in 2024, we saw GAAP emerge where Q3 RASM at United trailed Q2 and Q4. We expect -- in 2025, we expect this gap to once again exist and to have widened. This Q3 issue appears to be an industry issue not specific to United. As much as we love the relative Q4 performance in recent years, the idea that Q3 trails by the magnitude we've seen in 2024 and in 2025 represents an opportunity for margin expansion. In 2026, we'll adjust how peaked our summer capacity plan is by ending the summer schedule a week early, operating 15% fewer Red Eye flights and tended more capacity from the July 4 holiday to name a few, in pursuit of higher margins. I also expect that our Atlantic capacity year-over-year, excluding Tel Aviv will be flat to negative in Q3 2026. United's business model now has a more balanced demand levels across more of the year as our increasingly optimal mix between leisure demand, premium leisure demand and business demand is yet another emerging advantage we have over commodity-based airlines. United's ability to further de-seasonalize capacity, we think, creates yet another opportunity for cost convergence versus commodity airlines, they only see profit opportunities on peak leisure travel demand days or months. I think it's interesting to note, profitability is now inversely correlated with aircraft utilization in the U.S. The highest utilization airlines have the lowest margins. Mileage Plus had another strong quarter with total loyalty revenues up over 9%, overhead remuneration was up 15% year-over-year and should end the year up over 12%. We are seeing increased retention of cardholders along with higher spend as United's brand grows. Today, I'd also like to share my view of where United has come from in the past decade, why our actual 2025 results thus far have proven so durable and what we expect to drive continued gains among brand loyal customers and double-digit margins down the line. Starting with our many transformational annual investments of over $1 billion for our customers, we have successfully decommoditized most of United's passenger revenues. We believe that our tilt to brand loyal capacity and products in the last 5 years was well timed, but also consistent with the demand profile in our hub cities, which is why it's worked so well and why our premium efforts will be more margin accretive than others. However, it's important to understand we're always investing to create value for all passengers in all cabins. Even our most premium yield passengers often fly in the main cabin and our efforts to convert passengers to brand loyal clearly starts in the main cabin. Basic Economy has altered the competitive landscape in the U.S. and providing United a profitable entry far to attract many customers over a full life cycle. Quality and value matters more than ever to U.S. consumers, clubs that are not overcrowded, enhanced meals, great wind, industry leading technology, great customer service, seat-back screens and fast WiFi to name a few, those are the attributes we focus on. The quality part of the product offering was often overlooked by many as we favored simplicity and low cost. In our view, quality goes well beyond the schedule we offer are inherent excellent reliability. Smaller details do matter, and that combined with best-in-class customer service our team members deliver sets us up for success. Consistency of our products and services was unsurprisingly low at the early stages of our transformation, but is now reaching critical mass. United now operates 765 jets with more than 146,000 seat-back screens. These screens are 1 way of defining a premium airline in the U.S. Our signature interior conversion is now at 64% and an investment of over $1.6 million. At United, we've proven our ability to increase our relative RASM with the best results, while at the same time increasing domestic gauge by almost 20% since 2019. We said a decade ago that not all capacity was created equal, and our results have proven that business case. The statement is only true for Brand Loyal Airlines. Domestic gauge is expected to once again accelerate in 2027 as our [ 200 A321 ] fleet reaches critical mass after years of delay, helping drive better customer experience, but also creating cost convergence with others. This gauge increases a proven formula for margin growth and accelerate as we retire smaller, lower-margin A319 and A320 aircraft from our fleet by 2030. United hubs can support this higher gauge and allows us to accept more basic economy fasteners at a profit. Our transformation is making the world a smaller place for United and allowed us to add unique find places including, but not limited to, Greenland and Mongolia. A large thanks to the 100,000-plus United team members together have built this durable generational lead. I'm going to turn it over to Mike to talk about our financial results. Mike? Michael Leskinen: Thanks, Andrew. We delivered a strong third quarter. Customers are speaking with their wallets and are increasingly choosing to fly United because of our strong operational performance and the significant investments we made and continue to make in the airline. StarLink is another example of how we're differentiating our customer experience for the better. This quarter, I'm particularly proud of our team for our disciplined cost management. I expect that our [ negative 0.9% ] CASM-ex performance will be industry-leading. As Scott mentioned, we made strategic investments in our products that drive higher costs, but we are helping to offset those by running the core airline more efficiently. And those investments are increasingly differentiating United Airlines, creating brand loyal customers, decommoditizing United and driving solid margins and returns on capital. We've been investing over $1 billion annually over the last few years into improving our aircraft, our clubs, our food and our WiFi, and we expect to spend another $1 billion next year. We increased the amount we spend on food by 25% this year. We're investing $1 billion on our rollout of Starlink WiFi so that our customers have the best-in-class connectivity. Our investments in clubs doubled in 2025 and is expected to more than double in 2026 as demand for this product continues to grow. These are just a few examples, but it's important to note that we're doing this all while delivering industry-leading cost performance. Being able to invest in our customer experience is possible because we're simultaneously driving efficiency in the core operation. That produces meaningful and permanent savings. Some examples include: modernizing all of our maintenance technologies so that can be used on iPads, allowing our technicians quicker access to United resources. For example, before introducing iPads throughout the shift, our technicians would walk to and from our hangers and aircraft, checking the aircraft's paper logbook, printing manuals from the legacy mainframe systems at the hangar and ordering parts from their terminal at the hangar to ultimately fix the aircraft. Today, iPads give technicians the ability to instantaneously access, troubleshooting manuals and order parts, all while at the aircraft, turning airplanes faster and improving the efficiency of our workforce. Additionally, significant investments in people, process and technology have been made to improve our recovery from IROPs events which enables us to restart the airline following an event much quicker than we have in the past. One particular tool already in use is our Orca tool, which optimizes aircraft routing, crew pairings and customer connections so that our targeted delays or cancels prioritize our customers and the optimal plan for guiding the airline through significant events. Our operational leadership and frontline employees are performing the best in our history. This has led to United leading the industry in the quickest recovery following significant events and you can see the direct impact of that comparing our third quarter cost to others in the industry. We're not just looking to make our operation more efficient. We're making process changing -- changes and using AI to make -- the work of our headquarters management team more efficient too. In fact, our management headcount is 4% lower than last year as this efficiency work continues, we're planning to shrink another 4% in 2026. This is a new culture at United Airlines, and as such, I'm going to give a long-term framework on how we're thinking about CASM-ex. General inflation in this industry is running about 3% to 4% annually, and we expect that to continue inclusive of labor. At United, our gauge growth should provide about a 1-point annual tailwind through the end of the decade. We're also committed to driving efficiency into the core business of another 1 point per year. So together, our core CASM-ex growth should run up at 1% to 2% annually if we did nothing else. But as we've been highlighting, United is transforming because of our investments we have made into improving the customer experience and decommoditizing air travel. You should expect that to continue. And on average, we expect that to add about 1 point of CASM-ex pressure per year that is more than offset by revenue generation. Altogether, our CASM-ex run rate should run up around 2% to 3% annually. Now turning to the quarter. We delivered third quarter earnings per share of $2.78 above the top end of our guidance range of $2.25 to $2.75. And ahead of Wall Street expectations of $2.68. Our pretax margin was 8% and would have been a point higher absent the disruptions earlier this year at Newark. We had industry-leading operational performance that underpins strong unit cost performance. Our third quarter CASM-ex was down 0.9%. Our costs in the quarter did benefit by approximately 1 point of expense moving to the fourth quarter, primarily driven by maintenance and approximately 1 point from the timing of certain labor contracts. Looking to the fourth quarter. The momentum in the revenue environment, Andrew described continues, and we expect fourth quarter EPS to be $3 to $3.50, that brings our full year EPS towards the better half of our full year 2025 guidance range of $9 to $11 and should position us to be the only airline to grow earnings this year. This demonstrates that winning brand loyal customer drives resilience in the business and when the economy rallies provides upside. As I mentioned last quarter, the industry now has 2 brand loyal, structurally profitable and revenue diverse airlines, which together will represent about 100% of industry profits in 2025. We continue to target double-digit pretax margins in the long term. Turning to the balance sheet. We continue to march towards our goal of an investment-grade balance sheet. During the quarter and earlier this month, we bought back [ 377 ] aircraft off of expensive COVID Air leases to carry implied interest rates in the high single digits. This accelerated our deleveraging efforts while further optimizing our cost of capital. We've eliminated all expensive financing from the balance sheet and have no fixed coupons over 6%, an average floating margin of 1.9% and an average cost of debt of less than 5%. These actions are being noticed by the rating agencies. We are upgraded by S&P to BB+ from BB on August 12, the highest they have rated us in over 2 decades. This change gives recognition to the fact that our business plan is working as our earnings grow and become more resilient and continue our migration towards investment-grade credit ratings. Free cash flow generation also remains a key focus, and we expect to generate over $3 billion in free cash flow this year. I've talked about free cash flow conversion around 50%, and this year, we're trending well above that due to the timing of aircraft deliveries. As aircraft deliveries accelerate and CapEx rises, we expect to remain in the 50% range. And as we exit the decade, we expect the conversion to accelerate closer to around 75%. On the buyback, we continue to take a measured approach and take advantage of opportunistic moves in the market while also working towards getting our net leverage below 2x. To wrap it up, I want to thank the team for their continued execution. Our ability to manage through what has been an earnings recession for the airline industry has been remarkable. And while I still think there is upside to our absolute margin, and that matters the most, our relative margin is outstanding. My confidence in the financial future continues to grow as we exit the year. United Airlines and the industry continue to transform into a customer-centric brand-loyal business. United Airlines will continue to provide more value to our customers, to our employees and to our shareholders. Now back to Kristina to start Q&A. Kristina Munoz: Thanks, Mike. We will now take questions from the analyst community. We want to get to as many of you as possible, so please limit yourself to 1 question and if absolutely needed 1 follow-up question. Regina, please describe the procedure to ask a question. Operator: [Operator Instructions] The first question comes from the line of Catherine O'Brien with Goldman Sachs. Catherine O'Brien: So first, a follow-up to Scott's margin commentary to kick off the call. We've seen domestic main cabin seats come out of the market this year, although there has been backfill. You noted that system margins would go up a couple of points if the industry rationalized more. But what's your view on what would happen to main cabin margins if there was a step function change in main cabin supply? Would that narrow or even close the gap between main cabin and premium cabin margins? Or there just always going to be a gap given the demand profile of price-sensitive versus more premium customers? Scott Kirby: So thanks, Catherine. That's an interesting and, I think, insightful question. But to answer it, I'm going to give you some of the -- I think you guys take a step back and give some of the history and evolution of the industry. And for most of my career, essentially everyone associated with the airline industry -- airline executives, including myself for the first decade, but Wall Street analysts and investors have thought of the airline industry as a commodity, not just price, but that schedule. Schedule drove everything. And that's how most of us thought of the industry. And by the way, it's why people on Wall Street right notes that essentially every seat is created equal and do competitive capacity analysis or implicitly the assumption that every seat is created equal. I also think, by the way, it's the reason we trade at such low multiples because that's what happens in commodity industries. But what we've proven and continue to prove in the last few years is that it is possible to transform into a [ brand loyal airline ], which is dramatically different than the commoditized portion of the industry. For brand loyal customers, if you think about those, I think that the majority of customers in the industry, they're not all, but they're the majority of the customers in the industry. And for them, schedule is still the #1 factor. That's kind of how we got to thinking of this as a commoditized industry. But most customers have multiple airlines that have broadly competitive and similar schedules that give them the option. And so most of those customers like to choose an airline to give their loyalty to accumulate miles, get the credit card, go on great exotic destinations around the globe. And winning those customers is the winning formula. You have to win them, you have to give them great value, but winning those customers is the winning formula. And for those customers, it starts with the schedule, but that's just the starting point. And from there, it's the product, it's the technology, it's the service, it's how people treat all of them that allow us to win those customers. And we look at the data from the last 5 years in each of our hubs, we've won significant market share of customers that live in those cities. And it's those brand loyal customers that we have won. And that's something that we've been working on for almost a decade now, billions of dollars of investments to get there, a focused strategy that has been consistent over time. That's why I say that is structural, that is a structural change, but because it's structural, it's permanent and irreversible. What that means on the commodity portion of the business, we do have some of our seats that are being supplied to the commodity portion of the business. It's less -- the percentage is less than others, but everyone does. I think that portion of the business currently loses money for everyone. For the ultra low-cost carriers, they're 100% commoditized, and you can see how much it loses, but it really loses money across the board. Brand loyal is higher margin, but commodity loses money. That supply is adjusting in the commodity portion of the business. I think it is going to -- I just started the tip of the sphere is the airlines that are 100%, but it's not going to stop there. And I think within a couple of years, the supply and demand will be balanced for the commodity portion of the business, and it will be profitable for everyone. I think it will be low margin as all commodity businesses are, but it will be profitable. But the great news for us is that the majority of our revenue is going to come from the brand loyal customers. I think we're proving this year that, that revenue stream is resilient in tough times, but that also has more -- even more upside in the good times. So I think commoditized seats on an airline, the more commoditized seats you have, the lower the margins are going to be. I think they will be profitable. But that future really is going to go into the couple of brand loyal airlines that I think are going to be able to achieve more stability in earnings, less cyclicality, more stability and mid-teens margins. Catherine O'Brien: I really appreciate it. Maybe if I can squeeze in a quick follow-up for Mike on cost. So last quarter, you had said fourth quarter costs will look similar to 2Q inclusive of [indiscernible] deal. There's quite a lot of moving pieces since then with the flight attendants and some maintenance shift. Can you just update us on pulling that tethered could CASM still be close to that 2Q reference point? Or if not, just help us frame it a bit more? Michael Leskinen: Thanks for the question, Catie. And look, we -- we've got about a point benefit from maintenance moving from 3Q into 4Q, as I said. We also get about 1 point benefit from the labor agreement. Underlying that, we also got a further third point of goodness that I think is indicative of what you're going to see in the future from us of underlying core efficiency. So all that came together for really an excellent result. I do expect 4Q to trend up from the 3Q level, but really proud of those results. Operator: Our next question comes from the line of Jamie Baker with JPMorgan. Jamie Baker: So a question for Andrew. Last week, the topic of premium leisure yields exceeding certain corporate yields came up. Obviously, it's easy to find isolated examples of this. But my question to you is how widespread might this be across your network? And does this potentially represent a secular change? Or should investors still remain focused on corporate yields as representing the gold standard in the long run, the way they clearly were a decade ago? Andrew Nocella: Happy to, it's a really good question, Jamie. And it's a new [indiscernible] based on everything else in our business that's complicated. So the answer is the premise is correct that we've seen the growth, the premium leisure and the yield quality accelerate really fast. And when we look at it across our domestic system, we find, in fact, the quality of premium leisure business often exceeds that traditional corporate business, which, by the way, is a much smaller percentage of United business than it was in 2019. I think the distinction that I'll give you, that's a little bit different is that, that same phenomenon is not yet true in global long haul, that the corporate there does remain a much higher yield than the premium leisure business at this point. But again, premium leisure continues to accelerate. The percentage of the cabinet continues to grow, and our overall sold load factors and Polaris continue to grow. So we seek through RM, the best of both worlds. We seek to maintain all that corporate business and gain corporate share, while at the same time, as we reconfigure aircraft, taken on more and more premium leisure business. So I couldn't be more excited about this trend, like it's just an amazing thing that I don't think anybody would have predicted in 2019, but it's come true and it's come true quarter after quarter, I think for 3 years in a row now, and it will come true again in the Q4 this year, and we will lean further into premium capacity next year as a result with things we planned a couple of years ago. Jamie Baker: And somewhat related to that, Andrew, the relationship between revenue and nominal GDP got a lot of airplay during the recovery from COVID. It's not really a talking point anymore, but the bull case at 1 time, was it enough structural change has taken place that we would see the industry exceed the pre-COVID long-term relationship. And certainly, based on the A48 data that hasn't happened yet, maybe you crunched the numbers differently. But is this topic merely a blast from the past or something that we should continue thinking about? Do you think about it, put it that way? Andrew Nocella: I don't think about it that way anymore. And I don't think about it that way. In a large part, what Scott gave is a narrative on how we're different, how a few airlines like us are different. And our revenue streams are simply different and durable relative to the commodity-based airline. So when you look at the GDP relationship, you're looking at one big total of revenues, and it doesn't distinguish the high-quality airlines and the high-quality seats from the low-quality seats. And that's the thing that I think has been lost in the formula that we all used to rely upon. So no, we do not rely upon that formula as we used to. Operator: Our next question comes from the line of Andrew Didora with Bank of America. Andrew Didora: First question for Andrew. I guess I noticed the air traffic liability fell only 3% sequentially. If I look back historically, it's been closer to down [indiscernible] so I think this clearly supports some of the bullish commentary that you've had on the call. I guess my question, how should we read into this decline in the ATL? Does this speak to just the strong pricing that you're seeing? Or does it say something just in terms of how you're booked today for the rest of the year in terms of volumes than maybe you typically are at this point in time? Andrew Nocella: Those facts are correct in terms of the ATL. I would -- it's the momentum in the business. It is clearly a lot of good bookings that we've taken over the last few months and months reflecting our outlook for Q4, which we're really proud of the outlook for Q4 and how it is inflected nicely from Q3. We're also booked a little bit ahead as we go into Q4 that reflects that. But overall, we've seen a really good environment. I said in my prepared remarks, what we saw from business traffic at United, our bookings over the last few weeks, which have been really amazing. So looking forward to a positive news for Q4 and great 2026. Andrew Didora: Got it. And then just as a follow-up, I kind of wanted to ask you on the Latin America results in the quarter. Your calls are very focused on margins. So just curious, why did you grow so much in Latin America in 3Q when it seems like the RASM performance certainly didn't warrant it. Just curious your thoughts there and how maybe you can fix that going forward? Andrew Nocella: Yes. I think that's a very fair question. Look, results for Latin, we're disappointed. As we look towards Q4, I think Latin will have our largest sequential improvement, but that's not an easy -- it [ is an ] easy comp, I guess, at the end of the day. So look, I expect elevated year-over-year capacity in the region to exist for approximately another 2 quarters by United and the industry, while competitive capacity tailwinds are favorable across most of our network in the coming quarters, that isn't true in Latin America, and that's very focused on Mexico and Central America. As we see in our domestic line, we believe most of the new competitive line in the region to the United States is unprofitable and transitory. We have a good position in Houston, and we intend to hold our ground. Noncore, non-Houston line by United that underperformed will be removed. And I'll also say deep south line is setting up for a nice peak season driving improvements. But core United capacity [indiscernible] from Houston to Mexico and Central America will continue as planned, and we remain very focused on the long term when it comes to our Houston hub and our Latin American franchise. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe 2 questions. The first one, short term. Can we talk about the sequential unit revenue trajectory for Q4, the moving pieces of domestic versus international. It's just somewhat interesting that international is going to outperform given where schedules are shaping up? Can you just give us a little bit of data on the booking curve and how the holidays are looking? Andrew Nocella: Sure. Look, it's Andrew. Q4 is setting up nicely, as I've indicated. And I think as you all can figure out, if you look at our guidance, we're seeing really significant sequential gains in our RASMs. I'll start off with is Newark clearly had a substantial negative impact on Q3 of a little more than 1 point and while we're always yield focused as a premium branded loyal airline, we did temporarily use lower prices across all products to regain share following that event, and that continued for most of Q3. New York share did rebound first with lower yield in local leisure passengers and then with higher yield leisure and corporate business following the improvement throughout the quarter. And while the impact of bookings is largely dissipated, we did build a small deficit of Q3 bookings traveling into Q4, which is in our guide, by the way. The remainder of our Q3 gap relates to the timing of events in 2024, including the Paris Olympics and CrowdStrike. And I think that's pretty simple math that others in the industry have explained. So I'm really excited about the inflection. I think all 3 international entities are going to see really good sequential improvement. By the way, I think Atlantic, even with elevated capacity will absolutely be positive in Q4 year-over-year and probably the same is true for our Pacific entity. And so we did see this onetime gap in Q3 based on how we shape capacity. And as I said earlier in my prepared remarks, we're going to alter our schedule for 2026 to account for that. And then in the end, across the entire globe, Hawaii has definitely been a strong spot for us. But I'd say the rest of the globe is all performing at the same rate, which is a rate we're pretty happy with when we look again at the sequential improvement. Sheila Kahyaoglu: And maybe a longer-term question. So maybe for you, if you'd like. You mentioned the 100 bps of margin improvement per year. How do you think about that as [indiscernible] 2% to 3% per year. It implies margin expansion is assuming [indiscernible] low to mid-single digits per year. So how do you think about the drivers of that? And obviously, a significant divergence from history? Scott Kirby: Yes, it does -- the math means that RASM has to outperform CASM. I do expect that to happen. I mean if you look at next year, [indiscernible] comps to start with. But we just continue to have a lot of traction with brand loyal customers and look deeper into the data where we won market share in each of our hubs and how that is reacted -- how that is flowing through the margins. I feel pretty confident that we ought to be able to get at least 1 point of margin per year. And I think if you kind of look at this year, there's been an unprecedented amount of stuff that has happened this year kind of across the whole industry at a macro level and also to us, specifically in Newark. And the fact that we're going to grow earnings this year, I think, is quite remarkable. I use the word resilient, but it's also a demonstration that our strategy. If you strip all that out, we [indiscernible] more than a margin -- a full point of margin this year. And so we feel really confident to dig into the data on brand loyal customers and what's happening in each of our hubs that that's going to be a tailwind. And I also briefly mentioned it in my opening remarks, but we have some really big ideas on the loyalty program, which we're not going to tell you today for anyone else asking, but I think we're going to double the EBITDA by the end of the decade in that program, which is going to add more. I think we're just beginning to realize the full potential of the loyalty program, and there's a lot of -- a lot of runway there. Michael Leskinen: Sheila, I can help the pile on. When I talked about the CASM-ex buildup, I talked about 1% to 2% of CASM-ex related to inflation after we manage -- have the opportunity to drive Engage. And then we're adding a point as we create more segmentation, more premium product. We're adding that point very cautiously because it's driving consumer preference. It's driving consumers to upgrade their cabins, driving consumers to buy what is a premium product. And so that's profit accretive. If it wasn't profit accretive, we wouldn't spend it. Andrew Nocella: And then I'll just [indiscernible] since we're all talking for next year, our premium capacity will be up 2 to 3 points more than our total capacity. I'm not going to give you guidance for next year. But we've preprogrammed this long ago to make advantage of these premium trends. And we know that we need to change our commercial strategies, our configurations and our products in order to achieve those RASM gains. And the good news is we've preplanned it, and it's going to happen. Operator: Our next question will come from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: I appreciate you've covered a lot of good stuff already. But I wondered if we could bridge from the tone mid-September conferences to today, not really about the third quarter, but forward bookings. I assume you have a good head start on 4Q bookings and advanced yields year-over-year. Can you comment on how much of a head start you've built, specifically maybe on advanced book yields. And is your relative optimism about transatlantic, is that a volume comment? Or is that a yield comment? Andrew Nocella: Look, definitely, over the next 2 months, we've booked ourselves ahead versus last year. So we go into the quarter, booked a couple of points ahead, which was intentional on our part. We did use a little bit of yield to make that happen again, but that was intentional based on what we did last year and how we manage the capacity. And so we're happy with that. On the Atlantic, there's a Tel Aviv story, which is different than the rest. But Atlantic, again, we've learned a lot about Q3 seasonality and where capacity should be placed, and we are going to be a lot more prudent with July and August in particular next year and push capacity out into the other quarters. And so as we look at Atlantic, and you can see the numbers, we're growing pretty swiftly in Q3 or Q4, sorry. And I told you already that we expect we will be positive RASM across the Atlantic. So we properly placed our capacity. We're aware of the demand trends, and we're very happy with what it looks like. And the last thing I'll add is, in particular for us, the propensity or the share of revenue in premium cabins is the lowest in Q3 and the highest in Q4, which favors United Airlines given our business-centric airline and how we do well. And so we're heading into amazingly, which is a point of strength Q4 across the Atlantic, which, again, I don't think if we went back to 2017, '18 or '19, I would be able to say that. And I'm really excited about that. I think that opens up all kinds of possibilities for the airline on how we manage our capacity and it's off to a great start. We're early in the quarter, but it's off to a great start. Duane Pfennigwerth: And just quickly on costs. Mike, can you talk more specifically about the maintenance expense that shifted here? It just -- I mean, the muscle memory is such that there always seems to be something that's going to come back and then it never does. So I think you've been good and conservative there. Is there an accrual for flight attendants specifically baked into the 4Q guide? And should we think about 2026 as one of your framework 2 to 3 years? Michael Leskinen: Thanks, Duane. I think there are 3 questions in there. Let me try to address them in order. 2020, the quarter, the 1% movement was primarily engines. This happens with some frequency where an engine event that we had been expecting pushes from 3Q to 4Q or 2Q to 3Q that happens. And then, yes, sometimes what happens is that another separate engine event pushes from 4Q into 1Q and therefore, you don't see a catch up. I do think you'll see the catch-up of that point in 4Q of this year. So that was the point. Regarding flight attendants, look, we've got the best flight attendants in the business. They deserve an industry-leading contract. We're going to give them an industry-leading contract. We're hoping to get back to the negotiation table here in late October and very optimistic we will have a ratified deal in 2026, early 2026 to get them that industry-leading pay, but we're not going to accrue for expenses in the quarter when we don't expect a ratification in that quarter. And then your final question around 2026. I think that 2% to 3% is the right expectation for CASM-ex as you look over a multi-year time frame. We have -- we do have a build to pay on the labor front. I've been saying for some time that, that bill is 2 to 3 points when all of those labor agreements ratify. And so we will have some added expense relative to that in 2026. Operator: Our next question comes from the line of Conor Cunningham with Melius Research. Conor Cunningham: Scott, I know you asked us not to ask about the doubling of the loyalty EBITDA, but it's a pretty big cat, so I have to ask. Maybe you could talk about -- you redid the deal with the -- on your credit card with Chase right before the pandemic. I think that we're getting up to the time when we start to renegotiate a new one. So maybe you could talk about what is the driver behind doubling in terms of a new rate and versus what you're going to do behind the scenes to make the loyalty program more valuable? Andrew Nocella: Well, look, I'll start. Look, we -- I mean, we couldn't be more excited about the opportunity. There's a lot going on in the space, and I'm not going to divulge the details of our Chase contract in terms of its term, that remains confidential, but the term doesn't go forever, just like every contract we enter into. I think the broader point is when we think about the frequent flyer program, United is a true loyalty program. And loyalty is different than a reward program. And it's important that we manage our program in that vein. And there are a bunch of things we can do to take advantage of our unique status. And we think there's only in the United States, 2 to 4 loyalty programs, everything else we talk about is a reward program. And so we're not going to announce it today, but we're going to be working very hard to make sure that consumers fully understand the distinction between our program and the alternatives and the rewards and the value that can be achieved at United in a way that I don't think has been done in the past. So I think that's enough of a hint for now and more to come. But as Scott said, we're very excited about this, and we'll see where we get. Conor Cunningham: Okay. We'll look forward to that. Maybe sticking with the whole hub stuff in capacity in general. Scott, I think you did interview not too long ago, you talked about how United only fights [indiscernible] from the high ground. When you first came here -- when you guys first came there to take over United and reshape it, you talked a fair bit about the Mid-Con hub strategy. I was hoping you could just mark where we are in terms of that rebuild. It just seems like there's -- the industry is in flux right now. There's an opportunity to kind of start to potentially think about focus cities and whatnot. Can you just talk about the opportunity beyond the 7 hubs in general? Andrew Nocella: Well, I'll start off and I'm sure Scott can add some of his listening to the conversation. But we haven't completed the United next assignment that we set out to do. We should complete that either probably in late 2026 or maybe early 2027, and that goal is to reach a certain level of connectivity, critical mass engage that allows us to achieve much higher domestic margins than we have traditionally achieved in our domestic hubs. As I've said many times and I'll say again today, international margins lead the way united. And while I expect that to be true over the long run, I do expect the gap to be able to shrink dramatically based on what we plan for the hubs. And in particular, this gauge calculation, we still remain under-gauged, that gauge is going to change our cost convergence calculation even further allow us to capture more share the high end and more share at the low end all profitably. But we still have roughly 1 to 2 more years to go. We'll figure out the exact end point. But after that end point, we will take a broader look beyond our hubs at what makes sense. But we're very careful to make sure that whatever flying we add is margin accretive, and that will be a test beyond our hubs. But for right now, still very focused on our hubs. Operator: Our next question comes from the line of Scott Group with Wolfe Research. Scott Group: I've got 2 quick ones, I'll just lump them into one. The loyalty EBITDA doubling, like just a rough starting point, like what percentage of the EBITDA is it today? I just want to get a sense of the base. And then Mike, just your point about 2 to 3 points -- point bill from labor. Is that all 2 to 3 points incremental that comes [indiscernible], have you realized some of that from some of the other labor deals? I just want to -- [indiscernible] incremental 2 to 3 points, I guess, that's what I'm trying to figure out? Michael Leskinen: Let me take the expense question, Scott. This is not the time where we would give 2026 guidance and nor do we give CASM and TRASM guidance anymore. But what I will tell you is with the underlying inflation, with the labor headwinds we expect, we feel very confident about margin expansion and growth in earnings in 2026. For more detail on that, you're going to have to wait for the Q4 call. I'll give loyalty to Andrew. Kristina Munoz: We can answer -- I mean, Andrew just answered a very similar question right before this, Scott. And we'll have to -- we'll also wait and see for an Investor Day when we provide a clear breakdown of the contribution of this business. But it's obviously a very meaningful portion of our earnings. And for those of you that have -- that are next in the queue, I'd suggest you take my recommendation to limit yourself to 1 question. Operator: Our next question comes from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: I was wondering if you could just update us on the cadence of Starlink installation as we move through 2026 and then how the opportunities that opens up for Connective Media? Andrew Nocella: I'll give it a start. For United Express, I think we're over halfway through at this point with the [ Embraer 175s ] and the [indiscernible] on board the aircraft, by the way, is amazing. Hopefully, everybody tuned into the today show yesterday to see that demonstration on board. And if you haven't, you can find it on social media and TikTok because it was quite amazing. Our first 737-800 took off yesterday from New York to Houston with dramatically higher NPS scores like off the chart on that aircraft equipped with StarLink. It is a game changer, a gate-to-gate experience, reliable and as fast as your living room. This is going to be a unique differentiator versus our other competition. And I'd tell you like of all the things we put onboard aircraft, all the changes we've made, whether it's wine or food or better seats, StarLink could be the biggest of them all. And as you pointed out, one of the more exciting things is how we intersect StarLink and the ability to deliver unique content to each and every seat in our Connected Media business. Obviously, we have, I think, through the end of 2027 to install StarLink on all of our aircraft, and we're going to do it on every single one of our aircraft. And when we have that fully enabled. So it's still a bit down the road, the unique things we can do by no one who's in a seat and being able to deliver unique content to that seat very quickly. And by the way, that's not only the media opportunity, but that's about delivering [indiscernible] to help in the travel journey, whether you're luggage made an onboard the aircraft or what you're about to eat or any other thing you need to know to make sure that you are stress-free when you travel on United Airlines. So, so much upside. Again, I'm going to go back to the NPS scores on that flight the other day, we're off the chart, like a game changer for United. We couldn't be more excited about this. It's one of the biggest things we've done in a really long time and may be underappreciated, but it will soon be appreciated. Toby Enqvist: And if you want to geek out, this is Toby on statistics, we had 145 paying customers, 170 devices connected on the inaugural and 145 gigabytes used on the flight, which is about 1,000x more than a normal life. But [indiscernible] nerves out there. Operator: Our next question comes from the line of Mike Linenberg with Deutsche Bank. Michael Linenberg: Scott, I know this fourth quarter, I believe, you're going to be making a decision on the future shape and size of your wide-body fleet. And I know historically or at least the prevailing view has been that bringing on another airplane type, especially on the widebody side comes with various pain points. Can you just discuss some of the factors like how has that evolved? Or is it still as prohibitively expensive to bring on an additional type? Just your thoughts around that? Michael Leskinen: Mike, this is Mike. I'm going to take that question. You're right. We're always thinking about fleet decisions and this fourth quarter is an important decision for us. There are complexity costs around having additional aircraft types. That is always true for United given the nature of our hub network that has not changed. The larger we grow and to the extend it to a larger sub fleet that gives us opportunity to mitigate. But there are also different capabilities of different aircraft and you need different range and you need different gauge. And so we're weighing those against one another, and we're weighing the price, and we're weighing the expected maintenance cost of the aircraft, and we're going to make the decision that optimizes profits for the long term for United. So stay tuned. Operator: Our next question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I was curious if you could remind us again how you're thinking about the fleet plan. It seems like you had a few more deliveries this year than you had additionally planned, so Airbus and Boeing getting their act together. So curious how you're thinking about kind of 2026 and how that progresses? Michael Leskinen: Thanks, Savi. Look, Boeing is definitely getting their act together on the narrowbody side. And we're getting some additional deliveries versus what we had expected. And I think that's going to continue in '26. And maybe even '27. On the widebody front, we're still seeing some delays, although there's reason for some optimism on that front as well. To the extent that occurs, we'll see additional deliveries that will drive CapEx up in the short term. But the updating on the narrow-body side, in particular, combined with the financing terms and our prices, it is margin accretive. It's pretty quickly actually even return on capital accretive. And so we're welcoming -- welcoming some faster deliveries of delivery of aircraft. And as I talk about free cash conversion, we run a whole multitude of scenarios, and I feel very good about expanding free cash conversion even with growing CapEx. Operator: Our next question will come from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: Apologies if I missed this, but I think there hasn't been much talk of the government shutdown so far. If you can just help quantify what you're seeing out there? What are some of the puts and takes in terms of the range of outcomes and whether that is your active guard building your guidance for the quarter? Unknown Executive: Okay. I'll try. First, the controllers, despite a lot of the press, the controllers are professionals. The vast majority of the controller workforce is showing the business, we also have more communication and coordination at all levels with the FAA than I ever have seen in my entire career. And the sum of those 2 means that the system is actually running well. We have our most cancellation rate in a decade for October, second best on-time performance. From a bookings perspective, the first couple of weeks, there hasn't really been a measurable impact in the first couple of weeks of October. Though I think the longer this drags on, obviously, the risk will grow on both of those points. So I hope our politicians will figure out how to get in the room, compromise and get something done. Unknown Executive: Rob, to your question of an active guide. I think we calibrated the range of earnings per share for Q4 with government shutdown in mind. It's one active [indiscernible], but we've got reasonable room there for continued government shutdown, but it's not infinite. Operator: Our next question comes from the line of Brandon Oglenski with Barclays. Brandon Oglenski: I think I'm going to ask like a nerdy and geeky question of Andrew here. But speaking of brand loyal airlines versus commoditized low-cost carriers, I think from our perception, the booking window might actually be shorter at the lower end of the market, especially for like a spirit right now. So I guess can you talk to -- we're going to see another big chunk of capacity come out of the low end of the market here. That's disclosed by them in their reorganization plan. How is that going to impact dynamics competitively, especially as we go through the fourth quarter here. I don't mean to make this a near-term question, but I guess any insights you can provide would be helpful? Andrew Nocella: Sure. I'll give it a try. Clearly, future schedules have been recently loaded that are materially different than past schedules and unprofitable capacity is leaving the system. Certain airlines definitely have a very close-in booking curve based on pricing and how they price relative to others, I suppose, is the macro level thing, I would say. And their booking curves are different than United's booking curves because we have a full range of customers and products and flying all over the world. What it means for the future, look, as more and more unprofitable capacity comes out, we'll continue to adjust, but I'll tell you, basic economy is an entry point. There's always going to be ultra low-cost carriers in the marketplace. They may have different names over time. And we will always be competitive with them. The one thing we do think is going to change is unprofitable flying is going to be diminished because it just doesn't make sense in the long run, whether it be for United or any other carrier, we're going to make adjustments to Q3 as I reiterated earlier and others will [indiscernible] and are being forced to make adjustments. So it's a really great setup as that unprofitable capacity and that commoditized capacity leaves the system and supply and balance demand rebalance to a great outlook. Operator: We will now switch to the media portion of the call. [Operator Instructions] Our first question will come from the line of Niraj Chokshi with the New York Times. Niraj Chokshi: I was just curious, you guys have talked about how premium demand will be resilient in a downturn. Can you just kind of talk through a little bit more about how that is, why you believe that? Scott Kirby: Sure. Actually, I call it brand loyal demand instead of premium demand to start with because many of our brand loyal customers are flying in economy. They sometimes fly up -- upfront as well, but they often are flying in economy. And -- and that demand has been resilient, I think, is resilient. There are people that, one, in many cases, do have the income to continue traveling. Travel is high on the list of what people want to do and most of those people do. [indiscernible] of business travelers that are flying for business. And because you have a higher share there, that's what really makes that resilient. If demand kind of bleeds off on the lower end when there's economic stress, there's more seats available on United Airlines for those brand loyal customers. And so it makes it resilient. And you can see that in our results this year, I think. Operator: Our next question comes from the line of Rajesh Singh with Reuters. Rajesh Singh: Scott, I had a question on Russian overflights. United said this week that restrictions on flying over Russia means you are effectively bought from flying directly to China, from Chicago, Washington or New York. And United have called for expanding a proposed ban on Russian overflights to include Hong Kong. Should this band be included to other countries to bar their airlines from using Russian aerospace for flights to the U.S? And the second part of my question is that how much of a competitive disadvantage is it for U.S. airlines compared with other non-U.S. carriers that are currently using the same aerospace? Scott Kirby: Well, I'm going to focus on China. And I absolutely think this is just a matter of basic fairness. The Russian government does not allow U.S. airlines to fly over Russia. And we are competing with Chinese airlines that are allowed to. By the way, a country that is supporting Russia in the Ukrainian war. And a perfect example is we used to fly from New York to Hong Kong, and we cannot do it now. And we're competing with a Chinese airline that is allowed to fly from New York to Hong Kong, and that just isn't right, that isn't fair. And all we want is a level playing field and I absolutely think we should get it. And I really appreciate that this administration is looking at the issue and focusing on the issue and it started. They started with Beijing and Shanghai, and I hope they will continue the logical efforts and include the other large Chinese city, Hong Kong in those efforts. Operator: Our next question comes from the line of Leslie Josephs with CNBC. Leslie Josephs: With the shutdown, is there a certain point that you think the airline could start feeling some of the impact we heard from another airline that maybe if they went on for 10 days longer, which we're kind of in that territory now that things could get a little bit more difficult? Is there any sort of cutoff that you see there? And then second, there are a lot of other airlines large and small that are trying to go premium now. How successful do you think that can be? And how long do you think it takes to, I guess, to go upscale in certain products? Scott Kirby: So on the first question, the answer is we don't know. It was a little unprecedented or at least it doesn't happen often, so you don't really know. So I -- I think that at least for the first couple of weeks, people thought it was going to get resolved, so they just kind of continue business as usual. But as time goes on, as people read headlines and say, it's not going to get resolved soon, people start to lose confidence in the government and the government's ability to resolve this. And that's going to start to impact books. So I don't know when that happens. It's not some magic step function. But every day that goes by, the risk to the U.S. economy grows. So I hope we will avoid an unforced error here. And the second question on other airlines. Look, we've been doing the investment in the customer for a decade. It is billions of dollars of CapEx and OpEx. There's 2 ways that you can get market -- you can get revenue improvements from the kinds of premium investments that people are making. One, you can get your own customer base to buy up to those products; two, you can get market share shift. The other airlines, I think, will have some success in getting their own customers to pay more for some of their products. But the biggest upside is getting market share shift, and you're not going to get market share shift away from an airline that's been investing for a decade. Another airline getting a little bit better than they are today. Is it going to come nowhere close to what United is. And a brand loyal customer is not going to say, all of a sudden, airline X closed one of 100 points of gap between United and them. So I'm going to switch my loyalty. They're going to stick with United. So I think they might have upside in their own customer base, but there's really not much upside in the market share shift part of it. Operator: And I will now turn the call back over to Kristina Edwards for closing comments. Kristina Munoz: Thanks, Regina. Thanks for flying with us this season. We'll see you again next quarter. Please contact Investor and Media Relations if you have any further questions. Operator: Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.
