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DATE

• Thursday, July 24, 2025, at 1 p.m. EDT

CALL PARTICIPANTS

• President and Chief Executive Officer — Jared Wolff
• Chief Financial Officer — Joe Kauder
• Chief Investor Relations Officer — Ann [last name not provided]

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TAKEAWAYS

• Pretax, Pre-Provision Income: Pretax, pre-provision income grew 6% quarter over quarter, supported by revenue growth exceeding a slight rise in expenses.
• Total Loan Growth: Achieved 9% annualized loan growth, with broad-based commercial loan production driving the increase.
• Commercial Real Estate Loan Sale: Engaged in sales process for $507 million, with expected proceeds net of reserve release of 95%; $30.4 million sold, $476.2 million now held for sale.
• Tangible Book Value Per Share: Grew for the fifth consecutive quarter, reaching tangible book value per share of $16.46.
• Share Repurchase: Repurchased $150 million of common stock early in the quarter, equating to about 6.8% of outstanding shares; $150 million remains authorized.
• Loan Production: Volume for the quarter, including unfunded commitments, was $2.2 billion; Originations totaled $1.2 billion.
• Net Income: Reported net income of $18.4 million, or $0.12 per share; adjusted net income of $48.4 million, or $0.31 per share.
• Loan Yield on New Production: Loan yield on new production averaged 7.29%, up from 7.2% in the prior quarter.
• Reserve Levels: Allowance for credit losses (ACL) stands at 1.07% of total loans; total economic ACL coverage rises to 1.61% when including credit-linked notes and purchase marks.
• Credit Quality Metrics: Nonperforming, classified, and special mention loans declined by 19, 46, and 115 basis points, respectively, from the prior quarter.
• Net Charge-Offs: Excluding the loan sale impact, net charge-offs were 12 basis points of total loans.
• Core Deposits: Average core deposits increased 5% annualized; spot cost of deposits at quarter end was 2.12%.
• Net Interest Income: Rose 3.4% quarter over quarter to $240 million, primarily from loan growth and higher yields.
• Net Interest Margin (NIM): Net interest margin expanded to 3.1%, with spot NIM at quarter end of approximately 3.11%.
• Noninterest Income: Total noninterest income was $32.6 million, down 3% from the prior quarter, attributed to mark-to-market changes in certain investments.
• Noninterest Expense: Noninterest expense was $185.9 million, an increase of $2.2 million quarter over quarter, below the $190 million to $195 million quarterly target range.
• Provision for Credit Losses (Core, Ex-Loan Sale): Provision for credit losses (core, ex-loan sale) was $12.3 million, up $3 million from the prior quarter; adjustments made for updated forecasts and higher reserves on office loan portfolio.
• Effective Tax Rate Outlook: Expected to be approximately 25% going forward after a one-time $9.8 million noncash tax expense due to state apportionment changes, with the new rate applicable beginning in 2025.
• Loan Book Mix: Warehouse, fund finance, lender finance, and residential mortgages comprised 29% of total loans, up from 20% a year ago.
• Loan Maturities/Repricing: $1.8 billion of loans maturing or resetting through the end of 2025 with a weighted average coupon rate of 5%.
• Multifamily Portfolio: Represents 26% of loans, with approximately $3.2 billion set to reprice over the next two and a half years at a weighted average rate expected to provide a repricing benefit.
• Management Outlook: Guiding to mid-single-digit asset and net interest income growth for the back half of 2025, and expects to achieve margin target range in Q4.

SUMMARY

Banc of California (NYSE:BANC) management executed a strategic sale of commercial real estate loans at an estimated 95% of book value, optimizing the balance sheet and supporting a material reduction in credit risk exposure. The bank’s origination activity was diversified, with growth in lender finance, fund finance, and single-family residential loans contributing to portfolio remixing and higher yields. Management signaled flexible deployment of the share repurchase program and indicated that capital and liquidity remained resilient after significant buybacks. Expense discipline was observed, with actual costs tracking below guidance despite increased infrastructure and staffing investments. Noninterest income variability was managed, and margin expansion was achieved through effective asset repricing and funding mix. The credit profile improved, as evidenced by declines in nonperforming, classified, and special mention loans. A measured approach to additional provisioning was noted. Company leadership characterized prospective credit costs as stable, projected further margin and earnings growth in the second half of the year, and highlighted continued loan and deposit momentum, underpinned by targeted market share gains and digital initiatives.

• Wolff stated, Each 25 basis point cut provides $6 to $7 million in annual pretax income from a reduction in ECR.
• Kauder said, “We expect our effective tax rate to be approximately 25% [going forward after the noncash charge this quarter].”
• Credit improvement was attributed to the exit of large, low-leasing, well-collateralized construction loans, which had become classified due to slow lease-up.
• Commercial deposit gathering remained competitive, with spot cost increases in select categories offset by declines in CDs and savings.
• The digital account opening platform, launching this quarter, is positioned to drive nationwide deposit growth and complement branch-based expansion.
• Management sees margin expansion driven mainly by loan repricing and strong new loan yields, rather than further cost of funds reductions, as recent funding competitiveness persists.
• While M&A market interest was acknowledged, management underscored a strong preference for continued organic growth given the current franchise value and momentum.

INDUSTRY GLOSSARY

• ACL (Allowance for Credit Losses): A reserve set aside on the balance sheet to absorb potential future loan losses, inclusive of management’s forecasted losses under current expected credit loss (CECL) accounting.
• ECR (Earnings Credit Rate): A non-cash rate applied to business deposit balances that offsets certain bank service charges, directly affecting noninterest expense on rate-sensitive deposits.
• HFS (Held for Sale): Classification for loans or securities the bank intends to sell rather than hold, with valuation adjustments made to reflect estimated net realizable value.
• Net Interest Margin (NIM): The ratio of net interest income to average earning assets, indicating the bank’s core profitability from lending and deposit-taking activities.
• NIB (Non-Interest-Bearing): Deposit accounts that do not pay interest, generally checking accounts, valuable for institutions due to their low funding cost.
• CECL (Current Expected Credit Loss): A provisioning standard requiring banks to estimate expected credit losses over the life of a loan at origination or acquisition.
• Mini perm: A type of short- to medium-term commercial real estate loan used to bridge operations until long-term refinancing is available.
• Warehouse lending: Short-term funding provided to mortgage originators to finance residential mortgages prior to their sale or securitization.
• Non-QM (Non-Qualified Mortgage): A home loan that does not meet the Consumer Financial Protection Bureau’s standards for a qualified mortgage, often held for investment and not sold to government-sponsored agencies.

Full Conference Call Transcript

Jared Wolff: Thanks, Ann. Good morning, everyone, and welcome to our second quarter call. We delivered a strong second quarter with meaningful growth in core profitability. Pretax, pre-provision income grew 6% quarter over quarter as solid revenue growth outpaced a slight increase in expenses. Our core earnings drivers, including loan growth, net interest margin expansion, and disciplined expense management, all remain firmly on track with our strategy. We achieved our third consecutive quarter of robust broad-based commercial loan production, which helped drive total annualized loan growth of 9%. Our team also continued to make steady progress in attracting new business deposit relationships.

During the quarter, we opportunistically engaged in the sales process for approximately $507 million of commercial real estate loans, which we have transferred to held for sale with expected proceeds net of reserve release of 95%. We expect the strategic sales of these loans will further optimize our balance sheet and contribute to delivering high-quality, consistent, sustainable earnings growth for our shareholders. This move also helped to drive improvement across our credit quality metrics for the quarter. We will touch on more about the loan sales later in the call. Our strong second quarter earnings helped us achieve our fifth consecutive quarter growing tangible book value per share to $16.46.

Our balance sheet remains strong with capital and liquidity at healthy levels. As mentioned on our first quarter call, we opportunistically repurchased $150 million of common stock or about 6.8% of our shares early in the second quarter. We have $150 million remaining in our buyback program, which can be used toward both common and preferred stock. We will continue to be prudent with the remainder of this program and use it opportunistically. And while our outlook may change, we do not expect to deploy all this remaining capacity in the near future. Second quarter loan production, including unfunded commitments, was $2.2 billion and included our highest level of originations of $1.2 billion since the closing of our merger.

Strong production levels drove 9% annualized growth in our total loan portfolio, while core held-for-sale loans were up 12% annualized. Growth was broad-based, led by continued momentum in lender finance and fund finance originations, and complemented by expansion in our purchased single-family residential portfolio. Our loan origination volumes reflect strong execution by our team and our ability to capitalize on our attractive market position. Partially offsetting this growth was a decline in construction loans due to payoffs and completed projects, some of which moved to permanent financing in our CRE portfolio, and some of which were included in the loan sale. We have remained disciplined in our pricing and underwriting standards.

The rate on new production averaged 7.29%, which was up from 7.2% in Q1, and that helped drive expansion in our average loan yields and our margin. You have heard us emphasize many times now that proactively managing credit risk and quickly identifying any credit concerns is a key priority for us. In accordance with that philosophy, we took decisive action during the quarter to opportunistically sell the commercial real estate loans that I mentioned earlier. While many of these loans are money good and well collateralized, they exhibited characteristics that contributed to credit migration that were not guaranteed to resolve in the near term.

Rather than have the potential overhang while we continue to work through the credits, we took the opportunity to reset and align our balance sheet with our focus on growing high-quality, consistent, and sustainable earnings. Mainly driven by the loan sale process, our second quarter credit quality metrics improved meaningfully from Q1, but otherwise, our credit was stable. Nonperforming loans, classified loans, and special mention loans as a percentage of total loans declined by 19, 46, and 115 basis points, respectively, from Q1. Second quarter net charge-offs, excluding the impact from the loan sale actions, were just 12 basis points of loans. Proactive credit risk management will remain a top priority as we strive to maintain strong credit quality metrics.

Our headline reserve level is at 1.07% of total loans, and our economic coverage ratio is substantially higher at 1.61% of loans. This incorporates the unearned credit mark on the Banc of California loan portfolio acquired in the merger as well as coverage from our CreditLink notes. Our investor deck does a good job of laying out how our loan portfolio has changed over the last 12 to 18 months and how our coverage ratios reflect that migration to a much higher percentage of loans with short duration and no historical losses in warehouse lender finance and fund finance. Along with SFR, these loans now account for almost 30% of our loan book.

While some uncertainties remain in the broader macroeconomic environment, we have been encouraged by the resiliency of the market and continued strong demand from our clients for our products and services. We remain confident that the great work of our team members, our continued execution, strong balance sheet, and differentiated market position will drive growth and profitability, tangible book value per share, and long-term value for our shareholders. Now I will hand it over to Joe who will provide some additional information, then I will have some closing remarks before opening up the line for questions. Joe?

Joe Kauder: Thank you, Jared. For the second quarter, we reported net income of $18.4 million or $0.12 per share, and adjusted net income of $48.4 million or $0.31 per share. Adjustments this quarter included $20.2 million after-tax provision expense related to the sales process of $507 million of commercial real estate loans with expected proceeds net of reserve release of 95%. During the quarter, we completed sales totaling $30.4 million with the remaining $476.2 million transferred to held for sale.

The loss we took during the quarter through the provision line item is the net mark on the loans that were either sold or transferred to held for sale and reflects our estimate of market value based on either active bids or other market inputs. We anticipate $243 million of loan sales to close in 3Q and expect the remaining $233 million of loans to be sold over the next several quarters. We also recorded a one-time noncash income tax expense of $9.8 million primarily related to the revaluation of deferred tax assets following changes to California state tax apportionment methodology. This change in methodology positively impacts our tax rate going forward and retrospective to the beginning of 2025.

However, the day one impact of the lower tax rate on our deferred tax asset position resulted in the negative charge. Going forward, we expect our effective tax rate to be approximately 25%. Moving to our core results, net interest income of $240 million was up 3.4% from the prior quarter, driven by strong growth on loan balances and higher loan yields. Net interest margin expanded in the quarter to 3.1%, driven by a three basis point increase in average loan yields to 5.93%. The increase in loan yields was due to the full quarter impact of strong growth in higher-yielding loans.

The rates on new loan production averaged 7.29%, and total loans grew by 9% annualized, led by growth in lender finance, fund finance, and purchasing of family residential loans. As of quarter-end, our spot loan yield was 5.94%. Total cost of funds of 2.42% remained flat quarter over quarter as a 41 basis point decline in average cost of borrowings to 4.93% was offset by a one basis point increase in cost of deposits to 2.13%. The decline in borrowing cost was driven by the redemption of $174 million of 5.25% senior notes, which we replaced with lower-cost long-term FHLB borrowings.

Average core deposits were up 5% annualized, and the average cost of deposits increased slightly as the need to fund strong loan growth drove a mix shift towards interest-bearing deposits. While we continue to steadily grow the number of new NIB business relationships, the average balance per account has been under pressure, which we believe is attributable to both seasonal and macroeconomic factors. As of June 30, our spot cost of deposits was 2.12%, and our spot net interest margin was approximately 3.11%. The interest rate sensitivity of our balance sheet net interest income remains largely neutral as the current repricing gap is balanced when adjusted for repricing betas.

From a total earnings perspective, however, we remain liability sensitive due to the impact of rate-sensitive ECR costs on HOA deposits, which are reflected in noninterest expense. We expect fixed-rate asset repricing to continue to benefit NIM as we remix the balance sheet with high-quality and higher-yielding loans. We have $1.8 billion of total loans maturing or resetting through the end of 2025 with a weighted average coupon rate of 5%, offering good repricing upside. Our multifamily portfolio, which represents 26% of our loan portfolio, has approximately $3.2 billion repricing over the next two and a half years at a weighted average rate that will offer significant repricing upside.

Total noninterest income was $32.6 million, down 3% from the prior quarter, primarily due to mark-to-market fluctuations on CRA-related equity investments and credit-linked notes. Noninterest income remained in line with our normalized run rate of $10 million to $12 million per month. Noninterest expense of $185.9 million increased $2.2 million from Q1, remaining below our target range of $190 million to $195 million per quarter. The quarter-over-quarter increase was primarily driven by a $2.1 million increase in insurance and assessments, and a $1.19 million increase in compensation expense, which were lower in Q1 due to a one-time FDIC expense reversal related to prior periods.

In January 2025, we settled into the low end of the aforementioned range of $190 to $195 million as we increased comp expense and invested in our infrastructure to support growth. However, we do expect positive operating leverage to continue as higher expenses are expected to be more than offset by continued revenue growth. Excluding the impact of loan sales actions, our core provision for credit losses totaled $12.3 million, an increase of $3 million quarter over quarter. We added to the quantitative reserve to reflect updates to our economic forecast and also increased the qualitative reserve related to our office loan portfolio.

Our loan portfolio continues to expand, and our credit reserves remain well aligned with the risk profile of that growth. As Jared mentioned, we have seen meaningful shifts towards loan categories with historically lower losses, including warehouse, fund finance, lender finance, and residential mortgages. These lower-loss loan portfolios as a percentage of our total loans increased to 29% of total loans, up from 26% in Q1 and 20% a year ago. Under CECL, these portfolios require lower reserves due to the historically low loss content and shorter duration, and their growing share will continue to influence overall reserve levels.

Excluding these lower-risk categories, the remaining portfolio would carry an ACL coverage ratio of 1.44% compared to 1.07% for the total portfolio. Including the impact of credit-linked notes and purchase accounting marks, our total economic ACL coverage ratio stands at 1.61%, and we believe the assumptions and economic scenarios embedded in our ACL models remain appropriately conservative. Our 2Q results reflect the substantial progress we have made in successfully growing core profitability through our consistent and strong execution. We have continued to strengthen core earnings drivers, including high-quality loan growth, stable funding and deposit cost, net interest margin expansion, and prudent expense and risk management.

We remain on track with our 2025 guidance with tweaks to our outlook for margin and NIB percentage. We see good balance sheet and earnings growth continuing, with mid-single-digit growth in average earning assets for the back half of the year. We also expect mid-single-digit increases in quarterly net interest income in the back half of 2025 and achieving our margin target range in Q4. As we look forward to the second half of 2025, we expect to continue to drive consistent and meaningful growth in our core profitability. And at this time, I will turn the call back over to Jared.

Jared Wolff: Thanks, Joe. Our second quarter results clearly demonstrate our success in pivoting our business toward profitable growth following our substantial transformation last year. We are growing adjusted EPS at a double-digit rate quarter over quarter. Our loan engine is working, and we are moving out credits to try to eliminate noise for the benefit of future earnings. We are expanding our lending relationships in areas that have historically lower areas of loss where we have some great niches. We are bringing new relationships to the bank. Our loan-to-deposit ratio has remained very comfortable. We have been opportunistically growing all types of deposits to fund our loan growth.

NIB did not expand this past quarter, as I have shared in the past, it is not necessarily a straight line. We are doing the right things the right way for the long term, and we have confidence that our results will pay off over time. To that end, we have continued to expand market share in key attractive markets. Particularly, California is now the fourth largest economy in the world. We are continuing to capitalize on the dislocation in California's banking landscape and are the go-to business bank for people, including clients who want to bank with us and talented individuals who want to join our team.

Our teams execute with consistency and discipline, bringing new deposit relationships and originating high-quality loans while maintaining prudent operating and risk management practices. We continue to move the ball down the field every day, growing our profitability, scaling our business, and providing high-quality, reliable earnings growth. We are optimistic about our growth trajectory for the remainder of 2025, and indeed, our estimates for 2026 are only growing higher. I want to take a moment to thank our exceptional team at Banc of California. Their unwavering commitment to our clients, communities, and our shareholders is remarkable. I am very proud to work alongside such a dedicated and talented team. Thank you. And with that, let's open up the line for questions.

Operator: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. At any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And your first question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark: Hey, good morning, everyone. Thank you. Morning. Just on the loan sales, you know, the loans sitting in held for sale, looks like they are kind of ranging in that 5.3% to 6% yield range. I guess, what is the plan on the other side of the balance sheet? What do you plan to unwind and at what rate?

Jared Wolff: Matthew, I am not sure I fully understand what you are asking. When you say on the other side of the balance sheet, are you talking about the deposits that we plan to maybe just clarify a little bit?

Matthew Clark: No. With the loan sales, I assume you are going to unwind some wholesale funding as well.