Operator: Welcome to Manpower Group's Third Quarter Earnings Results Conference Call. This call is being recorded. [Operator Instructions]. I would now like to turn the call over to ManpowerGroup's Chair and CEO, Mr. Jonas Prising. Sir, you may begin. Jonas Prising: Welcome, and thank you for joining us for our third quarter 2025 conference call. Our Chief Financial Officer, Jack McGinnis is with me today. For your convenience, we have included our prepared remarks within the Investor Relations section of our website at manpowergroup.com. I will start by going through some of the highlights of the quarter, then Jack will go through the third quarter results and guidance for the fourth quarter of 2025. I will then share some concluding thoughts before we start our Q&A session. Jack will now cover the safe harbor language. John McGinnis: Good morning, everyone. This conference call includes forward-looking statements, including statements concerning economic and geopolitical uncertainty, which are subject to known and unknown risks and uncertainties. These statements are based on management's current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. We assume no obligation to update or revise any forward-looking statements. Slide 2 of our earnings release presentation further identifies forward-looking statements made in this call and factors that may cause our actual results to differ materially and information regarding reconciliation of non-GAAP measures. Jonas Prising: When we last reported earnings in July, we characterized the environment as one of continued uncertainty yet growing resilience. With employers hiring very cautiously and labor markets holding steady against the backdrop of geopolitical complexity and economic softening. Since then, these dynamics have largely persisted Geopolitical tensions remain elevated. The race to invest in AI continues at pace and employers are adapting to the fluctuating policy environment and cautious consumer sentiment in Europe and North America. Globally, conditions remain mixed. Strong momentum across Latin America and APME offset by softer trends in Europe and North America, where activity levels remain well below historical peaks, yet stable over recent quarters. While hiring remains cautious, we continue to see gradual broad-based signs of stabilization. Our most recent ManpowerGroup Employment Outlook Survey covering over 40,000 employers across 42 countries reinforces this view. Hiring outlooks remained relatively steady year-over-year with ongoing stabilization and 45% of employers planning to maintain current workforce levels, the highest since early 2022, as organizations balance capturing growth opportunities with mitigating economic uncertainty. Turning to our results. After 11 consecutive quarters of organic constant currency revenue declines we crossed back over to growth during the third quarter. The stabilization of demand in recent quarters in North America and Europe, despite ongoing tariff uncertainty has been a key factor in the revenue trend improvements. We're encouraged by this progress as well as a continuation of revenue growth in our largest brand, Manpower, with strength in North America, Latin America, Italy, Spain, Belgium, Poland and APME to name a few. Within Experis, we're beginning to see early signs of stabilization in professional and IT hiring. Win rates have improved modestly, and we have secured new enterprise programs in sectors such as financial services and life sciences. Our ongoing modernization of the Experis offering, including enhanced consultant development and tighter integration of our PowerSuite AI tools is supporting margin improvement and future growth as client demand recovers. The trends in talent solutions are also improving for our managed service provider offering, where win rates and demand stabilization is driving strong revenue growth, helping offset some weakness in recruitment process outsourcing and right management as labor markets remain somewhat frozen in terms of hiring and workforce reductions. Overall, for the quarter, reported revenue was $4.6 billion, down 2% year-over-year in constant currency. System-wide revenue, which includes our expanding franchise revenue base was $4.9 billion. Our reported EBITDA for the quarter was $74 million. Adjusting for restructuring costs, EBITDA was $96 million, representing a decrease of 22% in constant currency year-over-year. Reported EBITDA margin was 1.6%, and adjusted EBITDA margin was 2.1%. Earnings per diluted share was $0.38 on a reported basis, while earnings per diluted share was $0.83 on an adjusted basis. Adjusted earnings per share decreased 39% year-over-year in constant currency. As we look to the fourth quarter, we're closely monitoring several leading indicators of demand, including activity among our largest enterprise clients, new assignment starts and priority verticals such as logistics and manufacturing and year-end seasonal patterns. These metrics are helping us assess the depth and breadth of stabilization across our markets and inform our expectations as we plan for 2026. Looking closely at these indicators, we believe our demand in Europe and North America is holding steady and are confident that we're well positioned for future growth. Our AI-enabled data insights are increasingly instrumental in tracking, anticipating and predicting client demand. This real-time intelligence enables our teams to pivot quickly to sectors and regions where growth opportunities are emerging. Our enterprise pipeline continues to expand with most of the demand in this environment concentrated among global enterprise clients, although decision time lines across major markets remain extended. As a leadership team, we remain laser-focused on managing the current environment while positioning our business for future growth. We continue to take decisive actions to contain costs, drive efficiencies at scale and simplify our organization while accelerating the strategic initiatives that will strengthen our capabilities, expand our margins and deliver long-term shareholder value. I'll now hand it over to Jack for more details on the quarter's financial results. John McGinnis: Thanks, Jonas. U.S. dollar reported revenues in the third quarter were impacted by foreign currency translation. And after adjusting for currency impacts, came in at the midpoint of our constant currency guidance range. Our revenue trends demonstrate the continuation of largely stable activity levels across North America and Europe. Our revenue from franchise offices are significant and are included within system-wide revenues, which equaled $4.9 billion for the quarter. Gross profit margin came in below our guidance range, driven by shifts within staffing, reflecting an increased mix of enterprise accounts, lower permanent recruitment and lower outplacement. As adjusted, EBITDA was $96 million, representing a 22% decrease in constant currency compared to the prior year period. As adjusted, EBITDA margin was 2.1% and came in at the midpoint of our guidance range, representing a 50 basis points decline year-over-year. Foreign currency translation drove a favorable impact to the 2% U.S. dollar reported revenue increase from the constant currency decrease of 2%. Organic days adjusted constant currency revenue increased 0.5% in the quarter, which was slightly favorable to the midpoint guidance of flat. Turning to the EPS bridge. Reported earnings per share was $0.38. Adjusted EPS was $0.83 and came in $0.01 above our guidance midpoint. Walking from our guidance midpoint of $0.82, our results included improved operational performance, representing a positive impact of $0.02 and a slightly higher tax rate, which had a negative impact of $0.01. Restructuring costs and other represented $0.45 bringing reported earnings per share to $0.38. Next, let's review our revenue by business line. Year-over-year, on an organic constant currency basis, the Manpower brand had growth of 3% in the quarter. The Experis brand declined by 7% and the Talent Solutions brand declined by 8%. Within Talent Solutions, our RPO business experienced lower demand in select ongoing client programs year-over-year. Our MSP business continued the strong revenue growth performance while Right Management experienced declining year-over-year revenues as outplacement activity continued to slow. Looking at our gross profit margin in detail, our gross margin came in at 16.6% for the quarter. Staffing margin contributed a 40 basis point reduction due to mix shifts towards enterprise accounts. Permanent recruitment activity was softer than expected, and the lower contribution resulted in a 20 basis point decline. Lower career transition outplacement activity within Right Management resulted in a 10 basis point margin decrease. Moving on to our gross profit by business line. During the quarter, the Manpower brand comprised 63% of gross profit, our Experis Professional business comprised 21%, and Town Solutions comprised 16%. During the quarter, our consolidated gross profit decreased by 4% on an organic constant currency basis year-over-year. representing a slight improvement from the 5% decline in the second quarter. Our Manpower brand reported flat organic constant currency gross profit year-over-year, equal to the second quarter year-over-year trend. Gross profit in our Experis brand decreased 10% in organic constant currency year-over-year, an improvement from the 14% decrease in the second quarter. Gross profit in Talent Solutions declined 13% in organic constant currency year-over-year, a decline from the flat result in the second quarter. MSP and RPO experienced similar activity levels from the second quarter, but RPO declined year-over-year as they anniversaried large growth in the third quarter a year ago in select client programs. Right Management gross profit decreased on lower outplacement activity. Reported SG&A expense in the quarter was $702 million. SG&A as adjusted, was down 2% on a constant currency basis and 1% on an organic constant currency basis. The year-over-year organic constant currency SG&A decreases largely consisted of reductions in operational costs of $5 million, partly driven by previous restructuring actions. Corporate costs continue to include our back-office transformation spend, and these programs are progressing well with expected medium-term efficiencies. Dispositions represented a decrease of $8 million while currency changes contributed to a $20 million increase. Adjusted SG&A expenses as a percentage of revenue represented 14.8% in constant currency in the third quarter. Adjustments represented restructuring of $21 million. balancing gross profit trends with strong cost actions to enhance EBITDA margin is one of our highest priorities, and we continue to analyze all aspects of our cost base for additional ongoing efficiency improvements. The Americas segment comprised 24% of consolidated revenue. Revenue in the quarter was $1.1 billion, representing an increase of 6% year-over-year on a constant currency basis. As adjusted, OUP was $43 million, and OUP margin was 3.9%. Restructuring charges of $5 million primarily represented actions in the U.S. The U.S. is the largest country in the Americas segment, comprising 63% of segment revenues. Revenue in the U.S. was $691 million during the quarter, representing a 1% days adjusted decrease compared to the prior year. This represents an improvement from the 3% decrease in the second quarter. OUP as adjusted for our U.S. business was $24 million in the quarter. OUP margin as adjusted was 3.5%. Within the U.S., the Manpower brand comprised 28% of gross profit during the quarter. Revenue for Empower brand in the U.S. increased 8% on a days adjusted basis during the quarter, which represented strong market performance and a slight decrease from the 9% increase in the second quarter. The Experis brand in the U.S. comprised 39% of gross profit in the quarter. Within Experis in the U.S., IT skills comprise approximately 90% of revenues. Experis U.S. revenue decreased 9% on a days adjusted basis during the quarter, an improvement from the 14% decline in the second quarter. Town Solutions in the U.S. contributed 33% of gross profit and saw a flat revenue trend year-over-year in the quarter, a decrease from the 13% increase in the second quarter driven by lower RPO activity from select ongoing client programs and lower right management outplacement activity. The MSP business executed well during the quarter, again, posting strong double-digit revenue increases year-over-year. In the fourth quarter of 2025, we expect the overall U.S. business to have a similar to slightly further revenue decline compared to the third quarter, largely due to higher seasonal Experis health care projects in the prior year period. Southern Europe revenue comprised 47% of consolidated revenue in the quarter. Revenue in Southern Europe was $2.2 billion, representing a 1% decrease in organic constant currency. As adjusted, OUP for our Southern Europe business was $70 million in the quarter, and OUP margin was 3.2%. And restructuring charges of $4 million represented actions in Spain and France. France revenue equaled $1.2 billion and comprised 53% of the Southern Europe segment in the quarter and decreased 5% on a days adjusted constant currency basis. As adjusted, OUP for our France business was $31 million in the quarter. Adjusted OUP margin was 2.7%. France revenue trends improved slightly during the course of the third quarter despite the government uncertainty in September, and we expect a slightly improved rate of revenue decline into the fourth quarter, reflecting the third quarter exit rate. Revenue in Italy equaled $463 million in the third quarter reflecting an increase of 4% on a days adjusted constant currency basis. OUP as adjusted equaled $27 million and OUP margin was 5.8%. Our Italy business is performing well, and we estimate a slightly improved constant currency revenue growth trend in the fourth quarter compared to the third quarter. Our Northern Europe segment comprised 18% of consolidated revenue in the quarter. Revenue of $817 million represented a 6% decline in constant currency. As adjusted, OUP equaled a $1 million loss. This represents an improvement from the $6 million loss in the second quarter and reflects the impact of cost reduction actions. The restructuring charges of $14 million primarily represented actions in Germany and the U.K. Our largest market in the Northern Europe segment is the U.K. which represented 32% of segment revenues in the quarter. During the quarter, U.K. revenues decreased 13% on a days adjusted constant currency basis. We expect the rate of revenue decline in the U.K. to improve into the fourth quarter compared to the third quarter. In Germany, revenues decreased 23% on a days adjusted constant currency basis in the quarter. Germany automotive manufacturing trends continue to be weak. In the fourth quarter, we are expecting a similar year-over-year revenue decline compared to the third quarter trend. The Nordics continue to experience difficult market conditions with revenues decreasing 4% in days adjusted constant currency in the quarter. The Asia Pacific Middle East segment comprises 11% of total company revenue. In the quarter, revenues equaled $521 million, representing an increase of 8% in organic constant currency. OUP was $27 million and OUP margin was 5.1%. Our largest market in the APME segment is Japan, which represented 60% of segment revenues in the quarter. Revenue in Japan grew 6% on a days adjusted constant currency basis. We remain very pleased with the consistent performance of our Japan business, and we expect continued strong revenue growth in the fourth quarter. I'll now turn to cash flow and balance sheet. In the third quarter, free cash flow was $45 million compared to $67 million in the prior year. Following a trend of declining earnings and large outflows for tax and technology license payments through the first half of the year, free cash flow was positive during the third quarter. Earnings have also been stabilizing in recent quarters which will improve the trend of free cash flow going forward. The fourth quarter is typically a strong quarter for free cash flow as we look ahead. At quarter end, days sales outstanding increased 1.5 days to 59 days as enterprise client mix has increased. During the third quarter, capital expenditures represented $15 million. During the third quarter, we did not repurchase any shares. And at September 30, we have 2 million shares remaining for repurchase under the share program approved in August of 2023. Our balance sheet ended the quarter with cash of $275 million and total debt of $1.2 billion. Net debt equaled $941 million at September 30, reflecting an improvement from June 30. Our debt ratios at quarter end reflect total gross debt to trailing 12 months adjusted EBITDA of $3.1 million and a total debt to total capitalization at 38%. Detail of our debt and credit facility arrangements are included in the appendix of the presentation. Next, I'll review our outlook for the fourth quarter of 2025. Based on trends in the third quarter and October activity to date, our forecast anticipates ongoing stability in the majority of our markets and a continuation of existing trends. With that said, we are forecasting earnings per share for the fourth quarter to be in the range of $0.78 to $0.88. The guidance range also includes a favorable foreign currency impact of $0.08 per share and our foreign currency translation rate estimates are disclosed at the bottom of the guidance slide. Our constant currency revenue guidance range is between a 2% decrease and a 2% increase and at the midpoint is a flat revenue trend. Business days are stable year-over-year and considering the impact of dispositions, our organic days adjusted constant currency revenue increase represents slight growth, which rounds down to a flat revenue trend at the midpoint. EBITDA margin for the fourth quarter is projected to be flat at the midpoint compared to the prior year. We estimate that the effective tax rate for the fourth quarter will be 46.5%. In addition, as usual, our guidance does not incorporate restructuring charges or additional share repurchases, and we estimate our weighted average shares to be $47.1 million. I will now turn it back to Jonas. Jonas Prising: Thanks, Jack. In parallel with our disciplined cost control, we continue to advance our digitization and standardization agenda across both the back and front office. We are pleased with the strong progress of our global business services initiatives, which are streamlining operations, aligning processes and improving speed and quality while reducing costs. I recently visited our new hub in Porto, Portugal, where our finance and technology team, a standardized and centralized back-office functions across Europe. These advancements are providing a blueprint for how we will continue to evolve our operating model standardizing our processes and leveraging our scale advantage across countries and regions. We're now preparing to apply the same disciplined approach to the front office optimizing recruitment and sales processes on our global Power suite front office platform to identify similar opportunities for client and candidate service excellence, process standardization and productivity gains. By simplifying workflows and integrating technology, we're empowering our teams and building a business that will be leaner, more agile and well positioned for long-term growth. We are confident that our combination of operational rigor, strategic investment and disciplined execution will ensure Manpower Group continues to strengthen our value to clients and candidates in a fast-changing external environment. This confidence in our value reinforced by the consistent recognition of 3 strong and distinct brands received for their market leadership and capabilities. Last quarter, Everest Group recognized Manpower, Experis and Talent Solutions as industry leaders across multiple categories, reflecting the strength of our strategy, technology and people. Each recognition highlights Sophie AI, our enterprise-wide AI platform we introduced last quarter, where our AR solutions are being developed refined and incorporated into our operational workflows to further enhance our capabilities and help clients make smarter, faster talent decisions. We are now increasingly moving from AI use cases to scaled commercial impact. In our largest market, Sophie AI is now driving measurable gains with approximately 30% of new client revenue derived from AI rated probability. We also see that when prospects are identified as high probability by AI, the potential value is notably higher than prospects identified by human insight alone. With this new technology deployed across 14 key markets and scaling further, we expect to see significant value realization across our global footprint. The RPO and MSP, several recent client wins directly cite our AI-powered insights as differentiators in their selection process. These proof points reinforce how our technology investments are enhancing client outcomes. And as we look ahead, we do so with cautious optimism. While near-term conditions remain challenging in North America and Europe, our teams continue to execute our current priorities with discipline, serving our clients, supporting millions of associates and meaning for work and building the foundation for future profitable growth. I want to close by thanking our people around the world for their unwavering dedication and commitment to helping our clients win and our associates succeed. Operator, please open the line for our Q&A. Operator: [Operator Instructions] Our first question comes from Andrew Steinerman with JPMorgan. Andrew Steinerman: My first question is about when business confidence improves. So this is like beyond what you just guided for fourth quarter '25, would you expect kind of more of an early cycle pickup in flexible staffing volumes? And then also, Jack, if you could just comment on the gross margins that you talked about in the prepared remarks. Like is it this kind of an odd time where we're seeing softer outplacement and softer perm at the same time? Jonas Prising: Andrew, and yes, no, it is a bit of a strange time in many labor markets in Europe and North America. As you heard me characterize it in our call, it's like a frozen labor market. There's very little hiring going on, and there's very little workforce reductions going on. And we see that, of course, reflected in both our perm and RPO numbers as well as in the Right Management business also. But what's been very encouraging to us, though, is that despite this and despite PMI still being below 50 in many of our major markets, we're starting to see a distinct stabilization and growth in Manpower, which is what we would hope to see when the markets bottom out. And to your question, if employer confidence returns, we are hopeful that, that then would mean that we see a return to industry dynamics where we expect to see better Manpower growth and the rest of the brands also benefiting from that improved environment. Operator: Our next question comes from Kartik Mehta with Northcoast Research. Kartik Mehta: Maybe, Jack, if you just talk about the trends you saw in the quarter. And I guess I'm wondering if the quarter was even throughout or if you saw any volatility because of kind of what's happening in the economy. John McGinnis: Sure, Kartik, I'd be happy to talk to that. So I think if we look across our major markets, probably starting with the biggest one being France, in line with what I referenced in my prepared remarks, we actually saw improvement in the trend during the course of the third quarter in France, where you see on an overall basis, the revenue at that minus 5%. But as we exit it, it was minus 4%. So we did see it start to improve in the month of September. You actually saw that in some of the industry data that was published as well. And that's a positive sign. And I would say as we look at October data, it continues to hold in that space as well. So a slightly improving trend from where we started the third quarter here into the fourth quarter. And I'd say, similar with Italy as well, I think Italy, we saw an improving trend in the month of September as well as we went through the course of the quarter. And as we look to the fourth quarter, we would expect that rate of revenue growth to improve in Italy as we go forward. And then I'd say in the U.S., I'd say there was probably a little more stable. I think there's a little bit more volatility in the U.S. just due to some of the year-over-year. We had -- as I've talked about previously, we had some very large RPO volumes from select projects from select clients in the year ago period that completed. So that created a little bit of volatility in the year-over-year. But overall basis, I'd say the U.S., the Manpower business grew very steadily during the entire quarter. And I'd say the Experis business was more stable-ish in terms of activity levels during the quarter. I'd say those big ones that I referred to, and it kind of reflect what we saw on an overall basis in terms of the overall revenue trends. Kartik Mehta: And if we could just go back to the gross margin issue. As you look at the fourth quarter and kind of look at gross margin, are you seeing any price pressure? Or is there any mix issue that is impacting gross profit. And beyond the mix of I realized perm is still kind of in a recessionary standpoint. But just beyond there, is there anything else that you'd say is impacting the gross profit margin? John McGinnis: No. I'd say, Kartik, when we look at the staffing margin, it's primarily mix shift towards enterprise clients. And in this environment, enterprise clients continue to be the bigger part of the spend and the demand, and that's averaging in. And that's been a trend we've been seeing over the course of the year. So what that means is the larger enterprise mix is putting pressure on the consolidated margin as they continue to average in. We would expect that to start to reverse when convenience comes back and that market starts to come back. But in the current environment, it's the enterprise clients that are spending the most and have the greatest demand. And that's the main driver of what's happening on the staffing side. Pricing is always competitive, but we have not seen any dramatic changes in pricing on an overall basis. And to your point, in terms of the rest of the GP margin, yes, we did acknowledge that perm came in a bit softer than we expected that put a little more pressure on the GP margin this quarter. And our placement volumes, as we talked about previously was a bit lower as well, which was the other piece of the GP margin bridge year-over-year. But I would say it's primarily driven by mix shift. Kartik Mehta: And just one last question, Jonas. As you talk to customers, and I'm not sure how you measure this, but are you sensing any more or less amount of uncertainty? Because it seems like uncertainty has been kind of the word for the whole year. And I'm wondering, as you speak with them, if there's any level of difference in your opinion? Jonas Prising: I would say that the clients that we speak with are increasingly resilient to the fluctuating policy environment. So they're considering this not to be a bug, but rather a feature. And as they then plan for their businesses to be successful, they are moving their businesses forward and thinking about the investments that they need to make. Now as the year has gone on, even though there are a lot of oscillations, the environment in terms of tariffs appears to be gradually settling down. And as I say this, I'm sure that, that will change this afternoon. But most -- many of the major countries and regions now have trade agreements that companies can project into 2026. And we would expect that to continue towards the end of this year and the beginning of next year. So the operating environment in terms of visibility for many employers should improve coming into 2026. I should also note that from an economic perspective, as economists look at 2026, the expectations at this point at least, is for an improved economic environment, both in Europe as well as in North America, with Asia Pacific and our -- in Latin America continuing on the current good path. So there's reasons to be optimistic, but of course, we're managing the business as we see it today and to give guidance into the quarter, but employers are, I think, getting more and more resilient to the noise and are really trying to understand the signal of where this is heading. And as the year goes on, there's more stability in that outlook, I believe. Operator: Our next question comes from Manav Patnaik Barclays. John Ronan Kennedy: This is Ronan Kennedy on for Manav. This was touched on to a certain extent in responses to both Andrew and Kartik questions. But could I reconfirm the leading indicators of demand that you are seeing that is informing the assessment, the stabilization beyond, I think, largest enterprise clients with the new assignment starts -- anything to note in respective regions and/or brands there from those leading indicators? Jonas Prising: Well, as we mentioned in our prepared remarks, if you look at APME in Latin America, we continue to see good growth. So the notion of stabilization really mostly applies to some of the markets in Europe as well as the U.S. and Canada. And yes, those are the indicators, amongst others that we look at. We also look at the trends that we've now seen over a number of quarters with markets firming up. And despite a labor market that in some sense is a bit frozen between permanent hiring and workforce reductions. What is clear if you look at our performance from a Manpower brand perspective that we're starting to see demand coming through and giving us growth opportunities. And over time, as the market and the demand improves, we would expect to see the same trends play out also in our other brands. John Ronan Kennedy: Appreciate it. And then a follow-up question, Jonas, on the Sophie AI implementation. I think you indicated there are measurable results, 30% new client revenue deployment across 4 key markets. Can you just help us think about how -- what the current global coverage is the time line for deployment as I think you move from back office enhancement to front office? And then any other metrics to note or improved KPIs, whether it's producing time, higher revenue, time to fill, et cetera, and how we should think about implementation and benefits? Jonas Prising: Well, first of all, let me say that we believe that AI could have a really positive impact on our business. And as you know, we've spoken over quite some time now over -- to our significant investment into our digital core. So by the end of this year, 90% of our revenues will be covered by a common global front office platform. 60% of our back-office transactions will be handled by a global platform moving to 80% or 90% towards the end of the year. So all of that says that we now have a global digital core that gives us the opportunity to leverage our scale by standardizing processes, centralizing across countries and regions in completely different ways. It also gives us the opportunity, of course, to deploy AI in a scalable way as we have been doing in a number of instances. Like many companies, we've been working with use cases and really trying to understand where the opportunities lie. And I'd say we are still in the early innings of exploring what it can be, but the example that I cited in our prepared remarks really shows the strength of what can happen when you apply AI into your lead generation and prospecting database. Now we have the opportunity to really combine human insight with AI-generated insights, and the results that we're seeing in terms of the improvement in win rates as well as in value generation are very, very promising. So whilst I can't give you a time line for a global rollout on AI, I would say that we feel very good about our digital core and being able to deploy AI and more efficient processes enabled by AI across our network and across our global operations. John Ronan Kennedy: Very comprehensive answer. Certainly appreciate it. May I just sneak in a quick follow-up. Can you -- you talked about AI enabling real-time AI intelligence enabling quick pivots to sectors and regions for growth opportunities? Can you highlight some examples of that where you have pivoted or even potentially exited based on that data? John McGinnis: I think it's really around the pipeline management that Jonas was referring to, where we've seen significant impact in terms of probability-weighted assessment of our revenue opportunities, Ronan. And so when we look at that, that impacts across all industries. I wouldn't say it's one specific vertical that has benefited from AI. I'd say it's multiple verticals, verticals that we deliver into. And it's been a big benefit to the way we focus our sales teams focus their time on opportunities. I think in this environment, we've talked a lot about in the past about delayed decisions by clients. So having that type of technology has been a big improvement for us to make sure we're focusing our time on the best opportunities, and that's been working quite well. But I wouldn't say it's a specific industry. It's very broad across all of our industries. Jonas Prising: And as I mentioned in my prepared remarks, you can see that our Sophie AI platform has really helped us distinguish ourselves in the markets in terms of the accolades and the recognitions we've received. And we're very pleased with that initial recognition, but of course, we're counting on continuing to deploy this and applying commercial scale everywhere where we operate over time. Operator: Our next question comes from Mark Marcon with Robert W. Baird. Mark Marcon: Wondering with -- I don't want to harp on the gross margin, but I just want to understand it a little bit better. On the enterprise side within countries on a like-for-like basis, are the gross margins holding steady? Like if we take a look at your most important markets like France, Italy, U.K. and the U.S. Jonas Prising: Mark, I would say that just as Jack explained, most of the changes that we would see within country are really the same as we see on a consolidate basis -- consolidated basis, which is it's -- on a country basis is also related to business mix. So enterprise in the markets where that's growing, we can see -- growing more than the convenience side that's where we -- that's where we're seeing the business mix shift. And this is not unusual for us to think -- to see this effect in markets that are challenged. And I would also concur with Jack that pricing is always competitive, but that we're not seeing any major moves in any particular market of scale either. So it's really business mix at this point. And as you look at the labor markets and being frozen, what's important to note, though, is that there are solid labor markets, both in Europe and in North America. So unemployment, whilst the markets have been softening a bit here in the U.S., for instance, unemployment is still at a reasonably and historically low level. And the same is true for Europe. So finding and accessing talent when companies are looking for talent might be slightly easier today, but it is still a challenge in many areas and for distinct and specialized skill sets. So we've really seen the business mix shift being the main driver of the staffing margin, not any price competition. John McGinnis: Yes. And I would just add, Mark, it's not broad brush in every market. We improved staffing margin in Japan in the third quarter year-over-year. As we anniversary a very difficult environment in the Nordics from a year ago, we improved staffing margin there as well. We improved staffing margin in Canada. But as Jonas said, in the markets where we have very large enterprise client bases, we have seen a shift on the mix. So as enterprise becomes a bigger part of the pie, that's averaging in and putting pressure on in those other large markets. And of course, that would include France and the U.S. and Italy. Mark Marcon: Are there things that you could do to stimulate the convenience side of the market? I mean, like within the U.S., when we take a look at small business employment relative to large enterprise employment, on a macro scale, it doesn't seem like there's a huge difference, although I imagine that small businesses are a little bit more concerned about managing costs. But I'm wondering, are there things that you can do in order to tilt things a little bit on the convenience side. Jonas Prising: Well, our efforts around building stronger pipelines enabled by technology, and I mentioned earlier, help getting AI to target prospect lists, both for enterprise as well for convenience clients should help us get some traction, but what's not unusual at times like this is that enterprise demand is just higher because they have greater ability to absorb the uncertainty, and their caution is balanced across multiple geographies and multiple businesses as well. So we continue to believe that the convenience market is strong. We believe we have great opportunities to continue to improve our positioning and market share also in that market. But what we're seeing right now at this point in the cycle in Europe and in North America, is that enterprise demand is slightly higher than what we're seeing from the convenience. But those things, once employer confidence shifts can change quite quickly. So we expect to see the margin business mix to rebalance the way it has done in the past. John McGinnis: And I would just add, Mark, we do have significant convenience initiatives in place in markets like Italy and in France. That's one of the reasons we believe Italy is leading the market currently, our business. Our growth is -- yes, there's a lot of enterprise growth, but there's very good convenience growth in our Italy business. And it's a key initiative in U.S. Manpower and Experis as well. But we see significant growth in convenience in markets like Italy. And those initiatives are happening in all of our largest markets. It's just having a much bigger impact at the moment in Italy. Mark Marcon: Great. And then can I just ask about RPO. It sounds like you're starting to see some wins from Sophie. Are those new wins, those new RPO wins enough to offset the frozen market? Or would you expect RPO to continue to primarily be driven by the macro? Jonas Prising: I think it can help us drive better win rates, but what's clear is that both the size of the deals in the market today and the extended time of implementation means that we are anticipating RPO to still be feeling the headwinds at least looking towards the near term. The fact that companies are less interested in hiring permanently means that from RPO, which is a recruitment process outsourcing offering, essentially an outsourced perm hiring engine to bring in lots of talent into organizations. The companies are slower to act on those kinds of initiatives. And when they're planning for those initiatives, the time line for implementation tends to be longer and the initial volumes tend to be lower. So we think the RPO business model as well as the value that it presents for clients remains extremely strong. And especially if you think about the future where we are going to be demographically constrained, taking our RPO operations into any company looking to find talent at scale across geographies and nations is going to be extremely valuable. But right now, what we're seeing is that companies are less focused on that, so that's why we're expecting it to continue to face some headwinds in the near term. Mark Marcon: Okay. Can I speak one more in, please. Jonas, I just want to -- you've got a great perspective with regards to what's going on internationally, particularly in Europe. We all see what's going on in France from a political perspective. How is that impacting decision-makers on ground? Is it -- are businesses feeling any less certain about stability just given the turmoil that we're seeing from a political perspective over there? Jonas Prising: Yes. Thanks, Mark. I just came back from France last week and spent quite some time with our teams and being in various markets as well. And clearly, the political turmoil in France is not helpful to the sentiment of employers. Having said that though, if you look at the various elements of the political factions, no one disagrees that France needs to go through a budget process that helps reduce the deficit. So the degrees of how much that would relate to. So that's where the tensions lie. As you might have seen this morning, the government has survived 2 no-confidence votes, and we would expect that to continue. But what's coming next is the discussion around the actual budget, which needs to be concluded before the end of the year. And so there's still a lot of uncertainty in terms of what's going to happen. But from a company perspective, what our clients are doing is looking at their business and navigating through this environment, responding to the demand that they're seeing in various markets. And as Jack alluded to and as you've seen from our numbers, French PMI has improved. The outlook for Europe has improved somewhat into 2026 as well. So companies are preparing and that's what we're also seeing in our business that we're navigating this and companies are resilient, and they need to take care of their business first and what's very important to their business is to find the right talent to execute their plans. And in a labor market that is regulated as France, our offerings are extremely attractive to fuel those talent investments in environments like these. So to conclude, the environment in France right now with the political uncertainty is not helpful for sure. But at the same time, most of our clients are very pragmatic and they're responding to the demand that they are seeing. And in turn, that gives us the opportunity to provide talent into their operations and make sure that they are successful. Operator: Our next question comes from Trevor Romeo with William Blair. Trevor Romeo: If I could maybe just follow up very quickly on that last question with France. Just quickly, is there any change to your expectations or your confidence level at this point that the additional business tax from this year won't recur beyond 2025 at this point based on everything that's going on there? John McGinnis: Trevor, this is Jack. I'd say it's too early to tell, candidly, at this stage. There were some discussions just this week on that. But we're monitoring the situation. I'll give a better update on that at year-end, as Jonas said, once the budget is presented and passed. I think at this stage, there is -- there has been some discussion within the French budget of perhaps continuing the surcharge, but at a lower level than the current year into one additional year into 2026. But as I said, it's too early to tell. So I think from this perspective, we would expect our effective tax rate to decrease next year as the surcharge comes down. We'll see where it ends up as the budget continues to be debated and discussed within Parliament. But I'd say at this stage, it's a bit too early to give any firm guidance on that, Trevor. Trevor Romeo: Okay. Jack, that is helpful. And then I guess maybe kind of a broader question. I think for several quarters now of the Manpower brand outperforming Experis. So from kind of a macro perspective, I guess, what do you think are the drivers of blue-collar staffing outperforming white-collar staffing is AI playing a role there? Is it kind of more labor hoarding in those white-collar areas in the frozen labor markets you talked about, Jonas? Anything you could say on that topic? Jonas Prising: Well, we've been very pleased to see how Manpower has rebounded into growth for a number of quarters now and projected to do so again into the fourth quarter. But that evolution, of course, is tied to a number of different things. You've seen PMI start to improve. I talked about the resilience of employers that are getting used to a more fluctuating environment and have to run their business and make the talent investments going forward. So I think those are things that we are looking at. And of course, we've also been able to pivot to areas that are growing faster and targeting industry verticals that we feel are going to give us more opportunity for growth. If you think about Experis, clearly, it's unusual from an industry perspective, our own industry perspective to see that there is that disconnect. But really, there's been a lot of things that have been different in this post-pandemic era. And what we believe is happening from our Experis perspective is that companies are really focused in investing into the AI boom, and they are really moving much lower on the traditional IT project. And that's what we think is happening and impacting the demand for many of our big clients. They have shifted their priorities into AI investments, and whilst we are participating in those skill sets as well, the volumes that we have in different areas is really something that is being impacted at this point in time. Now we believe demand for more traditional digital project is going to come back with many of those same clients, but we think it's a moment in time, and that's why you're seeing this difference between white collar staffing. In our case, our Experis business as well as our Manpower business that is moving forward and is doing very well. Operator: Our next question comes from George Tong with Goldman Sachs. Keen Fai Tong: Going back to your comments on labor markets being frozen in terms of hiring in more ports reductions, can you parse out which markets are more frozen than others? And in which markets you're starting to see some volume? Jonas Prising: I would say the industry verticals, George, that we see are starting to pick up a bit are related to financial services in some markets, logistics, some of that is seasonality. That's coming back. There's a lot of activity also in the defense sector, especially in Europe that we feel could be very beneficial to us. On the flip side, we are still seeing sluggishness around auto that we've talked about. Construction is still sluggish in many parts of Europe as well, where we are in that business. So we can see a number of sectors that are more sluggish than others. But I would say that the nature of how employers are holding on to their workforce, we believe, is really the memory of the post-pandemic surge in demand for talent that had been dislocated in various countries. And employers are very keen not to relive their experience. They believe the workforces they have in place today are largely the workforces they will need going forward, and they're holding on to their workforce to a greater degree today than we have experienced in past economic slowdowns and periods of uncertainty of this kind because we think employers are informed and cautioned by that experience. And as long as they believe in a recovery and they will hold on to their workforces longer. And I think that's what we're seeing, especially here in the U.S. That's what the mindset is. Now the good news on that part is, of course, that once they are seeing tangible signs of an improvement in economic outlook and maybe also greater certainty from a policy perspective, they're ready to move forward bringing talent back on so that they can meet the growing demand. And of course, that's what we are preparing for and working with them on being ready to capture the future growth opportunities as things improve for them. Keen Fai Tong: Got it. That's helpful. You talked about accelerated initiatives to remove structural costs from the organization. Which regions are seeing the most amount of restructuring and headcount reductions? John McGinnis: Yes. Thanks for that question, George. I'd say in the third quarter, we continue to be very focused on Northern Europe. Germany was at the top of the list in terms of the restructuring of $11 million. But also we did some work in Spain, the U.K. and the U.S. as well. But I would say if you just -- if I just step back and look at 2025 overall, the most impact and most of the actions have been around Northern Europe. And we see that in the improvement in the trend from Q2 to Q3. So that minus $6 million moving to minus $1 million is actually showing the results of a lot of the hard work we've been doing in Northern Europe. We have more work to do to be clear, but we are making progress. As we go forward, I think as we talked about in the prepared remarks, we are looking at structural costs everywhere in the organization. So as Jonas talked about, we have a lot going on in the back office. He referred to our global business service center in Europe that is driving reduced cost going forward for us. And we're looking very, very closely at the front office and elements of all of our largest businesses, where there could be other opportunities to do similar things in terms of standardization and centralization. And that continues to be an opportunity for us that you'll hear us talk about in the future. Operator: Our next question comes from Stephanie Moore with Jefferies. Stephanie Benjamin Moore: Just some follow-up question. You talked a lot this morning about just the technology advancements and investments, whether it's AI or others that you've made over really the last several years here. When the underlying environment unfreezes or starts to be a bit more constructive? Do you believe that your technology advancements will enable you to capture some of that market growth or just that recovery with effectively less people and ultimately kind of seeing greater operating leverage and greater torque to the model than impact upswing? Jonas Prising: Thanks, Stephanie. Yes. And the investments we are making, first of all, I believe, positions us very uniquely in our industry with our scale, having 90% of our revenues flow through a common global front office platform mobile apps that are being deployed across many of our countries addressing both our associates, so the people that are working for us and are candidates, people that are playing for jobs. And then combining that with our back-office technologies also at a global level, gives us an opportunity to standardize, centralize and reimagine our processes in a completely different way. And clearly, what we're aiming to do is to leverage our scale not only across countries, but across regions as well. And when we look at our operations in Latin America, all 15 countries in which we operate and lead the market in across that region are handled from a back office perspective centrally. Our payrolling is handled centrally. And you've seen the progress that we have made across Latin America over time. We're very pleased with that performance and the improved productivity that we're seeing there. And we aim to drive similar kinds of effects, both from a growth perspective, being able to deliver faster to our clients at a higher quality, but also working on streamlining our processes in the back office and in the middle office so that we can gain productivity and efficiency there as well. And on top of all of that, of course, the impact of AI and what we can do through further automation, enabled by AI or just automation is, of course, another aspect that we're looking at very, very closely. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: Just 2 quick ones here. So I wanted to ask about SG&A leverage because in Q4, you're guiding to some margin compression on the gross margin line, but not much EBIT margin compression. So that obviously implies improving SG&A leverage. And I was just wondering what's driving that and whether you think you're at a point where SG&A can start potentially levering positively? John McGinnis: Thanks, Josh. No, you're absolutely right. The guy does anticipate that SG&A will be a big part of the equation in terms of falling gross profit dollars down to the EBITDA line. So with that guide, you basically see a relatively stable level of EBITDA from Q3 into Q4. And we talked about crossing over to organic growth. Well, that's a big step to hold our margin flat year-over-year. It's been a while since we were able to do that. And with all the actions we've taken, we're starting to bend the curve on SG&A as well, and that's going to have a meaningful impact in the fourth quarter, and you can see that incorporated into the guide. So you're absolutely right that, that is going to be a bigger impact in the overall equation in terms of holding that EBITDA. But I would say in terms of the GP, with that guide, it is just a modest change from Q3. So it's really just that effect that we've talked about with perm being a little bit softer, while we have a bit more enterprise in the mix. So just about 10 basis points sequentially as that continues to average in. But that's really the main impact there. But you're right. On SG&A, that is going to start to have a big impact on the EBITDA line. And that really is a reflection of all the work that we've talked about over the course of the year with the actions we've taken. And I talked about Northern Europe. That's one example of it, but we're seeing it in other markets as well in terms of improvement in bottom line profitability. Joshua Chan: Great. That's good to see. And then I guess, Jack, I wonder if there's a way for you to ballpark for us how good free cash flow could be in Q4? And maybe relatedly, could you talk about sort of the negative free cash flow in the first half and whether -- how unusual that is as we kind of think about what a normal cash flow should be kind of going forward? John McGinnis: Yes. No, sure, Josh. As I talked about last call, we had a big outflow in the first half of the year. And part of that was due to our very large market-leading MSP program. That does create some timing issues. We saw that at the end of last year into the first quarter of this year, where we had some very significant prepayments from some very large MSP clients at the very end of quarter and those payables went out at the very beginning of the following quarter. Usually, it's neutral, but sometimes if there's large prepayments that could create a little bit of volatility from a quarter-over-quarter. And we did see that flatter in the fourth quarter. We had a very strong free cash flow in the fourth quarter last year. It was flattered somewhat by that. But even putting that aside, it was still a very, very strong free cash flow for us in the fourth quarter of last year, but that did depress the first quarter outflow. We typically, as I've mentioned, over the last 4 years, we've had negative outflows in the first half of the year and very strong positive free cash flows in the second half of the year. And we started that here in the third quarter. The fourth quarter typically is a very strong free cash flow, and we would expect that to be the case again this year where the fourth quarter will be a strong free cash flow at this stage. So that's what I would to add a little more color. The other item in the first quarter outside of the MSP program was we did have some very large onetime payments. We had the Tax Act from 2017 that had multiyear transition payments go out. We had the last one of those in the first quarter, which is one of the biggest payments, so that goes away going forward. And as I mentioned, a lot of our technology license costs are all loaded into the first half of the year, and we don't have that in the second half of the year. So that's why typically the second half is much stronger, and that would be the outlook. The last point I'd make is now here we are about 3/4 of stabilized EBITDA, that is going to work into more favorable free cash flow trends as we go forward. Now that trailing 12 months EBITDA is stabilizing here with the guide for 9 months as we finish and that will be a positive impact because one of the other factors, of course, is trailing 12 months EBITDA had been decreasing with the downturn that we talked about that 11 quarters. And now that's shifting and we stabilized. So that will be a positive factor in terms of free cash flow as we go forward as well. Operator: Our next question comes from Tobey Sommer with Truist. Tobey Sommer: I wanted to ask a question about gross margin. If we do see employers sort of become a little bit more forward leaning and optimistic, how would the social costs that typically reinflate gross margin after a period of decline perform in this context where unemployment rates didn't really rise a ton? Jonas Prising: The changes that we've seen in the gross margin so far, Tobey, are all related to business mix. And to your point, there hasn't been a real decline in employment that's significant. And so whatever social burdens are carried today, and I'm sure that you're referring mostly here to the U.S., we would expect to carry on and be stable into the future because there's no need to re-up those burdens to a level that had been depleted, and that's what we would expect to see. So from that perspective, we don't think that social costs will have a major impact, barring changing legislations, of course, but just from an employment perspective, driving changes in social costs and aside from any pension-related costs in other countries that might go up or not, we don't really expect that to be a main factor in driving our gross profit margin differences. But of course, what we are very keenly focused on is when employers feel more confident in the economy that we will see permanent recruitment go up to more normalized levels, and that will have an overall very positive effect on our gross profit overall. Tobey Sommer: Understood. And from an IT perspective internally within the firm, you've been pushing process improvement, global standardization, et cetera. Where do you think you sit from a competitive perspective? Because globally for the largest enterprise customers, you compete with a relatively narrow set of firms, are you ahead on par, trailing? Where do you see yourself competitively from that perspective? Jonas Prising: Well, of course, it's hard to say, Tobey. But I don't know that many of our competitors, national or other -- or global certainly, have 90% of their revenues flowing through one common office platform. We also have an extensive data lake that captures all of the data of our actions through our various digital channels. So I think we're very, very well positioned from a competitive perspective. But we're also clear that this is a race and that it's all about enabling the company to shift the value to where it matters most, which is the human interactions with our clients, our candidates and our associates and render all the transactional activity as efficient as possible through automation, leveraging AI when appropriate and making our processes as efficient as possible. The true value that we create is in the last mile delivery with our clients and our associates, and that's what we're aiming firmly towards making sure that, that moment of truth is where we spend most of our time and that we enable our organization to be as efficient and as productive as we can, leveraging this global platform to the greatest degree possible. Operator: Thank you. That concludes our earnings call. And I'll hand it over to Jonas to end the call. Jonas Prising: Thank you very much, Michel, and thanks, everyone, for participating in today's earnings call. We look forward to speaking with you again on our Q4 call in January. Thanks, everyone. Have a great rest of the week. Operator: Thank you for your participation. You may now disconnect. Good day.
Breeka: Good morning, and thank you for attending the Insteel Industries Fourth Quarter 2025 Earnings Call. My name is Breeka, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Mr. Howard Osler Woltz, Chairman, President, and Chief Executive Officer at Insteel Industries. Thank you. You may proceed. Howard Osler Woltz: Thank you, Breeka. Thank you for your interest in Insteel, and welcome to our Fourth Quarter 2025 conference call, which will be conducted by Scot R. Jafroodi, our Vice President, CFO, and Treasurer. Before we begin, let me remind you that some of the comments made in our presentation are considered to be forward-looking statements that are subject to various risks and uncertainties, which could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC. The upturn in business activity that we previously continued during our fourth quarter and our fiscal 2025 acquisitions performed well. While our ability to forecast future activity is limited, we see no evidence of a broad-based slowdown in our markets, although housing continues to lag significantly, as it has all year. While the ongoing recovery of our markets is real, we are aware of uncertainties created by the administration's trade policies and from the economic cycle. I'll turn the call over to Scot to discuss our financial results. And following Scot's comments, I'll pick the call back up to discuss our business outlook. Scot R. Jafroodi: Thank you, Howard, and good morning to everyone joining us today. As noted in this morning's press release, we delivered a strong fourth quarter performance supported by higher shipment volumes and a continued recovery in spreads between selling prices and raw material costs. Our net earnings rose to $14.6 million or 74¢ per diluted share compared to $4.7 million or $0.24 per share during the same period last year. Quarterly shipments increased 9.8% year over year, driven by contributions from our recent acquisitions and stronger demand across nonresidential construction markets. On a sequential basis, shipments declined 5.8% from the third quarter. Supply constraints for steel wire rod, which we discussed during our third quarter call, eased gradually during the quarter, allowing us to better align production with customer demand and begin reducing lead times as we close out the quarter. That said, residential construction continues to be a headwind for volumes, with activity levels remaining subdued and has yet to show any meaningful signs of recovery. Average selling prices for the quarter rose 20.3% year over year and 4.7% sequentially from Q3, reflecting continued pricing momentum we discussed on our prior calls. The US steel wire rod markets have remained tight through much of 2025, and the increase in Section 232 tariffs has added further upward pressure on raw material costs. As a result, wire rod prices have moved meaningfully higher since the start of the year. In response, we have implemented a series of price increases throughout fiscal 2025, including further adjustments at the beginning of the fourth quarter to help offset these higher costs and support our margins. Gross profit for the quarter rose $16.3 million year over year to $28.6 million, with gross margin improving by 700 basis points to 16.1%. The increase was largely attributed to wider spreads as higher average selling prices more than offset the rise of raw material costs. As we discussed on previous calls, our results typically benefit during periods of strong demand and increasing steel rod prices, both from the timely execution of price adjustments to recover higher replacement costs and from the flow-through effect of lower-cost inventory under our first-in, first-out accounting method. On a sequential basis, gross profit fell $2.2 million from the third quarter, and gross margin narrowed 100 basis points, reflecting lower shipment and a slight decline in spreads. SG&A expense for the quarter increased to $9.7 million or 5.5% of net sales compared to $7.5 million or 5.6% of net sales in the prior year period. The year-over-year increase was driven primarily by a $1.3 million rise in compensation expense under our return on capital base incentive plan, reflecting stronger financial performance in the current year. We also recorded an additional $300,000 in amortization expense related to intangible assets from our recent acquisitions, along with a $200,000 unfavorable year-over-year swing in the cash surrender value of life insurance policies. Our effective tax rate for the fourth quarter was 24.4%, up from 23% in the same period last year. The increase was mainly driven by changes in both tax differences and the true-up of state apportionment percentages. For the full year, our effective tax rate was 23.8%. Looking into next year, we expect our effective rate will run around 23.5%, subject to the level of pretax earnings and other tax-related assumptions and estimates that compose our tax provision calculation. Turning to the cash flow statement and balance sheet, cash flow from operations used $17 million in the quarter compared to providing $16.2 million last year. Net working capital used $37.4 million in cash in the fourth quarter, primarily reflecting an $18.6 million increase in inventories and a $23.4 million decrease in accounts payable and accrued expenses. The increase in inventories was driven by the timing of raw material purchases and an increase in the average carrying value of inventory. The reduction in accounts payable and accrued expenses primarily reflects the timing of supplier payments. At the end of the quarter, our inventory position represented 3.5 months of shipments on a forward-looking basis, calculated off of our forecasted Q1 shipments, compared with 2.7 months at the end of the third quarter. As you may recall, inventories had fallen below desired levels in Q3 due to stronger shipment activity and limited wire rod availability from domestic suppliers. To address this, we supplemented supply in Q4 with offshore rod purchases, which allowed us to increase production and rebuild inventories. Looking ahead, we expect inventory to rise in the near term as additional import shipments are received before gradually normalizing as raw material volumes moderate in the coming months. Additionally, it's worth noting that our inventories at the end of the fourth quarter were at an average unit cost that was both higher than our beginning inventory balance and our Q4 cost of sales. As such, we could experience margin compression during the first quarter as the higher-cost materials are consumed, depending on our ability to push through additional price increases. We incurred $1.7 million in capital expenditures in the fourth quarter for a total of $8.2 million for the year, which is down $10.9 million from last year. Looking ahead to fiscal 2026, we expect capital expenditures to total $20 million. Howard will provide more detail on this topic in his remarks. In addition to our ongoing investments in the business, our financial strength has enabled us to continue returning capital to shareholders. In fiscal 2025, we returned $24 million through a combination of dividends and share repurchases. This included a $1 per share special cash dividend and four regular quarterly dividends, marking the eighth year out of the last ten that we have paid a special dividend. We also repurchased approximately 76,000 shares of our common stock during fiscal 2025, representing $2.3 million under our share buyback program. From a liquidity perspective, we ended the quarter with $38.6 million in cash on hand, and we are debt-free with no borrowings outstanding on our $100 million revolving credit facility. Going forward, our capital deployment strategy will remain focused on three objectives: one, reinvesting in the business to drive growth and to improve our cost and productivity; two, maintaining the appropriate financial strength and flexibility; and three, returning capital to shareholders in a disciplined manner. Looking at the broader economic picture as we enter fiscal 2026, conditions remain mixed. Raw material availability has improved, and demand across most nonresidential markets is generally strong, but residential construction continues to lag. At the same time, macroeconomic uncertainty remains. While potential rate cuts from the Federal Reserve could provide some support, we are approaching the year cautiously. On the demand side, we continue to monitor leading measures of nonresidential construction activity. In August, the Architectural Billing Index rose slightly to 47.2 from 46.2 in July, but remained below the 50 threshold signaling growth. Although fewer architectural firms reported declining billings compared to the prior month, the overall trend continues to point downward. Meanwhile, the Dodge Momentum Index showed continued strength and a healthy power project pipeline, rising 3.4% in September and now up 33% year to date, driven by strong commercial construction planning activity, particularly in data center development. In contrast, U.S. housing starts, another proxy for construction activity, declined 2.2% year over year in June and are down 5.3% year to date, reflecting some underlying softness in the sector. Finally, the most recent available construction spending data from the U.S. Department of Commerce shows that through July, total spending on a seasonally adjusted basis was down about 3% from last year. Nonresidential construction held relatively steady. Public highway and street construction, one of our major end markets, was essentially flat compared to a year ago. Even with the mixed demand backdrop, we are entering fiscal 2026 with solid momentum. Actions we took during the past year, including completing two acquisitions, consolidating our Welded Wire operations, and maintaining pricing discipline, have strengthened our position and improved our ability to adapt to changing market conditions. While we remain mindful of broader economic uncertainty, our focus on serving customers and executing on our key priorities gives us confidence in our ability to manage near-term challenges and continue building long-term value for our shareholders. This concludes my prepared remarks. I'll now turn the call back over to Howard. Howard Osler Woltz: We noted a substantial acceleration of demand for concrete reinforcing products early in fiscal 2025 and commented that we expected the demand recovery to continue through the fiscal year. We are glad to confirm that the positive trend continued through our fourth fiscal quarter, giving us confidence that we should perform well for the balance of the calendar year. The accelerated pace of business we experienced over the past few months is not reflected in the broader macroeconomic indicators that are generally used to measure the strength of the construction industry, but the demand recovery is nonetheless real. The confidence level of most customers and interactions our salespeople have with customers leads us to believe business conditions should remain reasonably robust into calendar 2026. As most of the people on this call are aware, housing is not a major driver of demand for Insteel. We estimate that about 15% of our revenues are derived directly from housing construction, with standard welded wire reinforcement and PC strand intended for slab-on-grade post-tension applications being the product lines most affected by the sector. Demand for new housing continues to be weak, and inventory of both materials and finished housing units are too high. With respect to finished housing units, we hear from customers that builders are experiencing the affordability problem created by higher material prices and interest rates that we've all read about, and that they are de-risking their businesses by reducing inventories. We hear that this process, which has been underway for quite a while, may run its course by the first of the year, when volume begins to recover to more normal levels. Over the past several months, we have spent substantial time and resources understanding the administration's tariff plan. As with any conversation about tariffs, we can speak about what we know now, which may or may not be true tomorrow. But as of now, we are affected by tariffs in two ways. First, the most significant tariff exposure we have is the Section 232 tariff on steel and aluminum, which is 50% of the value on all raw material imports purchased by Insteel. As a point of interest, the 50% Section 232 tariff also is applied to imports of PC strand under the derivative products provision. The Section 232 tariff has caused domestic steel prices to rise to levels that reflect the 50% tariff on imports, and predictably, imports have declined precipitously. This is particularly notable in the hot-rolled wire rod segment of the steel industry, as it has been recently undersupplied domestically, making imports necessary for Insteel and other consumers. The increase in our net working capital for Q4 is largely attributable to imports from wire rod that were delivered during Q4, and additional quantities will be delivered in Q1 2026. These purchases were made because domestic sources could not or would not provide assurances that our needs will be covered at prices that are competitive after giving effect to the Section 232 tariff. You may recall last quarter, we expressed concern that the administration's proclamation doubling the Section 232 tariff to 50% may have diluted the effect of the tariff with respect to imports of PC strand. Up to this point, we do not believe this has occurred, although we are requesting that the administration clarifies its expectation that the tariff is to be applied to the full value of imported PC strand. Because Department of Commerce statistics are offline during the government shutdown, we are unable to monitor the collection of tariffs applied to PC strand imports, but we will be active again as soon as services are restored. The second way we are affected by the administration's tariff policy is through our purchases of any imported goods that are subject to reciprocal tariffs in addition to Section 232 tariffs on steel and aluminum. Practically, all of our production equipment is imported, and purchases of spare parts, which are not discretionary, are subject to Section 232 and reciprocal tariffs. Administration of the tariff regime largely falls on our suppliers, who must sort through the exposure to Section 232 and reciprocal tariffs for each part shipped to the U.S. I want to reiterate that only about 10% of Insteel's revenue base is directly affected by imports and therefore potentially subject to unintended consequences of the administration's tariff policy. This is not coincidental, as we've recognized the futility of competing in markets where imports constitute a major source of competition. Moving to acquisition activity, we continue to be pleased with the operation and results of our Upper Sandusky, Ohio facility that was acquired during Q1. Our Texas acquisition, while considerably smaller, has also yielded the expected benefits. While improvements are ongoing, we consider the integration of these operations to be complete and successful. Turning to CapEx, as mentioned in the release, we expect to invest approximately $20 million in our plants and information systems infrastructure during 2026. You can expect our investments to broaden our product offering, reduce our cash production cost, and enhance the robust nature of our information systems. Consistent with past practice, we will provide quarterly updates on our investment activities and expectations as the year progresses. Looking ahead, we are aware of the substantial risk related to the administration's tariff policies and the future performance of the U.S. economy. Regardless of developments in these areas, we are well-positioned to pursue actions to maximize shipments, optimize our costs, and pursue attractive growth opportunities both organic and through acquisition. This concludes our prepared remarks, and we'll now take your questions. Breeka, would you please explain the procedure for asking questions? Breeka: Of course. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. If for any reason you would like to remove that question, please press star followed by the number two. Please press star then the number one. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. The first question we have comes from Julio Alberto Romero with Sidoti and Company. Your line is open. Julio Alberto Romero: Thanks. Hey, good morning, Howard, Scot. Scot R. Jafroodi: Good morning. Julio Alberto Romero: I want to start on demand. It sounds like the confidence level of customers continues to be positive. And then last quarter, you mentioned your view that data center construction and infrastructure projects were kind of filling the gap from commercial and residential. Does that still stand the same today? And is there any incremental kind of data points or anecdotal points that have materialized since the last quarter that can better support that view? Howard Osler Woltz: Well, I think it continues to be the fact that the data center construction is filling a hole that has existed in other markets. But consistent with what we've said for many quarters, our view is not several months long. It's only several weeks long. So we see the activity out there. We think it will continue, but our lead times remain compressed just by the nature of the industry. Julio Alberto Romero: Okay. Got it. That's helpful. And, on the raw material front, it sounds like you ended the quarter with 3.5 months of shipments of inventory. How would you describe the current supply of raw material? Would you describe it as normalized at this point? Or is there still improvement to come? Howard Osler Woltz: I mean, the first thing we want to do, Julio, is operate our plants effectively. And during our fourth quarter, particularly at the beginning of our fourth quarter, we were unable to do that because of supply constraints. So the quantities that we imported, we imported for a distinct reason, for distinct applications, and at plants that were deficient in domestic supply. And so we're not surprised at all about where we stand, and we're not disappointed about where we stand, that we have what we need, and the import market has changed some. Whereas we used to be able to buy 3,000 or 4,000 tons at a time, those quantities have moved up just based on the origin and shipping costs that are associated with imports. So all things considered, we're exactly where we thought we would be. Julio Alberto Romero: Okay. Got it. And with a year under your belt for the Engineered Wire Products deal, I believe, this month. Any way you could have us think about the year one contribution from EWP? It's on, you know, an earnings or margin or mixed basis? And then, secondly, Howard, as you've mentioned in the past that acquisitions are made not really for year one, but with the longer term in mind, do you feel like the true synergies from EWP are still to come? Howard Osler Woltz: Well, we can't really calculate the exact impact of EWP at the Upper Sandusky site itself because a considerable amount of the output of Upper Sandusky has been moved to other Insteel production facilities that are better located to customers and suppliers than Upper Sandusky. With that said, the financial performance of Upper Sandusky has been solid, and exactly where we thought it would be. It has a very attractive product mix. It's a very effective manufacturer. And we're pleased as punch with that transaction. Julio Alberto Romero: Very helpful. Last one, and I'll pass it on after this is, you mentioned residential still remains soft. And I think historically you've described it as comprising around the 15% of sales range. But you've acquired EWP, and, you know, it's obviously made up less of a portion of sales. I guess just if you could give us a sense of where that stands as a percentage of your mix. Howard Osler Woltz: Yeah. Keep in mind that it's really difficult for us to pinpoint the exact end markets that our products go into. And if you'll look back at my comment a few minutes ago, I referred to the direct impact of housing on our business. The indirect impact is infrastructure that goes into housing developments, streets, and, you know, sanitary sewers and storm sewers. And so when our customers ship a joint of concrete pipe or a box culvert out, they don't necessarily know exactly what that application is. And if it goes into infrastructure in a development, you know, the way that we look at it, it's not a direct housing application. It's more of an infrastructure application. It's really difficult to pinpoint the end use. Julio Alberto Romero: Very good. I'll leave it there. Thanks very much. Howard Osler Woltz: Thank you. Breeka: Just as a quick reminder, it's star followed by one if you would like to register for a question. And we now have a question from Tyson Lee Bauer with KC Capital. Please go ahead. Tyson Lee Bauer: Good morning, Good morning. Just going to follow-up on that last question. In general, with your comments on demand for '26, and obviously, that's for fiscal 2026, it sounds like you're not baking in any real meaningful recovery in residential. You're treating that as something that is a wait-and-see portion of your end markets. You're looking at strength and demand in other areas in the nonresidential really being the lead dog here. And residential, you're just going to wait until you actually see some evidence of any kind of recovery. Howard Osler Woltz: Yeah. I mean, I think nonresidential is always the lead dog for Insteel. And we know if our customers tell us about residential demand and applications. And I think there's some thought that the inventory issue will have run their course through the end of the calendar year. And therefore, we should see improved residential demand. But as we've said on multiple occasions, we really don't see out very far. So yeah, we're not banking on a huge housing recovery in 2026. Tyson Lee Bauer: Right. Okay. In regards to the inventory carry strategy, given the current environment and domestic supply issues, should we continue to see a heavier carry or elevated levels in that inventory? And if so, will that then increase the variability of your margins given the FIFO accounting, we could see some more quarter-to-quarter variability. Howard Osler Woltz: I think through our second quarter, inventories will be somewhat elevated relative to where they might be if we were acquiring raw materials domestically to a larger extent. But probably no higher than they are now. And here's the other thing about imports. Of course, we acquired offshore products at a known cost. Nobody knows what the cost domestically is going to be. So I think there is a benefit from just a pricing point of view of knowing what the price is going to be in those out months. So all things considered, we're not at all displeased with where we are or where we think we're going to be with respect to our sourcing activities and the cost for our raw materials. Tyson Lee Bauer: Does that actually make your pricing strategy a little, I don't want to say easier, but a little more, you know, what you need to hit given that certainty on the inventory side? Or as we go into some of these seasonally weaker quarters, pushing through those price increases can be a challenge. Howard Osler Woltz: Yes. I mean, I would say the answer to that is all of the above. In certain of our markets, the price will move as the price moves irrespective of what happens in the raw material markets. In other project-related business, where we have to give a price for a project that is some months out, the import pricing is actually a huge advantage for us. So it's a mixed bag. But keep in mind, the underlying reason that we went to the offshore markets was the inability to assure that we had availability domestically. And that's it. Tyson Lee Bauer: And in this fourth quarter, when we look at that shipment volume sequentially in the 5.8% decline, it doesn't sound like demand was the issue for you at all. Was a lot of that just based upon production supply issues and not being able to run efficiently and meet timelines on shipments? So how much of the quarter in the shipment decline was really related to the production issue side as opposed to demand? Howard Osler Woltz: I can't tell you how much, but the answer to your question is yes. Early in the quarter, we were operating short weeks at plants that were unable to get adequate quantities of raw materials. Tyson Lee Bauer: And that situation has been resolved as we've moved into the current quarter? Howard Osler Woltz: Yes. Both domestically, there's additional production as compared to our third quarter, and we took action offshore as we've talked about extensively. Tyson Lee Bauer: Okay. And the last question for me. You talked about you don't know exactly what your products are used for as far as the final destination. We kind of were able to derive that when distribution centers were the hot item a few years back. That was tilt-up kind of construction. So you kind of have an idea based on what the specs and what you were shipping out. Do you have that ability to have some kind of inference on what goes into data centers? Is that a tilt-up type construction? Is that other that's more specific? Any clarity on that side that kind of have an idea of where or how much that is helping? Howard Osler Woltz: Yes. We know. I mean, certainly, when demand is project-related, we can pinpoint it. When demand is more generic in nature, we can't necessarily pinpoint the end use. But the data center construction has been important to the company and will continue to be. And probably more than just data centers, our venture into the whole world of cast-in-place applications for our product is interesting and will be a source of growth for us. But it's not a segment of our business that we plan to disclose details on. Tyson Lee Bauer: Okay. Thank you. Breeka: Thank you. That is powerful if I want to ask any further questions. And we now have a follow-up from Julio Alberto Romero with Sidoti and Company. Julio Alberto Romero: Hey. Thanks. Thanks for taking the follow-ups. Guys, just maybe speak a little more to demand from a geographic standpoint? What areas are you seeing strength compared to three months ago? And what areas maybe you're up? Relatively weaker? Howard Osler Woltz: I don't know that there are any geographic trends that jump out at us. The legacy business of our supplying precasters is pretty steady over the entire country. The cast-in-place business that we do is so project-oriented that it could be in Miami today, Las Vegas tomorrow. So it's not dominated by any one geographic region. Neither of our product lines or activities is. Julio Alberto Romero: Got it. One other question. It's about water infrastructure. I know you guys make the concrete pipe culverts that are used in water treatment facilities and sewer systems and other kind of related applications there. There are states that are making initiatives to address aging water infrastructure. Texas is talking about passing Prop four in November, which would add a lot of, you know, state taxes towards that initiative. Can you would that benefit you guys at all? Particularly the Prop four in Texas. Howard Osler Woltz: Yeah. I think it's positive, Julio, to the extent that additional funding is available in those sorts of projects. There's gonna be plastic pipe. There's gonna be all kinds of non-concrete products that go into those applications, but there'll also be concrete pipe. There'll be box culverts and concrete-related things that definitely help Insteel. And I would tell you that I think that part of the recovery in demand that we've seen has been related to the funding provided by the Infrastructure Investment and Jobs Act, which is now five or six years old. But I think those funds are beginning to find their way into the market and translate into demand. Although, I would hasten to say that we can't track any particular shipment that we've made to an IIJA funding mechanism. But, nevertheless, something's responsible for the uptick that we're seeing, and I believe it's funding-related. Julio Alberto Romero: To that last point, Howard, you mentioned IIJA funding is several years old. But you guys are basically just kind of beginning to see that push now, and then therefore, there is runway to when the IIJA funds there's a multiyear runway remaining as regards to the benefit of IIJA funding to Insteel's P&L? Howard Osler Woltz: Yeah. I mean, I have no objective data to support my belief, Julio. I think the answer is yes. And if you go back to the Department of Transportation's comment on IIJA eight some years ago, they said, this is not a stimulus program. This is a new way we're considering funding infrastructure. And they acknowledge that the lead time is measured in years, not weeks or months, between the funding being available and translating into actual activity on job sites. And to the extent that that's the case, I think we're now seeing activity on job sites. Julio Alberto Romero: Very helpful. Thanks very much. Howard Osler Woltz: Okay. Thank you. Breeka: Thank you. We currently have no further questions. Just one final reminder, if you'd like to register, please press star. I can confirm that does conclude the question and answer session here. And I would like to hand it back to the management team. Howard Osler Woltz: Okay. We appreciate your interest in Insteel. Look forward to talking to you next quarter. And if you have questions, don't hesitate to follow up with us. Thank you. Breeka: Thank you for dialing in for the Insteel Industries Fourth Quarter 2025 Earnings Call. Today's call has now concluded. Thank you all for your participation, and you may now disconnect.
Jeff Su: Good afternoon, everyone, and welcome to TSMC's Third Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows: first, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2025, followed by our guidance for the fourth quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Jen-Chau Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT as our business was supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 10.1% sequentially to $33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9 percentage points sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas fabs. Accordingly, operating margin increased 1.0 percentage points sequentially to 50.6%. Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 23% of wafer revenue in the third quarter, while 5-nanometer and 7-nanometer accounted for 37% and 14%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC remained flat quarter-over-quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. And DCE decreased 20% to account for 1%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of TWD 2.8 trillion or USD 90 billion. On the liability side, current liability decreased by TWD 101 billion quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others as we paid out 2025 provisional tax of TWD 136 billion. In terms of financial ratios, accounts receivable turnover days increased 2 days to 25 days. Days of inventory decreased 2 days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx. During the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx and distributed TWD 117 billion for fourth quarter '24 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $9.7 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between USD 32.2 billion and USD 33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 30.6, gross margin is expected to be between 59% and 61%, operating margin between 49% and 51%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter '25 and fourth quarter '25 profitability. Compared to second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided 3 months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91 compared to our guidance of $1 to TWD 29. In addition, we also delivered better-than-expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas fabs. While the cost of overseas fabs remain higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1% to 2% as compared to 2% to 3% previously. Looking ahead, we continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next several years to be 2% to 3% in the early stages and widen to 3% to 4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now let me make some comments on our 2025 CapEx. As the structural AI-related demand continues to be very strong, we continue to invest to support our customers' growth. We are narrowing the range of our 2025 CapEx to be between USD 40 billion and USD 42 billion as compared to USD 38 billion to USD 42 billion previously. About 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mass making and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for the future growth with this higher level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now let me turn the microphone over to C.C. C.C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of USD 33.1 billion, slightly above our guidance in U.S. dollar terms, mainly due to the strong demand for our leading edge process technologies. Moving into fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading edge process technologies. We continue to observe robust AI-related demand throughout 2025, while non-AI end market segment have bottomed out and are seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full year 2025 revenue to increase by close to mid-30s percent year-over-year in U.S. dollar terms. While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risk from the potential impact of tariff policies, especially in consumer-related and price-sensitive end market segment. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 by continuing to invest for the future megatrend. Amidst the uncertainty, we will also continue to focus on the fundamentals of our business, that is technology leadership, manufacturing excellence and customer trust, to further strengthen our competitive positioning. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in AI market continue to be very positive. The explosive growth in token volume demonstrate the increasing consumer AI model adoption which means more and more computation is needed, leading to more leading-edge silicon demand. Companies such as TSMC, we are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continued strong outlook from our customers. In addition, we directly received very strong signals from our customers' customers, requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening and we believe the demand for semiconductor will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and thorough capacity planning system. Externally, we work closely with our customers and our customers' customer to plan our capacity. We have more than 500 different customers across all the end market segments. In addition, as process technology complexity increases, the engagement lead time with customer is now at least 2 to 3 years in advance. Therefore, we probably get the deepest and widest look possible in the industry. Internally, our planning system involve multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approach to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related business. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading edge specialty and advanced packaging technologies to support their growth. We will also remain disciplined and thorough in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' need as they value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to -- and to a more advanced process technologies in Arizona, given the strong AI-related demand from our customers. Furthermore, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multiyear AI-related demand. Our plan will enable TSMC to scale up through an independent giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI and HPC applications. Next, in Japan, thanks to the strong support from the Japan central, prefectural and local government, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has begun, and the ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from European Commission and the German federal state and city government. Construction of our specialty fab in Dresden, Germany, has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' need and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of 2-nanometer fab in both Hsinchu and Kaohsiung Science Parks. We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next several years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of global logic IC industry for years to come. Finally, let me talk about our end-to-end A16 status. Our 2-nanometer and A16 technologies lead the industry in addressing sizable demand for energy-efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter. With full year, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family. N2P feature further performance and power benefits on top of N2 and volume production is scheduled for second half '26. We also introduced A16 featuring our best-in-class Super Power Rail or SPR. A16 is best suited for specific HPC product with compressed signal routes and dense power delivery networks. Volume production is on track for second half '26. We believe N2, N2P, A16 and its derivatives will propel our N2 family to be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared statements. [Operator Instructions] Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line. Thank you. Operator: First one, Gokul Hariharan, JPMorgan. Gokul Hariharan: Great results again. So on the AI front, C.C., I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. And as you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40s data center AI growth CAGR earlier this year until 2029. Anything that you see which should kind of change that number? Definitely feels like the growth today seems to be much stronger. And related to that, you did talk about the very detailed capacity expansion planning that TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading-edge node. But in this cycle, TSMC revenues have grown 50% from the previous peak in '22, CapEx has only grown about 10%. So how should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand like are we looking at much higher CapEx in the next couple of years, given all these conversations you've had. And I have a follow up after that. Jeff Su: Okay. So Gokul's first question, sorry, Gokul, let me summarize for everyone's benefit. So again, he wants to know, firstly, related to the AI-related demand that TSMC works with many, if not everyone, who is doing AI. And many of the customers seem to be even more positive today. So I guess he would like to ask C.C. sort of what are we seeing or hearing from our customers. And then we had previously said that the next 5 years from 2024 to '29, we expect AI accelerator to grow at a mid-40s CAGR. Is there any update to this? I think this is the first part, then I'll get to the second part on CapEx. C.C. Wei: That's a long question, isn't it? Gokul, the AI demand actually continue to be very strong, it's more -- more stronger than we thought 3 months ago, okay? So in today's situation, we have talked to customers and then we talk to customers' customer. So the CAGR we -- previously we announced is about mid-40s. It's still -- it's a little bit better than that. We will update you probably in beginning of next year. So we have a more clear picture. Today, the number are insane. Jeff Su: And then the second part of Gokul's question are related to CapEx. He notes that in the past, when TSMC sees opportunities for higher growth, past cycles or past instances, we would step up the CapEx significantly to prepare to drive the future growth. But he notes, this cycle, actually, though, while CapEx is increasing, the revenue is increasing even faster. So his question really, I think, how do we see this playing out over the next few years, both in terms of the CapEx spend and the growth relative to the revenue growth. Jen-Chau Huang: Okay. Gokul, every year, we spend the CapEx based on the -- our business opportunity in the following few years. As long as we believe there are business opportunities, we will not hesitate to invest. And if we do our job right, the growth of our business, of our revenue should outpace the growth of the CapEx. And that's what we have been delivering in the past few years. Now going forward, assuming we're doing -- still doing a very good job, then we will continue to see that happening again. So a company of our size, the CapEx number, it's unlikely to certainly go up significantly in any given year. When we continue to invest and our growth is outpacing our CapEx growth, then you see the growth like what we have done in the past few years. Gokul Hariharan: Understood. I know that it is unlikely to drop, but it is also likely to grow quite a bit given what C.C. mentioned in terms of every customer asking you and every customers' customer requesting you for capacity addition, right? Jen-Chau Huang: Yes. As I said, a higher level of CapEx is always going to be correlated with a higher growth opportunity. So as C.C. said, next year looks to be a healthy year, and we are confident on the mega trend that we'll continue to invest. Gokul Hariharan: Yes. Maybe one more follow-up question from me. C.C., I think last year also, you gave us an indication of how much CoWoS capacity you would be building. I think you talked about 2x, of doubling the CoWoS capacity. It clearly feels like even that is not enough. Could you give us some idea about how much capacity would you be building next year just to get some idea about what you are seeing in terms of AI demand? And also just to get some understanding of TSMC's data center AI exposure, I think last year, we talked about mid-teens revenues. Where do we end up this year? Do we end up close to like 30% of revenues coming from AI? Jeff Su: Okay. So Gokul, your second question, really, he wants to understand can we provide any detail or color on the CoWoS capacity plan for 2026 in terms of year-on-year increase. And also in terms of our definition of AI accelerated revenue, the narrow definition, how much will it contribute for 2025 revenue? Is it 30%? C.C. Wei: Well, Gokul, this is C.C. Wei again. Talking about the CoWoS capacity, all I can say is continue the 3 months ago, we are working very hard to narrow the gap between the demand and supply. We are still working to increase the capacity in 2026. The real number, we probably update you next year. Today, all I want to say about the AI everything related like front-end and back-end capacity is very tight. We are working very hard to make sure that the gap will be narrow, but all I can say is we are working very hard. Jeff Su: Okay. Thank you, Gokul. I think we need to move on in the interest of time. So operator, can we move to the next participant, please? Operator: Yes. Next one, Charlie Chan, Morgan Stanley. Charlie Chan: And again, congratulations for very strong results, C.C., Wendell and Jeff. So my first question is really about your business demand. As C.C. just mentioned, your front-end demand is also very strong into next year. But one of your major customer said that more so is that -- I think his point is that doing maybe a system-level innovation in thermal, et cetera, can boost up more kind of performance. So just a kind of a dumb question. How do we reconcile your very, very strong leading edge demand and the customers continue to migrate to your most advanced nodes? And also you continue to reflect value, whereas the customer continue to think that Moore's law is dead. Can we get some clarification from TSMC? Jeff Su: So Charlie's question is very specific although -- he wants us to comment on a customer saying Moore's law is dead but how do we reconcile this with a very strong leading edge demand into 2026 and also with system-level innovations? C.C. Wei: Okay. Charlie, this is C.C. Wei. Yes, one of my customers, very important customer say Moore's law is dead, but what he meant is it's not only we rely on the chip technology anymore, now we have to focus on that whole systems' performance. So he want to emphasize the whole systems' performance rather than just talking about the Moore's law, which is not enough to meet his requirement. So again, we work very closely with his people and to design our technology both in front-end and back-end and also in all the packaging to meet his requirement. That's all I can say. Jeff Su: Okay. Thank you, C.C. Do you have a second question, Charlie? Charlie Chan: Yes, I do, Jeff. Yes. So anyway, I would interpret it as so-called Moore's Law 2.0 that your co-COO, Mr. Cliff Hou also comes here during the SEMICON Taiwan. But anyway, thanks, C.C., for your commentary. And my second question is actually a follow-up from last quarter's same question. Back then, I consulted you about China AI GPU demand, right, whether you can seize the market opportunity because China, certainly, they also expanding their AI infrastructure very rapidly. But given the recent kind of back and forth between U.S. and China, whether China can really import NVIDIA GPU, would that kind of discount your potential long-term growth of the AI CAGR? Is that something that TSMC would worry about? Jeff Su: Okay. So Charlie's second question is related around AI demand and specific to China. With the sort of the export control and restriction, his question is, does that impact our ability to address the market opportunity and will this impact our AI CAGR growth if we are not allowed to fully serve China. Charlie Chan: Yes. I think it's a little bit of both sides, meaning restriction from the U.S. but also China government's kind of discouragement to procure U.S. chip. Sorry for the interruption. C.C. Wei: Well, Charlie, to speak the truth, I have confidence on my customers, both in graphic or in ASIC, they are all performing well. And so if the China market is not available, but I still think the AI's growth will be very dramatically and as I said, very positive, and I have confidence that our customers' performance, and they will continue to grow, and we will support them. Charlie Chan: So even with limited opportunity from China for the time being, you are still confident that a 40% CAGR or even higher can be achieved in coming years? C.C. Wei: You are right. Jeff Su: Operator, can we move on to the next participant, please? Operator: Yes. Next one, Sunny Lin, UBS. Sunny Lin: Congrats on the very strong gross margin. So my first question is how should we think about 2026. I understand we should get better color maybe into January, but just want to get some directional major puts and takes for gross margin trending going to 2026. Especially, how should we think about the gross margin impact from 2-nanometer ramp for 2026? Jeff Su: Okay. So Sunny's first question is regarding gross margin. She would like to know directionally, how do we see the gross margin for next year 2026 in terms of certain puts and takes. And also if Wendell is able to comment specifically, Sunny, sorry if I heard you right, on the N2 dilution impact, correct? Sunny Lin: Yes, that's right. Jeff Su: Okay. That's her first question. Jen-Chau Huang: Okay. Sunny. Yes, it's too early to talk about 2026. But you already mentioned about the N2 dilution. And as all the new node, when they just come out, the N2 will have dilution in our gross margin in 2026. But at the same time, the N3 dilution is gradually coming down, and we expect the N3 to catch up to the corporate average sometimes in 2026. The other factors include like overseas fabs dilution, which will continue and which we said that it will be about 2% to 3% dilution in the early stage of the next several years. That will also be there. And also we all saw the dramatic foreign exchange rate movement in the earlier part of this year. There's no control. We don't know where that will be. But every percentage move of dollar against NT will affect our gross margin by 50 -- 40 basis points. So that just gives you some rough idea. Sunny Lin: Got it. Sorry, if I may, yes, a very quick follow-up. And so on 2-nanometer, would the typical 2% to 3% dilution by new node for the first 7 to 8 quarters of mass production be a good reference for 2-nanometer as well for 2026? Jeff Su: Okay. So Sunny, a quick follow-up. She wants to know for the 2-nanometer dilution, if we're able to provide any detail. And can she still think about it in terms of 7 to 8 quarters or 6 to 8 quarters dilution to reach the -- time, sorry, to reach the corporate average? Jen-Chau Huang: Yes. Sunny, let me share with you. N2's structural profitability is better than the N3, okay? Secondly, it's less meaningful nowadays to talk about how long it will take for a new node to reach to a corporate average in terms of profitability. And that's because the corporate profitability, the corporate gross margin moves and generally, it has been moving upwards. So less meaningful to talk about that, okay? Sunny Lin: Got it. No problem. That's very helpful. My second question is maybe for C.C. Thanks a lot for sharing with us the details on how you think about the capacity expansions and planning. And so my question is now cloud AI is ramping a lot faster than the prior opportunities like smartphones and PCs. Yes, I think the demand for cloud AI is also may be harder to forecast. So just want to maybe get a bit more color from you that now versus the prior rounds of capacity expansions, what is TSMC doing differently versus before? And how do you ensure that while you are ramping up the capacities more quickly while still having good risk control? Jeff Su: Okay. Thank you, Sunny. So Sunny's second question is regarding capacity planning and expansion. In a capital-intensive business, she notes this is very important. But in the past smartphone and PC megatrends; today, it's AI and cloud AI. She is wondering, does that make this planning process more difficult to forecast? And what are we doing differently or how do we forecast this to make sure that we are investing appropriately? C.C. Wei: Sunny, indeed, right now because of -- I believe we are just in the early stage of the AI application. So very hard to make the right forecast at this moment. What do we do differently? There's a big difference because right now, we pay a lot of attention to our customers' customer. We talk to and then discuss with them and look at their applications, be it in the search engine or in social media application, we talk with them and see how they view the AI application to those functions. And then we make a judgment about what AI going to grow. And so this is quite different as compared with before, we only talk to our customers and have an internal study, this is different. Did I answer your question? Sunny Lin: Got it. Yes, yes, yes, and looking forward to the CapEx guide in January. C.C. Wei: You're welcome. Jeff Su: All right. Thank you, Sunny. Operator, can we move on to the next participant, please? Operator: Next one, Bruce Lu, Goldman Sachs. Zheng Lu: I think Jensen talked about like $3 trillion to $4 trillion AI infrastructure opportunity by 2030, right? This compared to like 600 billion CapEx recent -- for this year implies for about 40% CAGR growth. This is similar to Jensen's guidance for the AI growth, right? But for me, first of all, what I want to know is what's TSMC's view for the AI infrastructure growth for the next 5 years? And what's TSMC's forecast for the token growth rate in the next few years? TSMC used to provide like semi industry growth, foundry growth and how much TSMC can outperform the industry, right? Given the context that can we assume like TSMC AI-related revenue can track -- will track with the CapEx growth of AI or the major cloud service provider? Or should we expect even higher growth rate for TSMC considering you're potentially getting more value out of it? Jeff Su: Okay. Let me try to summarize your question, Bruce. He notes that one of our customers has highlighted a $3 trillion to $4 trillion infrastructure opportunity over the next few years compared to 600 billion current CapEx, implying a 40-something percent CAGR or growth rate, which is similar to ours. Bruce's question is, he wants to know what is TSMC's forecast or view for AI infrastructure growth. He would also like to know what is TSMC's forecast or view for the token growth. And then what is TSMC's AI-related revenue growth? Can it track that of the cloud service providers? And his question is, should it be even higher -- shouldn't it be even higher given the value that we capture. That's actually several questions, but is that correct, Bruce? Zheng Lu: That's right. C.C. Wei: Well, Bruce, essentially just want to know that how accurate that we can predict the AI demand. We give you a number, roughly 40 -- the mid-40s is the CAGR, not including all the infrastructure build up and also align with our major customers' forecast for their view. More than that, I think if we are talking about the tokens, the number of tokens increase is exponential. And I believe that almost every 3 months, it will be exponentially increase. And that's why we are still very comfortable that the demand on leading edge semiconductor is real. And as I continue to say that we look at all the demand and look at our capacity expansion, we need -- TSMC need to work very hard to narrow the gap. That's what we are doing right now. Exact number that we probably will share with you in next year, so that when we have a very better, clear picture. Zheng Lu: I just had a quick follow-up. I'll use that as my second question anyway. I think the question is that the token growth seems to be substantially higher than the AI-related revenue guidance on TSMC, right? So the gap is actually enlarging if you compound in the outer years, right? That's why -- that's the differences between the -- what we see for the current TSMC outlook and the potential token consumption, right? So the gap is continue to see enlarging. How do we solve this? And do we really see that as a major issue? Jeff Su: Okay. So Bruce's second question, which is a follow-on from his first, is that the token growth is growing at a much higher rate or exponentially than TSMC's AI revenue growth, and this gap will only enlargen or widen in the next few years. So he wants to know -- sorry, Bruce, basically, what's the implication to TSMC or how do we see this? Is that correct? Zheng Lu: That's right. C.C. Wei: Okay, Bruce, you are right, you are right. The tokens and the number of tokens increase exponentially is much, much higher than TSMC's CAGR as we forecasted. And let me tell you that, first, our technology continue to improve. And so our customer moving from one node to the next node so that they can handle much more tokens number in their basic fundamental calculation. So that's one thing. We progressed very well for one node into the other node, and our customer working with TSMC to continuously to improve their performance. And that's why when we say that we have about 40%, 45%, CAGR, then the token number are exponentially increased because of our customer and TSMC's technology combined that can handle much more or much efficient than before. Did I answer your question? Zheng Lu: I see. So you believe your node migration plus your customer design change can fulfill or can meet the exponential growth for the token consumption? C.C. Wei: Exactly. Zheng Lu: Is that the conclusion? C.C. Wei: Yes. Jeff Su: Sorry, Bruce, that was your second question. Operator, we need to move on. Thank you, Bruce. Operator: Next on, Laura Chen, Citi. Chia Yi Chen: Appreciate C.C. sharing your view on TSMC strategy on the AI capacity planning. I think along with very strong advanced node demand, I believe that advanced packaging like CoWoS is also one of the focus for your AI clients they are now looking for. I recall that TSMC previously also planned to expand advanced packaging in Arizona. So can you give us an update here? And also, I mean, for the time being, just very stretched demand at the moment. So TSMC will work more closely with your OSAT partner to fulfill the strong demand at the same time? That's my first question. Jeff Su: Okay. Thank you, Laura. So her first question is on capacity planning. We have talked earlier on the call about the planning for leading nodes. She wants to understand also on the CoWoS capacity and specifically, I guess, advanced packaging in Arizona and how do we work with our OSAT partners. C.C. Wei: Okay. We have announced our plan to build two advanced packaging fab in Arizona and to support our customers. But at the same time, actually, right now, we are working with one OSAT, a big company and our good partner, and they are going to build their fab in Arizona, and we are working with them because they're already breaking ground, and the schedule is earlier than TSMC's two advanced packaging fabs. And we are working with them. And our main purpose is to support our customer, and so we can many in the U.S. Jeff Su: Laura, do you have a second question? Chia Yi Chen: Yes. Certainly, I mean, obviously, we see that the advanced node, advanced packaging are quite strong. And also at the same time, we are also seeing that the migration is also happening for N2 and N3. So just wondering that from the revenue growth perspective, I know it's still early to predict next year based on your guidance. But I'm just wondering, will it be more driven by the ASP increase because of the technology migration? TSMC will be able to sell in your value or more that will be driven by the capacity or volume growth on both N2 ramp-up? And also, C.C., you mentioned some of the mild silicon recovery. So that may also drive some of the volume growth into next year. So just wondering, like if you look at the growth outlook, that will be more driven by the technology upgrade ASP increase or also more like a volume? That's my second question. Jeff Su: Okay. So Laura's, again, second question is looking at 2026. She would like to understand what will be the key drivers of the growth. Is it more from the technology mix migration, things like N2? Is it more from ASP upgrade? Or is it more from just pure wafer volume growth? C.C. Wei: Laura, all the above. All right? You knew it, right? Chia Yi Chen: May I also follow up that because we see that actually N3 is very tight. And at the same time, we are also kind of expanding on N2. And C.C., you previously mentioned that you will migrate some of that to even N7, N6, and also N5G like -- but specifically on N3, do we also need to add more capacity into next year, newly added capacity? Jeff Su: Sorry, Laura is saying that will -- next year, will we continue -- sorry, Laura, if I understand correctly, will we need to add new capacity? Will we continue to do conversion? What will we do to support the very strong demand we see at leading edge next year? Chia Yi Chen: Right. Yes. C.C. Wei: Well, let me answer that question. We continue to optimize the N5, N3 capacity to support our customer. For the new building for the N3 capacity to expand, we put the new building for the N2 technology. That's today's plan. Jeff Su: Thank you, Laura. Operator, in the interest of time, we'll take the questions from the last two participants, please. Thank you. Operator: Yes. Next one, Krish Sankar, TD Cowen. Sreekrishnan Sankarnarayanan: My first one is, C.C., about 10 years ago, back in the smartphone days, TSM would talk about the revenue opportunity for TSM per phone. I was wondering in today's world, can you talk about how much 1 gigawatt of AI data center capacity could translate in terms of wafer demand or revenue for TSMC? And then I have a follow-up. Jeff Su: Okay. So Krish's first question, he noted in the past, in the smartphone megatrend, we talked about the content per phone opportunity for TSMC. So now with AI, is there a way to frame or quantify 1 gigawatt of data center capacity, what is the revenue opportunity for TSMC? C.C. Wei: We -- recently, as I said, the AI demand continue to increase, and then my customer say that 1 gigawatt, they need about -- invest about 50 billion, how much of TSMC's wafer inside, we are not ready to share with you yet because of different from different projects, okay? Sreekrishnan Sankarnarayanan: And then a quick follow-up. C.C. Wei: Yes, excuse me, I just want to say that right now, it's not only one chip. Actually, it's many chip together to form a system, all right? Sreekrishnan Sankarnarayanan: Got it, got it. Very helpful for that. Then a quick follow-up. Obviously, you first forecast long-term trend and then build capacity toward that. I'm kind of curious, when you look at the AI demand over the next several years, from a TSMC angle, does it matter whether it's -- that demand is coming through a GPU or an ASIC? Does it have an impact on your revenue or gross margin mix? Jeff Su: Okay. Thank you, Krish. So his second question is, again, with our business outlook. Again, we forecast the long-term trends. We plan our capacity, as C.C. said, in a thorough and disciplined manner. His question is, what are the implications, for example, of -- I believe you said GPU versus ASIC in terms of the AI market. Do we have a preference or what? Is there a difference for TSMC? Is that correct, Krish? Sreekrishnan Sankarnarayanan: That's right. The impact to revenue and gross margin, whether it's a GPU or an ASIC. Jeff Su: Right. Okay. C.C. Wei: Krish, no matter if it's GPU or it's an ASIC, it's all using that our leading-edge technologies. And from our perspective, we are working with our customer, and we all know that they are going to grow strongly in the next several years. So no differentiation in front of TSMC. We support all kinds of types. Jeff Su: Operator, can we take -- thank you, Krish. So we'll take the question from the final participant, please. Operator: Last one, Arthur Lai, Macquarie. Yu Jang Lai: Congrats on a strong outlook. I'm Arthur Lai from Macquarie. So my question is about competition. So C.C., you define the Foundry 2.0 market. And I wonder what's the strategic initiative that TSMC's undertaking to further strengthening your competitive landscape and also in this broader ecosystem. So some context. I got the question from the U.S. investor as your clients have announced they invest in Intel. Jeff Su: Okay. So Arthur's question is around competition. In the Foundry 2.0 landscape, what strategic initiatives, what things are TSMC focusing on to further strengthen our competitive advantage? I think the last part, Arthur, you're asking in the environment where one of our competitors in the U.S., how do we focus on the competition? Is that correct? Yu Jang Lai: Yes, yes. C.C. Wei: Okay. Let me answer that one. When we introduced our Foundry 2.0, we set a purpose that -- as I said, one of my customers say that the system performance is very important in these days, they're not only a single chip. And also -- let me share with you that our advanced packaging revenue is approaching close to 10% and it's significant in our revenue, and it's important for our customer. So that's why we introduced Foundry 2.0 to categorize this foundry business. Not as usual, previously, we only look at the front-end portion. Now it's the whole thing, the front-end, the back-end and also important for our customer. That's why we introduced 2.0. Talking about our competition in the U.S. Well, that competitor happened to be our customer, very good customer. So in fact, we are working with them to -- for their most advanced product. Other than that, I don't want to make any more comment. Yu Jang Lai: Can I ask one more question? Jeff Su: Yes, you have two. So your second question, sure. Yu Jang Lai: Yes. My second question is very quick on the end demand. So I recall, C.C., you, last time, mentioned that we should also monitor and worry about the prebuild, especially in the consumer electronics. And then this quarter, our number suggest that there's a Q-o-Q 19% growth in the smartphone. So my question is, do you still worry about the prebuild? Jeff Su: All right. So Arthur's second question is on smartphone. Do we -- are we concerned about prebuild or sort of, I guess, pulling prebuild from customers in that regard? C.C. Wei: No. We don't worry about the prebuild because of -- when you have a prebuild, you have inventory. And in this stage, the inventory already go to the very seasonal level and very healthy. So no prebuild. Jeff Su: Okay. Thank you, C.C. Thank you, Arthur. Thank you, everyone. So this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both are going to be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope you all continue to stay well, and we hope you will join us again next quarter in early 2026. Thank you, and have a good day.
Operator: Hello and welcome everyone to the Fiscal 2025 Fourth Quarter and Year End Earnings Call for Commercial Metals Company. Joining me on today's call are Peter Matt, Commercial Metals Company's President and Chief Executive Officer, and Paul Lawrence, Senior Vice President and Chief Financial Officer. Today's materials, including the press releases and supplemental slides that accompany this call, can be found on Commercial Metals Company's Investor Relations website. Today's call is being recorded. After the company's remarks, we will have a question and answer session and we'll have a few instructions at that time. I would like to remind all participants that today's discussion contains forward-looking statements, including with respect to economic conditions, effects of legislations and trade actions, U.S. Steel import levels, construction activity, demand for finished steel products, expected capabilities, benefits, costs, and timeline for construction of new facilities, the benefits and impact of the pending acquisitions of Foley Products Company and Concrete the company's operations, the company's strategic growth plan, its anticipated benefits, legal proceedings, company's future results of operations, financial measures, and capital spending. These statements reflect the company's beliefs based on current conditions, but are subject to risks and uncertainties. The company's earnings release, most recent annual report on Form 10-Ks, and other filings with the U.S. Securities and Exchange Commission contain additional information concerning factors that could cause actual results to differ materially from those projected in forward-looking statements. Except as required by law, Commercial Metals Company does not assume any obligation to update, amend, or clarify these statements. Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, or on the company's website. In addition, today's presentation includes financial information that gives effect to the consummation of pending acquisitions. Pro forma financial information is presented for illustrative purposes only and is based on available information and certain assumptions and estimates that the company believes are reasonable. The pro forma financial information may not necessarily reflect what the company's results of operations and financial position would have been had the transactions occurred during the periods discussed or what the company's results of operations and financial position will be in the future. Unless stated otherwise, all references made to year or quarter end are references to the company's fiscal year or fiscal quarter. And now for opening remarks and introductions, I will turn the call over to Peter. Peter Matt: Good morning, everyone, and thank you for joining our conference call. You've likely already seen, we have a lot of ground to cover today. First, we are excited to share more about Commercial Metals Company's agreement to acquire Foley Products Company, after which we will cover our fourth quarter performance, fiscal 2025 strategic progress, and our outlook. Before opening the call to questions. To supplement today's commentary, we have posted two presentations to our IR website, one for the Foley acquisition and one detailing our fourth quarter and fiscal 2025 results. Starting with Foley, we are thrilled to add a best-in-class business with industry-leading margins to Commercial Metals Company's portfolio. In combination with our recently announced acquisition of CPMP, the addition of Foley will create a high-quality large-scale platform in the strategically attractive precast industry, greatly enhancing Commercial Metals Company's financial profile and growth over the long term. I am confident that the acquisition of Foley will increase our value proposition for customers and shareholders alike, extending our growth runway and marking another major milestone as we execute our strategy. Slide four of the acquisition presentation provides a brief overview of Foley. Since its founding by Frank Foley over forty years ago, the company has grown into the largest regional precast producer in The United States, with 580 employees in 18 plants across nine states. Foley has a strong track record of growth and best-in-class margin performance, which is a testament to their talented management team and the industry-leading practices they have developed. We are very excited to welcome them to the Commercial Metals Company family and look forward to collaborating on Foley's continued success. As you can see on Slide seven, the addition of Foley in combination with our recently announced acquisition of CPMP creates immediate scale for Commercial Metals Company's Precast platform. Upon closing both transactions, Commercial Metals Company will be the third-largest Precast player in The U.S. and a leader across the Mid-Atlantic and Southeast, supported by 35 facilities across 14 states. Our strategic entry into Precast will broaden our commercial portfolio to support our customers, enhance our exposure to powerful structural trends in construction, offer new capabilities to address construction industry challenges, and establish a new platform with a significant future runway. Slide eight helps illustrate Foley's best-in-class operations, which will support our ability to build a broader Precast platform and unlock further synergies with CPMP. The left side of the page outlines Foley's industry-leading margin and cash flow profile, which has been consistent over time and is enabled by a highly efficient low-cost operating model. The company has achieved sustained cost advantages through a combination of centralized production planning, automation, best-in-class manufacturing practices, low-cost support functions, and optimized logistics. Foley has also developed a winning commercial formula with leading design and engineering capabilities, lead times, and product quality. With the most comprehensive product portfolio of any precast supplier within its core regions, Foley is a true one-stop shop for many construction applications. These capabilities have given the company enduring competitive advantages, which Commercial Metals Company will seek to preserve and strengthen. As highlighted on Slide nine, Foley and CPMP have highly complementary footprints, and we see many meaningful synergy opportunities between the two companies. We expect the acquisition of Foley to generate annual run-rate synergies of approximately 25% to $30 million of EBITDA by year three, in addition to the $5 million to $10 million of EBITDA we originally identified for CPMP and 35% to 40% of CPMP's forecasted 2025 EBITDA, consistent with our previous commentary that synergies would become more significant as our Precast platform gains scale. It is worth pointing out that meaningful commercial synergies are likely to emerge but have not been included in our initial synergy estimate. On Slide 10, we illustrate Foley's highly complementary proximity to both Commercial Metals Company and CPMP networks, which we believe will facilitate optimal coordination to achieve operational synergies and over the longer term substantial commercial opportunities. As you can see, every Precast site within the Eastern and Western U.S. is located near a Commercial Metals Company rebar mill or fabrication plant, allowing us to maximize value over time through close coordination across commercial, operational, and support functions. In particular, we are excited by the increased value we can bring to customers in these regions by providing Commercial Metals Company's full suite of early-stage construction solutions from site preparation to structural erection. Our offering will be unique in the marketplace and will grow more compelling over time as we integrate our portfolio and offer attractive turnkey solutions. While a vast majority of the acquired Precast facilities are located within one of Commercial Metals Company's densest geographic regions, we will also operate one satellite location in Louisiana and three satellite locations in the Western U.S., which will provide beachheads in those regions and offer the opportunity for profitable bolt-on growth in the future. To conclude my comments on Foley, when we began our study of the precast space nearly two years ago, we immediately identified Foley as a best-in-class operator based on its reputation, its standing among customers, and its top-tier financial profile in the construction material sector. Our due diligence confirmed Foley's attractiveness as a strong business and drove us to execute on this unique opportunity. I am incredibly excited about both of these announcements, and I am confident that the additions of Foley and CPMP unlock further upside as the cornerstones of our newly created Precast platform. Both businesses together will position us to drive significant value for our customers and shareholders alike. That summary of the deal rationale, I'll turn the call over to Paul to discuss the financial details. Paul? Paul Lawrence: Thank you, Peter, and good morning to everyone on the call. I will start by saying I share the excitement and optimism both about this transaction and the strategic momentum we have achieved at Commercial Metals Company over the last year. The acquisition of Foley in combination with CPMP is transformative to Commercial Metals Company's financial profile. As shown on Slide 11, the creation of the new Precast platform meaningfully shifts the composition of Commercial Metals Company's earnings, increases margin levels and free cash flow capabilities, and importantly should reduce earnings and cash flow volatility in our business. The sum of CPMP and Foley representing our Precast platform is expected to generate approximately $250 million of adjusted EBITDA in calendar 2025, before growth and synergies with EBITDA margins in excess of 34%. This compares to Commercial Metals Company's core EBITDA margin of 10.7% and the North American Steel Group adjusted EBITDA margin of 12.2% in fiscal 2025. The addition of these levels of earnings by the precast operations will significantly shift the composition of Commercial Metals Company's earnings, increasing the combined contribution from our EBG segment and Precast platform to over 32% of total operating segment adjusted EBITDA. Upon completion of the acquisitions, we expect nearly a third of our profitability will be generated by high-value-added solutions with attractive market penetration potential, strong margins, and cash flow conversion. The lower capital intensity of these businesses also means they require less reinvestment to maintain operations and less capital commitment to grow organically, enhancing free cash flows. Margin levels and normalized free cash flow conversion are both expected to increase meaningfully. Based on Foley and CPMP's forecasted results for 2025, the addition of Foley and CPMP would have increased Commercial Metals Company's core EBITDA margin by more than two percentage points, and given the stability of these businesses, we anticipate this improvement to be sustained over time. In fiscal 2025 alone, the platform would have improved normalized free cash flow conversion by over four percentage points. Now I will cover the major terms related to the transaction. Total consideration will be paid at closing and is subject to customary working capital adjustments. This valuation represents a 10.3 times multiple on Foley's expected calendar 2025 EBITDA. Importantly, the effective multiple is reduced to approximately 9.2 times when cash tax savings are considered, as Commercial Metals Company will benefit from a tax step-up on assets. We believe this is a fair valuation for a fantastic asset, and the multiple reflects Foley's best-in-class margin profile and business characteristics previously discussed by Peter. It's worth noting Foley's EBITDA margins are five to ten percentage points higher than those of many blue-chip building product and construction material companies that routinely trade at 10 to 16 times forward EBITDA. Importantly, we anticipate the transaction to be immediately accretive to earnings and cash flow per share. The combined total consideration of approximately $2.5 billion related to the purchases of Foley and CPMP will be funded through a combination of cash on hand and committed bank financing. As soon as feasible, we will seek to raise permanent debt in the form of corporate bond offerings. Immediately following the completion of both transactions, which is expected by the end of 2025, Commercial Metals Company's net debt is expected to increase to approximately 2.7 times trailing twelve-month adjusted combined EBITDA. As we have stated in the past, we are comfortable with temporarily increasing net leverage above our long-term target of two times for the right strategic opportunity. As we did with the highly successful acquisition of Gerdau's U.S. Rebar business in 2019, we will prioritize delevering in the quarters ahead with a goal of returning below two times net leverage within eighteen months. This effort will be aided by strong free cash flow generation from the Precast platform itself, the wind-down of capital expenditures for the construction of Steel West Virginia, and significant cash tax savings related to the 48C program and the One Big Beautiful Bill. Based on these supportive factors and the positive outlook for our business, we are confident in our ability to delever quickly. That concludes my remarks, and I'll turn it back to Peter to cover the fourth quarter and fiscal year. Peter Matt: Thank you, Paul. I will now turn to our earnings presentation. The goal of our strategy is to drive meaningful and sustainable improvements to Commercial Metals Company's margins, earnings, cash flow, and returns on capital, while reducing volatility in our business. As you can see on Slide five, we are executing against this objective along three paths. First, by investing in our people and pursuing excellence in all we do. Second, by investing in value-accretive organic growth, and third, by driving capability-enhancing inorganic growth as we just discussed in detail. Each of these objectives represents a significant opportunity for Commercial Metals Company and taken together will be game-changing for our returns, scale, and ultimately the value we create for investors. We made tremendous progress across each of these strategic paths over the last year. And Slide six outlines some of our most notable accomplishments. I'll start with investing in our people and pursuing excellence. As I've said before, the most important investment we can make in our people is to keep them safe on the job. And I am proud to report that fiscal 2025 was the safest year in our company's history and marked the third consecutive year of record safety performance. The job of improving safety is never done, but we are in an excellent position to maintain our momentum and cement our position as truly world-class. During the year, we also invested in the leadership talent and resources that will support strategic execution across our organization. Within our emerging businesses group, we now have in place a group of veteran leaders who are poised to drive EBG segment performance to new heights. We are already seeing early dividends in our Commercial Metals Company Construction Services and Performance Reinforcing Steel divisions as new sales and margin initiatives take hold. Late in fiscal 2025, we also streamlined reporting structures in our North America Steel Group to facilitate decision-making and provide optimal coordination in supporting key initiatives, including our TAG program efforts. On the topic of TAG, we began execution of our operational and commercial excellence program in fiscal 2025. I could not be prouder of the progress the Commercial Metals Company team achieved during the year. Not only did we generate $50 million in EBITDA benefits, well in excess of the $40 million we expected, but we also successfully identified additional opportunities to reduce costs, increase efficiencies, cut waste, and drive profitable sales in the future. Looking ahead, I am more confident than ever in this program's ability to drive meaningful and sustained improvement to Commercial Metals Company's financial profile. By the end of fiscal 2026, we now expect to generate a run-rate annualized EBITDA benefit of more than $150 million with virtually no related capital investment. The next strategic path is value-accretive organic growth, which we anticipate will represent a meaningful source of new earnings and cash flow over the next several years. Particularly as our Arizona II and Steel West Virginia mill investments reach full operations. I am pleased to report that we made significant progress on both projects during fiscal 2025. Notably, we achieved a full quarter of positive EBITDA at Arizona II, for which I would like to congratulate our team out west. I would also like to highlight Commercial Metals Company's attainment of an approximately $80 million net tax credit related to Steel West Virginia under the 48C program, which we will realize in fiscal 2026 and effectively reduces our capital investment in this project. Finally, turning to capability-enhancing inorganic growth, as I've already discussed at length, we have created a large-scale Precast platform with the announced acquisitions of Foley and CPMP. We believe this platform will greatly enhance Commercial Metals Company's financial profile, increase our value to customers, and provide an avenue for meaningful long-term growth. Paul will cover the financials, but before this, I would like to briefly reflect on our markets. First, in North America, a combination of resilient construction activity and a balanced supply landscape resulted in favorable conditions for both volumes and margins during the quarter. Shipments of finished steel increased year over year and were unchanged from the prior quarter's strong level. Downstream bid volumes, our best gauge of the construction pipeline, remained healthy and were consistent with recent quarters as we continue to see strength across a number of key market segments, including public works, highway and bridge, institutional buildings, and data centers. As we have indicated previously, we see substantial pent-up demand, particularly within non-residential markets. This view is supported by historic strength in the Dodge Momentum Index or DMI, as well as recent conversations with many of our largest customers. The DMI leads construction activity by twelve to eighteen months and reached a record high in September, driven by growth that was broad-based across several market segments. Additionally, our customers are increasingly bullish as they experience a large inflow of projects into the pipeline related to energy generation, reshoring, advanced manufacturing, and LNG infrastructure. When we look beyond the current environment, we remain confident that the emerging structural drivers will support construction activity over a multi-year period. These trends include investment in our nation's infrastructure, reshoring industrial capacity, growth in energy generation and transmission, the build-out of AI infrastructure, as well as addressing a U.S. housing shortage of 2 to 4 million units. As noted on Slide 10 of the earnings presentation, over $2 trillion of corporate investments across AI, manufacturing, shipping, and logistics, and energy have been announced in calendar 2025. Commencement of even a handful of related mega projects could provide a meaningful demand catalyst for Commercial Metals Company's products in the quarters ahead. Moving on to profitability in this segment, we experienced a strong sequential expansion in North American steel product margins during the quarter, achieving the highest level in two years. The improvement only partially reflects the impact of the June and July price announcements. Realized pricing increased steadily throughout the quarter, and we exited at a much higher level than the period average, positioning us to further expand margins in the first quarter. Within our downstream business, we have seen price levels on new bids rise in tandem with the mill rebar price. This should support average backlog pricing in the future as these higher-priced bids are converted into new contract awards. On the topic of backlog, I would note that average pricing stabilized in the fourth quarter following more than two years of sequential quarterly declines from the post-COVID peak. Before I move on to our other segments, I would like to briefly update you on the status of the rebar trade case filed with the International Trade Commission or ITC back in June. The petition alleges exporters located in Algeria, Bulgaria, Egypt, and Vietnam are guilty of dumping material into The U.S. Market and should be subject to corrective duties ranging up to 160%. In mid-July, the ITC ruled that the case has merit and has passed it to the Department of Commerce for further investigation. Based on the current case schedule, we expect a preliminary ruling on the antidumping claim sometime in late calendar 2025 or early 2026. It is worth noting that since filing the case, price levels have increased markedly on several rebar sizes often sourced from the subject countries. Turning to our emerging businesses group on Slide 11, current conditions are supportive, and we see encouraging signals regarding future activity, specifically solid quoting levels, busy engineering firms, and improved velocity of quote conversion into backlog. One attractive element of the EBG segment is the fact that our current solutions are underpenetrated in the market, which provides significant opportunities for growth as we drive product adoption in addition to market expansion. In our key proprietary products, we are winning share through the strong value proposition while maintaining solid margins. This dynamic helped us achieve record segment profitability during the quarter as shipments of core solutions such as Interox GeoGrid, Galvabar, and Chromax all increased from the prior year. We have outlined the unique capabilities of these products on prior calls, and we continue to expect that they, along with EBG's other high-value-added offerings, position the segment to achieve a consistent organic growth rate in the mid to high single digits and EBITDA margins in the high teens. Finally, for our Europe Steel Group, conditions improved modestly from the third quarter. Demand continued to normalize as a result of solid Polish economic growth, while on the supply side, import flows ticked up slightly from recent quarters but remain below the disruptive levels of a year ago. During the fourth quarter, we saw metal margins recover to their highest mark in over two years, aided by an improved price environment for merchant bar and wire rod. The green shoots that we have noted on recent earnings calls continue to mature. We are encouraged by recent developments that the EU is looking to bolster its trade legislation with the implementation of a long-term mechanism that will reduce existing quotas for foreign steel by nearly half. Imports beyond those quotas would be subject to new higher tariffs, which are currently proposed at 50%. Before turning the call over to Paul, I would like to recognize the efforts of our world-class employees. We have asked a lot of the team as we execute on our ambitious vision for the future, and I am truly inspired by all that they have accomplished so far. Their efforts have been instrumental in laying the groundwork for years of success ahead, and I look forward to maintaining that momentum in the new fiscal year. With that, I'll turn the call over to Paul to provide more color on the quarter. Paul? Paul Lawrence: Thank you, Peter. We reported fiscal fourth quarter 2025 net earnings of $151.8 million or $1.35 per diluted share compared to net earnings of $103.9 million and net earnings per diluted share of $0.90 in the prior year period. Excluding estimated net after-tax charges of approximately $3.2 million, adjusted earnings for the quarter totaled $155 million or $1.37 per diluted share compared to $97.4 million and $0.84 per diluted share respectively in the prior year period. These adjustments consisted of a $3.8 million pretax expense for interest on the judgment amount associated with the previously disclosed litigation, an impairment charge of $3.4 million, and a $2.9 million unrealized gain on undesignated commodity hedges. During 2025, we modified our method of calculating adjusted EBITDA to exclude the impact of unrealized gains and losses from undesignated commodity derivatives. This change was primarily driven by heightened volatility in copper forward markets, which introduced significant non-cash fluctuations unrelated to our core operations. The relevant financial figures, including historical numbers, have been adjusted to reflect this change, impacting consolidated adjusted earnings, adjusted earnings per diluted share, adjusted EBITDA, core EBITDA, and core EBITDA margin, as well as North American Steel Group adjusted segment EBITDA. Given the prominence of these metrics, we have published recast quarterly figures dating back to fiscal 2019 in a Form 8-Ks filing accompanying our earnings release this morning. We believe this change in reporting will provide a more representative view of our operating performance and cash-generating capability. Consolidated core EBITDA was $291.4 million for 2025, representing a 33% increase from the $219 million generated during the prior year period. Slide 14 of the supplemental presentation illustrates the year-to-year changes in Commercial Metals Company's quarterly financial performance. Segment level adjusted EBITDA increased by $87.4 million in total, with our North American Steel Group contributing $36.6 million of improvement, EBG providing $8.1 million, and the Europe Steel Group delivering $42.7 million. The consolidated core EBITDA margin of 13.8% compared to 11% in the prior year period. Commercial Metals Company's North American Steel Group generated adjusted EBITDA of $239.4 million for the quarter, equal to $207 per ton of finished steel shipped. Segment adjusted EBITDA increased 18% compared to the prior year period, driven primarily by higher margin over scrap cost on steel products and contributions from our TAG operational excellence efforts. In particular, scrap optimization, alloy consumption reduction, process yield improvements, and logistics optimization. North American Steel Group adjusted EBITDA margin of 14.8% compares to 13% in 2024. Segment results also improved sequentially as steel product margins continued the expansion that began early in the third quarter. As Peter noted, we exited the fourth quarter with steel prices on