Jared Wolff: Well, we have been growing. Right? We have been growing pretty fast. And so I do not know that we have kind of match-funded it that way. We also are providing some leverage on those loans that we are selling. And so we do not need there is not a really a one-to-one relationship. I will let Joe comment on that as well to see if there is anything specific that I missed.

But let me just say as well, you know, I got a couple of questions offline about what we sold and whether it was a rate mark or a credit mark, and I would say that I think we were pretty pleased with a 95 price for the loans. I think that reflects probably, you know, it is truly in the hands of the buyer to decide whether, you know, what the purpose of their price was. But from our perspective, it was really more rate than credit. As I mentioned in my comments, we just did not want to hold the loans on our balance sheet for as long as we would have to.

Many of them were, close to $300 million were kind of construction projects that were completed. We had appraisals as is that were above the value of our loan substantially. But they were taking much longer to lease up. And so there are private credit out there who have much longer duration and willing to work with it, and we provided them some leverage and, you know, the rates on the notes themselves, the underlying notes allow them to get a good return. And so we feel good about the 95% that we got. Specifically to your question about funding that $500 million, Joe, is there anything specific that we are letting go related to that $500?

Joe Kauder: No. I think you hit the nail on the head. We are providing, you know, we are providing we intend to provide leverage on these transactions, which will, you know, kind of offset some of the balance sheet impact. For example, the one deal that we closed in by June 30, it was a $30 million tranche. Provided leverage in the 80% to 85% range. Just to give you an example.

Matthew Clark: Got it. Okay. That is helpful. And so your loan growth guide, is that kind of all in, or is that just HFI?

Jared Wolff: That is held for investment.

Matthew Clark: Okay. And then on the expense run rate, guide, the kind of low end of the range of $190 to $195, came in well below that this quarter. Sounds like you, you know, you continue to make investments. But on the ECR side, I know you are not assuming any rate cuts in your outlook, which obviously would help. But it did look like the rate on those ECRs did come down. Just can you speak to what you did there and you know, what your plan is going forward?

Jared Wolff: I mean, we are just we work it hard. I mean, we are trying to manage those costs as much as we can. On the ECR, you are right. We do not have any cuts in our forecast. Each 25 basis point cut provides $6 to $7 million in annual pretax income from a reduction in ECR.

Joe Kauder: And, you know, the ECR shows up really the quarter after the cut is announced since, you know, you are not going to get the full benefit in the quarter. So the impact of two cuts fully baked in a quarter would be reducing ECR costs by about $3 million per quarter.

Jared Wolff: So it is there is a lot of benefit there for us should rates get cut, although we do not have it in our forecast.

Joe Kauder: And, Matthew, the decrease, we do work it hard. Jared is exactly right. Some of that decrease was just the timing of the way the rate cuts that happened at the '24 flowed through the way some of the contracts work, there is a little bit of a delay. Do we get the benefit? So that was, you know, full quarter benefit of some of those rate cuts in 2Q.

Matthew Clark: Understood. Thank you.

Operator: And your next question comes from Ben Gerlinger with Citi.

Ben Gerlinger: Hi. I would like to beat a dead horse queen. For the loan sale, I know you guys gave quite a bit of commentary, and there is it is kind of broken up. The remaining $233 over the next several quarters, is the is the like, do you have a buyer? Do and this is the timing, or is it just held for sale hoping to find a buyer?

Jared Wolff: We do not we have not identified buyers for every we had bids on all of it. Some of the stuff we decided to put out for sale rather than sell it to an individual buyer. And some, we actually have contracted or is we are drafting the contract now. We have determined who the buyer is or we have drafted the contract, and, you know, we will sell it. But we wanted to provide ourselves more time to sell some of the other ones. But we think our we think our mark is you know, look. We marked it at 95. We think that is conservative. We might end up at 96.

We could end up at 94, but I think it is the range is right. It is going to be around there.

Ben Gerlinger: Gotcha. Okay. And then it looks like a majority was construction. Were these bank loans or potentially Pac West loans? I am just kind of curious who underwrote them originally.

Jared Wolff: Yeah. So they were I do not the reason I do not want to differentiate is because as a company, we have worked really hard to make sure that we all own everything today. And so, let me just say that these were larger loans, I am not sure we would do these size loans again. You know, two of the loans were industrial construction. Out of out of California. They are projects that have really big sponsors behind them. They have we have as is appraisals that are well above our loan value. There is tons of equity in the projects. But they are competing for lease up, and it was going to take a while.

And so we while we were not going to lose any money, they were going to sit there as kind of, you know, classified loans. And we just took the opportunity to move them off our balance sheet. We did not think we were going to lose money, but why not why not free up the capital and use them for something else? So that is kind of a common theme with a lot of the loans that we let go.

Ben Gerlinger: Gotcha. That is helpful. And then if I could sneak one more in, expenses came in under guide again.

Jared Wolff: Yeah. You guys kind of reiterated the range. Is it should we expect to tick up or is it conservatism? I am just kind of curious. Like, you are beating your own guide, but are you are you previewing expenses going up? Yeah. Joe, you want to address that? Yeah.

Joe Kauder: Yeah. I think we have yeah. As I said in my remarks, we do expect to settle in the lower end of the range $190 to $195 range. And, really, it is just, you know, making investments both comp and infrastructure really to support our growth going forward. And we were, you know, we were pretty disciplined in the in the first half of the year. In terms of the timing of some of that. But, you know, it is with the plans that was always a little back end loaded. So we will I think we shall we will see a little bit of increase here in the back half.

David, I will give you the positive operating I will give you a little more color there. I mean, so through last year, I was approving every single hire in the company. Just I wanted to see it. I want to make sure it was necessary. I wanted to challenge people. This year, we gave all of our business unit leaders and all of our function leaders, we gave them their own budget. And said, go hire whoever you want. Just stay within your budget. And if you are growing faster, you, you know, you can have more expenses. If you are growing slower, then we expect your expenses to be down.

Teams are just doing a really good job of managing their budgets. Our revenues are higher but their expenses are coming in, and it is some of it is timing. And some of it is just discipline. And so the reason we are coming in lower is not because we intended to, really. It is because our teams are doing a really good job. So some of it is timing.

Ben Gerlinger: Got it. That is helpful. Thank you.

Operator: And your next question comes from Jared Shaw with Barclays. Please go ahead.

Jared Shaw: Hey, guys. Good morning. So should we should we assume that there is no more sort of loan restructurings coming out of the portfolio and that you are you are focused on growth opportunities from here almost exclusively?

Jared Wolff: I think that is right, Jared. We certainly tried to take as much as possible in the quarter. What I do not want to say is kind of we have cleared the decks because stuff always comes up. Right? You are know, that is just going to bite you. So we have to leave space for the idea that something else could pop up somewhere. But we certainly tried to take the opportunity to make this a one-time event. And, hopefully, it is.

Jared Shaw: Okay. Alright. And then on the on the growth, I mean, you know, you guys are now the hometown bank or one of the hometown banks of a really strong large economy. Are you is your growth optimism, is that coming from taking market share? Are you just seeing your customers be a little more optimistic and starting to do more work? What is what is sort of driving that? That growth optimism? Yeah. It feels like the split is 50% existing customers you know, and 50% new relationships to the bank. Our teams are working really hard to bring in new relationships. Then our existing customers are out there just doing more stuff.

In the in the lender finance area, that is all new customers to the bank today, but they are old relationships that our lender finance team had. You know, fund finance and warehouse are growing. They are bringing in new logos, and new clients and there is some expansion from existing clients too. In our commercial and community bank, which is kind of our platform in California, our 80 branches plus Colorado and North Carolina. We are just things are going really well, and our teams are working really hard. We so far this quarter, deposits are way up. I just do not know if that is going to hold.

So when I when I talk to my comments about it being timing, that is kind of why. You know? You are you are you are seeing the loan growth. Okay. Maybe deposits are not there. You are funding it with, you know, a different mix that you got. You are pulling in wholesale, but that is temporary. When good deposits come in, you will let it go, and you will reduce your costs. We want to certainly be there to fund the loan growth and keep our loan-to-deposit ratios in check. And, we have a lower wholesale funding level than historically the bank had, so we have the flexibility to do that.

I would say just in California, we seem to be growing our market share pretty meaningfully, though. It is it is pretty exciting to see what is going on here. Our team is really jazzed. Then if I could just sneak one more in, you know, I mean, with that backup, so you so you have improved the credit profile with you know, with this loan sale. You feel good about growth. Yeah. With your with your stock, at these valuations and, you know, below tangible book, would not you just be buying more stock here?

You know, it is something you know, you got a good price earlier on, but, I mean, you know, why not be a little more aggressive with the buyback? In the near term? We might. We might we might do that. There you know, I certainly do not expect stock to be a at these levels. I mean, we are growing pre pretax, pre-provision at a really good annualized clip. Core EPS is growing double digits quarter over quarter, and we see our earnings expanding going forward. You know, our NIM guide came down a little bit, but we are only doing that because we are we are growing, and we are acknowledging the mix shift.

And we do not have any rate cuts built in. So we are we are our internal numbers keep getting guided higher for earnings, which we feel really good about, and 2026 is going to be going to be a great year. And, obviously, we are ending we are know, our momentum in 2025 is really strong. Our loan volumes are really strong. So I do not expect our stock to be at these levels. But if it is, you know, we would not hesitate to do what is necessary while keeping an eye on our capital levels. We got to make sure our capital is within the right range.

And assuming it is, would not hesitate to be an active buyer. Great. Thanks.

Operator: And your next question comes from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell: Good morning. Morning. I wanted to ask a question around the single-family resi growth this quarter. I think in the prepared remarks, you mentioned some was purchased single-family. Do you have the dollar amount of what was purchased? And you just describe kind of the I mean, it sounds like and clearly growth is strong in other verticals. Just curious like what would drive the strategy of purchasing single-family here?

Jared Wolff: Well, we first of all, as I think I have mentioned in the past, Andrew, we only purchase single-family. We do not have a single-family origination platform. We have access to single-family through you know, we are we are a good-sized mortgage warehouse lender. We lend to nonbank lenders. Nonbank, you know, mortgage lenders. We are secured by the individual mortgages on all of those lines. So you know, we might have a $150 million line or a $75 million line that they are making $800,000 or $3 million mortgages. We are secured by each of those individual mortgages we are taken out by usually, it gets securitized or there is a forward purchase contract. But they are all hedged.

Or have a forward contract. So we see all those mortgages. We already like the credit, and we have the opportunity from time to time to buy those off the lines. We can give our warehouse borrower more capacity when we buy those credits. What we will do when we come into an agreement with them to buy those credits, we will give them more capacity on their line. We will not count that purchase against them so they have more freedom, which they appreciate. And then we get a good deal on the loans. The coupons right now on the single-family that we are buying is pretty good.

It is you know, we are getting stuff in, let me just say, around seven. And these are non-QM mortgages. They are often thirty-year fixed. Really high credit quality, really, you know, mid-700 FICOs, a lot of California, low debt to income, and importantly, these are owner-occupied loans, owner-occupied homes. They are not very low percentage of second homes or investor homes, which I think carry a lot more risk, you usually do not get paid from a coupon standpoint. So, we like that profile. We do not really have a lot of exposure to consumers being a business bank.

And therefore, we thought that it would be healthy to have some exposure to consumer and this is the way that we chose to do it. We have had a very strong history with the mortgages, so we know how they perform. And, they have held up really well, and we like the risk-adjusted return. We also buy them from partners that we have. It could be, you know, a large national bank that originates mortgages and things like that. And every now and then, we will look at pools. But that is why we do it is because we think that is a good way to balance out our portfolio.

Also, warehouse has the ability to, you know, balloon up and down less so now with the size that we are, but it has in the past. And so having single-family that has got a little more duration on it is a hedge against kind of the warehouse portfolio, which could go up and down. So that is why we do it. In terms of the volume of single-family, in the quarter, and by the way, the resi production portfolio yield excuse me. Production yield in the quarter was 7.59. So I said seven. It is much higher than that. I was trying to be conservative. And, Ann, I think the number was around $450 in the quarter. Around $400.

Okay. Thanks, Joe.

Joe Kauder: Yeah. It is a little bit north of Warren. It was right around $400 in the quarter. Okay. And then and, Andrew, we are at 13 you know, the resident more is about 13% of our portfolio. You know, we could see that increasing a little bit, 14, 15%. I do not think we would be upset if it went up to 15%. And excluding the purchases, which were higher this quarter than prior quarters, we were still north of $700 million of production. I mean, we had a very, very strong production quarter. Our teams just did a great job.

Andrew Terrell: Understood. Okay. Thank you for all the color. I appreciate it. And then on the on the loans that were transferred or, yeah, transferred to HFS, $507 million, do you have how much of that was previously sitting in criticized? I am looking at the decline in criticized sequentially. It was a little bit less than that $507 figure. So just wondering if you had the criticized amount HFS.

Jared Wolff: We can get you that. I do not have it off the top of my head. Ann or Joe, would you just look that up?

Andrew Terrell: Okay. Thanks for taking the questions.

Jared Wolff: Yep. Thanks, Andrew.

Operator: And your next question comes from Gary Tenner with D. A. Davidson. Please go ahead.

Gary Tenner: Thanks. Good morning. Good morning. I wanted to go back to some of the commentary around deposits and the kind of cost this quarter versus last quarter. And I appreciate, Jared, the commentary around kind of the need to fund growth and kind of the timing of deposits versus loan growth. But on an absolute basis, the rate paid on interest checking and on money market moved up quarter over quarter. So just as we are thinking about the back half of the year, and certainly, you could pay that and still, you know, put loans on that or you know, accretive to the overall margin. I get that.

But just thinking about those kind of rates paid, do you think those still trend higher over the back half of the year? Is there a competitive dynamic that has made that has kind of stabilized? No. It is a it is a good question. So interest-bearing checking went up almost nine basis points in the quarter, and money markets went up about two basis points. CDs surprisingly went down by 13 basis points and savings went down by about seven basis points. So overall, we saw, you know, a little bit of an uptick in the cost of deposits. And it is very, very competitive right now.

I approve because I want to see we have a committee that approves pricing exceptions on deposits for relationships, and I get involved if there is a lending relationship and stuff like that. And so I am seeing the requests that are coming in. And our teams are doing a great job. It is more competitive than we have ever seen. And or I should say in a long time. We just have not seen this kind of, and so there is obviously a demand for liquidity out there. I think part of it is that there is less liquidity and a lot of demand for loans. And so all banks are kind of looking for the same stuff.

We are getting our share of loans better than others, I think, because we have a solution that really works and that is bearing itself out. And you are not going to grow deposits as fast as loans. You are just not going to do it. Unless it is a slow growth environment, and then you are going to outpace with deposits, which is what we did last year in anticipation of this year. So we saw that coming a little bit and prepared ourselves for it. Obviously, we think the kind of heat around deposits is going to slow down when rates come down.

If they come down, although we do not have it in our forecast, for some reason right now, the dynamics are really competitive. And we generally get some rate benefit. We you know, our teams do a good job of trying to hold deposits. We are seeing some you know, uptick in deposits. People are have money markets and they are waking up, believe it or not, that they were at 2%. They are like, hey. Why are not they at three and a half? We are trying to hold the line. And say, look. You know, we are not going to pay you four. Which some banks are absolutely doing.

We are going to try to keep it in the threes and, hopefully, the mid-threes. For those clients who have more rate-sensitive relationships. Not every deposit in the bank is, you know, is operating accounts. We want to have that, and we focus on that. And our teams are doing a great job. But as Joe also mentioned in his comments, we are tracking average balances. And average balances are actually down in accounts themselves. So if we are staying flat, we are kind of winning. Or if we are able to grow, great. But average account balances are down. People are not closing their accounts. Just liquidity is falling out of the system.

For some reason, and, hopefully, it comes back.

Gary Tenner: Appreciate that. And then as it relates to the loan sale and your comment about offering or providing back leverage, you know, for private credit buyers, etcetera, how much of the amount that you have scheduled to sell in the third quarter, how much of that do you think comes back to HFI just in a different part of the loan portfolio? I think you could assume, you know, 50% to 60% is probably fair. Could be could be 70%, but I do not know that it is going to be much about that. Hard to tell because some of the stuff is just going to go without leverage.

But, you know, we have relationships with private credit with nonbank lenders through our lender finance group, and our team, our chief credit officer, and our head of lender finance, and people on the lender finance team have great relationships, and they were able to suggest and bring in this stuff. Which I thought was good. We have it modeled that we are going to have more leverage than that, but I do not know that we are going to get there. So to be conservative, I would say it is Yeah. It is less. Okay. And then last question.

In terms of that loan transfer, you have talked about Just to Gary, just on that point, like, we do not need it because we are growing loans fast otherwise, and so it does not really matter to me either way. It is only a couple $100 million, but to be conservative, that is why we are saying it is less. But we certainly would be willing to offer it to the right to the right buyer. To interrupt you. Yeah. No. No problem at all. I just wanted to clarify one thing. You have talked about, you know, marking these at 95%.

But if you consider the charge-offs of $37 million specific to these loans, that is about that is almost 7.5%. So are you only thinking of the kind of incremental provision that went through the P&L this quarter? Related to the loan charge or transfer? We released the reserve as well. So the net amount is the 5% is the charge-off but then you have to add back the reserve that we held against loans that we released. Joe, am I do I have that math right?

Joe Kauder: Yeah. You have it right. There is also some small amount of past 91 fees and, you know, deferred fees on it as well, but I think Jared has it right.

Gary Tenner: Okay. Thank you.

Jared Wolff: Yeah. 2,091 never factors into my math. I need to brush up on that. Thank you.

Operator: Thanks, Gary. And your next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler: Hi. Good morning. Morning. Looking at the margin outlook, in that kind of 3.20 to 3.30 4Q, that assumes some level of acceleration here in the back end of the year just talk me through what the driver is? Is that mostly on the fixed asset repricing side? Are you assuming some mix shift benefit with just the deposit growth earlier in the quarter? And I am just wondering if we do get some rate cuts, is that going to be beneficial at this point? Or is that be maybe a little detrimental towards that guide?

Jared Wolff: So rate cuts would be beneficial. Because we would immediately move down deposit costs and I think that is going to move a little bit faster. That it would because we are originating loans so fast. I think we are going to get, you know, loans do not move down as fast in from my perspective. And so think we will be okay there. In terms of I will let Joe comment on the components of our margin expansion. But before I do, one thing that we have not seen this year, which we expected to see, was accelerated accretion.

And that can have, you know, a meaningful impact on our margin, and we have not seen any really at all even though we saw a good amount last year. So, if we get rate cuts, we are going to see accelerated accretion well, which is going to help our margin. But that is not what we have planned here. So, Joe, what is the how would you describe kind of where we see margin expansion coming?

Joe Kauder: Yeah. The margin expansion is primarily coming on the loan side. So, you know, we are as you as we showed in our remarks, we are in the deck, you know, we are putting large amounts of loans on at very good rates. We also have a fair amount a you know, on our low we have the page where we talk about how much loans are rolling off. While those loans are rolling off at lower rates, that loan roll on, roll off is going to be have a significant benefit to us.

Then on the on the cost of deposits, our like, you know, we do not we are we are pretty conservative on that in our forecasting estimate. We are assuming it is going to be pretty flat. I would agree with Jared that we did not we you know, we have basically taken out any the accelerated depreciation or accelerated accretion in our forecast. So and we have no rate cut. So you know, we stand to benefit on if either of those two things would happen.

Timur Braziler: Okay. Thanks for that. And just looking again at the loan transfer, I am just wondering how much this accelerates the asset quality trends at the bank. As you are looking ahead, can you just give us a level of internal expectation for provisioning and charge-offs? Going forward? Yeah. Yeah.

Jared Wolff: I well, so this quarter, on a normalized basis, we provisioned, you know, a little over $12 million. And I think at the level of loan growth that we had, that is probably a fair estimate. Going forward. But the difficulty is that it really matters what type of loans that we are growing. I do not think fund finance is going to keep growing at the same pace. I think we are going to get more of traditional commercial loans out of the commercial community bank. And so those are going to carry a waiting that is a little bit higher.

And, therefore, I think that $12 million is probably Joe, is that kind of where we are we are guiding to, $10 to $12 million a quarter? On the provision?

Joe Kauder: Yeah. A little bit at the low end of that. I think we are you know, right in the middle right in middle of that.

Jared Wolff: 10 to $12 million is kind of the fair estimate there. Yeah. We certainly feel good about the opportunity that we have ahead of us. On the loan side. It seems to be working right now, and our teams are doing a great job.

Timur Braziler: Okay. And then just last for me, we have seen a frenzy of kind of M&A conversation reenter the regional bank here in recent weeks. I am just wondering, you guys are not really the only game left in town in Southern California. I am just wondering how you guys are thinking about maintaining independence here and maybe what considerations would be needed in order for you guys to consider partnering with a larger institution?

Jared Wolff: Well, what I am really proud of is how hard our teams are working at growing the bank organically. And we are doing that. And we have a huge opportunity in front of us to grow this bank organically. I mean, we are showing it. Right? And so I think the bar is very high for us. But we are a public company. We are out there every day. And, I think it will be interesting to watch how these dynamics change. Over the next several quarters and over the next twelve months. I mean, there is a lot of noise out there, I think the environment is very frothy right now. The regulatory environment is turning favorable.

From an M&A standpoint, and I think that, you know, people are excited about that. You know, I would expect us to have the opportunity to go buy somebody when we have a normal normalized, multiple on our stock, which I expect to get there soon as a reflection of our consistent growth in earnings. And, you know, we are building up tangible book value pretty fast. And as you point out, we have kind of we have got a very valuable franchise here in California. We are sitting here at $35 billion in assets, the largest independent bank. Really, in California. That is not you know, that is not focused on a niche.

I think East West might be considered a little bit more niche y. They are a tremendous bank. But not for not for all types of, partners. And so we are really pleased with what we got here, and we are just going to keep our head down and keep working. And I think things will take care of themselves.

Timur Braziler: Great. For the questions. Thank you.

Operator: And your next question comes from Christopher McGratty with KBW. Please go ahead.

Christopher McGratty: Oh, great. Thanks. Jared, just more of a big picture question for you. The 13 ROE that has been out there and the timing you know, still you know, in the future. Interested in your just giving you the mic for a minute and just, you know, the takes and how you get there, what kind of environment does that look like? You know, obviously, there is a numerator and denominator impact. But any update, that would be great. Thanks.

Jared Wolff: Yeah. So I do not have a date to put out there as you can imagine. But I think what we are doing right now growing core earnings at a pretty fast clip is going to result in that happening, sooner rather than later. We keep growing tangible book value. But we are growing earnings faster. And, we are going to be efficient with our capital. To make sure we are carrying the right amount want to make sure that we have a good return on our capital for our shareholders.

So I do not know if there is anything specific that you would want me to answer regarding that, Chris, other than when I look at our earnings profile, you know, we keep pushing up what we have internally as our forecast quarter over quarter and year over year because it is just it seems to be working right now. I feel like our pace of growth is going to expand quite a bit given, how quickly you know, now our earnings are probably going to expand. You know, we are getting some real operating leverage. Our earnings are growing faster than our revenues. Because our expenses are in check. And so I expect that to continue.

Operator: And your next question comes from David Feaster with Raymond James. Please go ahead.

David Feaster: Hey. Good morning, everybody.

Jared Wolff: Morning.

David Feaster: I just wanted to follow-up maybe on the growth side and some of your comments there. I mean, obviously, the increase in your production. Could the David, can I pause you just for one second? I apologize. Yep. Chris, if you are still on, I do not know if you got cut off too early and if you had another question. So please just jump back in the queue. If you are still on, and we will come back to you after David but maybe you are done. Sorry to interrupt you, David.

David Feaster: Oh, it is okay. Yeah. So shifting gears back to kind of the growth side. I mean, the increase in production is extremely encouraging, and especially with the rates that you guys are getting. You know? And just first of all, I am kind of curious how the pipeline shaping up heading into the third quarter and how the complexion of the pipeline is. You touched on maybe seeing a lit a bit less opportunity in the fund finance side. Just kind of curious how the complexion of the pipeline is shifting as well.

Jared Wolff: Yeah. We are seeing so in the quarter, kind of the breakdown, we had, about half as much multifamily in the second quarter as we did in the first quarter. But CRE kind of bridge lending was up. Construction was kind of flat. This is production. Obviously, we had a big uptick in resi. You know, venture was up quarter over quarter. Warehouse was flattish. Equipment lending was kind of doubled quarter over quarter. Fund finance was just another strong production, and lender finance was just another strong production. I would expect lender finance to continue. Fund finance, I think they had. They are maybe hitting the high watermark here, so that might come down a little bit.

Warehouse, I think, has room to expand. And then just general commercial, you know, and good lending from our commercial community bank, I expect to pick up here. We are seeing some traditional mini perms and things like that seem to be taking hold now. If rates come down at all, I think you are going to see even more lending. I think people are holding out a little bit. But it is pretty broad-based, David. I have been very happy with what our teams have been doing. I really, really have.

David Feaster: That is great. And maybe shifting gears back to deposits. I mean, you have alluded to the competitive landscape for deposits. I am curious where do you see the most opportunity to drive core deposit growth? Are there is there any segments that you see more opportunity? I know you guys are always working to drive NIB and core deposits. You know, we have talked in the past even about growing ECR deposits potentially. I am just kind of curious where you are focused on today and where you see the most opportunity.

Jared Wolff: So our teams across the bank are focused on bringing in business relationships where we can serve them better than where they are being served now. And there is still the opportunity to bring in, and we are being successful here. Clients that ended up at US Bank or ended up at, well, at JPMorgan from banks that have been acquired or kind of went under. And those are big targets for us, and we are, you know, we are not hearing a lot of people who are a midsized client who are really happy with the transition to JPMorgan. They are a great competitor for and great bank for many clients, but they cannot be everything to everybody.

And so, you know, we still see a lot of opportunity there. And then from a niche perspective, you know, every single one of our business units is focused on bringing in deposits. Even if they have not in the past. We are about to launch this quarter. We have a new digital platform for onboarding deposits digitally. And, through Salesforce. And that digital account opening goes live, it is going to give us even more capacity to bring in deposits, nationwide for clients that want our services. So, you know, traditionally, when you are doing an SBA client, we have a nationwide platform for SBA. We ask for the deposits.

We get deposits, but it is not as easy if, you know, there is not branches nearby and things like that. And but this digital account opening is going to really accelerate some stuff for us, so we are excited about that. And I think, that is going to go really, really well.

David Feaster: Okay. That is great. And then maybe just last one. You know, touching on the credit side, exclusive of loan transfer. Look. The past couple quarters have been a bit noisy. You guys have been very proactive. You know, managing and addressing potential issues. I am just curious, you know, exclusive of the transfer like, is there anything on the credit side that you are seeing that you are cautious on, or do you think the kind of the active management in the is like, the worst is behind us, and we should see pretty solid credit leverage going forward.

Jared Wolff: I really believe that, David. I think that we got ahead of it. As I as I suggested we would, and we proactively moved this stuff out. I do not see any big warning signs for me. These are some pretty large credits that we were sitting on our balance sheet that we were able to move away. And I give our team all the credit for proactively, you know, coming up with this solution, working through it, was a lot of work. The quarter, and they did a phenomenal job with a phenomenal result. And so I feel really good about where we are. Stuff pops up, though. You know? It does.

And, you know but I feel like the things that we were most concerned about we have had now the opportunity to move. And that feels really good. You know, our charge-off rate was 12 basis points, I think, excluding all this stuff, which was low. And I think our ratios now are pretty healthy, and I certainly feel good about our coverage. From a from a from a reserve standpoint. So feel really good about where we are.

David Feaster: Terrific. Alright. Thanks, everybody.

Jared Wolff: Thank you very much. Appreciate it.

Operator: This concludes our question and answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.

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DATE

• Thursday, July 24, 2025, at 9 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Nitin Mhatre
• President — Sean Gray
• Chief Financial Officer — Brett Brbovic
• Chief Credit Officer — Gregory Zingone

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

• Operating Net Income: $31.6 million for Q2 2025, up 14% from the first quarter and up 36% year over year.
• Operating Earnings Per Share: $0.69, up 15% from the first quarter and up 25% year over year.
• Operating Expenses: $67 million, down 2% from the first quarter and down 7% year over year, reflecting ongoing cost control.
• Operating Leverage: Positive operating leverage of 5% from the first quarter to the second quarter and 11% year over year.
• Operating ROTCE: 10.76%, up approximately 110 basis points from the first quarter and year over year.
• Net Charge-Offs and Nonperforming Loans: Net charge-offs were 14 basis points of loans; nonperforming loans totaled 27 basis points of loans for Q2 2025.
• Digital Deposit Program: Over $100 million in new deposits added since inception earlier in 2025.
• Merger with Brookline Bancorp: Estimated 23% earnings accretion to 2026 consensus (GAAP and cash basis).
• Annualized Net Income: Net income for 2025 annualizes to more than $118 million, surpassing the prior consensus of $101 million for 2025 as referenced in merger materials.
• Merger Cost Synergies: Pro forma cost save target set at 12.6%; technology stack integration progress described as "very pleased with the favorable outcome."
• Net Interest Margin: Net interest margin was 3.27% in the second quarter; June spot margin was 3.22%, up three basis points from the first quarter.
• Average Loans: Average loans increased $95 million (1% annualized) from the first quarter and $327 million (4%) year over year, with growth led by commercial and industrial lending.
• Average Deposits: Average deposits (excluding payroll and broker deposits) increased 1% from the first quarter and 6% year over year; average noninterest-bearing deposits as a percentage of total deposits remained steady at 23% in the second quarter.
• Net Interest Income: Net interest income rose $2.2 million (2%) from the first quarter and increased 4% year over year.
• Non-Interest Income: Operating non-interest income grew $1.1 million (5%) from the first quarter and $1.6 million (8%) year over year; loan-related fees increased in Q2 2025 due to loan servicing and BOLI gains, offset by reduced SBA gains.
• Efficiency Ratio: Efficiency ratio was 56.7% in the second quarter.
• Nonoperating Expenses: $1.5 million in nonoperating expenses primarily related to the merger for Q2 2025.
• Loan Loss Allowance: Reserve coverage to nonperforming loans reached 462% for Q2 2025; coverage ratio remained flat at 124 basis points.
• Firestone C&I Portfolio: Outstanding balance was $28 million as of the second quarter, down 15% from the first quarter; nonperforming loans in the Firestone C&I portfolio were $1.3 million; net charge-offs in the Firestone C&I portfolio were $900,000 in the second quarter.
• BOLI Gains: BOLI gains were about $800,000 above normal and nonrecurring.
• Tax Rate Guidance: Expected to normalize to "about 24, 25%."
• Tangible Book Value Dilution—Merger Impact: Prior guidance of 17% tangible book dilution and 40% earnings pickup at deal announcement may revise pending final FASB (CECL) rule adoption, which management cannot yet quantify.
• Multifamily Loan Portfolio: $700 million multifamily loan portfolio, confirmed to have no rent-controlled exposure in company footprint or in New York City.
• Merger Closing Timing: Targeted for September, per management, dependent on regulatory approval.

SUMMARY

Berkshire Hills Bancorp (NYSE:BHLB) reported operating earnings growth of 14% from the first to the second quarter of 2025 and 36% year over year in the second quarter. This was driven by stronger net interest income and a sequential rise in net interest margin, attributed to deposit growth and lower reliance on FHLB borrowing. Management highlighted that expense reduction was broad-based. The bank's new digital deposit initiative drove notable deposit growth, contributing to reduced borrowing costs and reinforcing balance sheet strength. Asset quality remained resilient, with confirmed absence of rent-controlled loan exposure in the lending book.

• CEO Mhatre said, "The merger with Brookline Bancorp is expected to deliver meaningful profitability."
• President Gray said, "Cost synergy realization is progressing favorably, especially in technology," positioning the bank to achieve its 12.6% pro forma cost save goal.
• Management noted annualized net income projections for 2025 currently exceed merger deck consensus by more than $17 million (GAAP), indicating potential outperformance relative to earlier 2025 consensus net income forecasts.
• Chief Financial Officer Brbovic said, "Our spot NIM for June 2025 was approximately 3.22," clarifying the sequential margin dynamics as deposits replaced higher-cost funding.
• On guidance, Brbovic gave a tax rate expectation of "about 24, 25%" going forward, normalizing from the merger-driven elevated level this quarter.
• Future tangible book value dilution and earnings accretion from the merger remain partially unquantified pending FASB CECL guidance, which management continues to monitor but cannot finalize at this time.
• Integration planning and regulatory approval are both on schedule for a September merger closing, pursuant to management's public guidance.

INDUSTRY GLOSSARY

• BOLI (Bank-Owned Life Insurance): Insurance policies owned by the bank on executives' or employees' lives, generating non-interest income for the bank.
• FHLB (Federal Home Loan Bank) Borrowing: Funding banks obtain from the FHLB system to manage liquidity needs.
• CECL (Current Expected Credit Loss): FASB accounting standard requiring banks to recognize expected lifetime losses on loans up front.
• NPL (Nonperforming Loan): Loan for which the borrower is not making interest payments or repaying principal as scheduled.
• NCO (Net Charge-Off): The amount of loan principal written off as uncollectible, net of recoveries.
• ROTCE (Return on Tangible Common Equity): A measure of profitability based on income returned on shareholders' tangible equity, excluding intangible assets.

Full Conference Call Transcript

Nitin Mhatre: Thank you, Kevin. Good morning, everyone, and thank you all for joining us today. I'll begin my comments on Slide three, where you can see highlights for the second quarter. Overall, this was a very strong quarter and the best quarter yet since we began our transformational journey in early 2021. We had operating net income of $31.6 million, up 14% linked quarter and up 36% year over year. Operating earnings per share of $0.69 was up 15% from the first quarter and up 25% year over year. We continue to drive expenses lower with operating expenses of $67 million, down 2% linked quarter and down 7% year over year.

We had positive operating leverage of 5% linked quarter and 11% year over year driven by both improved revenues and lower expenses. Operating ROTCE was 10.76%, up about 110 basis points linked quarter and year over year. Asset quality and balance sheet metrics remain strong. Net charge-offs and nonperforming loans remained low at 14 basis points and 27 basis points of loans respectively. We continue to make steady progress on our strategic initiatives. Our focus on the new digital deposit program has gained momentum and has delivered over $100 million of new deposits since inception earlier this year.

Our bankers' commitment to delivering relationship-focused personalized solutions to our clients has been at the core of our improved financial performance and has earned us yet another recognition this quarter. This time, from Time Magazine that recognized us again amongst the top-performing midsized US companies in 2025. As you know, in December, we announced a merger of equals with Brookline Bancorp. The transaction improved scale and meaningfully improves profitability as reflected in the estimated 23% accretion to Berkshire's 2026 consensus estimate on GAAP and cash basis, respectively. Berkshire's net income in 2025 annualizes to over $118 million and it's tracking well ahead of the 2025 consensus net income of $101 million shared in our MOE investor deck in December.

Our team continues to work proactively on requisite integration planning for a seamless transition. And on that note, I'll turn the call over to Sean Gray to provide an overview of the merger integration planning process. Sean?

Sean Gray: Thanks, Nitin. You know, as we await regulatory approval, there's only so much in detail we can share. But I can say this, the combined organization's leadership team has made really good progress and continues to work towards our pro forma cost save goal of 12.6%. I can speak to where our tech stack expenses are coming as most of that work is complete. And where that is coming in versus plan. So I'm very pleased with the favorable outcome of where our tech stack expense is showing up and that will bid favorably for the overall goal of the 12.6%. Thanks, Nitin. Thanks, Sean. I'll begin going over the financial details for the quarter.

I'll begin on Slide five, which shows an overview of the second quarter metrics. As Nitin mentioned, our operating earnings were $31.6 million or $0.69 per share. Our net interest margin was 3.27, up three basis points linked quarter. Operating expenses were down $1.3 million or 2% linked quarter and our efficiency ratio was 56.7%. Slide six shows our average loan balances. Average loans were up $95 million or 1% linked quarter on annualized and up $327 million or 4% year over year. Linked quarter, we had solid broad-based growth led by C&I. Slide seven shows average quarter and up 6% year over year.

Excluding payroll and broker deposits, average deposits were up 1% linked quarter and up 6% year over year. Average noninterest-bearing deposits as a percentage of total deposits remained steady at 23%.