an upward trajectory and steel product metal margins $31 per tonne above the period average, setting the stage for us to generate strong margins in 2026. As indicated earlier, demand for long steel products was resilient during the quarter. Finished steel shipments increased by 3% compared to a year ago, while rebar shipments from Commercial Metals Company's mills and downstream operations grew at a similar rate. Emerging business group fourth quarter net sales of $221.8 million increased by 13.4% on a year-over-year basis, while adjusted EBITDA of $50.6 million increased by 19.1%. The improvement was largely driven by three factors: strong demand for Geo grids and proprietary products within Commercial Metals Company's Performance Reinforcing Steel division, improved tensor cost performance, and the impact of commercial initiatives within our Commercial Metals Company Construction Services division. Turning to Slide 17 of the earnings presentation, our Europe Steel Group reported adjusted EBITDA of $39.1 million for 2025 compared to a loss of $3.6 million in the prior year period. Segment adjusted EBITDA margin of 14.8% increased from negative 1.6% a year ago. The biggest driver of improved profitability was the receipt of a $31 million CO2 credit, which was the first of two payments that will be received this calendar year as part of the government energy cost reimbursement program in place through 2030. Excluding this, operational results improved by $11.7 million, driven by higher margins, a 17% increase in shipment volumes, and ongoing cost management efforts. Similar to recent quarters, the team in Poland continued to drive efficiency gains with success in nearly every major cost category, including labor, consumable usage, alloys, and overhead. Most of these improvements are permanent in nature and set us up well to capitalize on market recovery. As Peter mentioned, during the quarter, we saw continued demand growth and a somewhat moderated level of long steel imports into Poland. The combination of these factors provided Commercial Metals Company the opportunity to achieve improved shipping volumes. Commercial Metals Company's effective tax rate was 21.5% in the fourth quarter and 21.3% for the full year. Looking ahead, we anticipate a full-year effective tax rate between 48% for fiscal 2026. As a result of several factors, we do not anticipate paying any significant U.S. Federal cash taxes in fiscal 2026, and for much of fiscal 2027. During fiscal 2026, we will benefit from our 48C tax credit, bonus depreciation on our West Virginia mill investment, as well as accelerated depreciation from the assets acquired in Commercial Metals Company's acquisition of Foley and CPMP, which will significantly increase our free cash flow generation. Turning to Commercial Metals Company's fiscal 2026 capital spending outlook, we expect to invest approximately $600 million in total. Of this amount, approximately $350 million is associated with completing the construction of our West Virginia micro mill, as well as a handful of high-return growth investments within our EDG segment. This concludes my remarks, and I'll now turn it back to Peter for additional comments on Commercial Metals Company's financial outlook. Peter Matt: Thank you, Paul. We expect consolidated financial results in 2026 to be generally consistent with those of the fourth quarter. Finished steel shipments within the North America Steel Group are anticipated to follow normal seasonal trends, while our adjusted EBITDA margin is expected to increase sequentially on higher steel product margins over scrap. While we expect financial results in the Emerging Businesses Group to decline on a sequential basis due to normal seasonality, we believe they will improve year over year. Our Europe Steel Group will receive the second tranche of the annual CO2 credit in an amount of approximately $15 million during the first quarter. Excluding this credit, adjusted EBITDA for our Europe Steel Group is likely to be around breakeven as seasonal factors and scheduled maintenance outages weigh on profitability. I am confident in Commercial Metals Company's long-term outlook and continue to believe in our ability to generate significant value for our shareholders. We are executing on several strategic initiatives, which we believe will deliver meaningful and sustained enhancements to our margins, earnings, cash flow, and return on capital. We will achieve this by leveraging our TAG operational and commercial excellence program to get more out of our existing enterprise, completing value-accretive organic projects, and adding complementary early-stage construction solutions that provide attractive new growth lanes. Taken together, we believe these efforts will position our company to take full advantage of the powerful structural trends in the domestic construction market for years to come. I would like to conclude by thanking our customers for their trust and confidence in Commercial Metals Company and all of our employees for delivering yet another quarter of very solid safety and operational performance. Thank you. Operator: And at this time, we will now open the call to questions. And your first question today will come from Mike Harris with Goldman Sachs. Please go ahead. Cecilia Tang: Hi, good morning. This is Cecilia Tang on for Mike Harris. You mentioned strong growth in the construction industry. I was wondering how much of that demand is coming from infrastructure, residential, industrial, and energy? Peter Matt: Yes. Thank you very much for the questions, Cecilia. Infrastructure has been very strong. It has been for the past several years really on the back of the IIJA. And we expect it's going to continue to be strong. And I would say that we expect there to be a follow-on bill so that this should be a multiyear trend. On non-residential construction, it's been a bit mixed. There have been certain areas that are very strong. Areas like energy, as you cite, that's been very strong. Data centers, obviously very strong. Institutional spending on hospitals, that type of thing has been also very strong. But then there have been other areas that are kind of weaker, and I'm thinking about kind of commercial buildings, retail has been weaker. The thing that's exciting about the nonresidential space is that there is a huge backlog of potential projects coming down the pike. And I'm thinking about, and we've said this before, there are something like $2 trillion of potential projects that are out there that have been announced. And then there's still a huge pipeline of potential projects that come behind that in some of these trade deals, if and when they get negotiated. So we're very bullish about a turn in non-residential spending, and we'll see that move from kind of what's been flattish to something that's growing again. And then lastly, residential markets, residential markets have been lackluster, I would say, and a lot of that is tied to interest rates. Those markets tend to be more sensitive to interest rates. But as we see interest rates start to come down, we have confidence that we're going to see a turn in that market. And remember that we have a deficit of 2 to 4 million homes in this country. So there's absolutely a demand backdrop that warrants the residential spending. And we just have to get to a place where the economics support that. But we think we're going to see that as rates continue to drift down. So in total, we remain very bullish about the level of spending over the next several years. Each of these sectors, it's a multiyear trend. Cecilia Tang: Thank you. That's very helpful. And also, given the bullish outlook, why is it that the first quarter outlook is not more positive, especially given the positive performance in the current quarter? Paul Lawrence: Yes, Cecilia, there's a few moving pieces to our outlook for the first quarter. You're correct. As far as North America Steel Group is concerned, we're going to have a very strong quarter in the first quarter. We often measure the North American Steel Group as EBITDA per ton, and it was great to see in the fourth quarter that the EBITDA per ton of that segment was over $200 a ton. And as we said in our stated remarks, we exited the quarter with a metal margin over $30 a tonne higher than the average for the quarter. So North America Steel Group will have a great quarter. However, if we look at our Europe Steel Group, two aspects to that. We talked about the reduction in the CO2 credits. We will get another credit in the first quarter, but it will be roughly half of what we received in the fourth quarter. So that'll be a $15 million impact. And then we have our typical seasonal planned maintenance outage that will reduce the operating performance, excluding the CO2 credits, to near breakeven. And the other piece is within the EBG group, because Tensar means a significant portion to that business, and it's really involved in site prep. The seasonality of that business is quite a bit more significant than our other businesses. So as we guided towards improvement over last year, but a similar type of transition from fourth quarter to first quarter, those are the major factors, which drive us towards a fairly consistent overall quarter over quarter, but many different moving pieces within the portfolio. Cecilia Tang: That makes sense. Thank you. Operator: And your next question today will come from Satish Kathanasan with Bank of America. Please go ahead. Satish Kathanasan: Yes. Hi, good morning, Peter and Paul. Congrats on a strong quarter and the announced acquisition. Thank you, Amit. With Foley and CPMP, Nava, like, I think you now have strong scale in the precast concrete market. With this kind of size, do you think the focus over the next couple of years will be to just integrate the assets and reduce debt, or given the fragmented market, would you continue to look for additional inorganic growth opportunities? Peter Matt: Yes. So that's a great question. So thank you very much. As we kind of look forward with these two transactions, I'd say it's fair to say we are done for now. We have quite a bit of integration to do with these transactions. And we're very happy with the platform that we've built. As we look a little bit further forward, once we bring our leverage down to into our acceptable range, then we would start to look at other transactions. We think this is a big market. Again, precast overall, as we said on the last call when we introduced CPMP, this is a $30 billion market. And it's fragmented, and we think there are going to likely be opportunities for us over time. Bolt-ons will be super attractive because they typically are cheaper, they come with synergies, and they strengthen our core, which is kind of part of the message that we are consistently trying to reinforce. And bigger transactions will likely be more episodic. But our goal for this platform is ultimately to create one of national scale that looks a little bit like our rebar business again, and that's to do that we're going to build a platform several $100 million of EBITDA, but we're going to do it on a measured basis. And remember, we've always said from the beginning, we're going to be super disciplined about M&A and making sure that we deliver the returns on the M&A that we do. And integrating these assets successfully is absolutely critical to ensuring the success of that going forward. So very excited about the opportunity, and these two businesses could not fit together better. So anyway, super excited about what we have so far. Paul Lawrence: Satish, I would just add, as we've been talking with the investment community probably for two years, we've been looking at the early-stage construction and really honing in on this precast market. And the one thing that came up repeatedly was that these are the two leaders in the space. And so obviously, don't dictate the timing of when the assets become available, but when they became available, it was imperative that we took a look and tried to build the portfolio that made sense. Satish Kathanasan: Yeah. That's great to hear. Just on Foley, it is clear that the margin profile is one of the best today, but can you maybe share the historical growth rate portfolio like over the past two, three years? And looking ahead, do you see potential for this business to continue to grow or gain market share and grow above the 5% to 7% market growth? Peter Matt: Yeah. I think if you look at the growth of the business over the last couple of years, I think we should assume there's a base level of growth that's kind of GDP related. And then on top of that, there's growth related to kind of share expansions that the business has a number of expansions that it's in progress on. In its territory today or in its territories today, that will provide opportunities for future growth. So we would expect to grow at a level in excess of GDP over the next couple of years from a volume standpoint. Paul Lawrence: And I would just add, Satish, the margin level that we described in the material, the business has generated that consistently over the last handful of years. So very consistent performer. Satish Kathanasan: Okay. Thank you. I'll jump back in queue. Thank you. Operator: And your next question today will come from Alex Hacking with Citi. Please go ahead. Alex Hacking: Yes. Thanks. Good morning and congrats on the deal. I guess just following up on the margin question, Foley's margins look like they're almost double CPMP. You maybe give a little more color on kind of what's driving that? And is there a potential opportunity to increase margins at CPMP from learning from Foley? Thanks. Peter Matt: Yes. Thanks, Alex. Appreciate the question. So a couple of things that I would point to. And again, I think as we look at these businesses, one of the things we really like about this is we've, and as Paul said, we spent a lot of time looking at these businesses, is that they both bring strength to the table. There are certain things that Foley does really well, there are certain things that CPMP does really well, and I think the combination of those two companies is going to build a really formidable company in our portfolio. If we look at Foley specifically relative to CPMP and try to articulate the margin differentials, one of the things Foley has a different operating model than CPMP, and so that's a factor. And the other thing that I would say on the CPMP side is that CPMP has made a number of acquisitions recently where they are kind of works in process, and so as a consequence, the margins in some of those businesses are lower, and they bring down the overall margin. So if you look at precast in general, it is the case that Foley's margins stand out. But CPMP does, if you look at the plants that are kind of the more mature plants, they have very attractive margins there as well. Alex Hacking: Okay. Thanks for the color. And then just following up, I guess, on the cash conversion side, of the $600 million CapEx next year, estimate? How much of that would be for precast? And within that, how much would be kind of sustaining versus growth? Thank you. Peter Matt: Yes. Well, for Precast, the maintenance CapEx on these businesses is much lower. We talked about in the case of CPMP, you may remember we talked about $8 million to $10 million of maintenance CapEx. In the case of Foley, it's like a kind of $10 million to $15 million type of number. In the case of CPMP, for the reason that I just explained to you, they've got these businesses that they've acquired where there's some investment that we think we can support, their spending is probably going to be a little bit higher over the first couple of years of our ownership as we kind of bring together the investments that they've made. And again, all of that CapEx beyond maintenance is spending that has very attractive returns tied to it. Paul Lawrence: The only thing, Alex, I'd add is Peter's talking about annual numbers, and as we talked about, really, we expect the transaction to close by the end of the calendar year. So the numbers in our fiscal will be a lot lower than those. Thanks for the clarification. Operator: Thank you. And your next question today will come from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Yes. Thank you very much. Good morning. And maybe a follow-up on the prior question. How quickly do you think that the margins in CPMP and particularly in those recent acquisitions could bring to the levels that Foley and maybe the core CPMP business is already experiencing? Is it a year or two-year? Peter Matt: Great question, Carlos. So the one thing I'd say is we want to be a little careful. We don't own these businesses yet. So we need to kind of close on the transactions and better understand what we have. And with that understanding will come more clarity on the timeframe. But I think the appropriate way to frame it for you at this juncture is that we talk about the synergies as being achievable over a three to five-year horizon, and I think that that's the right horizon to think about for any kind of improvement in the CPMP margins. Obviously, there are some things that will come quick, and then there's other things that will take longer. I just mentioned before in response to Alex's question that we're going to put some extra capital into CPMP to the tune of kind of $5 million per year, and that will be to accelerate some of that, and again, that's all really high-return capital that we'll be deploying. Carlos De Alba: All right. So the $5 million to $10 million incremental EBITDA in CPMP that you mentioned, that includes this recent acquisition by the company stepping up their EBITDA generation, right? Peter Matt: No. Just to be clear, so when we announced CPMP, we said that there was $5 million to $10 million in that transaction. We maintain that, right? And then in this transaction, we're bringing another $25 to $30 million over a three to five-year period. So it's that's why, and you'll remember in the last conversation that we had when we acquired or when we announced the acquisition of CPMP, we said that, as we have a platform, we would have more synergies with successive moves. And this is a great example of this. And honestly, you might ask the question about the timing of these two transactions, obviously, we couldn't call the timing, but I think when you see that magnitude of synergies, it makes it clear why this was a transaction we had to look at seriously. So it's yes, it's an extra $25 million to $30 million in this transaction. Carlos De Alba: All right. Fair enough. And my second question is regarding the outlook for dividends and buybacks vis-a-vis the cash flow generation of the company. You did mention that the acquisitions, both of them are going to be accretive to free cash flow. You're not going to really pay a lot of cash taxes in the next two years. How do you see dividends and buybacks in the coming quarters? Peter Matt: Yes. So let me just say to answer your question directly, on dividends, we have no plan to change our dividend. Zero plan to change our dividend. And I say also our long-term capital allocation strategy is not changing at all. Not at all. What I would say is that we are done with acquisitions for now. And we're going to focus on the big acquisitions for now, and we're going to focus on integration and making sure that we make these transactions highly successful and great return investments for our business. We will continue the organic growth projects that we've started across the company. As we move past Steel West Virginia, these will be much more capital-light investments, but we will continue those. And we will slow down our share repurchase program and bring it to a level where we're offsetting employee share grants in the short term as we get our leverage back down below the two times target. And as we once we get to the two times target or below, we'll then ramp up share repurchases. Share repurchases are a critical part of our capital allocation strategy. And we intend to resume those as our balance sheet comes into line. Paul Lawrence: And Carlos, we're very confident in both the numerator and the denominator in terms of being able to bring that leverage down in terms of the you mentioned the cash flow and the lack of U.S. cash taxes, the reduction in CapEx going forward. And the optimism in the current environment in our business is that cash flow generation is expected to be very strong. And then that also is helping the EBITDA that we expect the business to generate over the coming periods also expected to be strong, and therefore both aspects should help us achieve that two times net leverage over the coming quarters. Carlos De Alba: Perfect. Thank you. Peter Matt: Thank you, Carlos. Operator: And your next question today will come from Bill Peterson with JPMorgan. Please go ahead. Bill Peterson: Yes. Hi, good morning. Thanks for taking the questions and congrats on the second transaction here in a few months. Along those lines, I have a longer-term question, maybe more suited for a Capital Markets Day, but given these transactions, how would you envision the company looking like in sort of a five-plus-year timeframe in terms of product mix, rebar versus long products, ground stabilization, precast, or other materials? Given the margin structure in these newer businesses and acquired companies, would you consider selling core assets in order to accelerate the transition? Just trying to get a sense of how we should envision this company over the long term. Peter Matt: Yes, it's a great question. If you think about the strategy that we've outlined, it's one of becoming an early-stage construction supplier. And if you think about our rebar business, our fabrication business, these fit perfectly, and these are early-stage construction suppliers. You think about our tensor business, it's early-stage construction. Think about our recently acquired Precast platforms, early-stage construction, PRS performance reinforcing steel, early-stage construction, and construction services, same thing. So if you look at the portfolio that we have today, we've got a number of interesting assets that we can build on, and that's one of the things we find so compelling about the portfolio to become a leader in early-stage construction. So when we talk about our precast business, again, as I said in response to an earlier question, our goal is to build that into something where we have a national footprint, and that's going to mean kind of several $100 million of EBITDA. With these two transactions, we're well on the way to doing that. And with the footprint that Foley brings, I think we have a beachhead to examine some of those markets that, by the way, we know well because we're already in those markets with our rebar fabrication, our mills business, right? So there's a very natural path that we're following. As we look at our other EBG businesses, we would love to grow Tensar. We think that has great potential, and it's still a very underpenetrated market. It could be it will be an important piece of our portfolio. Performance reinforcing steel, the plant that we have today is sold out. So we're building another one. And we believe that the demand for kind of corrosion-resistant steel in this country, given some of the changes in weather and so forth, is only going to increase. And construction services is a tremendous asset. We talked to customers, and the customers tell us the construction services business where we are, and it's really a small segment of our footprint, which is really Texas, Louisiana, and Oklahoma, is it's a great asset to the customers we have. So that's something that we're looking at as a potential way to complement the early-stage construction portfolio that we're building. So as we look at the portfolio, again, we want businesses that can be of scale and that can be of significance to our customers. We want businesses that bring value to our customers. So it's difficult to define the portfolio precisely, but the direction that we're going is we want value-added products that have high margins and kind of good returns on invested capital. And I want to just come back sorry, this is a long answer, but I think this is important. I want to come back to our steel business and TAG. And what the whole mission of TAG is to improve the great platform that we already have in steel. And it is so critical when we talk to the customers, and I'm talking about big contractors, they tell us you guys are your franchise in the steel market is tremendously valuable to us because you do what you say you're going to do, and you do it when you say you're going to do it. And TAG is helping us make that business even better. And our goal with that business is to raise the margins through the cycle so that they start to look like the margins in some of our kind of ultimately some of our EBG business. So again, this is a it's a multiyear journey, but we think we have a lot of opportunity, and the team that's executing the TAG program within our company is doing a phenomenal job. So anyway, Bill, I know that's a long answer to your question, but hopefully, it gives you some color. Bill Peterson: No, certainly. Thanks for all that. Details there. My next question is more, I guess, term-focused. You talked about typical seasonality across several of these sectors. But I guess on North America, if you look back, this would imply something like a down 3% to 7% quarter on quarter. We've seen a lot of variability over the last five years or so. And I would assume you're really talking more driven by the downstream versus products. But can you unpack what typical seasonality has really meant here? And what that may look like for the various subsectors? Subsegments of your business? Paul Lawrence: Yeah, Bill. You know, the season, September through November, really it is a good construction season similar to our fourth quarter with the exception of the week that we lose for Thanksgiving. So really, we see it's usually that 3% reduction in volumes that we see in the first quarter on the North American steel group. As I said in an earlier answer, we do see impacts to the other segments a little bit stronger given the more cyclical nature of site preparation, which drives a lot of the EBG business. So that one is a little bit more seasonal, as you saw last year. And then Europe with the outage, it's less seasonal, but the outage season. Bill Peterson: Thanks for that, Paul. Thanks for all the details. Appreciate it. Peter Matt: Thank you, Bill. Operator: And your next question today will come from Andrew Jones with UBS. Please go ahead. Andrew Jones: Hi, gents. I just want to better understand the barriers to entry in this business. I mean, to me, it looks like it's a pretty fragmented business. You obviously call out a few things on the slides, including relatively high capital costs. I mean, could you give us some idea in terms of how to sort of quantify those? And when you talk about the steep learning curve, can you kind of give us some sort of sense as to how complex this is? Because I just high level, our fragmented business usually means a much lower margin than we're seeing in these numbers. Thanks. Peter Matt: Yes. So again, if we look at what drives this business, it starts with the customer, right? And if you look across the portfolio of CPMP or Foley, they've got great relationships in the region that connect them and obviously a reputation and the capability to service these the jobs that they're getting. And I think obviously reputation, just like in our rebar fabrication, it's critical that you deliver the products on time and that you deliver good quality products and that you help the contractor accelerate their jobs. So those are really important. And the third leg of this is capability. And when you look at the capabilities of both CPMP and Foley, they bring a broad-based precast capability. So you can be in the Precast business pretty easily if you kind of have a concrete mixer and a mold. But the point is that most of these comp job sites, they need a lot of different forms to serve the precast need. And so as a consequence, the capability that both of these companies have across the concrete pipe and precast fronts gives them a differentiating capability to perform in the market on these complicated jobs. And the last thing I would say is, and this goes to the speed point, is that having some scale helps a lot on these larger jobs because, again, what the contractors will tell you is when they start a project, they want to go fast. And so they don't want to wait for material, and the party that can have the material available has a real advantage in supplying the product. Andrew Jones: In terms of the percentage of Well, thanks very much. Peter Matt: So can you, Andrew, can you start over because we lost follow on. Andrew Jones: Oh, no, no. Just that no, that was clear. Thank you. Operator: And your next question today will come from Katja Jankic with BMO Capital Markets. Please go ahead. Katja Jankic: Hi, thank you for taking my question. Maybe just quickly, Peter, did you say earlier on in the call that you would like to grow the Precast business to $700 million in EBITDA? Did I hear that correctly? Peter Matt: No, no, several $100 million. Several $100 million. And sorry, go ahead. Katja Jankic: No, no, you go. Sorry. Peter Matt: No, I was just going to say several $100 million. And again, between these two acquisitions, we're already at $250 million. So we've got a good start. Katja Jankic: And I think with the announcement of the first acquisition, the commentary was that most of this the growth there is more likely through M&A. Is that correct? Peter Matt: It is. It is. I mean, there are organic projects, and I noted two of them earlier in this call on the Foley platform, and there's a number of organic growth projects in the CPMP platform. But again, to build scale and the scale that we're talking about doing, as I said in the last call, it's likely going to involve M&A. The good news is that now, as I said, we have a real that we can build around. So bolt-on acquisitions that come with lots of synergies will be very appealing. And then when they come around, some of these larger acquisitions, which are not going to be every single day, but when they come around, we'll be in a position to look at those as well. Paul Lawrence: Just to supplement that, Katja, I would say the step change comes from inorganic growth. I think as we look at the trends in these businesses, we see above-average growth for the adoption and penetration of Precast product. They really solve a labor shortage issue. They solve stormwater management issues, and, you know, that has been what really has driven some good-sized growth. If we look at the regions in which these businesses operate, the growth expectation of construction activity in their geographies is expected to be very attractive over the coming years. Katja Jankic: Perfect. Thank you so much. Peter Matt: Thank you, Katja. Operator: And your next question today will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead. Phil Gibbs: Hey, good morning. Peter Matt: Hey, Phil. Phil Gibbs: Question about the CapEx guidance for this year around $600 million. Does that include CapEx related to the businesses that you're poised to close on? And if not, what's the typical maintenance level of CapEx associated with those businesses? Peter Matt: Yes, it does not. That's a Commercial Metals Company CapEx number. But Phil, you may have heard us say in response to an earlier question, the maintenance CapEx for these businesses, it's probably $8 million to $10 million for CPMP and probably $10 million to $15 million for Foley. So they're not big CapEx numbers. That's a percentage of their revenues. No. That's million dollars. Phil Gibbs: Oh, okay. Yeah. So it's generally 3% to 4% revenue in this precast space is the maintenance CapEx, a very generic number, but that's it's very capital-light. Phil Gibbs: Okay. And as you've really pivoted and accelerated the strategy to acquire some of these more upstream-oriented construction-facing businesses in The United States, particularly in the Southeast and Mid-Atlantic. Do you think that you think that that means that there should be a more natural buyer perhaps for your European assets? Peter Matt: Well, so again, when we look at our European assets, I think I've said this in the past. We really, really appreciate those assets for what they bring to the Commercial Metals Company family. And I'd just point to the TAG kind of initiative that I mentioned earlier on the call. The team in Europe has done just a phenomenal job on being low cost, and there's a lot that we can extrapolate from what they've done to help us in North America. One of the things that our team in North America is absolutely dead set on is that we will be a low-cost producer in our steel business in North America. So the Polish business brings a lot to the table, and it's absolutely a core part of our portfolio. Phil Gibbs: Thank you. Peter Matt: Thank you, Phil. Operator: At this time, there appears to be no further questions. Mr. Matt, I'll turn the call back over to you. Peter Matt: Thank you very much. At Commercial Metals Company, we remain confident that our best days are ahead. The combination of the structural demand trends we have noted, operational and commercial excellence initiatives to strengthen our through-the-cycle performance, and value-accretive growth opportunities, including our recently announced precast acquisitions, create an exciting future for our company. Thank you for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Thank you very much, everybody. Operator: This concludes today's Commercial Metals Company conference call. You may now disconnect.
Operator: To all sites on hold, we appreciate your patience. Please continue to stand by. To all sites on hold, we appreciate your patience. Please continue to stand by. Please stand by. Your program is about to begin. Welcome to the M&T Bank Corporation third quarter 2025 Earnings Conference Call. All lines have been placed in a listen-only mode and the floor will be open for your questions following the presentation. Press one on your telephone keypad when posing your question. We do ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press 0. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Steve Wendelboe, Senior Vice President, Investor Relations. Please go ahead, sir. Steve Wendelboe: Thank you, Katie, and good morning. I would like to thank everyone for participating in M&T Bank Corporation's third quarter 2025 earnings conference call. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our Investor Relations website at ir.mtb.com. Also, before we start, I would like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the investor presentation, as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now I would like to turn the call over to Daryl. Daryl Bible: Thank you, Steve, good morning, everyone. M&T Bank Corporation continues to serve as a trusted partner for our customers and communities, bringing together people, capital, and ideas to make a difference. Earlier this quarter, we released our 2024 sustainability report, which highlights our community impact and the progress we have made towards meeting our sustainability goals. Highlights include $5 billion in sustainable lending and investments, and over $58 million contributed to nonprofits through corporate giving and the M&T Charitable Foundation. We are also proud to share that M&T Bank Corporation is now the top SBA lender across our footprint by total volume as of the end of the SBA fiscal year September 30. Our small business enterprise continues to be an important component of our support for entrepreneurs and the local economy. Turning to slide four, our businesses and leaders, notably our women in leadership, continue to receive accolades from the industry including recognition of our Wilmington Trust team, and individual recognition for leaders across the bank. Turning to slide six, which shows the results for the third quarter. Our third quarter results reflect M&T Bank Corporation's continued momentum with several successes to highlight. We produced strong returns with operating ROTA and ROTCE, of 1.56% and 17.13%. The net interest margin expanded to 3.68%, demonstrating a relatively neutral asset sensitivity, well-controlled deposit and funding costs, and the continued benefit of fixed rate asset repricing. Strong fee income performance we have seen throughout the year continued, with fee income excluding notable items reaching a record level. Revenues grew more than expenses, resulting in our third quarter efficiency ratio of 53.6%. Asset quality continues to improve with a $584 million or 7% reduction in commercial criticized balances and $61 million or 4% reduction in non-accrual loans. We increased our quarterly dividend per share by 11% to $1.50 and executed a $409 million in share repurchases while also growing tangible book value per share by 3%. Now, let's look at the specifics for the third quarter. Diluted GAAP earnings per share were $4.82, up from $4.24 in the prior quarter. Net income was $792 million compared to $716 million in the linked quarter. M&T's third quarter results produced an ROA and ROCE of 1.49% and 11.45%, respectively. The third quarter included a notable fee item of $28 million related to the distribution of an earnout payment to M&T associated with the 2023 sale of our CIT business, adding $0.14 to EPS. Slide seven includes supplemental reporting of M&T's results on a net operating or tangible basis. M&T's net operating income was $798 million compared to $724 million in the linked quarter. Diluted net operating earnings per share were $4.87, up from $4.28 in the prior quarter. Next, we look a little deeper into the underlying trends that generated our third quarter results. Please turn to slide eight. Taxable equivalent net interest income was $1.77 billion, an increase of $51 million or 3% from the linked quarter. The net interest margin was 3.68%, an increase of six basis points from the prior quarter. This improvement was driven by a positive four basis points related to the prior quarter catch-up premium amortization on certain securities. Positive three basis points from higher asset-liability spread mostly from continued fixed asset repricing, partially offset by a lower contribution of net free funds. Turn to slide 10 to talk about average loans. Average loans and leases increased $1.1 billion to $136.5 billion. Higher commercial, residential mortgage and consumer loans were partially offset by a decline in CRE balances. Commercial loans increased $700 million to $61.7 billion, aided by growth in our corporate and institutional fund banking and loans to REITs. CRE loans declined 4% to $24.3 billion, reflecting the full quarter impact of last quarter's loan sale and continued payoffs and paydowns. Residential mortgage loans increased 3% to $24.4 billion. Consumer loans grew 3% to $26.1 billion, reflecting increases in recreational finance and HELOCs, while our auto loans were largely stable from the second quarter. Loan yields increased three basis points to 6.14%, aided by continued fixed rate loan repricing, including a reduction in the negative carry on our interest rate swaps, and sequentially higher non-accrual interest. Turning to slide 11, our liquidity remains strong. At the end of the third quarter, investment securities and cash held at the Fed totaled $53.6 billion, representing 25% of total assets. Average investment securities increased $1.3 billion to $36.6 billion. In the third quarter, we purchased a total of $3.1 billion in securities, with an average yield of 5.2%. The yield on the investment securities increased to 4.13%, reflecting the prior quarter catch-up premium amortization on certain securities and continued fixed rate securities repricing benefit. The duration of the investment portfolio at the end of the quarter was three point five years. The unrealized pre-tax gain on the available-for-sale portfolio was $163 million, or an eight basis points CET1 benefit if included in regulatory capital. While not subject to the LCR requirements, M&T Bank Corporation estimates that its LCR on September 30 was 108%, exceeding the regulatory minimum standards that would be applicable if we were a category three institution. Turning to slide 12. Average total deposits declined $700 million to $162.7 billion. Noninterest bearing deposits declined $1.1 billion to $44 billion, mostly from lower commercial and noninterest bearing deposits related to a single customer client. We continue to consider the entirety of the customer relationships as we assess our overall deposit funding mix. Interest-bearing deposits increased $400 million to $118.7 billion, driven by growth in commercial and business banking, offset by a decline in consumer and institutional deposits. Interest-bearing deposit costs decreased two basis points to 2.36%, aided by lower retail prime time deposit cost and lower interest checking costs across other business lines. Continuing on slide 13, non-interest income was $752 million compared to $683 million in the linked quarter. We saw continued strength across all fee income categories. Mortgage banking revenues were $147 million, up from $130 million in the second quarter. Residential mortgage revenues increased $11 million sequentially to $108 million from higher servicing fee income. Commercial mortgage banking increased $6 million to $39 million. Trust income was relatively unchanged at $181 million as the prior quarter seasonal tax preparation fees were largely offset by growth in wealth management and fee income. Trading and FX increased $6 million to $18 million from higher commercial customer swap activity. Other revenues from operations increased $39 million to $230 million, reflecting a $28 million distribution of an earnout payment, a $20 million Payview distribution, and the gain on the sale of equipment leases. These items were partially offset by $25 million in notable items in the prior quarter. Turning to slide 14. Non-interest expenses for the quarter were $1.36 billion, an increase of $27 million from the prior quarter. Salaries and benefits increased $20 million to $833 million, reflecting one additional working day and higher severance-related expense, which increased $17 million sequentially. FDIC expense decreased $9 million to $13 million, mostly related to the reduction in estimated special assessment expense. Other costs of operations increased $23 million to $136 million, reflecting higher expense associated with the supplemental executive retirement savings plan. Due to market performance, the impairment of renewable energy tax credit investment. The efficiency ratio was 53.6% compared to 55.2% in the linked quarter. Next on slide 15 for credit. Net charge-offs for the quarter were $146 million, or 42 basis points, increasing from 32 basis points in the linked quarter. The increase in net charge-offs reflects the resolution of several previously identified C&I credits, the two largest of which totaled $49 million. CRE losses remained muted in the third quarter. Non-accrual loans decreased by $61 million. The non-accrual ratio decreased six basis points to 1.1%, driven largely by payoffs, paydowns, and charge-offs of commercial and CRE non-accrual loans. In the third quarter, we recorded a provision for credit losses of $125 million compared to net charge-offs of $146 million. Included in the provision expense is a $15 million provision for unfunded commitments related to the letter of credit to a commercial customer. The allowance for loan loss as a percent of total loans decreased three basis points to 1.58%, reflecting lower criticized loans. Please turn to slide 16. The level of criticized loans was $7.8 billion compared to $8.4 billion at the end of June. The improvement from the linked quarter was largely driven by a $671 million decline in CRE criticized balances. The decline in CRE criticized balances was broadly based with lower criticized balances across nearly all property types. Turning to slide 19 for capital. M&T Bank Corporation's CET1 ratio was an estimated 10.99%, unchanged from the second quarter. The stable CET1 ratio reflects capital distributions including $409 million in share repurchases offset by continued strong capital generation. In the third quarter, we also increased our quarterly dividend by 11% to $1.50. The AOCI impact on the CET1 ratio from available-for-sale securities and pension-related components combined would be approximately 13 basis points if included in regulatory capital. Now turning to the slide for the outlook. First, let's begin with the economic backdrop. The economy continues to hold up well despite ongoing concerns and uncertainty regarding tariffs and other policies. The passage and signing of the One Big Beautiful Bill Act into law removed one source of uncertainty and also gave businesses more incentive to invest in new capital. The economy bounced back in the second quarter after having contracted in the first. Consumer spending proved resilient despite tariff impacts. Businesses continued engaging in CapEx, though it was heavily in tech software and transportation and equipment, while spending on new buildings remained in decline. Although overall economic activity was resilient, we remain attuned to the risk of a slowdown in coming quarters, due to the weakening labor market. The possibility of declining jobs or a rise in the unemployment rate would likely cause weaknesses in consumer spending and possibly business CapEx too. We continue to monitor the possibility of a prolonged government shutdown and the potential impact on our customers, communities, and broader economy. We remain well-positioned for a dynamic economic environment with strong liquidity, strong capital generation, and a CET1 ratio of nearly 11%. Now turning to the outlook. We have three quarters of the year complete, so we will focus on the outlook for the fourth quarter. We expect taxable equivalent NII of approximately $1.8 billion, which implies full year NII excluding notable items to be at the low end of the $7 billion to $7.15 billion range, in line with the outlook we discussed in September. Fourth-quarter net interest margin is expected to be approximately 3.7%. Our forecast reflects two additional rate cuts in the fourth quarter. We expect continued loan growth and average total loans of $137 billion to $138 billion, with growth in C&I, residential mortgage, and consumer, and a moderating pace in CRE decline. Average deposits are expected to be between $163 billion and $164 billion. Our outlook for the fourth-quarter noninterest income was $670 million to $690 million, reflecting continued strength in mortgage, trust, service charges, and commercial services. We expect other revenues from operations to revert toward more normalized levels. This would imply full year noninterest income excluding notable items well above the top end of our prior range of $2.5 to $3.6 billion. Fourth-quarter expenses, including intangible amortization, are expected to be $1.35 billion to $1.37 billion. This would imply full year expense in the top half of our prior outlook of $5.4 to $5.5 billion. This is being driven by an increase in professional services. Net charge-offs for the fourth quarter are expected to be 40 to 50 basis points, with full-year net charge-offs of less than 40 basis points. Our outlook for the fourth quarter tax rate is 23.5% to 24%. We plan to operate with a CET1 ratio in the 10.75% to 11% range for the remainder of the year. We will be opportunistic with share repurchases, and also continue to monitor the economic backdrop and asset quality trends. As shown on slide 21, we remain committed to our four priorities, including growing our New England and Long Island markets, optimizing our resources through simplification, making our systems resilient and scalable, and continuing to scale and develop our risk management capabilities. Concluding on slide 22, our results underscore an optimistic investment thesis. M&T Bank Corporation has always been a purpose-driven organization with a successful business model that benefits all stakeholders including shareholders. We have a long track record of credit outperforming through all economic cycles while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and a prudent steward of shareholder capital. Now let's open the call up to questions before which Katie will briefly review the instructions. Operator: Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. Our first question will come from Ken Usdin with Autonomous. Your line is open. Ken Usdin: Good morning, Daryl. Thank you for taking my question. I wanted to ask first on loan growth. So, you know, we are seeing good traction in a few components of the loan portfolio, but the CRE is still moderating, albeit at a slower pace. Maybe just sort of a thought on where we stand with the actual inflection of the CRE book, sort of timing and magnitude, stuff like that. Daryl Bible: Yeah. So our if you wanna talk about CRE and our customers in CRE, I would say it's looking like much more of a rebound now. The amount of production that's being done and that's going through our system and our approval rates are double what they were in prior quarters. So we're really producing and have a lot more activity. Still having some payoffs and paydowns overall, but we feel very optimistic about the growth of that coming in the next quarter or two. You look at the areas that we are really focused on right now, it's primarily in multifamily with industrial close second. We also are interested in looking at retail, hotel, and healthcare on a case-by-case basis, but office, we know, pretty much we are still looking to reduce there. But net net overall, I think we're really moving in the right direction and feel very good at what we're seeing and have real good positive trends moving forward. Ken Usdin: Perfect. Okay, thank you. And then, you know, maybe just if you could expand upon your thoughts on sort of where M&T Bank Corporation fits in the now consolidating large regional environment, just kinda given all the events over the last few weeks. So I think you all have been, you know, quite transparent about you know, what you'd be interested in and have such a history of discipline. But, you know, just curious now that we're actually seeing activity, how do you sort of balance the maybe finite regulatory window need to have willing sellers? You know, does it cause you at all to sort of expand your geographic base a little to increase the number of possibilities, or will you simply kind of stay close to your knitting? Daryl Bible: Yeah, Ken. You know, we have been very successful with the model that we've had for a very long time. You know? And ours is really to continue to grow, share, and customers in the markets that we serve. So, you know, I'm sure an acquisition will come at some point down the road. Not sure when that's going to be. But when it happens, it will probably be within our footprint. You know, it may stretch into another footprint a little bit depending on who the company is that we partner with from that perspective. But it's gonna happen when it happens, Ken. Our strategy works, you look at our performance