Brett Brbovic: Turning to Slide eight. Net interest income was up $2.2 million or 2% linked quarter, and up 4% year over year. Net interest margin was up three basis points linked quarter to 3.27. Slide nine shows operating non-interest income up $1.1 million or 5% linked quarter and up $1.6 million or 8% year over year. Loan-related fees were up linked quarter driven by higher loan servicing fees and BOLI gains offsetting lower SBA gains in the quarter. Slide 10 shows expenses. Operating expenses were down $1.3 million or down 2% linked quarter to $67 million and down $4.7 million or 7% year over year. Linked quarter and year over year expense declines were broad-based.

Nonoperating expenses of $1.5 million were primarily related to the merger. Slide 11 shows a summary of asset quality metrics. Nonperforming loans as a percentage of total loans was 27 basis points and loan reserves to NPLs 462%. Net charge-offs of $3.3 million were down $200,000 linked quarter. And our coverage ratio remained flat at 124 basis points. And with that, I'll turn it back to Nitin for further comments. Nitin?

Nitin Mhatre: Thank you, Greg. As Brett outlined, we had a very strong second quarter. That has continued the EPS growth momentum over multiple quarters. This quarter was in fact the best quarter since we launched our transformation program in early 2021. Over the last four and a half years, our turnaround has been a journey of efficient growth and profitability while creating a positive impact for all stakeholders. We made significant strategic decisions, embraced innovation to invest in technology, reignited organic growth, and remained committed to our communities. We've not only improved our financial performance, despite the macroeconomic headwinds that have impacted the industry over the last few years, but have also positioned ourselves for continued strength in the long term.

Our progress is a testament to the unwavering dedication and hard work of our employees, the trust and loyalty of our clients, and the confidence and support of our shareholders. As I reflect on our progress since we began our transformation program in early 2021, I want to express my deepest gratitude to every member of the Berkshire team, our clients, and our board of directors. Our bankers' dedication, resilience, and commitment to our clients has been the driving force behind our improved operating and financial performance. Together, we've navigated challenges, embraced change, and delivered strong results for our clients, shareholders, and communities.

It has truly been an honor and a privilege to lead such an outstanding team of purpose-driven, values-guided, talented bankers. I'm incredibly proud of what we've accomplished together and excited to see what the combined company will achieve next. With that, I'll turn it over to the operator for questions. Carly?

Operator: Your first question comes from Laurie Hunsicker with Seaport Research Partners. Hi. Good morning.

Laurie Hunsicker: Hello, Laurie. I just wondered if we could just start with margin. You guys had that $100 million drop in FHLB. Just remind us when in the quarter that fell and then also your spot margin for June and just how you're thinking about it?

Brett Brbovic: Thanks. Hey, Laurie. This is Brett. Our spot NIM for June was about $3.22. The FHLB drop...

Laurie Hunsicker: Sorry, Laurie. Sorry. I think there was a dead spot there. Can you start over? Thanks.

Brett Brbovic: Sure. The spot NIM for June was $3.22. And the FHLB decline coincided with an increase in our deposits throughout the quarter, so it was just based on what we needed to borrow or what we didn't need to borrow based on the deposit growth that we saw this quarter.

Laurie Hunsicker: Gotcha. Okay. Gotcha. And do you have any sort of near-term large maturities coming due in CDs or for borrowings that we think about here in the next quarter?

Brett Brbovic: No. Nothing. I wouldn't say anything significant.

Laurie Hunsicker: Okay. Great. And then just jumping over to credit, obviously, your credit is looking great. But just wondered if you can help us think about that jump in the C&I nonperformers to $11 million from $9 million. And then also Firestone. I know it's small, but if you could just give us what is the Firestone C&I balance and how much are nonperformers and charge-offs?

Greg Lindenmuth: Greg, you want to give some color on it?

Gregory Zingone: Sure. Hi, Laurie. How are you? The jump in NPLs, it's a handful of just smaller credits. Probably just a half dozen of smaller credits with just individual problems related to each business. As far as Firestone, the balance is down 15% quarter over quarter to $28 million. And NPLs have historically ranged in the $1.5 million range. They're at $1.3 million right now. And for NCOs, there's a net $900,000 for the quarter.

Laurie Hunsicker: $900,000. Okay. And then again, you had outsized charge-offs just in the C&I bucket. Was there anything specific there that's worth calling out?

Gregory Zingone: No. Very similar to the NPL. Nothing noteworthy. Just a handful of individual credits on the smaller side.

Laurie Hunsicker: Gotcha. Okay. And then I think I know the answer to this, but I just want to triple-check. Your $700 million multifamily book, anything rent-controlled in that book?

Gregory Zingone: No. We have no rent control in our footprint. Even though New York City is technically within our footprint, we do not have any loans there.

Laurie Hunsicker: Okay. And then I know Mondami has expressed a desire to target other markets too, i.e., Albany. Do you have any rent-controlled anywhere?

Gregory Zingone: We do not. Not in our footprint. No. And not in the company.

Laurie Hunsicker: Okay. That's great. And then non-interest income, the loan-related fees that were really strong. What were the BOLI gains in this quarter?

Brett Brbovic: They were about $800,000 above normal. Just nonrecurring.

Laurie Hunsicker: Benefit. Death benefit? Or Correct. Okay. And then how do we think about the drop in the SBA loan? Gain on sale of SBA loans? How should we be thinking about that?

Sean Gray: So I think we can take that large, Barry. Hey. It's Sean. You know, we and Brett's probably gonna say the same thing. We're coming off a really good Q4 and Q1. We pulled some of that value forward. So a little bit of a move back to the mean. But when we look at the core business, we look at pipeline and volume, it looks very healthy.

Laurie Hunsicker: Okay. So this current run rate Q2 is probably a better run rate?

Sean Gray: I would say it's in between the Q1, Q2.

Laurie Hunsicker: Okay. Great. And then how should we be thinking about the tax rate going forward?

Brett Brbovic: So our tax rate is a bit elevated right now due to timing and merger-related aspects. I would expect it to normalize going forward.

Laurie Hunsicker: Okay. And so what would be a good, you know, like, 23, 24%?

Brett Brbovic: I would say about 24, 25%.

Laurie Hunsicker: Okay. And then just last sort of more high-level question. Here. Can you help us think about your deal tangible solution at announcement tangible book dilution was 17% and then a 40% earnings pickup. Can you just help us think about what the new FASB impact on CECL updates, the double count sort of means for your tangible book dilution? You help quantify that? And, also, you know, presumably, your tangible book dilution is something less, but your earnings pickup is also something less. Just how should we think about that? And then also deal-related, can you help us think about the timing?

Brett Brbovic: Sure. So obviously, the ASU hasn't been finalized yet. You know, it's expected to be adopted at the third or fourth quarter of this year. It will have an impact on the combined entity as we move forward. I don't think at this time, you know, we can quantify that right now on this call. But it definitely will have an impact, and it's something we're continuing to analyze as we get more information on the ASU. What it's gonna look like in its final state.

Laurie Hunsicker: Okay. And then what about deal closing? We've seen things really ramp up on the M&A side on deal closings just happen really, really a lot faster. Any color on that?

Nitin Mhatre: Yeah. Laurie, I think we in the investor materials, we did say we expect the closing to be September. Everything's on track so far, so we're just awaiting the regulatory approval. And the teams are already working on the integration planning, as Sean outlined.

Laurie Hunsicker: Okay. Great. Thanks, Nitin, for taking my question.

Nitin Mhatre: Thank you, Laurie. Thanks, Laurie.

Operator: There are no further questions at this time. I will now turn the conference back over to Nitin Mhatre for closing remarks.

Nitin Mhatre: Thank you all for joining us today for our call and for your continued interest in Berkshire Hills Bancorp. Have a great day, and be well.

Operator: This concludes today's conference. You may now disconnect.

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DATE

• Thursday, July 24, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Jonathan Price
• Chief Financial Officer — Crystal Prystai
• Senior Vice President, Base Metals — Shehzad Bharmal
• Vice President, Projects — Ian Anderson

Need a quote from one of our analysts? Email [email protected]

RISKS

• Teck lowered its QB (Quebrada Blanca) annual copper production guidance to 210,000 to 230,000 tonnes for 2025, citing ongoing TMF (tailings management facility) development issues and potential external delays, with online time affected in Q2 2025 and full completion dependent on successful remedial actions by year-end.
• The ship loader outage at QB’s port facility, announced June 2, is expected to extend into the first half of 2026, forcing the company to rely on alternative shipping arrangements resulting in an incremental impact on net cash unit cost, expected to be approximately $0.10 per pound.
• CFO Prystai highlighted a 21% reduction in corporate overhead as a positive in Q2 2025, but noted this was partially offset by lower copper and zinc prices, as well as higher operating costs at Highland Valley and QB.
• CEO Price acknowledged a fatality at the Antamina mine, noting the event led to a one-week site shutdown in the quarter and lower production from that operation.

TAKEAWAYS

• Adjusted EBITDA: $722 million of adjusted EBITDA in Q2 2025, up 3% year-over-year, driven by increased profitability at Trail operations, lower smelter processing charges, and reduced corporate overhead, partially offset by lower copper and zinc prices and higher operating costs.
• Copper Production Guidance: Revised to 470,000–525,000 tonnes for 2025, reflecting a lower outlook for QB due to TMF challenges, while all other operations maintain previous guidance.
• Copper Segment Gross Profit: $673 million before depreciation and amortization in Q2 2025, down 3% year-over-year, due to lower prices and higher costs, partially offset by co-product and byproduct revenues.
• Copper Net Cash Unit Cost: Net cash unit cost improved by $0.14 to $2.00 per pound in Q2 2025, driven by higher byproduct credits from zinc and molybdenum, despite cost increases at QB and Highland Valley.
• QB TMF Remediation Impact: Incremental net cash unit cost is expected to be approximately $0.10 per pound, with remediation work targeted for completion by year-end.
• Shareholder Returns: $487 million returned via buybacks in Q2 2025 (9.8 million shares); $1.1 billion returned year-to-date via dividends and buybacks; 70% of the $3.25 billion buyback authorization completed ($2.2 billion) as of Q2 2025.
• Highland Valley Copper Mine Life Extension (MLE) Project: Sanctioned by the board for construction, extending mine life to 2046 with expected average annual copper production of 132,000 tonnes; updated capital estimate is CAD2.1 billion–CAD2.4 billion (raised from a prior CAD1.8 billion–CAD2 billion estimate) due to contingencies, inflation, and accelerated procurement, as announced with the sanction of the Highland Valley Copper mine life extension project.
• Liquidity: $8.9 billion in liquidity, including $4.8 billion in cash on hand as of July 23, 2025; company maintains investment-grade credit rating and has reduced debt by $2 billion since 2024.
• Zinc Segment Performance: Gross profit before depreciation and amortization increased 137% year-over-year to $159 million in Q2 2025, primarily due to higher byproduct revenues and lower operating costs; Red Dog sales were 35,100 tonnes in Q2 2025, exceeding the guidance range.
• Zinc Net Cash Unit Cost: Decreased by $0.20 to $0.49 per pound in Q2 2025, mainly due to lower smelter charges and higher byproduct credits; annual production and cost guidance unchanged.
• Sustainability and Safety: High-potential incident frequency rate for controlled operations was 0.09 in the first half of 2025, below the 2024 performance of 0.12; recognized for the nineteenth consecutive year as a "Best 50 Corporate Citizen" in Canada by Corporate Knights in 2025.
• Labor Agreements: All collective bargaining agreements at QB now concluded, securing coverage through 2028; Carmen de Andacollo agreements finalized in June and July with three-year terms.
• Growth Projects Progress: Sanction readiness targeted by year-end for both Zafranal (Peru) and San Nicolas (Mexico) copper projects; Zafranal is more advanced in permitting and construction readiness.
• QB Optimization Potential: Mill optimization and debottlenecking could increase throughput by 15%-25%, according to company statements; planning underway with DIR permit application expected in the second half of the year.
• Copper Production Per Share: There is potential for a further 33%-50% increase in copper production per share by 2026 as QB stabilizes and share buybacks continue.

SUMMARY

Teck Resources (NYSE:TECK) reported a year-over-year increase in adjusted EBITDA for Q2 2025 and highlighted a robust capital return program, with approximately 70% of its authorized share buyback executed as of Q2 2025. The company sanctioned the Highland Valley Copper mine life extension project, raising its capital estimate to CAD2.1 billion–CAD2.4 billion to account for inflation, contingencies, and accelerated equipment procurement, and described this investment as foundational for its ambition to double copper production by decade’s end. Management addressed operational setbacks at QB, reducing copper production guidance for 2025 due to TMF issues and forecasting incremental unit costs of approximately $0.10 per pound due to alternate shipping logistics after a ship loader outage in Q2 2025, while asserting these constraints should be resolved by year-end. The company’s zinc segment delivered substantial profit growth in Q2 2025, and management emphasized disciplined cost management, resilient balance sheet strength, and maintained investment-grade credit status. Strategic project advances were noted across the portfolio, with Zafranal and San Nicolas targeted for sanction readiness and all major labor agreements now secured through multi-year terms.

• CEO Price stated, The project extends the core assets to 2046, with average annual copper production of 132,000 tonnes over the life of the mine.
• Ship loader repairs at the QB port are ongoing as of Q2 2025, with capital cost estimates pending full damage assessment, and insurance recovery is being pursued, according to Anderson: we do have insurance coverage, and that includes interruption.
• The planned transition to steady-state operations at QB will mark a one-time milestone following completion of TMF work, after which long-term production is expected to stabilize, with the company targeting design rates by the end of 2025. “showcase [QB] as a tier-one asset.”
• CFO Prystai reported, “We have now completed $2.2 billion or approximately 70% of our $3.25 billion authorized buyback, leaving approximately $1 billion remaining.”
• Growth project sanctioning approaches for Zafranal and San Nicolas were framed as optionality, with sequencing yet to be determined and each subject to final investment decisions.

INDUSTRY GLOSSARY

• TMF (Tailings Management Facility): An engineered structure for storing the byproducts (tailings) of mining operations, critical for operational continuity and environmental compliance.
• QB (Quebrada Blanca): Teck Resources Limited’s large-scale copper mining complex in Chile, subject to ongoing expansion and operational ramp-up.
• MLE (Mine Life Extension): A capital project that extends the operational life of an existing mine through new development and infrastructure.
• DIR (Declaración de Impacto Ambiental): The environmental impact statement submission required for permitting new or expanded mining activities in certain jurisdictions.

Full Conference Call Transcript

Jonathan Price: Okay. Thank you, Emma, and good morning, everyone. Now before we get into the quarter, I would like to take a moment to acknowledge the incident earlier on Tuesday at one of our peers' operations in the Northwest of our home province of British Columbia. Our thoughts are with the three workers that remain in the underground work area as well as their families, friends, and colleagues, and the emergency response teams. And we hope for their safe and speedy rescue. So turning to our second quarter 2025 results, starting with highlights on Slide four. Overall, we are advancing our strategy of copper growth, while returning cash to shareholders.

Our profitability improved compared to the same period last year, to $722 million of adjusted EBITDA. We had strong performance in our zinc segment, with Red Dog sales above our guidance range and a significant improvement in our zinc net cash unit costs. As well as another quarter of profitability and cash generation at Trail. Across our established operations, production is on track to meet our annual guidance. At QB, we had previously noted that we would be at the lower end of our guidance of around 230,000 tonnes for the year.

Whilst the team is working hard to achieve this, we acknowledge that there could be risk from possible external factors or, of course, any delay from the TMS development work. As a result, we've revised our outlook for QB to 210,000 to 230,000 tonnes for the year but continue to target design rates by year-end. Earlier today, we announced that the board has sanctioned the Highland Valley Copper mine life extension project in British Columbia for construction. This is foundational to our strategy to double copper production by the end of the decade. Given the strong demand for copper as an energy transition metal, the project will generate compelling returns.

With an IRR far surpassing our cost of capital and secure access to this critical mineral for the next two decades. The project extends the core assets to 2046, with average annual copper production of 132,000 tonnes over the life of the mine. We are continuing to return significant cash to shareholders, with elevated daily share buying levels in the quarter resulting in a total of $487 million or 9.8 million Class B shares. Year to date, we have returned a total of $1.1 billion to our shareholders through dividends and share buybacks and we have completed approximately 70% of our authorized $3.25 billion buyback which is the equivalent of $2.2 billion.

Finally, we are maintaining the resilience of the business. Including through our strong balance sheet which enables us to navigate uncertainty and continue to create value. We currently have $8.9 billion in liquidity, including $4.8 billion in cash. Turning to slide five. We continue to be committed to safety and sustainability. Across the operations that we control, our high potential incident frequency rate remained low in the first half of the year at 0.09 below our 2024 performance of 0.12. I would like to take a moment to acknowledge the fatality that occurred on April 22 at Antamina in which Teck Resources Limited holds a non-controlling interest.

We are deeply saddened by this event and offer our condolences to the family, friends, and colleagues of the deceased. Teck Resources Limited fully participated in the investigation, which was led by the team at Antamina, and learnings will be shared across our company and across the sector. We were honored to be named as one of Corporate Knights' 2025 Best 50 Corporate Citizens in Canada. It's the nineteenth consecutive year that we've received this recognition, which is based on an evaluation of up to 25 sustainability indicators including board diversity, resource efficiency, financial management, sustainable revenue, and sustainable investment. So now turning to QB on slide six. QB's second quarter performance was impacted by the ongoing TMF development work.

We're advancing multiple TMF development initiatives to improve sand drainage rates and accelerate mechanical movements of sand to achieve steady-state operation. This work impacted mill online time in the quarter as previously disclosed. The planned post-QB2 construction pace of TMF development was based on design assumptions for sand drainage rates that have subsequently proven unachievable. Modifications to cyclones alone, while showing an improvement in sand drainage rates, were not sufficient to allow us to fully catch up on TMF development work in the quarter. As a result, we are implementing a range of additional measures to improve sand drainage rates and accelerate the mechanical movements of sand. Including enhanced sand placement techniques and optimization of the grind size concentrator.

Importantly, the TMF development work and the transition from starter dam to regular ongoing sound lifts is a one-time milestone. Related to the ramp-up of the operation. When it is completed, the TMS development work will be behind us for the life of the facility. While the TMS development work will continue in Q3, we continue to target design rates. By the end of the year. Throughput increased from the prior quarter, and we expect to see consistent grades of approximately 0.61% in the second half of the year. Work is ongoing to improve recoveries by year-end, which will also be helped by more consistent mill run time.

The outage of the ship loader at QB's port facility announced on June 2 is expected to be extended into the first half of 2026. We have been successfully shipping concentrate through our alternative port arrangements and have maximized shipments to local customers so there has been no production impact. Alternative sales logistics have had some incremental impact on our net cash unit costs, which is expected to be approximately $0.10 per pound. We had a good step up in the molybdenum production as a result of some key process improvement initiatives implemented during the quarter. We expect to continue to see molybdenum production improvements and we continue to target design throughput and recoveries at the moly plant by year-end.

Once we have completed the TMF development work, QB will be able to run at steady state. Showcasing it as a tier-one asset will be a cornerstone of Teck Resources Limited's portfolio for generations. We continue to work on defining the most capital-efficient and value-accretive path for future growth of QB. Through optimization of the mill, and low capital debottlenecking opportunities, that could collectively increase throughput by a third of 15% to 25%. The foundation of QB is its large long-life deposit, which can support multiple expansions. And it offers multiple potential paths to create value for our shareholders including assessing adjacencies or synergies with Coyoac. The operation also has the advantage of a very low strip ratio.

Which enabled competitive all-in sustaining costs. We successfully achieved completion testing requirements under QB2.5 dollars project finance facility earlier this year, which provides independent verification confirming the robustness of design, construction, and operational capacity. And we have a taxability agreement in place through 2037. Taking all these factors into account, we are well positioned to generate significant future cash flows from this Tier one asset for decades to come. Turning to the mine life extension at Highland Valley on slide seven. Highland Valley is Canada's largest copper mine, and a core asset in our portfolio. And we are excited to announce the sanction of the Highland Valley Copper mine life extension or HPC MLE project.

This is a lower risk and lower complexity brownfield project that is 100% owned by Teck Resources Limited. The MLE is an extension of the operation to 2046. And is expected to produce 132,000 tonnes of copper per annum on average over the life of the mine. Based on additional technical and engineering work, have the project as a result this capital estimate of the sanction is CAD2.1 billion to CAD2.4 billion, in nominal terms.

Compared with our prior estimate of $1.8 billion to $2 billion Canadian dollars, it now includes project level contingencies, accounts for inflation, input cost escalation, and the impact of potential tariffs on construction materials, and reflects the accelerated procurement of mobile equipment originally planned for later project phases. It also incorporates additional scope, and indirect contract requirements identified through ongoing project refinement. The MLE project consists of development of site infrastructure and facilities, grinding circuit upgrades, increased tailings storage capacity and enhancements to power and water systems. As well as the mine pushback that requires additional waste stripping to access high-quality resources within the Valley Pit.

The project economics are attractive including generating a robust internal rate of return is significantly above our cost of capital and a project net present value using an 8% sorry, a positive net present value using an 8% discount rate. The capital intensity of the project is expected to be low at US$11,500 to US$13,200 per tonne of copper on an annualized basis. Overall, we expect to generate significant EBITDA inflows over the life of the mine. We have operated Highland Valley for decades and have successfully executed several mine life extensions there.

And importantly, project readiness for construction has been confirmed through independent assurance activities including an external construction readiness assessment and a review of the technical scope, capital cost estimate, and execution strategy and planning. We are well positioned for solid project execution of the Highland Valley mine life extension, with a strong and experienced team in place. All major permitting complete, engineering nearly 70% complete, and all contracting and permitting well advanced. Construction mobilization is underway, We plan to start construction in a few weeks, and we look forward to delivering on this value-accretive project.

We have summarized the changes to our guidance on slide eight, Production changes are driven by the revised outlook for 230,000 tonnes for the year, Whilst this is still possible, we acknowledge that there could be risk from possible external factors or from any delay to the TMS development work, As a result, we have revised our outlook for QB to 210,000 to 230,000 tonnes for the year, but continue to target design rates by year-end. Production guidance for all other operations is maintained. As such, the impact of the revised QB outlook is the only driver of flow-through changes to total copper production moly production, and therefore net unit cash costs.

We have also incorporated the increase in copper production in 2028 and the start of the growth capital investment associated with the sanction of the Highland Valley copper mine life extension project. Please refer to the MDA for further detail. Turning to the near-term growth on Slide nine. Our ongoing growth trajectory is underpinned by our established portfolio of operating mines. The sanction of the HBC MLE project is foundational to our copper growth. Strategy, and a significant milestone in the growth of Teck Resources Limited's copper production into the future. Our high returning greenfield projects at Zafranal in Peru and San Nicolas in are progressing as planned. And we are targeting sanction readiness by year-end.

Now for now, we initiated advanced early works in May, following receipt of the advanced works permit in April. This will enable construction to start immediately following project sanction. We are targeting receipt of the construction permit of Stage A approval first of two approvals required in Q3 and the earliest date for a potential sanction decision is late in 2025. San Nicolas? Engagement with government authorities and other stakeholders is ongoing to support our permit applications. We plan to complete the feasibility study in the fourth quarter which is the earliest date of the project to be positioned for a potential sanction decision following the receipt of necessary permits.

These projects are significantly less complex and smaller in scope than QB, with lower capital intensities attractive project economics, and well-balanced risk-return profiles. In addition, we are working to define the most capital-efficient and value-accretive path for further growth of QB, for optimization of the mill, and low capital debottlenecking opportunities it could increase throughput by 15% to 25%. Our priority at QB remains completing the ramp-up. But optimization plans are also progressing. Detailed planning for debottlenecking is underway. This should enable us to submit the declaration of environmental impact or DIR permit application in the second half of the year.

All of our growth projects must meet stringent criteria, delivering attractive risk-adjusted returns competing for capital in alignment with our capital allocation framework. Overall, we expect to be able to double copper production by the end of the decade with a path to annual copper production of up to 800,000 tonnes through these near-term projects. With that, I will now hand the call over to Crystal.

Crystal Prystai: Thanks, Jonathan. Good morning, everyone. I will start with our second quarter 2025 financial performance on slide 11. Our adjusted EBITDA increased by 3% in the quarter compared to a year ago, $722 million primarily due to another profitable quarter from trail operations, lower smelter processing charges, and reductions in corporate overhead costs. Partially offset by lower copper and zinc prices and higher operating costs at Highland Valley due to increased production, and at QB. The improved performance from trail operations reflects the implementation of initiatives to improve profitability and cash flow including increasing byproduct revenue. While the current load smelter processing charges are a headwind for Trail, Teck Resources Limited overall has a net benefit from them.

We successfully reduced our corporate overhead cost by 21% reflecting our ongoing efforts to reduce costs across our business. We continue to expect lower annual corporate overhead costs compared with 2024. Importantly, we continue to return cash to shareholders. With $548 million returned in the second quarter, This includes $61 million of base dividends, and $487 million of share buybacks which equates to 9.8 million shares and reflects elevated daily share buying levels through the quarter. Year to date, we have returned over $1.1 billion to our shareholders. Turning to Slide 12. Which summarizes the key drivers of our financial performance in the second quarter compared to the same period in 2024.

Our adjusted EBITDA increased by $19 million to $720 million driven by another profitable quarter from Trail Operations. Lower smelter processing charges, reductions in corporate overhead costs, and lower royalty. It also reflects higher sales volume, and an increase in commodity prices for our byproducts, and positive foreign exchange impact. Trail's improved results reflect higher byproduct production volumes such as silver, germanium and indium, and higher refined lead production as compared with the year ago. These factors were partially offset by a $91 million reduction in settlement pricing adjustments and higher operating costs at Highland Valley due to increased production. And at Now looking at each of our reporting segments in greater detail, starting with copper on slide 13.

In the second quarter, gross profit before depreciation and amortization from our copper segment declined by 3% to $673 million compared with the same period last year, primarily due to lower copper prices, and higher operating costs partially offset by increased co-products and byproduct revenues from same and molybdenum, and lower smelter processing charges. Copper production remains similar to the same period last year at 109,000 tons. At QB, no online time was impacted by the TMS development work, required to complete the wrap-up of the operation. As expected. Our established operations are performing in line with guidance, and our outlook remains on track for the balance of the year.

Production improved significantly at Highland Valley, driven by higher grades and mill throughput as we advanced mining in the Lornecks Pit. Production at Antamina was lower, reflecting a shutdown of approximately one week due to the fatality. As well as the processing of a lower proportion of copper-only ore as expected in the mine plan. The site returned to full production in June. Hermizan De Coyo had higher production in the quarter, driven by higher grades and recoveries as water availability improved compared to the same period last year, which was impacted by drought conditions. The improved performance in Q2 2025 was despite maintenance at the SAG mill for approximately one month for repair.

The operation has been running at full rates since its successfully restarted at the June. Our net cash unit cost improved by $0.14 per pound to $2.00 $2 US per pound. While cost of sales increased, particularly at QB and Highland Valley, this was more than offset by increased byproduct credit including significantly higher zinc revenue from Ativan, and additional molybdenum revenue from Highland Valley and QP. As well as much lower sales. In order, we labor agreements at QB and Carmen de Andacollo acollo.

QB's third labor union by the new three-year collective bargaining agreement in early April, completing all labor negotiations for QB's workforce and ensuring that labor agreements are now in place through 2028 across our QB operations. At CDA, both units contracts were ratified in June and July with each covering a three-year period. Looking forward, we continue to target design rates at QB by the end of this year. We also continue to expect higher quarterly copper production at Highland Valley through the balance of this year as we process increasing proportion of higher grade Flornex ore. As mentioned earlier, we've updated our annual production and unit cost guidance based on our revised QB operational outlook.

Copper production has been revised to 470 to 525,000 tons. And copper net cash unit costs have been revised to a dollar 90 to $2.05 US. Per pound. Turning now to our zinc segment on slide four Performance in our zinc segment was very strong in the second quarter. Our profitability in zinc improved substantially. With 137% increase in gross profit before the pre-depreciation and amortization, compared to the same period last year, to a 159,000,000. This improvement was driven by higher byproduct revenues as a result of our updated operating strategy at Trail, and lower operating costs. Red Dog performed well despite lower grades that we expected in the mine plan.

Red Dog sales of 35,100 tons were higher than our guidance range of 25 to 35,000 tons due to the timing of sale. Our net cash unit cost for zinc improved significantly. Decreasing by 20¢ US per pound to US 49¢ per pound primarily due to lower smelter processing charges and higher byproduct credit. At Trail Operations, profitability was strong in the quarter, reflecting our updated operating plans to improve profitability and cash flow generation, in challenging smelter market position. We have curtailed our refined zinc production and increased production of byproducts such as silver, germanium, and other critical metals compared with the same period last year.

We also implemented cost reductions in 2024 the benefit of which continued into Q2. Overall, this strong performance led to a 13% improvement in our gross profit margin before depreciation. And amortization for our zinc segment 28% compared to the same period last year. Looking forward to the third quarter, we expect zinc and concentrate sales from Red Dog of 200,000 to 250,000 tons And with Red Dog shipping season commencing on July 11, we expect reductions in Red Dog inventory in the third quarter reflecting the normal seasonality of sales. Our annual production and unit cost guidance for zinc segment is unchanged. The zinc concentrate production of 525 to 575,000 tons.

Refined zinc production of a 190 to 230,000 tons, and net cash unit cost of US 45 to 55¢ per pound. Looking at our cash return to shareholders on slide 15. We continue to build on our strong history of cash returns to shareholder. We have returned a total of approximately 6,000,000,000 since 2020. This includes over 1,100,000,000.0 year to date reflecting elevated daily share buyback levels in the second quarter. We have now completed $2.2 billion or approximately 70% of our $3.25 billion authorized buyback, leaving approximately $1 billion remaining. And with the strong cash flow generation potential of our business, we could see further cash returns to shareholders in line with our capital allocation framework.

We remain committed to returning between 30% and a 100% of future available cash flows to our shareholders. Looking now at our balance sheet on slide 16. We remain focused on maintaining the resilience of our business including the strength of our balance As of yesterday, our cash balance remained significant at $4,800,000,000 and our liquidity is strong at 8,900,000,000.0 We also continue to maintain investment grade credit rating. We have moved into a small net debt position in the quarter, as we continue to deploy the proceeds from the sale of steelmaking coal business to shareholder return.

But we do expect a release of working capital build of Red Dog inventory to unwind in the third quarter, reflecting the normal shipping season. Since 2024, we have reduced our debt by $2,000,000,000 left and our $1,000,000,000 US outstanding term notes are long dated. We made a semiannual repayment of a 147,000,000 US on the QB project finance facility in the quarter And through these payments, we are further deleveraging our balance sheet on an ongoing basis. Our near term growth projects, including the HPC MLE, project, remain well funded, and we are strongly positioned for continued value creation as we execute on our strategy. With that, I'll turn it back to Jonathan.

Jonathan Price: Thanks, Crystal. On Slide 18, we remain focused on our priorities to create value for our shareholders. Completing the TMS development work at QB and ramping up the operation, targeting design rates by year-end. Driving operational excellence including growing our copper production reducing our unit costs and improving our margins. Continuing to return cash to our shareholders through execution of our authorized share buyback program and through our base dividend and progressing our value accretive near-term copper projects to create options for our next phase of copper growth. Maintaining the resilience of our business including our strong balance sheet. We are committed to continuing to balance investment in growth in copper, with cash returns to shareholders.

Turning to slide 19, We can continue to significantly impact the accretive growth potential of our metrics on a per share basis. Last year, with the ramp-up of QB and with a significant portion of our $3.25 billion share buyback completed, we increased our copper production per share by 54%, compared to the prior year. By 2026, our copper production per share could increase by a further 33% to 50% as we stabilize QB at full production while completing the remaining authorized share buyback. Our copper production per share could increase substantially beyond that as we bring on near-term value accretive growth projects.

And this does not consider the impact of any further share buybacks that could be authorized under our capital allocation framework given the strong cash flow generation potential of our business. Our copper production has the potential to increase rapidly long-term on a per share basis. So thank you. And with that, operator, please open the line for questions.

Operator: Certainly. To join the question queue, You will hear a tone acknowledging your request. We ask that you please limit yourself to one question and one follow-up. If you're using a speakerphone, please ensure you lift the handset before pressing any keys. If you wish to remove yourself from the queue, you may press star. Then two. The first question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Orest Wowkodaw: Hi, good morning. Some questions on QB2, please. Firstly, the tailings issue that's limiting throughput and then the new investment required here. Is there any knock-on impact to 2026? I mean, will tailing still be a constraint next year?

Jonathan Price: Hi, Orest. Thank you for that question. Yes, as you point out in the current quarter and to some extent as well, expected in Q3, the TMS development work has been limiting online time for QB. Actually, throughput at the plant and the recoveries of the plant have been good considering these constraints, but online time is an issue. Our expectation here, Orest, is that we can work through the TMS development issue and put that behind us. So that it won't deconstrain operations on an ongoing basis. On that basis and based on what we see in terms of throughput and recoveries and grade, of course, the operation we have maintained our guidance for 2026.

But of course, as we noted, we'll continue to monitor the progress TMS development work through the balance of the year.

Orest Wowkodaw: Is there potentially more investment required in the tailings next year?

Jonathan Price: At this point, we've guided to the know, to the capital incremental capital spend for this year. We don't expect additional investment next year. We expect normal operating conditions around the TMS and its ongoing development, but we don't expect to signal additional capital essentially as we have done in the current quarter.

Orest Wowkodaw: Okay. And just I mean, given the state of the ramp-up, I mean, at this point, I'm having trouble understanding how realistic it is for QB to even reach the low end of its guidance for '26. I mean, that would imply monthly production required of 23,000 tons a month. The operation hasn't done that in a single month to date. What at this point, what gives you confidence that you can exit the year anywhere close to that kind of run rate?

Jonathan Price: Yeah. So our view, Orest, is that when we can put the TMS issue behind us, and we can therefore improve the online thing. Plan. That we see from a throughputs, recoveries, and grade perspective, the potential around the guidance for 2026. So these are assumptions that we are able to underpin by operating parameters that we have experienced and delivered at the plant. Of course, it requires us to run the operation consistently through the year to achieve those numbers. They're consistent with design, of course, and at the low end of the range, you know, we have seen operating results already that give us confidence that those numbers are achievable.

You know, as you can imagine, we continue to interrogate both the operational parameters at QB, and we continue to interrogate the forward guidance for QB. But at this point in time, we don't see any changes to 2026. And believe with a period of consistent operation without the constraints of TMS development that we can move forward and deliver.

Orest Wowkodaw: Okay. Thank you.

Operator: The next question comes from Matthew Murphy with BMO Capital Markets. Please go ahead.

Matthew Murphy: Hi. Have a question just on the pace of CapEx this year. So first half of the year, you've done almost $700 million CapEx that's growth in sustaining, not including capitalized stripping. And then your guidance is around $2.4 billion if I'm not mistaken. So you have to spend $1.6 to $1.8, call it, back half of the year. Am I thinking about that right?

Jonathan Price: Yeah. I'll let Crystal speak to the details behind that. Of course, you know, we have increased our capital guidance for the second half of the year. In large part based on the sanctioning of HPC MLE. Which goes to both capitalized stripping, but it also, of course, goes directly to the growth capital as well as some of the additional capital that we've just discussed. For TMS development at the QB. But, Crystal, over to you.

Crystal Prystai: Yeah. Matt, for the question. You're right. So year to date, we spent $700 million on capital expenditures capitalized stripping and our total for the year is at the low end, $2.3 billion. So that's a reasonable run rate in terms of what you're thinking. That would put us around $1.6 billion over this second half of the year. Again, a large portion of that is in relation to growth, and that number, again, is increasing as a previously didn't increase the sanction capital associated with HBCMLE over the balance of the year. So we have now embedded that spending for the second half of the year, and that's why I think seeing that the run rate.

Of course, we also have embedded the TMS expected cost associated with that work It is the plan, and you'll see some of that coming through in the first quarter as well.

Matthew Murphy: Okay. Yeah. It's just the magnitude of the step up. I mean, do you worry about being able to get that done this year? Or are there some big ticket items in there that you're confident you'll see that spend? And is a lot of the tailing spend, therefore, yet to come in the back half of the year?