and our earnings, all really strong, and we're going to continue to execute on this strategy and be very successful. Ken Usdin: Perfect. Alright. Thank you very much, Daryl. Thank you. Operator: Thank you. Our next question will come from Gerard Cassidy with RBC. Your line is open. Gerard Cassidy: Hi, Daryl. How are you? Daryl Bible: I'm doing good, Gerard. How are you? Gerard Cassidy: Good. Thanks. Just to follow-up on what you just said about the approvals on commercial real estate. I think you said they're double from what they were prior. Can you share with us a little deeper what changed to have more approvals? Daryl Bible: You know, I think, you know, as we ramp back up with our new systems and processes that we have, you know, earlier in the year, we weren't running as smoothly as possible. That has eased up now. Both our team and Peter Darcy's, our first line folks, as well as in the credit area, with Rich Barry and his team. They're working much more closely together with the people on the line and are just flowing through a lot easier. And that's not just CRE. We're also seeing it on the C&I front. Both in commercial as well as in our business banking area. So I think the momentum is growing, and we're having a lot more success and a lot more wins, and seeing more loans go on the books. Gerard Cassidy: Very good. And then just a broader picture, if we step back for a moment, you've had in the past some very good insights on what's going on in Washington with the regulators. And we saw the notice of proposed rulemaking on matters that require attention, MRAs. Can you give us your view of how the regulatory environment is changing and how that may help your profitability going forward? Daryl Bible: Yeah. One of the big things that's happened and that we've started to see now is we used to always get when you have a review, you would get observations. Then if it was more serious, you might get an MRA or something really serious, an MRIA. From that perspective, observations are now being given. And the way we treat observations is, you have a year to get it fixed before they come back to next year. And if it makes sense, we go ahead and get them done. That's what's really helped a lot. By just having a recommendation to do something, you don't have the whole process and everything else that you have to do when you're trying to cleanse an official issue like an MRA or MRIA. So just that itself, the timeline to get it done is a lot faster, a lot fewer people working on it. As far as how much that actually reduces in headcount and all that, I think it's, you know, definitely will be fewer people needed in the remediation areas. But, you know, we'll probably try to redeploy those folks in other areas throughout the company because those people were really important, very expensive, experienced people that you would want to keep in the company. From that perspective. So I don't look at it as too much as an expense save. I look at it as a way of just things getting done a lot faster, a lot smoother. And it gives our teams a lot more energy to be more productive as well. Which is really, really important as we look forward. Gerard Cassidy: And just to stick with this for a second, obviously, the Basel III endgame is coming up soon, maybe by the end of the year or the first of next year. Many investors have identified the benefits to the money center banks. But in terms of regional banks, what do you see the potential benefits for M&T Bank Corporation from the Basel III endgame being a lot less onerous than what it was proposed in July 2023? Daryl Bible: You know, our hope is that it's a lot more straightforward really focused on key areas that we should try to figure out what the capital is. That original proposal, they had adjustments for PeopleBank our size, has a very low market operation markets that to build something out that really doesn't make a lot of sense for what we are looking for and charging for operational risk. It didn't seem very logical from that perspective either. So I'm sure it'd be much more streamlined, much more trimmed down, really focused on what's really needed from a capital perspective for the industry as well as for M&T Bank Corporation. Gerard Cassidy: Thank you. Appreciate the insights. Operator: Thank you. Our next question will come from Erika Najarian with UBS. Your line is open. Erika Najarian: Hi, Daryl. Thank you for taking my question. Just wanted to follow up on Scott's line of questioning. You mentioned production picking up, the things that you just talked about with Gerard. But, you know, rates are, in theory, supposed to trend lower from here. How should we think about the push-pull between some of these loans getting refied away from you and the production? In other words, is the fourth quarter still a good inflection point for when CRE balances would bottom? You know, when can we start seeing, you know, period-end balances start to tick upward in a more consistent way? Daryl Bible: Yeah. I would love to tell you that fourth quarter is the bottom. We hope it is, but, you know, you don't really know for sure. It really depends on what payoffs are coming through. I will tell you though, in 2026, for the amount of maturities that we see coming due in '26, it's much less in '26 than what we had in '25. So we're starting out of the blocks in '26 with just fewer payoffs coming through, which is a positive. And with our production that we're growing, I think it'll be really helpful. So, if I had to guess right now, it's probably bottoming in the first quarter. Maybe if we get fortunate enough, maybe it'll be sooner than that. But we feel really good that it's gonna bottom and start to grow up. Gonna be a really good earning asset. To get back to be positive momentum. Erika Najarian: Got it. And maybe the second question, Daryl, is you know, M&T Bank Corporation has been known to have a conservative culture and there has been a lot of credit noise recently, you know, whether it's related to NDFI or, you know, credit pre-announcements, which always makes the market nervous. So, you know, you're the first management team to call out NDFI. And, additionally, the, RWA treatment of NDFI via SSFA. So maybe my question is this. Maybe walk us through what the NDFI exposure is for M&T Bank Corporation. You did mention that loans to financial and insurance companies were the driver for C&I growth. And maybe help investors figure out what questions to ask in order to really properly assess the credit risk from a go-forward perspective. Because all we're getting from other banks is that oh, don't worry about it. This is way, you know, way less free and way less severe than a direct C&I loan. Daryl Bible: Yeah. No. Thank you for the question, Erika. So if you look at our NDFI portfolio, it is one of the lower exposures. We're probably 7% or 8% of total loans in that big bucket. We really focus on businesses in this bucket that you know, we believe in and are really good businesses that are on the lower end of the risk scale. So I'll start with our top three categories: fund banking, which helped with our loan growth, this past quarter and pretty much throughout the year. It has been growing nicely. Those are capital call lines. And we do those. But if you want to take more risk, which we don't, is you would do NAV lending, which we don't do. From that perspective. So in that case, it's our choice to stay on the more conservative end. The other category that we have that we have a fair amount in is in our industrial CRE, made up a lot primarily from our REIT activity that we have. And we stay with really good conservative-known REITs that perform well. So very good from an institutional performance. The other business I'd like to call out is residential mortgage warehouse. Done properly, from an operations perspective, you really can't lose money from a credit perspective. It's really an operational risk business. If you have good operations and good controls in place, you know, it's a really safe business to run from that perspective. So those are the ones that we have that are our largest. We do dabble in other ones. And we do lend to BDCs, but we only focus on public BDCs. We don't do private ones. We don't think there's enough disclosure and just more of a higher risk orientation. So we split that there. As far as your SSFA question goes, SSFA is basically transactions where you have securities or loans that are put on the balance sheet in a structure. So there's no recourse on the loans, your ability to get paid back is strictly from the assets. I think the way we're looking at it is we have a very small exposure today and you have to be selective on what assets you're going to put into these structures. And, you know, we have one structure that has loans, another structure that has mortgages. Most of our structures that we have is more in ABL right now. But the thing you have to really look at when you look at SSFA is that it's procyclical. So you start off with a lower RWA, and it's because of the structure that you have. But as delinquencies increase, as the economy turns down, your RWA automatically increases. In times of really bad stress, these portfolios will actually use up capital when you actually need capital the most from that standpoint. So we're aware of that and we're just trying to take it very conservative from that perspective. Times are very benign now. But times could get a lot worse at some point down the road. And you just want to make sure you don't have too much of this procyclical type structure on your balance sheet. Erika Najarian: Got it. Operator: Our next question will come from John Pancari with Evercore. Your line is open. John Pancari: Good morning, Daryl. Daryl Bible: Morning. John Pancari: On the capital front, I know you're at 10.99% CET1 and you are net of the $409 million in buybacks. As you look out, I know you have your 10.75% to 11% target. Can you provide us your updated thoughts around that target? What is keeping you from moving that lower? And as you get clarity on the regulatory front. And once you do have that confidence and the ability to move it lower, can you help us frame where you think a bank of your size and your regulatory considerations where you really could be operating at? Daryl Bible: Yeah. Thanks for the question, John. So first I'd start with when we look at where we're positioned right now, definitely feel comfortable in repurchasing shares. We didn't buy back as much as we could have this past quarter, just because we think the market was a little bit overheated. You know, and there was more risk into the environment. So we're a little bit cautious there. Our credit quality continues to improve really well. And that will probably continue, so we feel good about that. And the other thing is we're a little bit price sensitive on how much we buy depending on when we buy it. So, you know, it went up much higher last quarter, and we just bought less on a daily basis. So, I mean, right now, you know, we could buy anywhere from $400 million to $900 million this quarter depending on how we feel about the economy and the value of the stock. John Pancari: And in terms of your CET1 target, the 10.75% to 11% range, what would you need to see to move that lower? Daryl Bible: You know, that's a discussion we'll have with our board later this quarter. When we get our strategic plan approved and go through that. But, you know, as we continue to perform, we'll look for opportunities to potentially try to decrease our capital ratio down over time as that makes sense. But that's really a Renee and board question. And we'll probably have something to say about that come our January earnings call. John Pancari: Got it. John Pancari: Got it. Okay. And then if I could just throw in one more. On the loan front, I appreciate the color you gave around appetite around CRE and some of the loan growth dynamics. Can you maybe talk about competition a bit? What are you seeing in terms of loan spreads? We're hearing a little bit more that competition is starting to bear down again and that larger banks are becoming even more of a form of competitor to the regionals on the lending front. What are you seeing there in terms of front-end loan spreads on the commercial book? Daryl Bible: Yes. No, it's definitely much more competitive. You know, if you take and look at all of our commercial businesses, C&I and CRE together, I would say spreads are down maybe 10 or 15 basis points approximately from what we're originating maybe a quarter ago. But we're still seeing really good production. You know, we're doing really good in our business banking business. We don't talk much about business banking because it's really more of a deposit gatherer. It's 3x more deposits than loans, but you know, they've had really big success the last quarter or two in growing their loan book and continue to build that out, which is really good for us. It's the smaller end of the commercial space, and it's really serving our communities and our clients in the right space. So that said, you know, I think it's competitive, but from a pricing perspective, you know, we're pretty efficient, we can still get our returns with these pricing. John Pancari: Got it. Alright. Thanks, Daryl. Operator: Thank you. Our next question will come from Chris McGratty with KBW. Your line is open. Chris, your line is open. Please check your mute. Chris McGratty: There we go. Sorry about that. Daryl, if you think about operating leverage going into 2026 or the medium term, can you just speak to how you think this plays out in terms of widening, narrowing and then the drivers, between revenues and expenses? Daryl Bible: What would you say is narrowing? Chris McGratty: Just operating leverage. Is it gonna widen or narrow, I guess, is the deal. Yeah. Daryl Bible: Yeah. You know, Scott, you know, banking is simple when it comes down to this. Long term, but you know, it's really just growing revenue faster than expenses at the end of the day. We have a lot of momentum right now on our fee businesses. And if you look at our fees growing with trust, mortgage, and our commercial swath of products that we have in the commercial area to our customers there. We're going to grow that really strong again this next year. So that's a positive. We have positive momentum on our net interest margin. We guided up for the fourth quarter. Gonna hit three seventies. So we have momentum there. And CRE is going to start growing as well. So we'll have all of our portfolios growing. So I'm pretty positive that our earning assets will start to grow maybe a little bit faster. And still have good expansion on our net interest margin from that. So I feel good overall, and that should come down to a good operating leverage number. Chris McGratty: Thanks for that. And then I guess quick follow-ups. Kind of two-part. One, I guess the visibility into the improvement and the criticized that you've noted in the CRE book, I presume that'll continue. And then secondly, I just noticed in a nuance in kind of your geography question about M&A. I think you said adjacent markets. Just you could unpack that for a minute, that'd be great. Thanks. Daryl Bible: Yeah. So from a credit quality perspective, you know, our non-accrual loans came down to 1.1% and that was really driven by both C&I and CRE. When you look at the criticized balances, it is really a function of the CRE portfolio. CRE portfolio basically decreased in every category in CRE. But really driven by multifamily and healthcare. And those were the drivers there. Pretty optimistic that that will continue over the next several quarters. So we actually might think about pulling this slide out of our presentation in a quarter or two because we'll be pretty much back to normal credit quality and normal operating from that perspective. So we feel really good and excited about that. As far as geography goes, the only I say expanded geography is if you buy a bank that's, let's say, headquartered in one of the 12 states that we are, but they might have some exposure outside the 12 states that's really how you might get a little bit of more growth in another area. But it's still really focused on getting scale and density in the 12 states and in the District Of Columbia where we operate. Chris McGratty: Okay. Thank you. Appreciate it. Operator: Thank you. Our next question will come from Manan Gosalia with Morgan Stanley. Your line is open. Manan Gosalia: Hey, good morning. You noted in your credit comments a few one-time C&I NCOs that were embedded in the overall 42 basis point NCO number. And then I guess your guide for next quarter is 40 to 50. Are there more lumpy items that you're expecting next quarter? And, you know, I guess, the bigger picture question is, how do you expect that to trend into 2026? And, you know, what's a good normalized NCO run rate for M&T Bank Corporation? Daryl Bible: Yeah. No. Thank you for the question. So this quarter, I mean, net charge-offs were $146 million. It was really driven by two large C&I loans. They were two contractors that added up to $49 million and that's really what drove us higher than our, you know, 40 basis points this quarter. As further goes to next quarter, we could have maybe another one or so in the fourth quarter. But we still think that net net year to date, we'll come in for the year under 40 overall. So I think that's where it's kinda shaking out. From that perspective. As far as next year goes, we aren't going to give any guidance yet. All that. But the economy still overall is in relatively good shape. You know, there is stress in certain areas, but overall, it's still in really good shape. I wouldn't expect much change one way or the other. For '26, but we'll give you more of that in January. Manan Gosalia: Got it. And then separately, you spoke about, you know, more room on the operating leverage side. Some of your peers have spoken about accelerating investments in AI and tech. Can you talk a little bit about what M&T Bank Corporation is doing there? And if you will need to spend more next year as as you invest there. Daryl Bible: Yeah. We definitely are spending a lot of money in the company. I mean, the two and a half years I've been here, we've had some really significant projects that we've started and that we're starting to finish up. Like our my world, in the finance world, the general ledger will go live probably in the next quarter or so. So that that will be a big success and also a big drop in run rate. But, you know, we have other projects right behind that that we're going to be investing in. We're putting in a new debit platform for all to serve our customers. That's going in. We're looking at commercial servicing system that needs to get upgraded, consumer servicing system that needs to get upgraded, so there's other investments out there. You know, from a data center perspective, our two data centers are up and operating. We're still moving applications over there. That would take another year or two to get that fully accomplished. And Mike Whistler and his team are putting as many applications as we can up into the cloud. So we can maybe get out of doing some of the data centers. Which in the long run will actually reduce costs. So I think our costs will be controlled. I think our revenues will grow more than our expenses, but we're going to continue to invest in our company and do the right thing. And continue to have really strong service quality for our customers and really predictable sustainable platforms that serve. Manan Gosalia: Got it. Thank you. Operator: Thank you. Our next question will come from Matt O'Connor with Deutsche Bank. Your line is open. Matt O'Connor: Just a bigger picture question on credit, which is obviously driving the reasonableness of bank stocks today. We're seeing some of these kind of one-off in commercial that, according to the media, are fraud related. What are your thoughts in terms of why we're seeing these events now, you know, with rates kind of coming down? I thought that would have taken the pressure off, but just any big picture thoughts as you guys kind of sit around and think about the credit environment. I'm sure you have talked about some of these positions out there. If you don't have any, just any thoughts on that. Daryl Bible: You know, a lot of people have a lot of different ideas on this. I think one of the things we think about is, we've seen stress out in the marketplace for a while. So if you look at the consumers, you know, we've been saying for years that in the lower end, call it the 20-odd percent in the lower end, are really hurting in that space. And those are the ones that are paying the higher credit card yields and all that. And then it's just, it's really tough for them when they have to pay these high interest rates. If you look, we've tightened a little bit in our small business areas. So business banking has pulled back a little just because of some of the weakness we were seeing there in the last year or so. And have a leasing business that also we tightened up there as well. So on those areas, you know, we're things that we're just trying to tighten and see. But there's definitely stress out there. And sometimes people can only go so long. And then they have to kind of throw in the towel. On the larger end commercial, there's sectors that have been impacted in certain situations, whether it's tariffs or, you know, just other operating private equity coming into buy. Some of these companies sometimes it's a good thing, sometimes maybe not. They aren't experienced in trying to run these companies. Like the original teams were. So you see one-offs from that perspective. So there are things you have to be careful for. What we really focus on are the fundamentals, and really try to make sure we're underwriting and looking at everything we can, making really good sound decisions for the long term. We don't want to put loans on the books that aren't gonna be there in the next year or two in the credit situation. So, we're trying to do that and trying to be really holistic. You know, Rich Berry, our chief credit officer, has set up some verticals and some specialty areas for like our leverage lending area, and a couple of other areas just to focus, make sure that you know, we have controls in place in areas that we deem as higher risk. In place. So I think we're doing all the right things. Really trying to be guarded from that. But net net, if rates come down more, I think that will relieve some of the pressure. But right now, I think you're just seeing some of the pressures from it's been elevated for a while. Matt O'Connor: That's helpful. And then I'm sure it's a lot easier to kind of get comfortable with your book. You know, you originated them, and you can kind of evaluate it on an ongoing basis. And I guess, hypothetically, if you were kind of looking at an external book, do you still feel like there's enough visibility where you could evaluate it, or are there enough red flags again, just kind of generally in credit these headlines that you're seeing, that that might give you a little pause? All hypothetical, obviously. Daryl Bible: You know, it sounds like you're trying to lead to a question if we do a due diligence on a company and you're looking at a credit book and all that. I mean, if that's where you're going, it really starts with the culture and, I mean, do they underwrite similar to how we underwrite? And that needs to get established upfront from that perspective, and you really need to know that and trust that. Like, when we acquired Peoples, we knew day one that their culture was very similar to M&T Bank Corporation, that would fit in quite nicely from that perspective. But when you look at stuff, you have to be really careful and ask a lot of questions and information and keep digging until you get satisfied. I mean, I think that's the way it works. You have to do your homework. It all comes back down to fundamentals again. Matt O'Connor: Okay. That's helpful. Thank you. Operator: Thank you. Our next question will come from Dave Rochester with Cantor. Your line is open. Dave Rochester: Hey. Just back on your margin comment, you mentioned earlier you had some momentum there guiding to the 3.70 level in 4Q. Do you see any upside potential of that going forward given your outlook for more Fed rate cuts on the one hand and then given the repricing that you see you still have left to do on the fixed rate segments of your loan and securities books? Daryl Bible: So, I mean, what we have modeled right now is we have two cuts in this year and three cuts next year, so five cuts total. When we do our modeling, our base scenario embeds the forward curve. So when you look at that and then you look at it, down 100, or down 100 is basically flat from an NII perspective. So that's really rates going down 200 plus basis points over twelve months. So I think we're very neutral from that perspective. If rates go up 100, which is basically rates staying flat, because you got the forward curve embedded into that, we're off just a touch, so I'd say we're a little bit more liability sensitive on the way up a little bit. But the way our balance sheet is really structured is we have to hedge to have the position that we are at. And if we don't do any hedging on how we operate, within a year, we can become very asset sensitive very quickly. Just naturally as things happen. So we're constantly having to hedge to neutralize our interest rate sensitivity from that perspective. We feel really good about where our net interest margin is. We do have a piece of it obviously based upon the shape of the yield curve. That's also impactful for us. We're still benefiting from that from a roll-on roll-off basis. If you look at our loan book, in the consumer book that we have, we're still probably getting about 75 basis points spread positive there. The investment portfolio is probably going to be anywhere from 50 to 75 basis point positive there from that perspective. So still benefiting from the roll-on and roll-off from that perspective. So that's really good. And our deposit betas are 54% We came in and we think that's pretty much what it was when rates were going up. So coming down, we're gonna mirror that as well. So we feel very good that we'll stay in the low to mid-fifties from a beta perspective. I think we got things positioned pretty well from a sensitivity perspective on NII and feel good about what we're guiding to. Dave Rochester: So it sounds like it all adds up to some upside potential there to that 3.70 going forward. All else equal. Daryl Bible: Great. Dave Rochester: Maybe just back on your comments on the government shutdown and M&T Bank Corporation being ready for that. It doesn't sound like you're too concerned about it right now, given your comments, when would you start to get worried about it from a credit perspective? How long would this have to drag on before you guys get more concerned about it? Daryl Bible: You know, from a government shutdown, you know, we are monitoring and looking at various sectors that potentially could happen. Obviously, it hasn't been around long enough to know, but you know, we've seen some stress in gathering contractors. Obviously, this puts more stress on them because of the shutdown, so that's important. You know, the SBA business has gotten a shutdown right now. So that's some stress from that. HUD and FHA, we're looking at that to see what impact that might have. You have C&I healthcare from a reimbursement perspective. That will probably impact if it goes longer. Reimbursements might slow down or stop. And then nonprofits that get grants. Then government employees, which is the heart and soul of the government, those people at all. So we're monitoring all those areas. Haven't really seen anything yet. But if it goes on a few months, I think you're starting to see some stress maybe. Dave Rochester: Yeah. Okay. Maybe just one last one. Was hoping you'd just give a little update on your exposure if you have anything to the Tricolor situation. I know you have any credit exposure, but if you just talk about anything like a legal perspective or anything else there, it'd just be great to hear how you're assessing that risk, just given Wilmington's roles there. Daryl Bible: Yeah. Yeah. Happy to talk about it. So first of all, we publicly reported, there are allegations of fraud is never good for an industry overall. But we expect the industry will improve over time to make sure that such events happen less frequently. We are and always have been a very client-centric culture and company, and we will always strive to provide the best services and execution. We've got a thorough review of what we're looking at and enhancing our quality and service. We still believe in our corporate trust business, feel good about where we are, and just looking for better ways to partner with our clients. Know, regarding your current situate, question that you have, it clearly will play out over a long period of time. It's really not helpful to kind of speculate what's gonna happen from that perspective. You know, we were our roles in the transaction. We have no lender experience or exposure from M&T Bank Corporation or Wilmington Trust whatsoever. Our roles that we have there were focused in the warehouse account banking custodian and on the securitization roles, owner trustee, indenture trustee, custodian, paying agent, note register, and certificate register. Those were our roles that we have from that perspective. So there's no credit exposure that we have there. So I think that's really what we see right now, and we're just going through the process and seeing how things play out. And, you know, there will probably be people that sue other people just because of the bankruptcy and what happens, but we'll see, you know, if we're impacted or not from that. We don't know. Dave Rochester: Alright. Thanks, Daryl. Appreciate it. Operator: Our next question will come from Ken Usdin with Autonomous. Your line is open. Ken Usdin: Hey, great. Hey, Daryl. Just one quick one. You mentioned in the slides that the fourth quarter expense up, you pointed out professional services. I know you guys typically do have higher expenses, third to fourth. But I'm just wondering, is that a specific nuance that you're just finishing some projects or something like that and just obviously, you know, we'll hear more in January about what next year's expenses look like. But, I just wanna know if that's atypical or more of kind of the normal ramp that we typically see towards year-end? Daryl Bible: You know, Ken, we have a lot of projects going on and we're just trying to get some of them finished off. So it's kind of the cost of, you know, getting things done is just increasing expenses from a professional services perspective. We'll give you guidance for '26, and, you know, we will make sure that we have revenue growing faster than expenses. Ken Usdin: Okay. Alright. Got it. Thanks for that clarification. Operator: Thank you. Our next question comes from Christopher Spahr with Wells Fargo. Your line is open. Christopher Spahr: Hi. Thanks for taking the question. First, about the buybacks during the quarter, and you kind of indicated like you were being a little price sensitive. Just with the accumulation of capital, regulatory relief coming in, an AOCI becoming even more favorable for you. I'm a little surprised that you talked about being price sensitive, just given where the overall stock is and and your accumulation of capital. Daryl Bible: You know, we just have a grid that we have, Christopher, in that, you know, depending on what the tangible book level is, what we're trading at, we have certain amounts that we buy at certain levels. And adjust it fluidly from that perspective. But you know, just like investors out there, you know, we're investing in our company as well, and we think of it the same way. Christopher Spahr: Okay. And as a follow-up, with five rate cuts kind of in the forward curve, what is your outlook for deposit growth over the next year or so? Thank you. Daryl Bible: Yeah. You know, my guess is our deposit growth and we'll give you guidance in January. But deposit growth and loan growth shouldn't be much different than really the growth of the economy plus or minus a little bit. Is what it is. So economy grows two or 3%, I think it'd be in that same neighborhood. Christopher Spahr: Alright. Thank you. Operator: Thank you. This concludes today's Q&A. I will now turn the program back over to our presenters for any additional or closing remarks. Daryl Bible: Thank you all for participating today. And as always, if clarification is needed, please contact our Investor Relations department. Operator: Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the Q3 2025 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, Thank you. I would like to turn the conference over to Matthew Korn, Head of Investor Relations and Strategy. Please go ahead. Matthew James Korn: Thank you, Colby. Good afternoon, everyone. We are very pleased to have you join our third quarter earnings call. Joining me from the CSX leadership team are Steve Angel, President and Chief Executive Officer; Mike Cory, EVP and Chief Operating Officer; Kevin Boone, EVP and Chief Commercial Officer; Sean Pelkey, EVP and Chief Financial Officer. And the presentation that accompanies this call, which is available on our website, you will find slides with our forward-looking and non-GAAP disclosures. We encourage you to review them. With that, I am very happy to turn the call over to Mr. Steve Angel. Steve Angel: Thank you, Matthew. Hello, everyone. We are happy to have you join our third quarter calls today. First, I want to recognize Joe Hinrichs. He led this company through some difficult times and worked with this leadership team to make some real progress. Now we are all eager to move forward from a solid position. My connection to this industry goes way back. My career started at GE where I worked directly with locomotives and rail operations. That experience gave me a deep appreciation for railroading that has stayed with me. I spent the last couple of decades leading large industrial companies, specifically industrial gas companies, but the interest in rail never faded. There are some similarities between the industrial gas business and the railroad industry. First of all, safety. It is not just a nice thing to do; it is a sacred responsibility. Everyone must come home safe at the end of each and every workday. Industrial gas and railroads are both capital-intensive businesses. Our strategy at Linde was to build network density in targeted geographies. That is how you leverage your infrastructure to generate ever higher returns on capital. That concept applies to the railroad industry as well. I think of pipelines and railway track the same way. He who owned the pipelines, provided they were in the right locations, had a strong advantage over their competition. Same for railroad tracks. Another similarity is our vision. At Linde, our vision is to be the best performing industrial gas company in the world. And we achieved that, in some cases, by a large margin over the next best competitor. At CSX, the vision is to be the best performing railroad in North America. I like that. And when we say best performing, I am certainly talking about financial performance, operating margins, return on capital, cash flow, but I am also talking about safety, customer service, employee engagement, integrity, and ethics. And I do not see any of these as being mutually exclusive. You can be best in class in all these areas. In every important aspect of running a great railroad company. How do you do it? It takes a concerted effort. Sounds trite, but you have to make the most important things the most important things. Focus, execute, grind the details, repeat. Build a strong stable foundation and get better every day. In essence, you build a disciplined, high-performance culture. And you build a talent pipeline that will sustain the culture long after you are gone. That is enough about me. I will turn it over to Mike. Michael A. Cory: Thank you, Steve, and thanks to everyone for joining us today. First, I want to recognize the very good work of our teams across the network. Their dedication and their execution have really led us to deliver one of our strongest operational performances in recent years. And we are building on that great service cost momentum from last quarter, and it is really paying off. We are seeing improvements across the board, but it is really exciting to see the railroad become more efficient and even more responsive to our customers' needs, especially given the current market conditions. You can turn to the next slide. As Steve noted, safety is our largest shared responsibility. Our FRA personal injury frequency rate ticked up slightly from last quarter, but the bigger picture is very positive. Through September, we have seen a solid reduction in moderate and severe injuries with fewer cases requiring employees to miss work. This shows our SafeCSX program is working. Our culture is shifting to be more proactive, data-driven, and safety-focused in daily operations. On the train accident front, this quarter was the best since 2023. Human factor accidents are down 16% year to date thanks to targeted efforts, better training, and smarter tools that help our people make safer decisions. Next slide. Now let's take a look at the operational performance. This was our fastest quarter for train velocity since early 2021. For all time hit its lowest point since mid-2023, and average daily cars online were the lowest since 2020. That shows how disciplined the team has been in running a balanced, efficient network even while major construction continued on the Howard Street Tunnel and Blue Ridge Subdivision. Trip plan compliance continued to improve, Intermodal TPC rose to 93% from 90%, and carload TPC climbed to 83% from 75%. These are strong gains, a result of fluidity of the network. Next slide. I am proud of how this team has kept momentum on improving asset utilization. With market changes and mix shifts, our ability to be efficient and nimble is extremely important and was evident last quarter. Through disciplined cost asset and cost management, we reduced train miles and optimized horsepower utilization. Running efficiently without impacting customers. These improvements show up in our solid fuel productivity and horsepower management. Car miles per day also improved, reflecting both faster train velocity and our unwavering focus on yurt operations. Let's go to the next slide. And finally, I want to highlight two major wins for us. The Howard Street Tunnel and the Blue Ridge subdivision projects. Both were extremely complex efforts and finished slightly ahead of schedule. A tremendous accomplishment. And I want to give a big thank you to everyone on our team who was involved to make that happen. With these projects complete, we now have full network access. Positioning us for greater capacity and resiliency as we go forward. In closing, I could not be prouder of the team. The momentum this quarter is real and we are going to keep it going. We are not done improving, innovating, or delivering for our customers and shareholders and each other. With that, I will hand it over to Kevin. Kevin S. Boone: All right. Thank you, Mike. As Mike just mentioned, we are excited that both the Howard Street Tunnel and Blue Ridge projects are complete. As we move forward, customers will see benefits from reduced outer route miles that will improve on our best-in-class service levels. Starting in 2026, we will begin to capitalize on double stack clearance through Baltimore that will expand our intermodal service offerings into the Northeast Region. Looking across the markets we serve, business conditions are mixed. Customers face uncertainty and headwinds from shifting trade policies, weak global commodity prices, unsupportive interest rates, and a persistently soft trucking market. Now let's turn to merchandise revenue on Slide eight. Revenue and volume were down 1%. With RPU flat as core pricing gains were offset by lower fuel surcharge and unfavorable mix. On the positive side, Minerals volume and revenue were up 812% respectively. The team continues to capitalize on strong demand in aggregates and cement by leveraging our unique footprint into the Southeastern market. Fertilizer volume rebounded due to improved production at a key phosphate producer which helped drive 7% growth in the quarter. Metals and equipment volume was up 5% driven by increased wallet share combined with new capacity on our network. Increased automotive production drove 1% higher volume and moving forward production levels are expected to remain relatively steady through year-end with minimal anticipated impacts from the aluminum supply challenges. Broader market softness and tariffs continue to impact our forest product and chemical markets. Where we have some customers that have rationalized production for both volume was down 7% compared to the prior year. A positive core pricing has mitigated revenue declines. Ag and food volume was down 7% as a strong Southeastern crop has provided feed buyers a robust local supply. We have also seen increased competitiveness in the ethanol and weakness in certain food and consumer products. In the fourth quarter, we expect a stronger export market and improving domestic grain trends from the Midwest harvest. Now let's turn to Slide nine to review the coal business. Coal revenue declined 11% for the quarter on 3% lower total volume. All in coal RPU declined 9% year over year, but as shown on the slide, the headwind from export benchmark pricing continues to diminish as we move into the fourth quarter. Export tonnage was down 11% largely due to reduced production associated with mine fires we had noted earlier in the year. But recent trends have been encouraging. Our operational performance has been very strong and we are pleased with the recent reopening of a key export mine. Our domestic coal business continues to see steady trends through the year. Steel industrial tonnage was down 15% year over year due to softer market fundamentals and reduced domestic steel production. On the other hand, utility coal performed well over the quarter with tonnage up 22% year over year. Power demand remains supportive helped by higher natural gas prices. Turning to slide 10, Intermodal performed well despite a soft trucking market and muted pricing. Third quarter revenue was up 4% a 5% increase in volume. Our international business benefited from strong growth with key customers. Tariff impacts and general consumer demand remain watch items. Volumes have softened in recent weeks looks largely in line with typical seasonality. Domestic volumes grew modestly year over year, primarily due to new service offerings. Following a successful bidding season for our IMCs Strong East eastbound volumes we expect continued strength in our domestic business in the near term. As we look ahead to the end of the year, and start of 2026, we are excited about the opportunities to leverage the strength of our network performance. Win in the marketplace and find ways to create and creatively convert more business to the railroad. Now let me turn it over to Sean to discuss the financial. Sean R. Pelkey: Thank you, Kevin, and good afternoon. Third quarter reported operating income was $1.1 billion and earnings per share was $0.37. These figures include $164 million and $0.07 per share from impairment of the remaining goodwill related to quality carriers. I will now speak to adjusted third quarter income statement excluding the goodwill impairment charge. Revenue was lower by about $30 million or 1% as 1% volume growth and an increase in other revenue were offset by headwinds from unfavorable mix in coal pricing. Adjusted expenses increased by 3% and I will discuss the details on the slide. Interest and other expense was $19 million higher compared to the prior year while income tax expense fell by $46 million on lower pretax earnings and a lower effective rate that was driven by renewable energy and state tax credits. As a result, earnings per share fell by $0.02 reflecting a combined $0.02 of discrete unfavorable impacts. $35 million of restructuring, severance and regulatory advisory expenses, and approximately $25 million of network disruption costs related to the recently completed Blue Ridge and Howard Street projects. CSX is well positioned and building momentum. Year over year headwinds eased into the fourth quarter and strong operational execution and cost control provide a positive setup for improved results. Let's now turn to the next slide for a closer look at expenses. The total expense variance includes the $164 million charge based on impairment testing completed during the quarter. Despite the difficult trucking market, quality carriers has helped drive truck to rail conversions, maintained industry leading share and stable pricing across its end markets. We are working closely with the QC team to aggressively identify additional efficiency opportunities that will support an improvement in near term financial results while still positioning quality carriers to fully capture the upside when the trucking market recovers. Expenses excluding the impairment increased by $71 million or 3%. Including approximately $60 million of severance network disruption and other costs noted on the prior slide. This expense management reflects solid fundamentals and disciplined execution delivering increased volume with a lower rail headcount. And year over year efficiency savings across the expense base. Turning to the individual expense line items, Labor and fringe was up $9 million year over year including $22 million of management and executive severance. These costs plus the impact of inflation were mostly offset by lower incentive compensation and efficiency savings. Reflecting lower rail headcount and network driven improvements in T and E overtime and ancillary costs. Headcount will hold stable to slightly lower sequentially in the fourth quarter while cost per employee will see a normal seasonal increase as the benefit of lapping restructuring and severance costs will be at least partially offset by higher incentive compensation expense. Purchase services and other costs increased $54 million year over year. This was driven by cycling a prior year favorable inventory adjustment as well as network disruption costs this year trucking casualty and freight damage claims and inflation, plus $13 million of restructuring and advisory costs slightly offset by higher property gains. Importantly, the team delivered significant PS and O efficiency savings which were broad based. Continued execution and the easing of network disruption costs will help partially offset the normal sequential increase in PS and O in the fourth quarter despite $5 million to $10 million in regulatory advisory costs. Depreciation was up $8 million due to a larger asset base. Fuel cost was up $5 million driven by additional consumption due to network reroutes, and a slightly higher price per gallon. Partly offset by improvement in gallons per gross ton mile. Finally, equipment and rents decreased by $5 million year over year higher costs from inflation, and the negative impact of reroutes on car cycle times offset by savings from improved fluidity and increased income generated from company owned real estate. We are encouraged by the structural cost improvement the team delivered in the third quarter. These efforts position us well build upon strong resource utilization, identify additional efficiency opportunities. Now turning to cash flow and distributions on slide 14. Targeted and efficient investment in the safety, reliability and long term growth of our railroad is our highest priority use of capital. Copy additions are higher year to date including $440 million of spending towards the rebuild project on our Blue Ridge subdivision. In total, spending to rebuild the Blue Ridge is now expected to exceed $500 million before insurance recoveries. Year to date free cash flow is $1.1 billion which includes over $850 million of cash outflows for Blue Ridge and previously postponed tax payments. Lastly, CSX remains committed to shareholder distributions, and has returned over $2 billion year to date. Now for a review of our guidance. Given solid network momentum, new business wins and expanded service offerings, we still expect to deliver volume growth for the full year. Recall that our fourth quarter performance in 2024 last fall's major hurricanes. We expect our fourth quarter results to reflect the strong operating performance and cost efficiencies that we driven through the year. There is no change to our full year CapEx guidance of $2.5 billion excluding the Blue Ridge. Finally, expect to continue our demonstrated long term track record of powerful cash generation. Combined with a strong investment grade credit rating that enables value creation through the opportunistic use of share repurchases. While also annually reviewing the dividend with steady increases for over twenty years. With that, let me turn it back to Steve for his closing remarks. Steve Angel: We are encouraged by the progress made this quarter. Our team did a great job at working together and responding effectively to the test faced earlier in the year. The railroad is running well, and we have strong foundation to drive further improvements. While the underlying economy is mixed, our customer service is strong, and we have excellent relationships with those customers. We are working closely with numerous partners to help accelerate the build out of industrial capacity on our network. Our commercial team is actively developing new solutions that will help us expand our reach and gain share. We have received quite a few inquiries on strategic opportunities. We will of course pursue anything we believe can create compelling value for our shareholders. We are confident in our path forward and energized by our vision. To be the best performing railroad in North America. With that, Matthew, we will open it up for questions. Matthew James Korn: Thank you, Steve. We will now proceed with the question and answer session. To ensure that we maximize everyone's opportunity to participate, we ask that you please limit yourselves to one and only one question. Colby? Operator: Are ready to begin. Operator: Thank you. We will now begin the Q and A session. Your first question comes from the line of Brian Ossenbeck from JPMorgan. Your line is open. Brian Patrick Ossenbeck: Hey, good afternoon. Thanks for taking the question. So Steve, maybe to start off with the obvious one, you have been through industry before that had complex M and A. As you mentioned, there are some similarities there to railroads. So stepping into the role, realizing you have only been there for a couple of weeks, how do you believe the company's positioned versus your peers, obviously, pursuing a TransCon merger? Do you feel like that is part of the mandate in terms of why you are brought into this position? The first place? Was that something that interested you? Given your prior history? Steve Angel: Yes, thank you for that question. So if you you know, you alluded to my history. And if you go back and look, I ran Praxair for ten years. Before we concluded a merger with Linde AG. And so you could say I was very patient. But, you know, the way these things work, these strategic opportunities, you have got to wait the right timing. You have got to wait for when the conditions are right. So what you do in the interim, you run the company to the best of your ability every day, and you create value that way. And so, you know, if and when that time comes, you are going into that discussion from a position of strength. So that is really how I think about it. You have got to run you know, the franchise you have to the best of your ability, build value that way, keep your eyes open for strategic opportunities. And when they come, you put yourself in a good position to capitalize on it. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Your line is open. Stephanie Moore: Hi, good afternoon. Thank you. I wanted to touch on, as you think about two things that are happening, one is the completion of your large infrastructure projects, and then two is as obviously noted, some changes from a strategic standpoint in the industry. Maybe, Steve, if you wanted to talk about how you are positioning the company to essentially capitalize on both of those factors. One is directly in your control. And then the other might be in response to some of the actions of your peers. Thank you. Sean R. Pelkey: You will take the first question. Yeah. Sure. Yeah. Stephanie, happy this is Sean. Happy to kind of talk a little bit about Blue Ridge and how Street. And I think, you know, obviously, that sets us up very well as we go into next year. The network recovered really well this year. It is operating, you know, about the best that it has in quite some time, which is great. And we are building cost momentum on top of that. Now you have got, both our North South routes that are open It will take us into Q2 next year before we get that double stack capacity. From Howard Street. But that is exciting because it means cost reduction. It also means ability to sell into that. So a well run, network hopefully going into a year next year where we start to see a little bit of momentum build really helps us out. I think that is something to build on longer term as well. And I will take the second part of the question. So as you think about what is taking place strategically, in this industry, you know, when you have know, the prospect for merger, whether it is this industry or or any industry, there are you know, pluses and minuses associated with it. There are risk and opportunities that come out of any type of consolidation within an industry. And so it really behooves us to you know, mitigate those risk and capitalize on those opportunities. I think you know, a lot of it remains to be seen. You know, I was you know, interesting enough, I was involved in the the industry though tangentially when the first merger that I remember took place, it was UP and SP think it was back in the late nineties. And, you know, that did not go so well. That did not go swimming. And I think a lot of what is taken place with the STB in terms of the new standards that are now in place with respect to what is in the public good demonstrating enhanced competitiveness and and what might take place downstream, that really came about as a result of that. So I think it is it is interesting to watch. Obviously, as they move forward with their application. And they have to demonstrate the standards that that need to be met, have an opportunity to review that. What you can rest assured is we are going to make sure that we are competitive no matter what. So I talked about mitigating risk, taking advantage of the opportunities, but we also want to make sure that we have a chance to present our case in terms of what we need to be competitive going forward. And that is what we will do. Operator: Your next question comes from the line of Chris Wetherbee from Wells Fargo. Your line is open. Christian F. Wetherbee: Hey, thanks. Good afternoon. I guess maybe a question for Steve and maybe Kevin. I am kind of curious as you guys go through this period, Steve, noted maybe some inbound strategic opportunities. I do not know if that is coming from the customer side or maybe other partners in the rail industry. But as you think maybe customer response to what is going on with consolidation in the industry, do think CSX is well positioned to take advantage of that as we go through a period of uncertainty over time? I guess how do you guys think strategically about the in front of you as a stand alone right now while we are seeing integration going on in the industry? Steve Angel: Well, I mean, all starts with with you know, running this business to the best of our ability and that that positions us well from a customer service standpoint. Mike talked about the way the the railroad is running today and, you know, we feel very good about that going forward. Yes, I think there are some opportunities you could certainly say that maybe some of these opportunities are coming forward as a result of what might take place from a merger standpoint. But I think the opportunity set has always been there. For railroads to work more closely together to take trucks off the road. For example. And so we see those opportunities. We are working on those opportunities. You can look at our numbers and see we have already had some success. And I think that is definitely additive to our base case going forward, and and we will continue to pursue those opportunities. Operator: Your next question comes from the line of Ken Hoexter from Bank of America. Your line is open. Kenneth Scott Hoexter: Great. Good afternoon. It is Ken Hoexter from BofA. Steve, welcome. Congrats on the new role. It seems like service from Mike Cory's presentation is operating well. Sounds like things are progressing kind of actually very well given the improvements. Major costs are leaving the network as Sean detailed and maybe Sean can maybe detail the expenses where we are now, how quickly they leave But what do you look at and aim to do? It maybe is it selling quality to improve operation to improve? Is there something on operations that as you went through the the process, the interview process, that you were focusing on that was not right? Maybe talk to us about what at CSX you see that needs to be changed. Is it the culture? Operations? You know, what what are you brought in and what do you hope to? Steve Angel: Well, think, as I said in my remarks, I think the team really responded well to some challenges during the course of the year. And I think you know, they turned into solid quarter. So you know, I always you know, when you come into a situation like this, and I talked a lot about you know, driving productivity, efficiency, best in class best operating margins, all of those things, you know, you do that by building a high performance culture. And but you have got to start with stability. And whether you are talking about operations, you are talking about the company, you you must be stable. Because if you are not, you are not going to have a chance to work on continuous improvement every day. So I I like what I have seen in the team and the performance with respect to that during the third quarter, but really during most of the year. I think that gives us a good foundation going forward. And from that, you it is really you know, working all the profitability levers efficiency, productivity, price yield, volume, did you get into capital efficiency and all of that? And it is just that is what running a business is all about. That is what excites me. And, it all starts with a solid foundation in a, you know, great company and a great industry, and it is about building a high performance culture and and becoming best in class. Operator: Your next question comes from the line of Ari Rosa from Citigroup. Your line is open. Ariel Luis Rosa: Thanks. And Steve, let me echo the congratulations on the new role. Just if I could ask a kind of two separate but related questions. So following on Ken's point, is there anything that you see kind of doing differently versus kind of what is already been in place? Because we understand the network has been running quite well. And then you know, in terms of the the opportunity to double stack and some of the opportunities that are opened up by the by the new projects. Could you speak to and may maybe there is actually a better question for Kevin. But how much opportunity there is there in in terms of actually filling that capacity given, you know, the the completion of these projects now? Thanks. Kevin S. Boone: Yeah. Let me take the second one. You know, we have been talking about probably double stack. You know, we have people here that have been here for forty years about opening up the last of part of our network that needed that clearance for a long, long time. And so we are very excited about what that creates in terms of market access for us into the Northeast. And you will see us obviously start to market that during bid season. In the second quarter, start that service and we will grow into it. So it will not be an overnight you know, phenomenon, but, you know, we expect to work with customers, and they are very excited about what we can offer there. And then I will also add to Blue Ridge. You know, it is on us and it is on the sales team to to capitalize on, you know, that that route. And, there are opportunities in the works too that we are working on to continue to drive and obviously get a return on that reinvestment that we had to make. And with respect to your your first question, the way I would describe my priorities is drive best in class performance, And I talked about that and all that that entails. Build a high performance culture, develop a strong pipeline of talent, and then capitalize on strategic opportunities that can that can create compelling value for our shareholders. So that is my focus. Operator: Your next question comes from the line of Jonathan Chappell from Evercore. Your line is open. Jonathan B. Chappell: Thanks, Coley. Good afternoon, everyone. Sean, you cleared a lot of the disruption period. It seems like the costs are going to start to melt off really quickly now that these two big projects are done. Laid out a couple guideposts, so to speak, or, sorry, margin improvement year over year in 4Q and also EBIT growth next year with the absence of any type of volume Can you help us think about the exit rate some of these important cost line items starting in 4Q and going into 2026? You read that PS and O section, you are your release, and there is just, a litany of things that you cannot really tell if they are one time or not. So just any kind of help you can provide on the major cost line items for 4Q in addition to what you have already noted. How we think about then run rate into 2026? Sean R. Pelkey: Yeah, Jonathan. Let me let me see what I can do there. In terms of Q3 to Q4, so the unique items in this quarter, had severance and restructuring costs. Of about $30 million You got the advisory cost of $5 million That $30 million is roughly $20 ish in labor roughly 10 in PS and O. Then you had the the ongoing cost from the network reroutes. And so on and so forth. That was 25 in the quarter. About half of that was in PS and O. We will have a little bit of that that lingers into fourth quarter, call it about $10 million with demobilization and sort of some final costs coming through there. So between that, you have got about sort of $45 million of sequential benefits that see from Q3 to Q4 I will note, you know, you saw the other revenue line that was strong this quarter. That probably normalizes back down to kind of 120 to 130. And then incentive comp will likely be a little bit higher, 10 to 20 higher in Q4. So that is how to think about the sequentials. Those items kind of net out when you pull it all together. But at the end of the day, I think underlying all that is strong cost momentum, and we are seeing in labor you know, with headcount down, volume up. We will see that likely continue into Q4. You are seeing PS and O efficiency. You saw strong gains in fuel efficiency. Car cycle times are better that is impacting rents. All of that provides a nice setup as we get into next year. And, you know, just to tie a bow on that, all of that network disruption and whatnot gives us about a $100 million out of the gates going into next year of costs that will not repeat. Operator: Your next question comes from the line of Scott Group from Wolfe Research. Your line is open. Scott H. Group: Hey, thanks. Afternoon. So Steve, you have said best in class multiple times. Today. And it sounds like in your mind that is inclusive of margins. I am not sure you are like ready to give like all the details yet, but just at a high level, like is when you sort of do your initial look, is this cost opportunity Can we get back to a better pricing algorithm? Or are you just thinking more of a volume growth and operating leverage kind of story? I just want to understand like your vision of how you get back to best in class. Steve Angel: Well, I am still working on it. I have not got there yet. So but the way I would think about it, Scott, is you know, obviously, you know, price yield is a part of the equation. Volume growth is important to leverage our cost structure and the margins fall through more heavily as get especially as you get the right kind of volume through the system. I think again, the railroad is running well. And so with that as a basis, can really work on continuous improvement within the railroad system. I think that falls through And, you know, those are kind of the levers to profitability. And so that is I I really think in terms of improving operating margins year over year. And I think if you work all three of those levers, you are able to grow your margin some basis points. I have not put a number on it yet. But some basis points per year and you can get to you know, best in class. Or if you are not best in class, you are rivaling best in class. And so that that is really the objective. Operator: Your next question comes from the line of Brandon Oglenski. From Barclays. Your line is open. Brandon Oglenski: Hi, good afternoon, and welcome to Raready, Steve. I guess I was wondering if you could give us your initial impressions of the commercial strategy at CSX because if you have looked at recent history books for railroads, and we can generally see these carriers getting price. You can get some cost efficiencies. But I think what is proved elusive for a lot of CEOs and maybe your predecessor is really converting that highway to rail opportunity So what do you see, you know, as maybe potentially limiting volume for the group and how are you going to pursue that differently? Thank you. Steve Angel: Well, I cannot say for sure how going to pursue it differently, but you know, there are some opportunities that are here with our other railroads working together to really take the friction out of the system. And you know, I think it is a fair question why it did not happen in the past I think there could be several reasons for that, but it does seem to be a concerted effort working with several of our partners to really take that truck volume off the highway and onto rail. And, you know, we are starting to see some of the benefits of that. I think if you look at the inner intermodal numbers this quarter, you know, it looks pretty good. And I think the projection going forward looks pretty positive. So I am, you know, I am optimistic based on what I have seen. I understand it really has not If you go back historically, we really have not had this level of cooperation as we are seeing today. I have seen a lot of people in this building that are from the other railroads, and I think we are clearly working together to make this So I I think there is reason for optimism. Operator: Your next question comes from the line of Tom Wadewitz from UBS. Your line is open. Thomas Richard Wadewitz: Yeah. So I guess, you know, Kevin, you are not getting as much airtime as you normally do, so maybe I will give you one. How do you think about markets and just kind of where you think they may go? I mean, you have got fairly considerable weakness chemicals, metals, forest products. Is there any kind of reason for optimism near term, any signs of improvement or or kind of things that you may be move beyond? And I guess as you look at it maybe into 2026, you think carload can kind of rebound? Or should we be thinking more about intermodal as the growth driver? Thank you. Kevin S. Boone: Thanks Tom. I have gotten a little less airtime. But look, there is a I think, in my opening comments, you know, talked about a lot of it is a mixed bag. The has done an incredible job on the aggregate side and cement side and we are continuing to capitalize on our only our footprint but just some of the strategic things we are able to achieve over the last year, and that is really showing a lot of momentum. And I think that can continue. There is a lot of confidence there. We have had some unique items that have really impacted us this year. We have had a few closures on us that I mentioned pretty concentrated in the forest products area, everybody is familiar with some of the consolidation that is happened in that that market. But I do think that market with a little bit of bump from the economy could could come back, for us. I am not predicting that at this point, but you know, some of these markets that are very are very low in terms of a cycle where they are. Chemicals has been one of those that we have highlighted all year long that have faced a lot of pressure from tariffs and other things. And I think just more certainty around where everything, lands in terms of what the tariffs look like, what the new rules going forward will create some certainty around investments and other things that are that will be helpful to our business. You know, the metal side, the team has done a excellent job of going after some market opportunities with the EFs and and scrap. Opportunities there. So I think we are controlling what we can control. Some of these markets undoubtedly have been, hit over the last couple of years and we have been able to offset them. I think that one thing that is probably surprised us this year is some of the temporary closures. We have had a number of outages, temporary outages on our network, whether it is in the the coal side with two mines or on the chemical side, we have really faced faced some challenges. And the hope there is that we will see some better performance as we move into next year. So I am not not here to call the cycle. You know, we had a we had one of our customers obviously talk about trucking capacity starting to come out. That is good to hear. We will see if that materializes in the next year. That would be extremely helpful for a lot of our markets where we compete against truck. And we have been in probably the longest down cycle than all of us have seen in a long, long time. So you know, the domestic coal side, you know, that story, was a challenge a year or two ago, and, I think there is a lot more optimism on what we can do there. Terms of utilization on the plants we serve today. So a lot of great work by the team. Lot of strategic thinking. We will continue to lean into where we find opportunities and to, you know, Steve's point, we will we will continue to work with all of our partners to create opportunities. The good thing is, I think, overall, the rail industry is performing pretty well versus where we have been in the last few years and that gives us all the opportunity to lean into those opportunities to convert. Model share across the network. Operator: Your next question comes from the line of Walter Spracklin from RBC Capital. Your line is open. Walter Noel Spracklin: Yes. Walter Spracklin here. Thanks for taking my question. My question here is for Mike. Steve mentioned best in class, and Kevin indicated that some of the capacity improvements might take maybe in the midyear next year. But is it unreasonable to think that operations can perhaps reestablish and put the quicker than that? Would you say whether there is anything stopping you in getting continued improvement through fourth quarter? Perhaps be in a position to run the railroad at fairly optimal performance level from an operational standpoint through 2026. Michael A. Cory: Thanks for the question, Walter. To get it to optimal, we are running very well right now. It is just go back. It is our fastest quarter for train velocity since 2021. Our cars online at the lowest in five years. Our dwell is down about as low as it is ever been. We expect improvement on each and every one of those. Now these projects are going to give us capacity, but really resiliency as well. You know, we suffered the first quarter with two of those two routes out and we may normally only handle 20% of our volume, but they could have handled about 40% at that time with what we were inflected with between Cincinnati and Birmingham. So our focus is always going to be to execute grind, sweep the corners, continue to improve on every one of those things, but it is it is all that together. So now Walter expect expect to continue to improve, like, you know, we we got still have weather coming up against this storm season is not over, and we have winter. But we learned a lot That capacity will essentially not just get its resiliency, but it gets us stable. That is where we have been this last two months. And as Steve said, that is the basis for us to improve on. So that is it. Operator: Your next question comes from the line of Ravi Shanker from Morgan Stanley. Your line is open. Ravi Shanker: Hey guys, thanks for the time. Just a clarification on earlier comment that you made in response to an M and A question. Did you say that you already seeing opportunities because of the merger? If you can clarify that or expand a little bit? And also how far in advance do customers think of their rail sourcing or rail versus truck ship or intra rail kind of share shift. Is that something that is kind of done pretty tactically on a year forward basis? Or is that something can be long term planning well? Thank you. Kevin S. Boone: Yeah. I you know, in terms of know, what you have seen in the market, these are these are things that the team consistently has been working on for the last few years. I think some of them have materialized, obviously, in the short term, but we have a very strategic thinking team that had these ideas. I think some of them probably have not materialized because the industry had to get to a a place where we are thinking about growth. From an operation standpoint. A lot of struggles obviously through COVID and then you know, digging ourselves out of the hole with the workforce. And you know, I think this is a natural progression out of that that we are now as an industry leaning into that. And I think we have a team that is forward leaning on that and bringing ideas to the table. And really working with every partner that can benefit and grow the business for the CSX franchise. So a lot of opportunities there. I am trying to understand second question, but maybe I will I will pass on that one. Operator: Your next question comes from the line of Richa Harnane from Deutsche Bank. Your line is open. Richa Harnain: Hey, gentlemen. Thanks. I want to go back to your Investor Day some time ago. You shared some pretty exciting stats regarding you know, the growth outlook, particularly in intermodal. The ability to grow maybe above GDP. Just as we fast forward from then to today and considering how well your service metrics have improved despite some of the headwinds that you have undertaken and and all of that. I mean, how should we think about you know, those growth projections? I mean, could they be stronger? And I know, Kevin, you said that you are going to be selling, Howard Street Tunnel during this bid season. And potential to sell in Q2 of next year. But any inklings from customers as far as how they are feeling about that product and, again, that ability to sort of grow, stronger than maybe you thought. A a couple quarters ago? Kevin S. Boone: Well, you know, we did lay some of the benefits that we expected to see from the Howard Street Tunnel in that presentation. So I think we are on track and now it is up to the team to deliver on that. In terms of, you know, we have a great service right now, and all all begins with the service team. And we are able to dynamically go after these opportunities as they come along. And we are always talking to customers about markets where they see the opportunity and we have one particular customer that is highlighted that within the East they see a huge conversion opportunity. And we are we are highly interested in that. We are highly, interested in working with everyone to convert that. Obviously, it is got to have a return. It is got to be attractive to all parties. Make the investments that might be required to go after it. But there is a lot of work being done. I think we have the best team up against it to understand where opportunities are and you are seeing a lot of momentum that is playing out in our weekly volumes. Operator: Your next question comes from the line of Jason Sadeel from TD Cowen. Your line is open. Jason H. Seidl: Steve, congratulations on the new role there. Definitely exciting for you. I am going to turn it back over to to give some time there to Kevin. Kevin, can you talk a little bit about the marketing agreement with the BNSF sort of how we should think about the build as you move through 2026? And then I guess are you guys looking to tie that freight up longer than the normal sort of one ish year on a domestic intermodal front in terms of contracts, given that you might have a competitor coming out after that? And I guess a follow-up on the coal. You mentioned, I think you have seen a little bit more positive. Is the positivity on the coal due to sort of increased demand for domestic coal and data centers? Or is it something else? Kevin S. Boone: Alright. Let me handle the coal one first. You know, I think you have clearly seen a a shift in just the political environment the regulatory environment there. And I think that provides opportunities for better utilization in some of the, obviously, the utilities that we serve. You know, data center is a hot topic right now. Everywhere, and that is certainly one of the demand pulls on electricity demand right now. So we are very positive on that market. You know, weather does impact that one. So, you know, we always look for a cold winter in the South. That is that is always helpful. So normal weather is is a good thing, and we kind of that played out this year. And so we continue to work with the plants that we serve to advantage them in the market to take you know, more more capacity there. So a lot of success, a lot of good work by the team. To really go after that opportunity. The intermodal side, you know, again, know, some of the things that we have announced recently have been in the works for a long, long time. The team has been is constantly having discussions with partners how we can create the best in class service and more options for our customers to reach markets, in a more efficient way. And so I think that is an outcome of, you know, not not something that we recently started, but things that we started last year and that have really materialized here recently. We got a lot of other ideas. You know, we are continuing to work on those things. I think the velocity of those things maybe to Steve's point, and our ability to execute them quickly is maybe improved with basically the industry in a better position to you know, grow with the, you know, service, and and we lead the way. With our best in class service in the East. So you will continue to see things there are opportunities for us to go and capitalize on. Operator: Your next question comes from the line of Jordan Alliger from Goldman Sachs. Line is open. Jordan Alliger: Yeah. Hi. Afternoon. Hi, Steve. Just sort of curious, you know, I know you have only been in the seat for a couple weeks or so. I am sure well, I I would imagine, you know, some customers, maybe some larger customers have been you know, calling to say hello and and what have you. I am wondering given what is going on with U and P Norfolk Southern, any read from folks you might be speaking to externally in terms of giving you thoughts on what you know, what might be good from a competitive standpoint for you guys? Thanks. Steve Angel: I would say, you know, since I have been here, we have not had that kind of discussion. Operator: Your next question comes from the line of Jeffrey Kaufman. From Vertical Research. Your line is open. Jeffrey Asher Kauffman: Thank you very much. Steve, welcome aboard. Best of luck to you. Figured I would ask a question to Sean here. Just based on the idea that you are not going to have the Blue Ridge expenditures year and you are not going to have these congestion costs and there are some things you are excited about, it looks like cash flow could double if the world goes right, maybe up 50% to 70% if it does not. Not that you have spent it before you earned it, but can you tell me about cash priorities for 2026? Are there projects that you have not been able to get to that are at the top of the list? Do you want to bring debt down to a certain level? Or would more of that free cash flow probably be aimed at shareholder capital return? Sean R. Pelkey: Jeff, I appreciate the question. As you can probably imagine, we are working through our plans for next year as we speak. We will give you an update certainly on that as we move along here. But just stepping back, I think the good news is we do not have any major construction projects that are planned for next year, you know, with the Howard Street and the Blue Ridge complete. There is nothing anywhere close to that scale that is on the horizon for us. And in 2026. So, you know, we will we will continue to maintain capital discipline focus, that capital on safety and reliability, and then look for projects that help drive strong returns and support the growth that we are looking to deliver. So it will be more of the same on that without the significant spend on those big projects. And then after that, you know, we we have we have been fairly consistent in our approach here you know, strategic and opportunistic use of cash flow, to to lean in when it is possible. On share repurchases and we have looked on an annual basis at the dividend and raised modestly for twenty plus years. So you will see more of the same from that. I think from our perspective. Operator: Your next question comes from the line of David Vernon from Bernstein. Your line is open. David Scott Vernon: Hey, good afternoon guys and thanks for fitting me in here. So, Steve, I wanted to ask you and maybe in the broader team a bigger picture question. Around the industrial logic on end to end railroad mergers. How do you view that And do you think it is possible to recreate those economics through partnership arrangements like you guys have been doing with the airline deals with BN and CN. What are the other platforms that is come out and obviously said, you know, they are not very interested in the merger and they are asking customers to object. I am trying to get a sense for kind of where you shake out on the topic of whether or not an in an end to end railroad merger is actually a good thing to pursue? Steve Angel: So the way I think about it is and I was reading your entire question here, is that you know, we have the whole focus is is really performing, you know, well as a standalone company. And then we talked about some of these opportunities. We have talked about it several times through the course of this. That I think are very interesting to us We see a good bit of potential and provided the economics are favorable, we will continue to pursue that. So I think that is how we will drive shareholder value. Now if there is a better path to drive shareholder value, downstream will certainly pursue that. But it is kinda hard to really say standing here today how all this is gonna shake out because there is a lot of it that has not been determined yet. There is a very rigorous approval process that two parties are gonna have to go through. And, you know, when I read the language of of the evaluation criteria of an STB, it is it is pretty onerous onerous. So I think there is a lot I think it is really too early to address some of which you have got up there. But I can say right now, we can improve the performance of the base business, capitalize on the opportunities in front of us And if there is a better path to shareholder value that presents itself later on, we will 100 pursue that. Operator: Your next question comes from the line of Bascome Majors from Susquehanna. Your line is open. Bascome Majors: Steve, when you think about your philosophy on incentivizing your team, what do you think the right annual and long term incentive structures are? For senior management, the railroad industry and really CSX specifically? Thank you. Steve Angel: I think if you go back to my earlier comments, obviously, profitability, operating margins, I mentioned that. I think if you I think growth is important to this industry and if you are able to get right kind of volume, the right kind of growth, you know, there is tremendous leverage down the P and L statements. I think those are metrics that matter. An industry like this, you always have to have safety. I I do not think you should ever take that for granted. I think calling that out and having, you know, a thousand or so people, at least from a management, level, compensated based on safety performance is a very important metric. Customer service has not been the hallmark of this industry historically. So therefore, having calling that out is a metric that is important I think, is good idea and that is what we have here today. I think long term because this is a capital intensive industry a return on capital metric makes the most sense to me. That is that is what I am familiar with, and and that is what, you know, we utilized in my past life And I used to say that, you know, return on capital is the truth serum. It kinda encapsulate it encapsulates all the decisions you have made in the past plus the decisions you are making going forward. And how well and what kind of returns you are earning on your capital base. So you know, I, for one, like return on capital for an industry like this. Operator: This concludes today's question and answer session. As well this concludes today's conference call. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Interactive Brokers Group Third Quarter 2025 Earnings Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. If your question has been answered, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Nancy Stuebe, Director of Investor Relations. Please go ahead. Good afternoon. Nancy Stuebe: And thank you for joining us for our third quarter 2025 earnings call. Joining us today are Thomas Peterffy, our Founder and Chairman, Milan Galik, our President and CEO, and Paul Brody, our CFO. I will be presenting Milan's comments on the business, and all three will be available at our Q&A. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. During the third quarter, the market climbed a huge wall of worry with little pause. There is no shortage of traditional reasons for investors to be concerned about the economy or the markets, but as they've cropped up, they are treated either as a positive like the huge sums of money being spent on AI, or the minor impediment like the government shutdown. The Federal Reserve cut interest rates this quarter for the first time since late last year. With a less restrictive regulatory environment and steady to declining interest rates, market sentiment in the third quarter was positive overall, with the S&P 500 Index rising 8% and showing strong positive returns in each month. Investors bought dips if the market declined, and participated in rallies as they occurred, showing a continued comfort with the current economic backdrop. At Interactive Brokers Group, in any given week this quarter, the most active names showed a preponderance of buying over selling. Our strong net new account growth came from all regions and all client types. This is organic account growth. We attract clients without temporary bonuses or incentives. Our products, pricing, and execution quality speak compellingly for themselves. During the quarter, we added our four millionth customer and reached $150 billion in client cash balances, both up over 30% from last year. For client equity, it took us from 2020 to 2024 to advance from $250 billion to $500 billion. It took just over one year to add the next $250 billion. This quarter, our client equity surpassed $750 billion, up 40% from last year versus 16% for the S&P. The 790,000 net new accounts we've added through the third quarter already exceed what we added in all of last year. More accounts meant more activity, which helped expand client trading volumes this quarter, especially in stocks and options. Our commission revenue increased by 23% compared to last year. It is slightly understated since the SEC fee rate, which is included within our commission revenue, was reduced to zero in May. Net interest income was up 21% on a combination of larger balances and securities lending opportunities from a greater number of accounts. Our total net revenues were up 21%. Volumes rose to a record $418 million in options contracts and were up 67% in equities, as more people globally continue to participate in the markets. In terms of newer products, we are seeing increasing activity by our clients in crypto, forecast contracts, and overnight trading hours. We now offer a wide variety of over 8,200 open forecast contracts, 27% more than last quarter, and contract volumes traded grew 165% in the second quarter. In crypto, our trade volumes rose 87% from last quarter and are up over five times versus last year. While this is from a base we want to grow much bigger, it is a sign of the growing strength of our offering. In addition, we introduced recurring buy orders for cryptocurrency and added Solana to our Hong Kong crypto offering. Overnight trading, where we offer over 10,000 U.S. stocks and ETFs, as well as equity index futures and options, and global corporate and government bonds, was up 90% from 2024, which itself has seen higher volumes surrounding the first Fed funds rate cut in years. As we've noted, for our global client base, U.S. overnight hours are their daytime trading hours, so this offering in particular resonates with them. We are continually making additions and enhancements to our as well as infrastructure upgrades. We added new liquidity providers for options, U.S. stocks, and our Lite program, and for U.S. Treasuries, corporate and international bonds, further enhancing execution quality for our active trading clients. Our pipeline of potential introducing broker clients remains healthy, with a steady stream of new prospects entering as we onboard the brokers who have previously signed up to offer the platform. Demand continues steadily around the world for our global introducing broker offering. In terms of new efforts and product introductions, we again had a busy quarter. We work continually to innovate and give our clients the products they ask for. We added both NESAs, tax-advantaged savings accounts for Japan, and ISKs, tax-advantaged accounts in Sweden, to our growing offering of country-specific savings plans. We introduced our proprietary Connections feature, where clients can discover multiple investing relationships connected to any one company. These include stocks, ETFs, forecast contracts, options, and economic indicators, as well as competitor data, related products, and option strategies. As an example, investors holding long positions in sectors like homebuilding can use connections to explore related businesses like mortgage financing, review forecast contracts linked to new home sales or housing starts, and gain insight into option strategies that could help reduce their exposure to economic fluctuations in the housing market. Decades of work expanding our product offering and geographic reach is what makes Connections possible, helping clients uncover opportunities other platforms can't. We have so far been averaging about 20,000 unique daily users, so it's a feature that has resonated with our clients. Connections complements the investment themes we debuted last quarter, where clients can use natural language prompts like quantum computing or artificial intelligence to find actionable investment opportunities. In recognition that our prime brokerage offering and its many features benefit our clients, giving them a competitive edge, the latest annual CREC and hedge fund rankings showed that Interactive Brokers rose to rank number four for the number of hedge funds serviced, behind only Sachs, Morgan Stanley, and JPMorgan, and ahead of all the other historically better-known names in the funds industry. This should serve as evidence that we must be doing something better than some of the entrenched players, and that potential clients may benefit from adding us as an additional prime broker. We have much on our plate for the remainder of the year, and even more to come in 2026. I look forward to sharing these developments with you as they are introduced. The trend towards more global investing across multiple client types and across jurisdictions and our ability to give investors the tools to invest in the companies and products they want, paying for them in currencies they wish, around the clock, continues. This trend and our ability to serve our clients' needs with a lower cost structure and a much broader product and toolset is what sets us apart and will continue to do so in the years ahead. I want to thank our team and especially our founder, Thomas Peterffy, for the hard work and dedication it took to bring Interactive Brokers from its humble beginnings all the way into the S&P 500 Index this quarter. It is an achievement in which we all rightfully take pride. With that, I will turn the call over to Paul Brody. Paul? Paul Brody: Thank you, Nancy. Good afternoon, everyone. I will review our third quarter results, and then we'll open it up for questions. Starting with our revenue items on Page three of the release, we're pleased with our financial results this quarter as we again produced record net revenues and pretax income. Commissions rose to a record $537 million, 23% above last year's third quarter. We continue to see higher trading volumes from our growing base of active customers outpacing industry volumes across major product classes. Our options volume rose 27% and set a new quarterly volume record, and equity volumes were up 67% from last year. Net interest income also reached a quarterly record of $967 million, despite lower benchmark rates in most major currencies. Higher segregated cash and margin loan balances and significantly stronger securities lending contributed to these results. Net interest income also received a benefit from lower benchmark rates on the interest we pay our customer cash balance. Other fees and services generated $66 million, down 8% from the prior year, driven by more cautious risk-taking by clients, leading to lower risk exposure fees, partially offset by positive contributions from higher FDIC sweep and market data fees. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that many of these noncore items are excluded in our adjusted earnings. Other income was $85 million as reported and $50 million as adjusted, primarily driven by a gain on a long-held investment. Turning to expenses, execution and clearing, execution, clearing, and distribution costs were $92 million in the quarter, down 21% from the year-ago quarter primarily due to two factors. First, we had a full quarter effect of the SEC reducing its fee rate to zero after it was cut midway through the second quarter. SEC fees were $20 million in the third quarter last year and $24 million in 2025. And second, we achieved higher rebates and lower costs at exchanges resulting from our smart order routing optimization. These costs and rebates are largely passed through to customers, so these reductions don't have much impact on our profitability, but they are components of our clients' profitability and one of the reasons they execute through us. As a percent of commission revenues, execution and clearing costs were 13% in the third quarter for a gross transactional profit margin of 87%. We calculate this by excluding from execution, clearing, and $21 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $156 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 10%, down from last year's quarter. As always, we remain focused on expense discipline as reflected in our moderate staff increase of 5% over the prior year. Our headcount at September 30 was 3,131. G&A expenses were $62 million, down from the year-ago quarter, which included a legal settlement that added $78 million and a one-time charge of $12 million to consolidate our European operations. Without those items, last year's G&A expense would have been $63 million, about level with the current quarter. G&A was also driven by an increase of $10 million in advertising expenses. Our pretax margin was 79% for the quarter, both as reported and as adjusted. Income taxes of $126 million reflect the sum of the public company's $64 million and the operating company's $62 million. The public company's effective tax rate was 19.4% within a usual range. Moving to our balance sheet on Page five of the release, our total assets ended the quarter 35% higher than the prior year quarter end at $200 billion, with growth driven by higher margin lending and segregated cash balances. New account growth also helped drive our record customer credit balances. The numbers seem to be supporting our long-held view that our strong financial standing and competitive interest rates provide customers with an attractive place to hold their idle cash. We have no long-term debt. Profit growth drove our firm equity up 22% over the prior year quarter to $19.5 billion. We maintain a balance sheet geared towards supporting growth in our existing businesses and helping us win new business by demonstrating our strength to prospective clients and partners, while also considering overall capital allocation. In our operating data, on pages six and seven, our customer trading volumes surpassed industry growth over the prior year quarter in our three major product classes. Options contract and share volumes rose 27% and 67%, respectively. Futures volumes declined 7% in an environment of weaker industry activity. Stock volumes were driven both by increased activity levels overall and by relatively higher trading in low-priced stocks. On page seven, you can see that total customer DARTs were 3.6 million trades per day, up 34% from the prior year, strong in options and stocks. Commission per cleared commissionable order of $2.70 was down from last year, primarily due to the elimination of the SEC fee and the performance of our smart order router leading to the capture of higher exchange rebates and minimizing exchange costs, which as pass-throughs, serve to lower both our commission revenues and our execution and clearing costs. Page eight shows our net interest margin numbers. Total GAAP net interest income was up 21% from the year-ago quarter to $967 million. Adjusted for the net interest margin presentation, net interest income was $999 million. We include for NIM purposes certain income that is more appropriately considered interest, but that for GAAP purposes is classified as other fees and service or as other income. Our net interest income reflects strength in segregated cash interest, margin loan interest, and securities lending, partially offset by a modest increase in interest expense that was moderated by lower benchmark interest rates on customer cash balances. Most central banks, including the UK, Canada, Australia, Hong Kong, and the US, reduced rates this quarter, while others, including Europe, Switzerland, and Japan, held steady. Year on year, the average US Fed funds rate fell 96 basis points or by 18%. Despite this decline, our segregated cash interest income was up 3% on higher balances, while margin loan interest was up 4%, bolstered by higher lending balances. The average duration on our investment portfolio remained at less than 30 days. The U.S. Dollar yield curve remains inverted from the short to medium term, so we continue to maximize what we earn by focusing on short-term yields rather than accept the lower yields and higher duration risk of longer maturities. Particularly in an unpredictable economic environment, this strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest was stronger this quarter. We saw a higher level of short activity and a significant rise in the total notional dollar value of securities we lend. Contributors to this growth include several factors. As our account base has grown, our inventory of attractive stocks to lend has grown with it, including international securities around the world. We pay interest on short cash balances, which makes us attractive to investors who feel our short selling. Our fully paid lending program generally shares proceeds with clients on a fifty-fifty basis, which appeals to investors looking to maximize the return on their portfolios. And activity has picked up in some of the typical drivers of securities lending, including IPOs, and merger and acquisition activity. As most benchmark interest rates are now sufficiently above zero, a portion of what we earn from securities lending is classified as interest on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loaned, then total net revenue related to securities lending would have been $314 million this quarter, double the $156 million we earned in the prior year quarter. Interest on customer credit balances, the interest we pay to our customers on the cash in their accounts, rose slightly on the combination of 33% higher client cash balances from new account growth, and from lower benchmark rates. As we have noted in the past, the higher interest rates we pay on customer cash, currently 3.59% on qualified US dollar balances, is a significant attraction to new customers. Fully rate-sensitive customer balances ended the current quarter at $25 billion versus $19.5 billion in the year-ago quarter. Now for our estimates of the impact of changes in rates, given the market expectations for the rate cuts in 2025, we estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $77 million reduction in annual net interest income. Our starting point for this estimate is September 30, with the Fed funds effective rate at 4.09% and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 29% of our customer interest-sensitive balances is not in US dollars, so estimates of a US rate change exclude those currencies. We estimate the effect of decreases in all the relevant non-US benchmark rates would reduce annual net interest income by $35 million or a 25 basis point decrease in those benchmarks. At a high level, a full 1% decrease in all benchmark rates would decrease our annual net interest income by $417 million. This takes into account rate-sensitive