Crystal Prystai: Yeah. I think the run rate is reasonable. We've done a detailed scrub through the project to understand exactly what, you know, what if remaining ongoing. We do have a few larger projects in the sustaining side that we expect to kick off in including, you know, the Antamina tailings lift associated with the mine life extension, We have the QB truck shop that we're continuing construction on. We also have some demobilization of the facilities as we've been to the next phase of mining there. So that, in addition to ATV MLE, which of course, we have a, you know, a rigorous schedule associated with the project and the CapEx that we've articulated is, is in line with that.

Schedule. And then in the context of TMS, we have we have spent past today. We haven't disclosed what that figure is, but we can step up, out to folks as required. But do you expect that spending to continue through the second half the year? And, really, you know, maybe to articulate a bit more about why that number is the number that it is. We did have spend associated with CMS embedded in our in our sustaining capital guidance for this year. But the amount and distance of mechanical proven of sand related to the TMF. And the related cost of that work. Has increased that expected cost and tends to get our guidance in relation to that.

Matthew Murphy: Okay. Thank you. Thanks, Matt.

Operator: The next question comes from Carlos De Alba with Morgan Stanley. Please go ahead.

Carlos De Alba: Yes. Thank you. Good morning, everyone. Just on QB, maybe could you please provide a little bit more comments around the ship loader repairs? How long would it take if you have already started? And also if there is any maybe you mentioned this but I might have missed it. If there is any impact on CapEx that are material because of the of the repairs.

Jonathan Price: Yes, Carlos. Thank you for that question. As you know, we disclose the challenge with the ship load back in June. Essentially, cause for that was a brake failure on the shuttle, which caused an overextension of the ship loader and of course some damage associated with that It took some time to be able to access the ship loader to even assess the repair work, and that was because we were required to apply for and obtain some submarine permits. The assessment of that damage is ongoing. And the repair plans are being finalized associated with that work as well.

As we've said, we do think that's going to be an extended shutdown now that will extend first half of 2026. We haven't got a finalized capital number for that repair at this point in time because that assessment is ongoing. Importantly, as we've said, the work on the ship loader and the downtime of the ship loader is not impacting our production here. As you'll recall, previously we had in place trucking arrangements while we were awaiting the completion of the ship loader originally that was allowing us to move material to either smelters in Chile or to other ports in Chile. We've just reactivated that and we have that trucking fleet operating daily.

So no production constraints, and that allowed us to minimize any buildup in inventory at the port.

Carlos De Alba: Fair enough. And then just if I may, second question. Just on the sequence of the projects, for Safranal and San Nicolas. While both are likely to be sanctioned or maybe sanctioned by the end of this year, the earliest, is it fair to think that Safra now probably is ahead and maybe will be developed earlier?

Jonathan Price: Well, I mean, I think it's fair to say that Zafaranal is more advanced. In terms of the permitting status, in terms of the construction readiness of that team. For example. However, you know, we consider both of those to be options. While we're saying we would like to get them ready for sanction by the end of the year. Of course, those are decisions that are yet to be taken, and they're they you know, a range of factors that will play into those decisions. So I wouldn't give any particular guidance now on the sequencing of those projects.

Think of them as options that we have in the portfolio as we look to derisk and predict progress those options to the point that we could take sanction decisions when ready.

Carlos De Alba: Thank you very much, Jonathan. Bye.

Jonathan Price: Thanks, Carlos.

Operator: The next question comes from Craig Hutchinson with TD Cowen. Please go ahead.

Craig Hutchinson: Hi, good morning guys. Just on the Highland Valley extension, now that you guys have made a final investment decision, is there a plan to file a technical report? And just maybe as an interim, can you give me a sense of what throughput you're looking at to achieve that annual production rate of 132,000 tons a day? Tons a year, sorry?

Jonathan Price: Yeah. So we will publish a technical work report. We expect that to happen in August, and, of course, you'll get all the detail associated with that. The throughput throughout the life of the future mine will be variable. Of course, it's going to be a product of the ore wind mining. You'll see in our disclosure that we go through various phases here. Where we're mining different pits, different ore hardnesses associated with the ore coming from those pits. So there'll be variable throughput is the answer and variable grade of course, that goes with that.

Crystal Prystai: And, Craig, we did disclose in our investor day in November of what a production profile would look like for HTC, Emily. So I just encourage you to go back and look at that as about it. It shows the variability.

Craig Hutchinson: Which is, I guess, to get to the 132,000 tons per year, I would assume the throughput has to be truly higher just based on your reserve grade, unless I'm missing something.

Jonathan Price: I mean, I think we are adding capacity to the circuit. We're adding mills there to increase the throughput of material and also to improve recoveries of material. I should say. I mean, last year, you saw production at HPC come in just below 100,000 tonnes. This year, of course, that production guidance is materially higher, you know, in the sort of one forty, one fifty range. You see there year on year currently the through the operations at HPC, and that's been driven this year in the processing of additional Lawn X ore. And I think that's what you should expect going forward is variability depending on the ore type that's dominating mill speed at any point in time.

Craig Hutchinson: Okay. And then just on QB, how are the recoveries progressing? And you guys do you feel like you'll be through the transitional? This quarter, or is that still kind of you know, lagging into four?

Jonathan Price: Yeah. Look. I'll just ask Shehzad Bharmal to talk about that in terms of the transition or where we are on recoveries and what we're doing there. To drive those higher.

Shehzad Bharmal: Thanks, Greg. Greg, as we have noted last year that we did expect lower recoveries in the first half as we were dealing with more transition hours. And our recovery performance was just a slightly below what we had expected. Due to the inconsistency in the first half of the down days. We do expect to have better quality ore in the second half with a high grade and higher recoveries. And the transition ores will be variable. But, yes, we expect lot less variable transition over in the second half. And in 2026.

Craig Hutchinson: Alright. Thanks, guys.

Jonathan Price: Thanks, Craig.

Operator: The next question comes from Myles Allsop with UBS. Please go ahead.

Myles Allsop: Yes. Just a couple of questions. Maybe first on QB and Colawesi, as you mentioned in your presentation, it sounds like discussions are not happening at the moment. Is that right, or is there any progress in terms of looking at that option seriously?

Jonathan Price: Look. There are discussions regarding QB Kaua'iwaseo. I'm not gonna go into those because, of course, they are, you know, they're confidential in nature. But as we've said before, we recognize the potential of the opportunity there for synergies. We will always do what's in the best interest of our shareholders in that regard. As you can see right now, we have our hands full with ramping QB up to the steady state, which has to be our priority here to make sure we get stable production there and then the cash generation that this asset is capable of delivering.

But, you know, as I mentioned, you know, in parallel, we continue to think about continue to discuss the potential synergies there, but I won't unpack discussions given their confidential.

Myles Allsop: That's fair enough. And then just going back to two issues, at QB. Why is it taking a year to fix the shiploader if it's overextended? It's a new ship loader. Seems an awful long time. And, obviously, there is a meaningful OpEx impact. And with the tailings, when will when are you hoping to get that complete? Is it right to assume that will be sorted largely by the end of this year. Or is that gonna drag?

Jonathan Price: So I'll hand the ship over there to over to Ian Anderson in a moment. I'm just gonna talk about tailings. I mean, of course, given the fact that we have maintained our guidance for 2026, our expectation is that we put the TNF issues behind us this year. And, you know, that's what we're providing for in our guidance. So as I mentioned, you know, it's sort of a onetime event at associated with ramp up. And when we get through that phase of work, move into a steady state operation. So it's not something we expect to be plaguing this operation indefinitely at all. It's something we expect is a, you know, it's a discrete piece of work.

We'll get that resolved and move past it. And then we'll be able to secure the online time essentially that we need from this operation and in stages. Ian, would you like to make some comments just on the ship loader outlook, please?

Ian Anderson: Sure. Thank you very much, Miles, for the question. So despite the fact that we said it would conclude in the first half 2026, that's not saying that it will, in fact, take a year. At this point, we're really carefully defining the nature of that work. So as a result of the brake failure, of course, we have to assess all of the structural elements, make sure that ship loader is returned safely. And similarly, that we complete all the work to get it back into great condition. And so we'll progress that project as we go. Course, you are dealing with maritime authority. That can cause permit delays.

We certainly wanna be cautious about how we deal with that announcement. So make sure that continues at pace, but at the same time, the nature of the incident demands.

Operator: The next question comes from Bill Peterson with JPMorgan. Please go ahead.

Bill Peterson: Yes. Hi, good morning, everyone, and thanks for taking the questions. On the higher CapEx guide for Highland Valley, mine might extension relative to last year's strategy day, looks around 15% to 20% higher you provide additional color or breakdown between materials inflation, contingencies you mentioned or any other factors? And then is there any read through for projects sanctioning for Zafranal or San Nicolas, for example? Should we expect some more sort of double-digit increase at this stage? Just to be prudent or any read through at all? Thanks.

Jonathan Price: Yeah. So on the HPC piece, I mean, I won't specifically give that breakdown. But as I mentioned, there's a range of things in there. Mean, project level contingency, it's inflation, it's cost that escalation, the potential for tariffs on construction materials, we think is a real driver of course, particularly between The US and Canada. So that is something that we've reflected here. Importantly, as I mentioned, it's also the acceleration of the procurement of mobile equipment. That we brought forward from later project phases, and that materially derisks the project and the rate at which we'll be able to essentially access the valley pit for the long term.

So you know, those are important derisking elements in our view. I'll also ask Crystal just to comment on some of the process by which we looked at this capital spend through the investments approach here that we've taken and you know, our determination to ensure that we give robust capital numbers that can be delivered.

Crystal Prystai: Sure. No problem. Thanks. Phil. But we've advanced this project through the final stage of our project delivery framework as well as for our governance processes, including through our investment committee. Those processes embed the final project requirement the construction readiness, probabilistic modeling around various facets of the estimates involved, As well, we had detailed independent assurance provided on many areas of the business plan as well as in the context of construction. Readiness. So all of those are learnings that we chose from the key project that we've committed to embedding as we go forward in future projects, an HPC, MLE, and the conclusion of that work ahead of sanction has led to capital range that we're disclosing.

Of course, in addition to the factors that John noted the context of what's embedded in that range.

Jonathan Price: So I think they'll be looking at read through for future.

Jonathan Price: Yeah. Yeah. I was just gonna just gonna pick up on that. Look, you know, every project has its own characteristics. We will take the same approach with future projects Crystal just outlined in terms of, you know, using independent insurance taking probabilistic modeling to ensure the full range of obviously, economic outcomes associated project, but also the full range of potential input assumptions here. Which go to capital because we need to ensure that we're reflecting uncertainties or known unknowns in the project as we're setting forth the assumptions here. But, again, as I mentioned, this project has its own unique characteristics. So I don't think you should take a direct read through from that.

But what I can say if we will apply the same rigorous approach the Dapronal and Sandlink that we've applied to HPT.

Bill Peterson: Well understood. Thanks for that. My next question is not something the teams talked about recently, but is NewRange, the potential project in The U. S. Any update on where that project stands in terms of permitting, community engagement, an opportunity to potentially move faster than what appears to be pretty strong support within The US in terms of permitting and promoting domestic production?

Jonathan Price: Yeah. Look. I mean, you know, that remains an interesting option for us. It's clearly further out than the, you know, than Zafra now or San Nicolas here in the schedule. I think the key for us there is to define what is the right project. What is the configuration that will deliver the greatest value in the event that project develops, and that's the work that we're doing now. And, of course, you have to define that before you can start to approach the permitting process in any detail. So think that's the conversation for later, Bill. We have our hands full with other things right now, but we do continue work that in. Work that in parallel.

Bill Peterson: Well, understood. Thanks for your insights.

Jonathan Price: Thank you.

Operator: The next question comes from Chris LaFemina with Jefferies. Please go ahead.

Chris LaFemina: Hi, thanks for taking my question. I just wanted to ask about first on the incremental CapEx for QB for the TMF. How do you decide whether you're going to include CapEx in the project CapEx or in sustaining? Because I would think if you're spending money to ramp the project to full capacity, for whatever reason, that would have been part of the project CapEx. I understand it's really just a question of semantics. When we think about the capital intensity of the project, why wouldn't that be project CapEx rather than sustaining?

Jonathan Price: I hand the Symantec's question over to Crystal. Hi, Chris.

Crystal Prystai: Thanks for the question. Okay. In the context of PMF, when we thought about the growth capital for the project, of course, there was construction costs associated with that built into the project capital that we've ordered against in our results over years. I think the pieces that I add to why now sustaining I mean, firstly, we're running the operation, and we're producing copper. So I think it you know, these things are no longer growth capital.

We did expect spend on the TMF, but that amount, as I mentioned, is more significant than we expected as we are now, you know, moving significantly more sand further distances than we expected for mechanical movements, and a related cost of that is in expected cost, then I think at this point, it doesn't make sense to selling growth capital, and it becomes part of the sustaining capital as well.

Chris LaFemina: Okay. That's fair enough. And then secondly, just on the ship loader, you have any insurance related to the issues there, or is it all on you? Thank you.

Jonathan Price: Ian, do you wanna comment on that as well?

Ian Anderson: Yes. Certainly, we are investigating the root cause and we'll understand based on that what the next steps will be. In terms of insurance. So, yes, we do have insurance coverage, and that includes interruption. That's that.

Chris LaFemina: Okay. Great. Thanks.

Jonathan Price: Thank you, Chris.

Operator: Thank you. We are out of time for further questions. I will now hand the call back over to Jonathan Price for closing remarks. Please go ahead.

Jonathan Price: Thank you, operator, and thanks again to everyone for joining us today. We look forward to welcoming many of you to our QB site visit on November of this year. Please reach out to Emma Chapman and our IR team for further information on the site visit or, of course, if you have any follow-up questions on the quarter. So thank you and enjoy the rest of your day.

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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DATE

• Thursday, July 24, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• President and Chief Executive Officer — Jim DeVries
• President, Corporate Development and Chief Financial Officer — Jeff Likosar

Need a quote from one of our analysts? Email [email protected]

RISKS

• Non-Payment Cancellations: Management reported non-payment cancellations were modestly higher year over year in Q2 2025, indicating increased credit risk exposure.
• State Farm Partnership Underperformance: CEO DeVries said, "the pace and the volume isn't what I think either party had hoped to achieve" regarding the State Farm partnership subscriber growth.
• Q3 Cash Flow Decline: Likosar stated that a larger sequential decline in adjusted free cash flow citing higher cash interest outflows.
• Relocation Losses: Management noted relocation losses were slightly worse year over year in Q2 2025, which contributed to higher attrition in select customer segments.

TAKEAWAYS

• Recurring Monthly Revenue (RMR): Grew 2% year over year to a record $363 million in Q2 2025, reflecting continued expansion of the core monitoring business.
• Total Revenue: Increased 7% to $1.3 billion in Q2 2025, driven primarily by both monitoring and higher installation activity.
• Adjusted Earnings Per Share: Rose 35% to $0.23 in Q2 2025, reflecting higher profitability and share repurchases.
• Adjusted Free Cash Flow: Reached $500 million in the first half of 2025, up 38%, with $274 million of adjusted free cash flow including swaps generated in Q2 2025.
• Adjusted EBITDA: Increased by 7% to $674 million in Q2 2025, Key drivers of this performance include RMR growth, overall efficiency, and the non-recurrence of a prior year legal settlement.
• Customer Attrition: 12.8% at the end of the quarter, improving by 10 basis points year over year, yet slightly above last quarter's level.
• Shareholder Returns: $589 million was returned year to date via share repurchases and dividends in the first half of 2025, including $96 million in share buybacks in Q2 2025.
• Bulk Account Acquisition: ADT acquired approximately 50,000 accounts for $89 million in Q2 2025, directly augmenting new subscriber growth.
• Installation Revenue: Rose by $60 million to $197 million in Q2 2025, reflecting greater adoption of premium platforms and outright sales.
• Technological Advancements: "100% uptime throughout the first half of 2025" and greater than 50% reduction in false alarms year to date due to Alarm Messenger.
• AI/Premise Service Efficiency: Ninety percent of customer service chats were processed by AI agents in Q2 2025, with nearly half resolved without live intervention; AI voice agent rollout initiated.
• State Farm Partnership Subscribers: Totaled "right around 33,000," below expectations despite high customer satisfaction ratings.
• Net Debt / Leverage: Leverage decreased to 2.8x adjusted EBITDA, and net debt totaled $7.5 billion as of Q2 2025, with unrestricted cash at $45 million and no outstanding revolver usage in Q2 2025.
• Interest Rate Management: Secured $550 million of new 2032 term loan commitments at favorable terms, locking in a lower fixed rate for future debt refinancing.
• EPS Guidance Raised: Full-year 2025 adjusted EPS guidance increased by $0.04 to a range of $0.81 to $0.89 per share, driven by the reduced diluted share count.

SUMMARY

ADT (NYSE:ADT) delivered record recurring revenue and improved adjusted profitability (non-GAAP) in Q2 2025, supported by operational efficiency gains and sustained high customer retention. The company completed an $89 million bulk account purchase in Q2 2025, boosting new subscriber count, while installation revenues benefited from a shift toward comprehensive smart home platforms. Management confirmed continued discipline in capital deployment, securing favorable debt refinancing and maintaining full-year guidance across all major metrics. Technological initiatives achieved more than a 50% reduction in false alarms year to date. Despite lower-than-expected results in the State Farm partnership and modestly higher non-payment cancellations, ADT reaffirmed its strategic objectives and raised its full-year EPS outlook above prior guidance.

• DeVries stated, "average installation revenue for our installs that include Trusted Neighbor is north of $2,500, pretty meaningfully above our overall average," highlighting product-led revenue contribution.
• Likosar confirmed: "We are on track to deliver full-year results consistent with the guidance we shared in February," maintaining investor visibility despite sector headwinds.
• Expansion of the Nest Aware subscriber base to over one million users underscores ongoing momentum in smart home adoption and the strength of the Google partnership, as reported in the Q2 2025 earnings call.

INDUSTRY GLOSSARY

• Recurring Monthly Revenue (RMR): Contracted, recurring revenue stream generated from the ongoing monitoring and service of security systems, measured on a monthly basis.
• Bulk Account Acquisition: Large-scale purchase of customer accounts from another provider, typically involving due diligence on credit quality and service terms, designed to augment subscriber base efficiently.
• Trusted Neighbor: ADT smart home feature enabling customers to grant temporary access to others, integrating with security controls and biometric devices for enhanced flexibility and protection.

Full Conference Call Transcript

Jim DeVries: Thank you, Elizabeth, and good morning, everyone. I am very pleased that ADT is reporting yet another quarter of strong financial results and cash generation as we continue to execute on our 2025 strategic priorities. Our results continue to demonstrate the resilience of ADT's business model. ADT ended the second quarter with another record recurring monthly revenue balance of $363 million, which was up 2% year over year. We continued to grow total revenue up 7% while balancing profitability and investments for the future. We also delivered very strong adjusted earnings per diluted share of $0.23, an increase of 35%.

Cash flow continues to be a highlight with adjusted free cash flow, including interest rate swaps, of $500 million through the first half, up 38%. This strong cash generation has enabled us to return $589 million year to date to ADT shareholders through share repurchases and dividends. Our customer retention also remained solid with attrition at 12.8%, down a tenth of a point from last year's second quarter and slightly higher than last quarter's record performance. I'd also like to note that during the second quarter, we completed a strategic customer portfolio acquisition of approximately 50,000 subscribers for $89 million. Jeff will provide more details about our results and full-year outlook later in our call.

First, I'd like to spend the next few minutes updating you on ADT's strategic focus areas, which remain consistent with the themes we've discussed on previous earnings calls. We are very proud of our progress to date and our progress towards delivering on our full-year 2025 commitment. As I mentioned earlier this year, our primary objective in 2025 is to continue execution of our strategy and importantly optimize and complete the rollout of our newly developed and launched capabilities, platform, and offerings. ADT's mission remains clear, to empower people to protect and connect what matters most. Delivered through our differentiators, unrivaled safety, innovative offerings, and a premium best-in-class customer service experience.

As always, we are relentlessly focused on delivering unrivaled safety and peace of mind to our over 6 million customers, who trust us to keep them safe every day. We continue to invest in our core monitoring capabilities, including the technologies and redundant infrastructure that have enabled 100% uptime throughout the first half of 2025. We also continue to advance new technologies and introduce features such as Alarm Messenger, which has enabled more than a 50% reduction in false alarms this year. One of the key components of our strategy has been investing in our product and experience ecosystem to develop new and innovative offerings for our customers.

This includes further expansion of our ADT Plus to a larger percentage of our new customers, increased availability across additional sales channels, and enhanced capabilities to enable existing customers to enjoy some of the features available to new customers. We continue to see an increasing percentage of our new customers select our new ADT Plus platform, who are also choosing larger and more comprehensive systems. With our reduced use of discounts and promotions, this is driving average installation revenue to approximately $1,500 per unit. Another contributor to this strong revenue is our Trusted Neighbor offering, which continues to generate positive customer feedback. As a reminder, this feature allows our customers to grant trusted individuals temporary access to their homes.

In April, we enhanced this offering with the launch of the new Yale AssureTouch smart lock, which integrates seamlessly with ADT Plus and Trusted Neighbor for an elevated security experience utilizing fingerprint recognition. In addition to these innovative offerings, we remain focused on delivering the best in industry customer experience. We are pleased that ADT's customer satisfaction remains at a three-year high, including a record NPS during the month of June. ADT's results demonstrate the cumulative benefit from our focus on continuous improvement across customer experience metrics, agent satisfaction, and areas such as virtual service, first call resolution, customer onboarding, and agent training.

Additionally, our partnership with Google remains strong, and our Nest Aware subscriber base has now surpassed one million customers, highlighting the continued strength of our collaboration and growing smart home adoption. Turning to our State Farm partnership, since our original launch, we have generated slightly more than 30,000 subscribers. While this volume is below the level we projected at this stage of the partnership, we're pleased that these customers report high satisfaction with the program. As we near the three-year anniversary of our partnership, we're working together on redesigning our approach and leveraging our combined learning to explore a new program related to prospective movers who are relocating. We hope to gain more traction with this new approach.

We also remain pleased with our progress with ADT's remote assistance program and early artificial intelligence efforts. Approximately half of our service calls continue to utilize remote alternatives rather than requiring in-home service visits, allowing us to efficiently serve our customers while avoiding thousands of truck rolls, which ultimately contributes to reductions in our field service costs. Our initial AI efforts remain focused on our customer care operations with an emphasis on improving the customer service experiences for both our ADT customers and our employee agents while also improving overall efficiency. We built on our first quarter AI progress, with 90% of our customer service chats processed by AI agents.

And we are now resolving nearly half of these chats without the need for a live agent interaction. Utilizing the knowledge we've gained from our experience with chat, we have now started our initial rollout of AI agents for voice calls. We remain excited about the opportunities to leverage AI to support and serve our customers more efficiently. In closing, I am confident in ADT's outlook, and we remain committed to delivering value for our customers, employees, and shareholders. I want to say thank you to the entire ADT team for their dedication and performance. I remain incredibly proud of this team as well as encouraged for the opportunities that lie ahead. Thank you for your time today.

I'll now turn the call over to Jeff.

Jeff Likosar: Thanks, Jim, and thanks everyone for joining our call today. I'll take the next few minutes to share some additional detail on our second quarter results, along with an update on our full-year outlook. Like Jim, I'm very pleased with our first half performance and our progress towards achieving our full-year 2025 objectives. As Jim mentioned, our very strong cash flow remains a highlight. We generated $274 million of adjusted free cash flow including swaps in the second quarter and $500 million through the first half, up 38%. Adjusted net income for the quarter was $191 million or $0.23 per share, and year to date, we have generated adjusted earnings per share of $0.44, up 22%.

Adjusted EBITDA for the quarter was $674 million, up 7%. Key drivers of this performance include our RMR growth, overall efficiency, and the non-recurrence of a prior year legal settlement. Our adjusted earnings per share also benefited from our repurchases enabled by our strong cash generation and efficient capital structure. Our top line was also very strong with total revenue up 7% to $1.3 billion. Monitoring and services revenue was up 2% driven by a record $363 million RMR balance, also up 2%. Installation revenue was $197 million, up $60 million driven by our continued mix shift to our ADT Plus platform and the outright sales of relevant equipment.

During the quarter, we generated 242,000 new subs adding $14.3 million of new RMR inclusive of our bulk accounts purchase. Another highlight in the quarter is that our leverage ticked lower and is now at 2.8 times adjusted EBITDA with net debt of $7.5 billion. Additionally, we continue to enjoy a very efficient weighted average interest rate of approximately 4.4%. We finished the quarter with $45 million of unrestricted cash on hand and no outstanding revolver balance. I'm also happy to share that we recently received lender commitments to fund an incremental $550 million of our existing 2032 term loan. The pricing on this facility is very favorable at SOFR plus 175 basis points.

We also entered into swaps to fix the effective interest rate, which at a little over 5.3% is lower than the 5.75% April 2026 notes we will redeem with the proceeds. We expect the loan transaction to close tomorrow, and along with our ongoing cash generation, are very well positioned to repay our remaining 2026 notes. As Jim mentioned earlier, we continue to return significant capital enabled by this efficient capital structure and our cash generation. In addition to our $47 million dividend payment, we repurchased and retired 12 million shares during the quarter for an aggregate price of $96 million. Through the first half, we have returned $589 million to shareholders.

As we look to the second half, we are on track to deliver full-year results consistent with the guidance we shared in February. We are therefore reaffirming our full-year guidance ranges for total revenue, adjusted EBITDA, and adjusted free cash flow. Additionally, we are increasing our adjusted earnings per share range by $0.04 to $0.81 to $0.89 per share reflecting our lower diluted share count. I will note that the timing of marketing expenses, working capital flows, cash interest, and potential tariffs will affect our second half relative to the first. We expect third-quarter adjusted EBITDA and EPS to be similar to or slightly lower than the second quarter and a larger sequential decline in adjusted free cash flow.

The most significant specific driver is the timing of cash interest, which we expect to be approximately $70 million higher in the third quarter. Despite ongoing uncertainty as to the exact amounts, we continue to believe we can absorb our tariff exposure within our full-year guidance ranges. With the first half of the year behind us, I am exceptionally pleased with our progress and remain confident in delivering our full-year objectives. Like Jim, I want to thank all our employees, partners, customers, and investors for helping us deliver a very strong first half of the year. Thank you everyone for joining our call today and for your support of our company. Operator, please open the line to questions.

Operator: To withdraw your question, simply press star one again. We will pause for just a moment to compile the Q and A roster. Your first question comes from the line of George Tong with Goldman Sachs. Please go ahead.

George Tong: Hi. Thanks. Good morning. You completed a bulk account purchase for $89 million this quarter that added around 50,000 customer accounts. Can you talk more about what made this account purchase bulk account purchase, economically attractive and your appetite for future bulk account purchases?

Jim DeVries: Sure, George. It's Jim. Good morning. We have, as you know, executed both deals in, I think, five of the last six years. In Q2, we brought on, as you mentioned, 50,000 accounts. These were acquired from a single seller. The accounts had high density, good credit scores. As you know, we always build in attrition protection for ADT, and we did so again this time. The returns for bulk are generally consistent with our dealer business. The bulk pipeline is strong. I'd say probably stronger than we've seen even in the last couple of years. And we'll continue to review bulk as an option for incremental subscriber ads.

George Tong: Great. Very helpful. And then can you provide an update on your State Farm partnership, how that's tracking in terms of new states being launched and new customers being acquired?

Jim DeVries: Sure. So I'd mentioned on the call, our program to date subscriber ads is right around 33,000. Candidly, George, the trajectory has been positive for us, but the pace and the volume isn't what I think either party had hoped to achieve. We're right now in the process of designing a new approach that's focused on movers, on prospective customers who are relocating. It's not necessarily the last effort in trying traditional distribution with State Farm, new states, the same tactics, that we've been focused on in the past, but it's a fresh tactic. And we'll lean in and see if we can get some better traction here.

Lastly, it's probably worth mentioning, we conservatively budgeted new subscribers from the State Farm Partnership. We're hopeful. I'm hopeful the new approach carries some momentum. But even if it doesn't, the results won't be material to our gross ads budget or delivery of our financial commitments. Thanks for the question, George.

George Tong: Very helpful. Thank you.

Operator: Your next question comes from Peter Christiansen with Citi. Please go ahead.

Peter Christiansen: Good morning. Thanks for the question. Nice results here, gentlemen. I want to get back to the bulk purchase that you did in the quarter. We figure LTV to CAC somewhere in the mid threes potentially, but which sounds great. Was just wondering, Jim, can you just talk about when you do when you think about these bulk purchases, the opportunity to uplift a lot of these customers convert them onto new systems, How do you think about the incremental value that you can drive by fully merging these customers onto the ADT platform particularly with a lot of the new products and solutions that you've been delivering. Thank you.

Jim DeVries: Yeah. Thanks, Pete. So the playbook for us on bulk is a well-established playbook. We have a team that's focused on it. We do a really good job converting customers. There's some, to be frank, some heightened attrition at the beginning of the conversion. That's why we build in the attrition protection usually for twelve months. Sometimes a little bit longer. But the swing to our monitoring and our service is something that we do well. I mentioned, Pete, we always look for high density. Have accounts in a concentrated geography that help us with service costs. We are conscious of the equipment that we're acquiring, the most recent acquisition, bulk acquisition. Had high-quality equipment we feel great about.

And so and then we pay a lot of attention to the credit scores and ensure that we have a high credit quality customer when we bring them on board. But all in all, I think it's a well-worn playbook one that we execute well. And I'm optimistic this will be a supplemental way for us to grow subscribers going forward.

Jeff Likosar: And one point I might add is, as Jim notes, the returns are very strong. You can think of it similar to dealers, a little bit less efficient at the time of acquisition. Your point about the acquisition cost, but it's because we have insight into the other characteristics, including attrition protection, including knowledge of the account base. But your specific question about seeking to upgrade those customers or have additional sales or revenue opportunities over time, we don't underwrite based on that, but that for sure would be an opportunity. But we speak of their terms where we're not banking on that.

Peter Christiansen: That's good to hear. Certainly sounds like a lot of opportunity, but with the customers. Jim, I also want I would love to dive a little bit into Trusted Neighbor. You know, what are you seeing from initial feedback there and pickup of the product? You know, how do you see things trending with that new launch?

Jim DeVries: Sure. So some context that I shared on the last call and I'll share on this call is that Trusted Neighbor is the initial product to launch. It's the first part of an overall product-led strategy to drive growth for us. Trusted Neighbor was launched in August of 2024. It's still relatively early, but we continue to be optimistic, Pete. Trusted Neighbor represents, I think, something north of 10% of our do-it-for-me installations. And the customer response has been really positive. Our field sales and technician response has been positive. And, very importantly, the average installation revenue for our installs that include Trusted Neighbor is north of $2,500, pretty meaningfully above our overall average.

So it's got good traction out of the gate. And feel great about the install revenue.

Peter Christiansen: That's good to hear. Glad to see that. Thank you.

Jim DeVries: Thank you.

Operator: Your next question comes from the line of Manav Patnaik with Barclays. Please go ahead.

Ronan Kennedy: Hi. Good morning. This is Ronan Kennedy off from Manav. Thank you for taking my questions. You mentioned, Jim, in the prepared remarks, efforts around increased availability across additional sales channels. I think on the prior calls, you talked about an emphasis on sales process and go-to-market optimization initiatives. Refining structure, bundling pricing, marketing. Can you provide more color around these and an update? And if, for example, that includes, say, more deliberate focus on DIY or other efforts.

Jim DeVries: Sure. Ronan, thanks for the question. We're always working, I think, on sales process and optimization testing new bundles, testing new pricing. One of the more meaningful shifts that we've undertaken over the course of the last twelve months and I'd say accelerated in the last six months or so is a process change to focus on what we call tech engineers. And so the customer is sold an initial basic system and when the tech engineer arrives at their home, arrives at their premise, the technician both sells and installs the equipment in one consistent motion. We've had really good success with install revenue using this technician engineer construct.

The customer feedback has been positive because the sale and install can happen simultaneously. And it's been a nice change and a nice win for our organization. But across all offers, pricing, process, we're constantly adjusting the knobs and dials, Ronan, and trying to improve conversion.

Ronan Kennedy: That's very helpful. Thank you. If I may, go to attrition for a follow-up. Actually, a two-part question. Can you provide color on the drivers of attrition? And then as far as relocation having been a headwind to gross adds, but a tailwind to attrition. How do how should we think about the puts and takes to that under different scenarios of the housing market? If it continues to remain challenged versus and it picks up if there's anything to be mindful there such as lapping a relocation tailwind method.

Jim DeVries: Sure. So a little bit of color on attrition, specifically related to relocation. As you know, we ended the quarter at 12.8% attrition, down ten basis points from last year. A couple ticks up sequentially. Color on Q2 nonpayment cancellations were modestly higher than last year. Relocation losses were actually a bit worse than last year. We had a large loss in our multifamily business that accounted for about half of our voluntary losses. Save rates were modestly down as well. But all in all, a pretty good quarter for us. You're right that relocation losses being down is a good guy when it comes to attrition, and a bit of a headwind when it comes to gross adds.

But, despite that fact, we had a pretty decent quarter on the gross adds front and as you heard a minute ago, supplemented by some pretty good return bulk. So last thing I'll mention on attrition, we continue to feel optimistic. I think this was in the prepared notes. Our NPS continues to improve. We had our best scores in three years on NPS, all-time record in June. Call center metrics are clipping along nicely for us, continue to improve. And the customer response to self-service has been really positive. So as I've said a bunch of times, attrition improvement won't be linear, but we are optimistic.

Ronan Kennedy: Thank you. I appreciate all the insight there. Thank you.

Operator: Your next question comes from Ashish Sabadra with RBC Capital Markets. Please go ahead.

Will Chi: Hey. Good morning, guys. This is Will Chi on for Ashish Sabadra. I appreciate you taking our question. Wondering if you could maybe spend a little bit of time just on your views on the macro environment. I know there's a lot going on, but you know, curious how you're seeing kind of the general end client behaving. There's any developments on that. You mentioned kind of a modest uptick in slower payments the prior quarter, though not notably material, but curious if there's any updates on that front.

Jim DeVries: Sure. Thanks for the question. I'd start with some context. Our business, we feel, is very resilient in most any environment. And while we're not insulated from the macro environment, we tend to be an organization and have a model that performs well in any environment. Relocation is trending down, I think, across the country a bit. That, as I mentioned on the earlier question, provides a bit of a headwind when it comes to gross adds, fewer bites at the apple, but it's a nice tailwind for us on retention. Non-pay has increased from last year. We're watching it very closely. The increase has been relatively modest in non-pay cancellations. Labor market's cooling a bit.

That's been helpful to the cause from an employee retention perspective. And then I'm not sure if it's considered tariff pressures closely. That's obviously difficult to predict given the frequency of change. We have a team focused on it. And as Jeff mentioned in his prepared remarks, we can manage the net exposure to tariffs within the 2025 guide.

Jeff Likosar: And one thing I would add on the resilient point is, as you know, most of our revenue is recurring in the truest sense of the word recurring. So as and if we start to see trends or dynamics, you know, we tend to see them with enough foresight that we're able to make other adjustments in our business, which is why we're able to even in this environment, even with some uncertainty, affirm our guidance and as you saw, increase our EPS guidance in the results or the release we put out today.

Will Chi: Thank you. That's very helpful. And maybe just a follow-up on the State Farm side. Curious if you might be able to provide additional color on some of the learning points on the initial stages of the partnership and, you know, how that's gonna form the new redesign strategy.

Jim DeVries: Sure. The central thesis is one that I continue to believe that by having professionally monitored 24 devices in the home, that can be a source of claims mitigation, large claims mitigation, and fire and water in particular. And I also think that there's the potential to use the data with customer consent, use the data that the sensors provide to help provide more sophisticated more precision in the pricing algorithms. The new program that we're contemplating is focused, as I mentioned, just on movers. Customers, prospective customers that are changing geographies.

And we're working together with State Farm and an external organization that has some very deep digital expertise to design a new tactic around those movers and see if we can get a little more volume than what we've had to date.

Will Chi: Understood. Thank you very much. Appreciate the color.

Operator: Your final question comes from Tony Kaplan with Morgan Stanley. Please go ahead.

Yehuda Silverman: Hi. Good morning. This is Yehuda Silverman on for Tony Kaplan. Just had a question on subscriber growth and demographic trends in general. So it's been relatively stable past few quarters and years around 6.4 million. Just curious, aside from bulk purchases, what are some ways that you could take market share? Are there any changes to your target demographic or any products or themes that you think are shaping industry in the midterm or the long term?