customer balances and firm equity. In conclusion, we posted another financially strong quarter in net revenues and pretax margin, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business. Our business strategy continues to be effective, automating as much of the brokerage business as possible, continuously improving and expanding what we offer while minimizing what we charge. With that, we will open up the line for questions. Operator: Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press *1 on your telephone keypad. And our first question comes from the line of Brennan Hawken from BMO. Your question, please. Brennan Hawken: Good afternoon. Thanks for taking my question. Paul, you spoke a bit in the beginning about how you're starting to see hard-to-borrow specials come back on the back of capital markets active ramping. Could you talk about how the trajectory that played out in the quarter? What impact we could expect if we were to see capital markets activity ramp, as is broadly expected, and what kind of benefits we could expect from that? Paul Brody: Yeah. I wouldn't exactly call it cyclical. However, as we know, the securities lending revenue is based on a general increase in our customer balances and shorting. And then on top of that, we see these specials, hard-to-borrow stocks that come up from time to time. And as a general statement, we might say that those specials tend to come up more in an environment of more IPOs and M&A activity. So it's not predictable, but we have spent a lot of time building out our systems to optimize and take advantage when these opportunities present themselves. Brennan Hawken: Okay. Thanks for that color. And then a couple of years ago, I seem to remember Thomas making comments that he was bullish on the prospect of AI leading to more velocity in trading and turnover. Are you where you can sort of see chatter around this in some of the various websites and blogs and whatnot? Are you actually seeing evidence of this in your business yet, or is that still something that has yet to play out? Paul Brody: I'm sorry. Are you asking whether we can see evidence in the trading volumes of AI? Is that what the question was? Brennan Hawken: Yeah. Whether you book Marcus, several years ago, Thomas had suggested that AI would lead to higher trading volumes. So I don't know whether or not you have any visibility or any idea about whether or not that thesis is actually playing out now that we see AI become much more broadly integrated into people's everyday lives. Milan Galik: Yeah. Unfortunately, we have no visibility into that. We obviously can see the increased volumes on our platform just like in the industry overall. I think the anticipation of AI permeating the financial industry causing higher volumes, I think that thesis in the long run should become real because if you think about it, you give a trader tools through which he can more easily research the stocks, his position, evaluating the news, he will be able to more quickly react to what's happening in the marketplace, how his portfolio is being affected. He will be able to make quicker decisions, and he will be able to make them with greater confidence. So I think if Thomas was anticipating that a couple of years ago, I'm not surprised that he would make a statement like that. But to repeat, we do not have an ability to see whether that's the reason behind the volumes or what percentage of those volumes would be attributable to that. Thomas Peterffy: So, Milan, you're absolutely right, but I do not recall ever saying that. Brennan Hawken: Alright. Thanks. Fair enough. Operator: Thank you. And our next question comes from the line of Benjamin Budish from Barclays. Your question, please. Benjamin Budish: Hi. Good evening, thank you for taking the question. Maybe just first on the interest rate sensitivity to non-U.S. balances. It looks like that stepped up a little bit from what you had disclosed last quarter. It also looks like for the last several quarters, the percentage of balances that are not in U.S. dollars is going up. Curious if you could unpack a little bit what's going on there? Any particular trends to be aware of? And what is impacting that sensitivity going forward? Paul Brody: Yeah. Yes, Ben. Fairly straightforward. As this business grows for us, we take on more clients, we get bigger balances. Bigger balances also mean more balances that are fully interest rate sensitive. And, therefore, it looks like the sensitivity goes up, but that's good news for us because it means the baseline is a lot higher than it was before. Benjamin Budish: Got it. But nothing specific this quarter to the non-USD balances other than platform growth? Paul Brody: Yeah. There was a bit of a change from the second quarter. Some of the several non-U.S. dollar currencies that had low rates actually approached zero again. And there's a bit of a nonlinearity there as you project rates to go down from there in terms of whether we're passing through negative rates or not. So, this quarter was a bit of a more normal-looking environment. Benjamin Budish: Understood. Thank you for that. Maybe just a follow-up. I was wondering if you could give us a little bit more color on Forecast X. There's been some press suggesting that you've made a filing preparing to launch contracts on sports. I'm curious if you can comment on that. But maybe otherwise, it sounds like there's a lot of momentum there, given the international customer base versus maybe what we see as a lot of headline noise in the U.S. What sort of products are seeing the most traction? And how are you thinking about the pace of product rollout from here? Thank you. Thomas Peterffy: So at this point, we're waiting for the courts to decide if the states have an exclusive right to regulate sports betting or not. But as far as Interactive Brokers is concerned, we are not currently contemplating getting into sports betting. We are focusing on election contracts and economic indicators and climate indicators, and we are taking that global, and so that's where our focus currently is. However, the exchange will be available for other brokers to carry sports contracts. So introducing brokers can come to Forecast X and carry sports contracts provided that the states will let us do that. Benjamin Budish: Alright. Thank you, Thomas. Appreciate it. Operator: Thank you. And our next question comes from the line of Patrick Moley from Piper Sandler. Your question, please. Patrick Moley: Yes. Thanks for taking the question. Maybe just following up on the prediction markets and Forecast X. Could you just maybe speak a little bit more to your strategy for growing that business, whether it's adding more broker partners? We've seen a number of JVs get announced in the space. What are your thoughts on how you're going to grow the number of users on that platform? Thomas Peterffy: Thanks. We are focusing on adding broker partners, but we're also focusing on our own Interactive Brokers direct customers participating more and more in forecast contracts. Patrick Moley: Okay. Thanks for that. And then just a follow-up. Margin loans were up 20% quarter over quarter. Could you maybe just provide a little color on the breakout of the types of customers that drove that growth? Was it retail? Was it hedge funds? And then given some of the choppiness we've seen here month to date, what are your expectations around margin loan growth from here? Do you think it's sustainable? Thanks. Thomas Peterffy: We do not look at the breakdown of where the margin loans are coming from. We do have some internal measures that obviously we understand what they are. We're not comfortable talking about it in public as to how exactly it happens. I think I could state in general that the appetite for risk has grown. That's what typically happens when the markets are going up, when they are momentum-driven. That is what we have seen. Our margin balances are at their all-time high. Should there be a sudden dislocation in the market, I would expect that it is likely to decrease. What we like in what we see is that our customers have been trading stock on leverage. They are not making as many bets with being short, cheap options as perhaps in some quarters in the previous year. We see that in the reduced income due to the exposure fees that we collect. So when we see the margin balance is going up, that's fantastic. We directly benefit from that to the bottom line. When we see the exposure fees increasing, that's somewhat of a mixed feeling for us because on the one hand, we like to see that revenue, but we are conscious that it's coming from the fact that the clients are making cheap option bets that can go bad. So high margin numbers, we like them a lot. Operator: Thank you. And our next question comes from the line of Dan Fannon from Jefferies. Your question, please. Dan Fannon: Thanks. Good evening. Just another quarter of strong account growth. Curious about the mix, any changes from either the profile of that customer and or geographies where you're sourcing those accounts from? Thomas Peterffy: It pretty much looks the same as in the previous quarters. Geographies, the different geographies are equally represented, different mix of clients. We still like all the segments that we have been growing, whether it's direct clients, introducing brokers, cross-trading firms, financial advisers. It's all growing well, hedge funds, of course. Dan Fannon: Okay. And thank you. And then as a follow-up, Paul, I was hoping as you think about 2026 and expenses and investments you're making, any preliminary thoughts on expense growth and where those areas of investment might be directed anywhere different than what you've been doing more recently? Paul Brody: Oh, we don't really make forward-looking statements as you know. I would say that this quarter's a typical run rate, I think, for most of the expense categories. Milan, you might want to add to that? Milan Galik: Of course. The way we look at things is we have always run our business in the way that we do not allocate budgets to certain activities. There are some ideas that we have. There are certain ways we like to grow our business. There are opportunities that we see. And we work on them. When we see that we fell behind in terms of our staffing, be it either technology folks or on the operational side, we adjust. That is how we have been running the business. So we should not think of that as we are allocating $25 million to a certain project. If we want to do something, we're fully in. We're obviously paying attention to make sure that we do not build our technology too extensively. But that has been the modus operandi since Thomas started this firm decades ago. And that approach has worked for us well. And that is what we're going to be continuing. Dan Fannon: Understood. Thank you. Operator: Thank you. Our next question comes from the line of James Yaro from Goldman Sachs. Your question, please. James Yaro: Good afternoon, and thanks for taking the question. You've seen a smaller percentage of U.S. clients over time. Could you just walk us through recent geographic client acquisition trends in your view? And then specifically, the regulatory environment in China around account opening has weighed on and will continue to impact your growth in this region? Thomas Peterffy: Yeah. There was a change. You noticed it. Chinese regulators clamped down on foreign brokers acquiring accounts in Mainland China. We have been getting some number of them. What basically changed was we now have to ask the account applicants to prove to us that they have a residence outside of the Mainland. And many have been doing that, and we are still getting clients in China as a result. It is a smaller number than before, but it is not something that would materially impact our figures. James Yaro: Great. Thank you. You recently led a new funding round for HashNote. Could you just update us on the extent there's anything new on your aspirations in digital assets and especially any update on the 30% limit, as regards what percentage of crypto customers can have in their accounts? Thomas Peterffy: You meant funding out in Zero Hash? Sorry. Zero Hash. Yeah. Sorry. Right. So the funding round was concluded. We have upped the dollar value of our investment. We have kept the percentage of the investment in roughly 30%. Zero Hash has been a good partner with us. We are working with them on a significant project together. They're going to be the provider we're going to use for our European offering. They're going to be getting their license. We anticipate that sometime in October or November of this year, they will receive a Dutch license, and they will be authorized to offer crypto services on the European continent. And that is what we will do. We will offer cryptocurrency trading to our European clients through Zero Hash. As far as other aspirations in the area, we are working on stablecoin deposits on the ability for account holders to fund their accounts with stablecoin. That's something that should be going online in October. We're working on the crypto asset transfers, which I'm cautiously optimistic about. And the reason for that is very simple. If you look at our pricing, despite the fact that we are latecomers to the crypto industry, our pricing is very good. We are significantly less expensive than our bigger competitors. Yet, we do not see an inflow of accounts, and part of the reason could be that if somebody wanted to switch their providers, let's say they wanted to come to us from Coinbase or from Robinhood or wherever, if they already have cryptocurrency positions with embedded tax gains, unrealized tax gains, the only way for them to come to us now would be to sell their investments and realize those gains. With the asset transfer, they will not have to do that. So when we put online the crypto asset transfers, I would hope to see an increase in the activity. Another thing that we have in the plans is to offer staking. Obviously, we are relying on Zero Hash to do their work first. Once they are ready to offer staking, we will offer that to our clients. James Yaro: Excellent. That's very helpful. Thank you. Operator: Thank you. As a reminder, ladies and gentlemen, you may press *1 to ask a question. Our next question comes from the line of Craig Siegenthaler from BofA. Your question, please. Craig Siegenthaler: Good evening, everyone. So my question is on total account growth. I'm actually going to ask a similar question to last quarter. So at a May conference, Thomas talked about a potential deceleration in account growth, and my question is, where is it? Because account growth is again showing no signs of slowing down through September. Thomas Peterffy: We have not seen any deceleration. As a matter of fact, we saw exactly the opposite. And we expect that to continue. Craig Siegenthaler: Got it. Thank you, Thomas. My thoughts are on crypto. More specifically with timing. So when will clients be able to transfer tokens in and out of their IBKR accounts? And how will the rollout work by geography? Will some regions move faster? And I believe IBKR will end up offering a noncustodial wallet just like some of the crypto exchanges offered today. Thomas Peterffy: So the rollout is going to be varied. At the moment, we are able to offer cryptocurrency trading to our U.S. clients and Hong Kong clients. And, hopefully, soon, we will be able to offer it to our European clients as well. The rollout schedule will be funding with stablecoins in October. Crypto asset transfers by the end of the year. Staking maybe the beginning of next year. That is roughly the schedule. It depends somewhat on our partner, Zero Hash. They have to complete their work first, and then, obviously, we have to integrate the feature into our platform. So unfortunately, I cannot give you better estimates than that. Craig Siegenthaler: Got it. Thank you, Thomas. Operator: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Nancy Stuebe for any further remarks. Nancy Stuebe: Thank you, everyone, for participating today. As a reminder, the call will be available for replay on our website, and we will also be posting a clean version of the transcript on our site tomorrow. Thanks again, and we will talk to you next quarter end. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Jeff Su: Good afternoon, everyone, and welcome to TSMC's Third Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows: first, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2025, followed by our guidance for the fourth quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Jen-Chau Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT as our business was supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 10.1% sequentially to $33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9 percentage points sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas fabs. Accordingly, operating margin increased 1.0 percentage points sequentially to 50.6%. Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 23% of wafer revenue in the third quarter, while 5-nanometer and 7-nanometer accounted for 37% and 14%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC remained flat quarter-over-quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. And DCE decreased 20% to account for 1%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of TWD 2.8 trillion or USD 90 billion. On the liability side, current liability decreased by TWD 101 billion quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others as we paid out 2025 provisional tax of TWD 136 billion. In terms of financial ratios, accounts receivable turnover days increased 2 days to 25 days. Days of inventory decreased 2 days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx. During the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx and distributed TWD 117 billion for fourth quarter '24 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $9.7 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between USD 32.2 billion and USD 33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 30.6, gross margin is expected to be between 59% and 61%, operating margin between 49% and 51%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter '25 and fourth quarter '25 profitability. Compared to second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided 3 months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91 compared to our guidance of $1 to TWD 29. In addition, we also delivered better-than-expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas fabs. While the cost of overseas fabs remain higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1% to 2% as compared to 2% to 3% previously. Looking ahead, we continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next several years to be 2% to 3% in the early stages and widen to 3% to 4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now let me make some comments on our 2025 CapEx. As the structural AI-related demand continues to be very strong, we continue to invest to support our customers' growth. We are narrowing the range of our 2025 CapEx to be between USD 40 billion and USD 42 billion as compared to USD 38 billion to USD 42 billion previously. About 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mass making and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for the future growth with this higher level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now let me turn the microphone over to C.C. C.C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of USD 33.1 billion, slightly above our guidance in U.S. dollar terms, mainly due to the strong demand for our leading edge process technologies. Moving into fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading edge process technologies. We continue to observe robust AI-related demand throughout 2025, while non-AI end market segment have bottomed out and are seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full year 2025 revenue to increase by close to mid-30s percent year-over-year in U.S. dollar terms. While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risk from the potential impact of tariff policies, especially in consumer-related and price-sensitive end market segment. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 by continuing to invest for the future megatrend. Amidst the uncertainty, we will also continue to focus on the fundamentals of our business, that is technology leadership, manufacturing excellence and customer trust, to further strengthen our competitive positioning. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in AI market continue to be very positive. The explosive growth in token volume demonstrate the increasing consumer AI model adoption which means more and more computation is needed, leading to more leading-edge silicon demand. Companies such as TSMC, we are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continued strong outlook from our customers. In addition, we directly received very strong signals from our customers' customers, requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening and we believe the demand for semiconductor will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and thorough capacity planning system. Externally, we work closely with our customers and our customers' customer to plan our capacity. We have more than 500 different customers across all the end market segments. In addition, as process technology complexity increases, the engagement lead time with customer is now at least 2 to 3 years in advance. Therefore, we probably get the deepest and widest look possible in the industry. Internally, our planning system involve multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approach to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related business. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading edge specialty and advanced packaging technologies to support their growth. We will also remain disciplined and thorough in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' need as they value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to -- and to a more advanced process technologies in Arizona, given the strong AI-related demand from our customers. Furthermore, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multiyear AI-related demand. Our plan will enable TSMC to scale up through an independent giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI and HPC applications. Next, in Japan, thanks to the strong support from the Japan central, prefectural and local government, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has begun, and the ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from European Commission and the German federal state and city government. Construction of our specialty fab in Dresden, Germany, has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' need and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of 2-nanometer fab in both Hsinchu and Kaohsiung Science Parks. We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next several years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of global logic IC industry for years to come. Finally, let me talk about our end-to-end A16 status. Our 2-nanometer and A16 technologies lead the industry in addressing sizable demand for energy-efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter. With full year, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family. N2P feature further performance and power benefits on top of N2 and volume production is scheduled for second half '26. We also introduced A16 featuring our best-in-class Super Power Rail or SPR. A16 is best suited for specific HPC product with compressed signal routes and dense power delivery networks. Volume production is on track for second half '26. We believe N2, N2P, A16 and its derivatives will propel our N2 family to be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared statements. [Operator Instructions] Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line. Thank you. Operator: First one, Gokul Hariharan, JPMorgan. Gokul Hariharan: Great results again. So on the AI front, C.C., I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. And as you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40s data center AI growth CAGR earlier this year until 2029. Anything that you see which should kind of change that number? Definitely feels like the growth today seems to be much stronger. And related to that, you did talk about the very detailed capacity expansion planning that TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading-edge node. But in this cycle, TSMC revenues have grown 50% from the previous peak in '22, CapEx has only grown about 10%. So how should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand like are we looking at much higher CapEx in the next couple of years, given all these conversations you've had. And I have a follow up after that. Jeff Su: Okay. So Gokul's first question, sorry, Gokul, let me summarize for everyone's benefit. So again, he wants to know, firstly, related to the AI-related demand that TSMC works with many, if not everyone, who is doing AI. And many of the customers seem to be even more positive today. So I guess he would like to ask C.C. sort of what are we seeing or hearing from our customers. And then we had previously said that the next 5 years from 2024 to '29, we expect AI accelerator to grow at a mid-40s CAGR. Is there any update to this? I think this is the first part, then I'll get to the second part on CapEx. C.C. Wei: That's a long question, isn't it? Gokul, the AI demand actually continue to be very strong, it's more -- more stronger than we thought 3 months ago, okay? So in today's situation, we have talked to customers and then we talk to customers' customer. So the CAGR we -- previously we announced is about mid-40s. It's still -- it's a little bit better than that. We will update you probably in beginning of next year. So we have a more clear picture. Today, the number are insane. Jeff Su: And then the second part of Gokul's question are related to CapEx. He notes that in the past, when TSMC sees opportunities for higher growth, past cycles or past instances, we would step up the CapEx significantly to prepare to drive the future growth. But he notes, this cycle, actually, though, while CapEx is increasing, the revenue is increasing even faster. So his question really, I think, how do we see this playing out over the next few years, both in terms of the CapEx spend and the growth relative to the revenue growth. Jen-Chau Huang: Okay. Gokul, every year, we spend the CapEx based on the -- our business opportunity in the following few years. As long as we believe there are business opportunities, we will not hesitate to invest. And if we do our job right, the growth of our business, of our revenue should outpace the growth of the CapEx. And that's what we have been delivering in the past few years. Now going forward, assuming we're doing -- still doing a very good job, then we will continue to see that happening again. So a company of our size, the CapEx number, it's unlikely to certainly go up significantly in any given year. When we continue to invest and our growth is outpacing our CapEx growth, then you see the growth like what we have done in the past few years. Gokul Hariharan: Understood. I know that it is unlikely to drop, but it is also likely to grow quite a bit given what C.C. mentioned in terms of every customer asking you and every customers' customer requesting you for capacity addition, right? Jen-Chau Huang: Yes. As I said, a higher level of CapEx is always going to be correlated with a higher growth opportunity. So as C.C. said, next year looks to be a healthy year, and we are confident on the mega trend that we'll continue to invest. Gokul Hariharan: Yes. Maybe one more follow-up question from me. C.C., I think last year also, you gave us an indication of how much CoWoS capacity you would be building. I think you talked about 2x, of doubling the CoWoS capacity. It clearly feels like even that is not enough. Could you give us some idea about how much capacity would you be building next year just to get some idea about what you are seeing in terms of AI demand? And also just to get some understanding of TSMC's data center AI exposure, I think last year, we talked about mid-teens revenues. Where do we end up this year? Do we end up close to like 30% of revenues coming from AI? Jeff Su: Okay. So Gokul, your second question, really, he wants to understand can we provide any detail or color on the CoWoS capacity plan for 2026 in terms of year-on-year increase. And also in terms of our definition of AI accelerated revenue, the narrow definition, how much will it contribute for 2025 revenue? Is it 30%? C.C. Wei: Well, Gokul, this is C.C. Wei again. Talking about the CoWoS capacity, all I can say is continue the 3 months ago, we are working very hard to narrow the gap between the demand and supply. We are still working to increase the capacity in 2026. The real number, we probably update you next year. Today, all I want to say about the AI everything related like front-end and back-end capacity is very tight. We are working very hard to make sure that the gap will be narrow, but all I can say is we are working very hard. Jeff Su: Okay. Thank you, Gokul. I think we need to move on in the interest of time. So operator, can we move to the next participant, please? Operator: Yes. Next one, Charlie Chan, Morgan Stanley. Charlie Chan: And again, congratulations for very strong results, C.C., Wendell and Jeff. So my first question is really about your business demand. As C.C. just mentioned, your front-end demand is also very strong into next year. But one of your major customer said that more so is that -- I think his point is that doing maybe a system-level innovation in thermal, et cetera, can boost up more kind of performance. So just a kind of a dumb question. How do we reconcile your very, very strong leading edge demand and the customers continue to migrate to your most advanced nodes? And also you continue to reflect value, whereas the customer continue to think that Moore's law is dead. Can we get some clarification from TSMC? Jeff Su: So Charlie's question is very specific although -- he wants us to comment on a customer saying Moore's law is dead but how do we reconcile this with a very strong leading edge demand into 2026 and also with system-level innovations? C.C. Wei: Okay. Charlie, this is C.C. Wei. Yes, one of my customers, very important customer say Moore's law is dead, but what he meant is it's not only we rely on the chip technology anymore, now we have to focus on that whole systems' performance. So he want to emphasize the whole systems' performance rather than just talking about the Moore's law, which is not enough to meet his requirement. So again, we work very closely with his people and to design our technology both in front-end and back-end and also in all the packaging to meet his requirement. That's all I can say. Jeff Su: Okay. Thank you, C.C. Do you have a second question, Charlie? Charlie Chan: Yes, I do, Jeff. Yes. So anyway, I would interpret it as so-called Moore's Law 2.0 that your co-COO, Mr. Cliff Hou also comes here during the SEMICON Taiwan. But anyway, thanks, C.C., for your commentary. And my second question is actually a follow-up from last quarter's same question. Back then, I consulted you about China AI GPU demand, right, whether you can seize the market opportunity because China, certainly, they also expanding their AI infrastructure very rapidly. But given the recent kind of back and forth between U.S. and China, whether China can really import NVIDIA GPU, would that kind of discount your potential long-term growth of the AI CAGR? Is that something that TSMC would worry about? Jeff Su: Okay. So Charlie's second question is related around AI demand and specific to China. With the sort of the export control and restriction, his question is, does that impact our ability to address the market opportunity and will this impact our AI CAGR growth if we are not allowed to fully serve China. Charlie Chan: Yes. I think it's a little bit of both sides, meaning restriction from the U.S. but also China government's kind of discouragement to procure U.S. chip. Sorry for the interruption. C.C. Wei: Well, Charlie, to speak the truth, I have confidence on my customers, both in graphic or in ASIC, they are all performing well. And so if the China market is not available, but I still think the AI's growth will be very dramatically and as I said, very positive, and I have confidence that our customers' performance, and they will continue to grow, and we will support them. Charlie Chan: So even with limited opportunity from China for the time being, you are still confident that a 40% CAGR or even higher can be achieved in coming years? C.C. Wei: You are right. Jeff Su: Operator, can we move on to the next participant, please? Operator: Yes. Next one, Sunny Lin, UBS. Sunny Lin: Congrats on the very strong gross margin. So my first question is how should we think about 2026. I understand we should get better color maybe into January, but just want to get some directional major puts and takes for gross margin trending going to 2026. Especially, how should we think about the gross margin impact from 2-nanometer ramp for 2026? Jeff Su: Okay. So Sunny's first question is regarding gross margin. She would like to know directionally, how do we see the gross margin for next year 2026 in terms of certain puts and takes. And also if Wendell is able to comment specifically, Sunny, sorry if I heard you right, on the N2 dilution impact, correct? Sunny Lin: Yes, that's right. Jeff Su: Okay. That's her first question. Jen-Chau Huang: Okay. Sunny. Yes, it's too early to talk about 2026. But you already mentioned about the N2 dilution. And as all the new node, when they just come out, the N2 will have dilution in our gross margin in 2026. But at the same time, the N3 dilution is gradually coming down, and we expect the N3 to catch up to the corporate average sometimes in 2026. The other factors include like overseas fabs dilution, which will continue and which we said that it will be about 2% to 3% dilution in the early stage of the next several years. That will also be there. And also we all saw the dramatic foreign exchange rate movement in the earlier part of this year. There's no control. We don't know where that will be. But every percentage move of dollar against NT will affect our gross margin by 50 -- 40 basis points. So that just gives you some rough idea. Sunny Lin: Got it. Sorry, if I may, yes, a very quick follow-up. And so on 2-nanometer, would the typical 2% to 3% dilution by new node for the first 7 to 8 quarters of mass production be a good reference for 2-nanometer as well for 2026? Jeff Su: Okay. So Sunny, a quick follow-up. She wants to know for the 2-nanometer dilution, if we're able to provide any detail. And can she still think about it in terms of 7 to 8 quarters or 6 to 8 quarters dilution to reach the -- time, sorry, to reach the corporate average? Jen-Chau Huang: Yes. Sunny, let me share with you. N2's structural profitability is better than the N3, okay? Secondly, it's less meaningful nowadays to talk about how long it will take for a new node to reach to a corporate average in terms of profitability. And that's because the corporate profitability, the corporate gross margin moves and generally, it has been moving upwards. So less meaningful to talk about that, okay? Sunny Lin: Got it. No problem. That's very helpful. My second question is maybe for C.C. Thanks a lot for sharing with us the details on how you think about the capacity expansions and planning. And so my question is now cloud AI is ramping a lot faster than the prior opportunities like smartphones and PCs. Yes, I think the demand for cloud AI is also may be harder to forecast. So just want to maybe get a bit more color from you that now versus the prior rounds of capacity expansions, what is TSMC doing differently versus before? And how do you ensure that while you are ramping up the capacities more quickly while still having good risk control? Jeff Su: Okay. Thank you, Sunny. So Sunny's second question is regarding capacity planning and expansion. In a capital-intensive business, she notes this is very important. But in the past smartphone and PC megatrends; today, it's AI and cloud AI. She is wondering, does that make this planning process more difficult to forecast? And what are we doing differently or how do we forecast this to make sure that we are investing appropriately? C.C. Wei: Sunny, indeed, right now because of -- I believe we are just in the early stage of the AI application. So very hard to make the right forecast at this moment. What do we do differently? There's a big difference because right now, we pay a lot of attention to our customers' customer. We talk to and then discuss with them and look at their applications, be it in the search engine or in social media application, we talk with them and see how they view the AI application to those functions. And then we make a judgment about what AI going to grow. And so this is quite different as compared with before, we only talk to our customers and have an internal study, this is different. Did I answer your question? Sunny Lin: Got it. Yes, yes, yes, and looking forward to the CapEx guide in January. C.C. Wei: You're welcome. Jeff Su: All right. Thank you, Sunny. Operator, can we move on to the next participant, please? Operator: Next one, Bruce Lu, Goldman Sachs. Zheng Lu: I think Jensen talked about like $3 trillion to $4 trillion AI infrastructure opportunity by 2030, right? This compared to like 600 billion CapEx recent -- for this year implies for about 40% CAGR growth. This is similar to Jensen's guidance for the AI growth, right? But for me, first of all, what I want to know is what's TSMC's view for the AI infrastructure growth for the next 5 years? And what's TSMC's forecast for the token growth rate in the next few years? TSMC used to provide like semi industry growth, foundry growth and how much TSMC can outperform the industry, right? Given the context that can we assume like TSMC AI-related revenue can track -- will track with the CapEx growth of AI or the major cloud service provider? Or should we expect even higher growth rate for TSMC considering you're potentially getting more value out of it? Jeff Su: Okay. Let me try to summarize your question, Bruce. He notes that one of our customers has highlighted a $3 trillion to $4 trillion infrastructure opportunity over the next few years compared to 600 billion current CapEx, implying a 40-something percent CAGR or growth rate, which is similar to ours. Bruce's question is, he wants to know what is TSMC's forecast or view for AI infrastructure growth. He would also like to know what is TSMC's forecast or view for the token growth. And then what is TSMC's AI-related revenue growth? Can it track that of the cloud service providers? And his question is, should it be even higher -- shouldn't it be even higher given the value that we capture. That's actually several questions, but is that correct, Bruce? Zheng Lu: That's right. C.C. Wei: Well, Bruce, essentially just want to know that how accurate that we can predict the AI demand. We give you a number, roughly 40 -- the mid-40s is the CAGR, not including all the infrastructure build up and also align with our major customers' forecast for their view. More than that, I think if we are talking about the tokens, the number of tokens increase is exponential. And I believe that almost every 3 months, it will be exponentially increase. And that's why we are still very comfortable that the demand on leading edge semiconductor is real. And as I continue to say that we look at all the demand and look at our capacity expansion, we need -- TSMC need to work very hard to narrow the gap. That's what we are doing right now. Exact number that we probably will share with you in next year, so that when we have a very better, clear picture. Zheng Lu: I just had a quick follow-up. I'll use that as my second question anyway. I think the question is that the token growth seems to be substantially higher than the AI-related revenue guidance on TSMC, right? So the gap is actually enlarging if you compound in the outer years, right? That's why -- that's the differences between the -- what we see for the current TSMC outlook and the potential token consumption, right? So the gap is continue to see enlarging. How do we solve this? And do we really see that as a major issue? Jeff Su: Okay. So Bruce's second question, which is a follow-on from his first, is that the token growth is growing at a much higher rate or exponentially than TSMC's AI revenue growth, and this gap will only enlargen or widen in the next few years. So he wants to know -- sorry, Bruce, basically, what's the implication to TSMC or how do we see this? Is that correct? Zheng Lu: That's right. C.C. Wei: Okay, Bruce, you are right, you are right. The tokens and the number of tokens increase exponentially is much, much higher than TSMC's CAGR as we forecasted. And let me tell you that, first, our technology continue to improve. And so our customer moving from one node to the next node so that they can handle much more tokens number in their basic fundamental calculation. So that's one thing. We progressed very well for one node into the other node, and our customer working with TSMC to continuously to improve their performance. And that's why when we say that we have about 40%, 45%, CAGR, then the token number are exponentially increased because of our customer and TSMC's technology combined that can handle much more or much efficient than before. Did I answer your question? Zheng Lu: I see. So you believe your node migration plus your customer design change can fulfill or can meet the exponential growth for the token consumption? C.C. Wei: Exactly. Zheng Lu: Is that the conclusion? C.C. Wei: Yes. Jeff Su: Sorry, Bruce, that was your second question. Operator, we need to move on. Thank you, Bruce. Operator: Next on, Laura Chen, Citi. Chia Yi Chen: Appreciate C.C. sharing your view on TSMC strategy on the AI capacity planning. I think along with very strong advanced node demand, I believe that advanced packaging like CoWoS is also one of the focus for your AI clients they are now looking for. I recall that TSMC previously also planned to expand advanced packaging in Arizona. So can you give us an update here? And also, I mean, for the time being, just very stretched demand at the moment. So TSMC will work more closely with your OSAT partner to fulfill the strong demand at the same time? That's my first question. Jeff Su: Okay. Thank you, Laura. So her first question is on capacity planning. We have talked earlier on the call about the planning for leading nodes. She wants to understand also on the CoWoS capacity and specifically, I guess, advanced packaging in Arizona and how do we work with our OSAT partners. C.C. Wei: Okay. We have announced our plan to build two advanced packaging fab in Arizona and to support our customers. But at the same time, actually, right now, we are working with one OSAT, a big company and our good partner, and they are going to build their fab in Arizona, and we are working with them because they're already breaking ground, and the schedule is earlier than TSMC's two advanced packaging fabs. And we are working with them. And our main purpose is to support our customer, and so we can many in the U.S. Jeff Su: Laura, do you have a second question? Chia Yi Chen: Yes. Certainly, I mean, obviously, we see that the advanced node, advanced packaging are quite strong. And also at the same time, we are also seeing that the migration is also happening for N2 and N3. So just wondering that from the revenue growth perspective, I know it's still early to predict next year based on your guidance. But I'm just wondering, will it be more driven by the ASP increase because of the technology migration? TSMC will be able to sell in your value or more that will be driven by the capacity or volume growth on both N2 ramp-up? And also, C.C., you mentioned some of the mild silicon recovery. So that may also drive some of the volume growth into next year. So just wondering, like if you look at the growth outlook, that will be more driven by the technology upgrade ASP increase or also more like a volume? That's my second question. Jeff Su: Okay. So Laura's, again, second question is looking at 2026. She would like to understand what will be the key drivers of the growth. Is it more from the technology mix migration, things like N2? Is it more from ASP upgrade? Or is it more from just pure wafer volume growth? C.C. Wei: Laura, all the above. All right? You knew it, right? Chia Yi Chen: May I also follow up that because we see that actually N3 is very tight. And at the same time, we are also kind of expanding on N2. And C.C., you previously mentioned that you will migrate some of that to even N7, N6, and also N5G like -- but specifically on N3, do we also need to add more capacity into next year, newly added capacity? Jeff Su: Sorry, Laura is saying that will -- next year, will we continue -- sorry, Laura, if I understand correctly, will we need to add new capacity? Will we continue to do conversion? What will we do to support the very strong demand we see at leading edge next year? Chia Yi Chen: Right. Yes. C.C. Wei: Well, let me answer that question. We continue to optimize the N5, N3 capacity to support our customer. For the new building for the N3 capacity to expand, we put the new building for the N2 technology. That's today's plan. Jeff Su: Thank you, Laura. Operator, in the interest of time, we'll take the questions from the last two participants, please. Thank you. Operator: Yes. Next one, Krish Sankar, TD Cowen. Sreekrishnan Sankarnarayanan: My first one is, C.C., about 10 years ago, back in the smartphone days, TSM would talk about the revenue opportunity for TSM per phone. I was wondering in today's world, can you talk about how much 1 gigawatt of AI data center capacity could translate in terms of wafer demand or revenue for TSMC? And then I have a follow-up. Jeff Su: Okay. So Krish's first question, he noted in the past, in the smartphone megatrend, we talked about the content per phone opportunity for TSMC. So now with AI, is there a way to frame or quantify 1 gigawatt of data center capacity, what is the revenue opportunity for TSMC? C.C. Wei: We -- recently, as I said, the AI demand continue to increase, and then my customer say that 1 gigawatt, they need about -- invest about 50 billion, how much of TSMC's wafer inside, we are not ready to share with you yet because of different from different projects, okay? Sreekrishnan Sankarnarayanan: And then a quick follow-up. C.C. Wei: Yes, excuse me, I just want to say that right now, it's not only one chip. Actually, it's many chip together to form a system, all right? Sreekrishnan Sankarnarayanan: Got it, got it. Very helpful for that. Then a quick follow-up. Obviously, you first forecast long-term trend and then build capacity toward that. I'm kind of curious, when you look at the AI demand over the next several years, from a TSMC angle, does it matter whether it's -- that demand is coming through a GPU or an ASIC? Does it have an impact on your revenue or gross margin mix? Jeff Su: Okay. Thank you, Krish. So his second question is, again, with our business outlook. Again, we forecast the long-term trends. We plan our capacity, as C.C. said, in a thorough and disciplined manner. His question is, what are the implications, for example, of -- I believe you said GPU versus ASIC in terms of the AI market. Do we have a preference or what? Is there a difference for TSMC? Is that correct, Krish? Sreekrishnan Sankarnarayanan: That's right. The impact to revenue and gross margin, whether it's a GPU or an ASIC. Jeff Su: Right. Okay. C.C. Wei: Krish, no matter if it's GPU or it's an ASIC, it's all using that our leading-edge technologies. And from our perspective, we are working with our customer, and we all know that they are going to grow strongly in the next several years. So no differentiation in front of TSMC. We support all kinds of types. Jeff Su: Operator, can we take -- thank you, Krish. So we'll take the question from the final participant, please. Operator: Last one, Arthur Lai, Macquarie. Yu Jang Lai: Congrats on a strong outlook. I'm Arthur Lai from Macquarie. So my question is about competition. So C.C., you define the Foundry 2.0 market. And I wonder what's the strategic initiative that TSMC's undertaking to further strengthening your competitive landscape and also in this broader ecosystem. So some context. I got the question from the U.S. investor as your clients have announced they invest in Intel. Jeff Su: Okay. So Arthur's question is around competition. In the Foundry 2.0 landscape, what strategic initiatives, what things are TSMC focusing on to further strengthen our competitive advantage? I think the last part, Arthur, you're asking in the environment where one of our competitors in the U.S., how do we focus on the competition? Is that correct? Yu Jang Lai: Yes, yes. C.C. Wei: Okay. Let me answer that one. When we introduced our Foundry 2.0, we set a purpose that -- as I said, one of my customers say that the system performance is very important in these days, they're not only a single chip. And also -- let me share with you that our advanced packaging revenue is approaching close to 10% and it's significant in our revenue, and it's important for our customer. So that's why we introduced Foundry 2.0 to categorize this foundry business. Not as usual, previously, we only look at the front-end portion. Now it's the whole thing, the front-end, the back-end and also important for our customer. That's why we introduced 2.0. Talking about our competition in the U.S. Well, that competitor happened to be our customer, very good customer. So in fact, we are working with them to -- for their most advanced product. Other than that, I don't want to make any more comment. Yu Jang Lai: Can I ask one more question? Jeff Su: Yes, you have two. So your second question, sure. Yu Jang Lai: Yes. My second question is very quick on the end demand. So I recall, C.C., you, last time, mentioned that we should also monitor and worry about the prebuild, especially in the consumer electronics. And then this quarter, our number suggest that there's a Q-o-Q 19% growth in the smartphone. So my question is, do you still worry about the prebuild? Jeff Su: All right. So Arthur's second question is on smartphone. Do we -- are we concerned about prebuild or sort of, I guess, pulling prebuild from customers in that regard? C.C. Wei: No. We don't worry about the prebuild because of -- when you have a prebuild, you have inventory. And in this stage, the inventory already go to the very seasonal level and very healthy. So no prebuild. Jeff Su: Okay. Thank you, C.C. Thank you, Arthur. Thank you, everyone. So this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both are going to be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope you all continue to stay well, and we hope you will join us again next quarter in early 2026. Thank you, and have a good day.
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