Jim DeVries: Sure. I think on the so we continue I continue to be bullish on our core PIFM business. I'm excited about the product roadmap. I like the direction we're heading in terms of premium customer service. There's some differentiation that I think we'll be able to deliver around monitoring, quality, and speed on the monitor front. And so continue to be bullish on DIFM. DIY, for us, we had tightened our credit standards. We were returns focused. We're making some changes to the go-to-market on DIY. The product set and cost in DIY. So that we can more assertively compete in that space.

So it's a little bit of a hiatus, the last handful of months, and I think by the end of this year, early 2026, we'll be able to compete more effectively in DIY. And then I continue to be bullish on the small business channel. That too is an area of increased focus for us. We have a new leader over the SSC SMB space, and I think that's the third leg of the stool that helps us get some traction on gross ads. We also have been talking a couple of times on the call about bulk acquisitions. Frankly, our dealer channel was down a little year over year. We replaced that volume with bulk acquisitions.

But I think dealer will get back on track in the second half. And bulk opportunities are more plentiful than what they've been historically.

Jeff Likosar: And I would add to a little bit further to I believe it was Ronan's question about optimization, and a lot of those things are to do with the nature of offer, the recurring price versus the upfront price when we offer financing and when we don't. Some of those when Jim says knobs and dials. But there's also things related to that to do with features and one of the reasons, in fact, the main reason that we transition to our proprietary ADT Plus platform was to enable things like Trusted Neighbor.

And we continue to make adjustments, some smaller, some larger, including some of the things that you see with respect to biometric lock, the HomeAway automation feature that we noted. And those are also kinds of things that we're able to put in front of customers who are more attracted to a particular feature or a particular use case. And as we look beyond 2025, we would expect more of that as a means of driving growth as well.

Yehuda Silverman: Great. Thank you. That will conclude our question and answer session.

Operator: And I will now turn the call back over to Jim DeVries for closing remarks.

Jim DeVries: Thank you, Tiffany, and thanks everyone for taking the time to join us today. ADT had a strong quarter and a strong first half of the year. We're confident, as we reiterated earlier, in achieving our financial commitments for 2025. I'd like to again extend my appreciation to our ADT employees and dealer partners. Thanks again everybody, and have a great day.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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DATE

• Thursday, July 24, 2025, at 11 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — David Foulkes
• Chief Financial Officer — Ryan M. Gwillim

Need a quote from one of our analysts? Email [email protected]

RISKS

• Management stated that tariffs continue to directly impact earnings, with total tariff costs for Chinese imports potentially reaching $20 million to $30 million at current rates, based on the anticipated 2025 impact, in addition to approximately $30 million in Section 301 tariffs already factored into 2025 annual guidance.
• Operating earnings and EPS declined year-over-year in Q2 2025 due to tariffs, reinstated variable compensation, and lower absorption resulting from decreased production levels, with management noting these negative impacts were "only partially offset by new product momentum [and] ongoing cost control measures."
• Sales declined in both the value category for boats and in Navico Group, with value brands highlighted as "challenged" and management continuing to "optimize the profitability of these brands at reduced production volumes."
• Ryan M. Gwillim said, "is an extremely dynamic situation" explicitly acknowledging ongoing uncertainty regarding future tariff policy, exposure, and related capital market disruption.

TAKEAWAYS

• Revenue: $1.4 billion in sales for Q2 2025, with each segment performing at or above management expectations.
• Earnings Per Share (EPS): $1.16 in earnings per share for Q2 2025, exceeding guidance and increased sequentially from Q1 2025.
• Free Cash Flow: $288 million in the quarter, a record for Q2 2025, and $244 million for the first half -- a $279 million improvement over the first half of 2024.
• Propulsion Segment Sales: Propulsion business sales increased 7% in Q2 2025, primarily due to strong U.S. OEM orders; Both sales and operating earnings grew sequentially from Q1 to Q2 2025.
• Mercury Outboard Engine Share: Gained over 300 basis points in U.S. retail share for engines over 300 horsepower in Q2 2025, and 30 basis points overall on a rolling twelve-month basis.
• Engine Parts & Accessories (P&A) Sales: Engine parts and accessories sales increased 1% year-over-year in the second quarter of 2025. Distribution business sales were up 4% year-over-year in the second quarter of 2025. Products business sales were down 4% in Q2 2025, reflecting offsetting trends.
• Navico Group Sales: Down 4% compared to Q2 2024; Year-to-date revenue for Navico Group is down 2.5% versus the first half of 2024. Segment operating earnings declined due to lower sales, tariffs, and the variable compensation reset in Q2 2025.
• Boat Segment Sales: reflecting weakness in value categories, partially offset by premium and core segment performance; with Freedom Boat Club contributing approximately 12% of segment sales in Q2 2025.
• Wholesale Shipments & Inventory: U.S. wholesale boat shipments were down 9% in Q2 2025, resulting in an 11% reduction in U.S. pipelines, or over 1,200 fewer units year-over-year; Global pipelines are down 2,300 units as of Q2 2025.
• Tariff Exposure: Less than 5% of cost of goods sold (COGS) is potentially subject to $20 million to $30 million in new tariff expense from China for 2025, in addition to $30 million in Section 301 tariffs; Mexico and Canada supply approximately 15% of U.S. COGS, but benefit from USMCA exemptions, limiting exposure.
• Guidance: Full-year sales are projected at approximately $5.2 billion for 2025, Full-year adjusted EPS guidance is approximately $3.25, and free cash flow guidance has been raised to over $400 million for the full year 2025; debt reduction target increased by $50 million to reach $175 million in 2025.
• Dealer Inventory & Pipeline: Boat-side weeks on hand in the low 30s at present, which are expected to reach around 40 by year-end 2025, while global and U.S. field pipelines remain at historical lows, excluding the COVID period, as of Q2 2025.
• New Product Launches: Mercury introduced 425-horsepower and refreshed 350-horsepower outboard engines; Sea Ray introduced new models featuring integrated Navico Group technology.
• Awards & Recognition: Brunswick was again named one of America's best mid-sized companies by Time magazine, achieved several Boating Industry Magazine product awards, and earned multiple distinctions from Newsweek.

SUMMARY

Brunswick Corp. (NYSE:BC) achieved record free cash flow of $288 million in Q2 2025 and delivered improved sequential EPS in Q2 2025 while navigating persistent tariff headwinds and segment-specific pressures. Management credited cost controls, operational execution, and resilient aftermarket and premium brand performance for offsetting volume weakness in value categories. Cautious optimism for the second half stems from positive July retail trends, strategic inventory management, and an enhanced competitive position driven by domestic manufacturing and proactive supply chain adjustments.

• David Foulkes emphasized the company's "fully committed" stance on driving further profitability via rationalization and manufacturing capacity optimization actions in the second half.
• Ryan M. Gwillim explicitly stated that over 75%-80% of Q2 2025's tariff impact fell on the propulsion segment, with residual effect on P&A and minimal exposure for boats.
• Management clarified that the impact of 15% tariffs on Japanese imports is not yet visible in Mercury's OEM orders as of Q2 2025 and is not factored into current guidance.
• A 25% reduction in value fiberglass models is planned for the 2026 model year lineup to simplify the portfolio and increase margins in smaller market segments.
• Internal data indicated that retail sales in July 2025 were trending positively compared to July 2024, supporting management's confidence in a steady wholesale outlook for the remainder of the year.
• Restructuring at Navico Group included consolidation of two production facilities, a transition to a third-party logistics provider in Europe, and a leaner organizational structure to improve agility and reduce expenses.
• Debt maturities are deferred until 2029, and the company reported $1.3 billion in liquidity at the end of Q2 2025, supporting ongoing share repurchases and debt reduction goals.
• Management highlighted the enhanced competitive positioning from U.S.-centric manufacturing, vertical integration, and rapid onshoring, allowing Brunswick Corporation to mitigate and adapt tariff exposure more effectively than offshore-dependent competitors.

INDUSTRY GLOSSARY

• USMCA: United States-Mexico-Canada Agreement, a trade agreement that enables tariff exemptions for certain goods moved between the U.S., Mexico, and Canada.
• P&A (Parts & Accessories): Engine and boat parts, electronics, and various consumables sold into both OEM and aftermarket channels.
• COGS: Cost of goods sold; the direct costs attributable to the production of goods sold by a company.
• Aftermarket: Recurring sales of replacement parts, maintenance products, and upgrades after the initial sale of marine engines or boats.
• OEM (Original Equipment Manufacturer): Companies that manufacture boats or equipment using Brunswick’s propulsion and other systems as original content.

Full Conference Call Transcript

David Foulkes: Thanks, Steve, and good morning, everyone. Brunswick Corporation delivered strong second quarter results. As the power of our market-leading products and brands, efficient operational execution, and cost control, continued prudent pipeline inventory management, and the benefits from the resilient recurring aftermarket focus portions of our portfolio resulted in second quarter financial performance ahead of expectations. This was despite the challenging macro environment and uncooperative weather in many parts of the U.S. through the first two months of the quarter. Year to date, both unit retail sales in the value category are underperforming our initial expectations for the year.

The continued overall resilience in the premium and core categories combined with improving retail sales trends in July is expected to provide a floor for wholesale performance in the second half of the year. Tariffs continue to directly impact our earnings and add uncertainty for both our end consumers and channel partners. But all our businesses are executing strongly on their mitigation plans, resulting in a smaller net tariff impact than originally anticipated. Against this backdrop, we are pleased to report second quarter sales of $1.4 billion, up slightly from the prior year, and earnings per share of $1.16, both exceeding the top end of our guidance and sequentially up from the first quarter.

Earnings were impacted by the reinsurance reinstatement of variable compensation and the effects of tariffs but were consistent year over year excluding those items. A continuing highlight of our financial performance is our free cash flow. We had another quarter of our outstanding free cash flow generation, with $288 million of free cash generated in the quarter, a record for any second quarter in company history. This performance also resulted in a record first half free cash flow of $244 million, a $279 million improvement versus the first half of 2024. The free cash generated in the past three quarters represents the largest free cash flow generation in any fourth through second quarter period in Brunswick Corporation history.

In summary, despite everything going on around us, Brunswick Corporation was firing on all cylinders in the second quarter. But of course, NEXT never rests. And we are fully committed to doing a lot more, including progressing certain rationalization and manufacturing capacity optimization actions in the second half of the year to improve profitability and cash flow in several of our businesses while still driving incremental product costs and operating expense reductions, and maximizing the positive impact of our cash generation on our capital strategy. Our overall results were supported by performance ahead of or in line with expectations for each of our segments. Our propulsion business delivered strong year-over-year sales growth, with shipments to U.S. OEM customers outpacing expectations.

Resulting in sequentially improved earnings despite the anticipated tariff and absorption headwinds. Mercury's outboard engine lineup continues to take market share, gaining over 300 basis points of U.S. retail share in outboard engines over 300 horsepower in the quarter, and 30 basis points of share overall on a rolling twelve-month basis. Despite heavy wholesale shipments by competitors, ahead of tariffs being implemented on Japanese imports. Mercury's leadership in high horsepower outboard will be further reinforced by the new 425 and 350 horsepower engines launched earlier this week, with performance, smoothness, quietness, weight, and other attributes far ahead of the competition.

Our engine parts and accessories business had another strong quarter, with slight year-over-year sales growth and steady earnings, despite a weather-affected start to the boating season. This primarily aftermarket-based business continues to derive its success from stable boating participation and the world's largest marine distribution network, which in the U.S. has gained 180 basis points of market share resulting from our ability to support same-day or next-day deliveries to most locations in the world. Navico Group had slightly lower sales compared to 2024, with aftermarket sales and sales to marine OEMs modestly lower. However, sales trends continue to improve each month in the quarter.

Navico Group earnings remain consistent with first-quarter levels and were driven by enthusiastic customer acceptance of new products and steady operational performance. Year-to-date revenue for Navico Group is only down 2.5% versus the first half of 2024, led by steady performance from the group's aftermarket businesses. Restructuring actions continue to gain traction despite tariff and market headwinds, and in the quarter, we consolidated two production locations and transferred European distribution to a 3PL. While in July, we implemented a leaner organizational structure that will reduce expenses and increase agility.

Our boat business had lower overall sales mainly resulting from weakness in value categories but outperformed the market in some other key categories, resulting in overall market share gains and has delivered 30 new model launches year to date. In response to the tighter value fiberglass market, we have rationalized our value fiberglass model lineup by 25% for the 2026 model year. Dealer inventories remain healthy, and Freedom Boat Club continues its journey of profitable growth, launching its first club in the Middle East, located in Dubai, and with plans for additional expansion, further reinforcing its position as the world's largest and only global boat club.

Now looking at external factors, we see some areas of continued uncertainty, but also some emerging bright spots. Compared with the first quarter, interest rates remain steady with the potential for improvement, and foreign exchange tailwinds should benefit predominantly U.S.-based business. In addition, the One Big Beautiful Bill Act favorably addressed tax increases that were previously scheduled to take effect and restored key pro-business provisions such as full expensing of U.S. R&D. We are still analyzing the impact of all these changes on a global basis but anticipate a significant positive cash flow impact moving forward. Brunswick Corporation continues to actively monitor and manage tariff exposure.

Our coordinated team across trade compliance, supply chain, and finance analyzes the latest updates, implements mitigations, and continually refines our forecast. Despite recent tariff increases for some countries, overall, we've revised down our estimate for total potential net exposure. Ryan will go into more detail, but I will again stress that despite the negative direct impact of tariffs on our earnings, given our primarily U.S.-based vertically integrated engine and boat manufacturing base and predominantly domestic supply chain, and the fact that we manufacture almost all our boats for international within those markets, we remain competitively well-positioned in an environment of persistent tariffs.

In addition, our leading position and scale afford us the resources and sophistication to effectively manage this complex evolving situation, including through the deployment of AI tools. We see an improvement in longer-term dealer sentiment and inventory comfort, which is moving closer to historical norms. Boating participation remained strong with upticks throughout the quarter, dealer foot traffic is stable, and we have seen a slight increase in people considering a boat purchase in the next twelve months. OEM production rates were up over the second half of last year, and while overall retail was down for the quarter, July is off to a strong start.

We're using competitive incentives where appropriate to support second-half sales and are continuing to invest in and derive benefits from the latest digital marketing technologies to generate more leads and optimize conversion. Overall, while we remain mindful of the dynamic macroeconomic backdrop and soft consumer sentiment, there are some reasons for cautious optimism as we progress through early Q3. Moving now to industry retail performance, outboard engine industry retail units declined 6% in the quarter, with Mercury gaining 30 basis points of share on a rolling twelve-month basis and 140 basis points of share in the same time frame on engines 150 horsepower and greater.

Mercury continues to gain share internationally, with 170 basis points of share gain in Canada over the past twelve months, and strength in high horsepower share continuing around the globe. As of the latest reporting from May, U.S. main powerboat industry retail was down modestly year to date with Brunswick Corporation boat brands outperforming the industry. Since June, internal Brunswick Corporation U.S. registrations are only down mid-single-digit percent over the same period in 2024. On a global basis, first-half retail remained very steady for our premium brands, including Boston Whaler, Sea Ray, Lund, and the van, as a whole for our core brands.

Retail performance for our value brands continues to be challenged, and as noted, we're working to optimize the profitability of these brands at reduced production volumes. We have continued to diligently manage both levels and second-quarter U.S. wholesale shipments were down 9%, resulting in an 11% reduction in U.S. pipelines, or over 1,200 fewer units versus last year. Global pipelines are down 2,300 units over the same period, reflecting our continued focus on maintaining the freshest inventory in the market.

Lastly, as I indicated earlier, according to internal data, July retail for essentially all our businesses has accelerated and is trending positive versus July 2024, giving us and our channel partners positive momentum to start the back half of the year. Before turning the call over to Ryan, I want to highlight the diligent efforts across our enterprise that resulted in record free cash flow. Despite some inventory banking for tariff mitigation, and continue to support our investment-grade credit profile, our strong Q1 cash performance continued into the second quarter. And in the first half of the year, we delivered $244 million of free cash flow, up $279 million versus the prior year.

We've delivered $1.5 billion of free cash flow since 2021, and a record $542 million in the last three quarters, in very dynamic and challenging market conditions. Our balance sheet remains very healthy, with no debt maturities until 2029, and an attractive cost of debt and maturity profile. Given our continued strong cash performance, we're increasing our previous debt reduction guidance for 2025 by $50 million, a total target of $175 million for the year. With this increase in our 2025 debt reduction target, by year-end, we are on track to have retired $350 million of debt since 2023. We remain on the path of returning to our long-term net leverage target of below two times EBITDA.

We're accomplishing this while maintaining significant financial flexibility, as evidenced by and commitment to our investment-grade credit rating. At quarter-end, we'll have $1.3 billion in liquidity, including full access to our undrawn revolving credit facility. I want to thank the entire Brunswick Corporation team for their disciplined focus on execution, driving efficiencies, working capital management, optimization of capital expenditures, and many other actions that together allow us to return capital to shareholders while maintaining financial flexibility and opportunistically reducing leverage. Our cash generation profile and investment-grade credit rating are important to our business and also differentiate Brunswick Corporation in our industry and sector.

I'll now turn the call over to Ryan Gwillim to provide additional comments on our financial performance and outlook.

Ryan Gwillim: Thanks, Dave, and good morning, everyone. Brunswick Corporation's second-quarter results were solidly ahead of expectations. Sales were up slightly over the second quarter of 2024 as steady wholesale ordering by dealers and OEMs, together with modest pricing benefits, offset the impact of continued challenging consumer demand market conditions. Operating earnings and EPS were ahead of guided expectations but down versus the prior year, as the impacts of tariffs, reinstated variable compensation, and lower absorption from decreased production levels were only partially offset by new product momentum, the benefits from the slight sales increase, and ongoing cost control measures throughout the enterprise.

Lastly, as Dave mentioned earlier, it was a historic second quarter from a cash generation standpoint with Brunswick Corporation generating a record $288 million of free cash flow. On a year-to-date basis, sales are down 5%, primarily due to anticipated lower production levels in our propulsion and boat businesses only being partially offset by steady sales in our aftermarket-led engine P&A and Navico businesses. Year-to-date adjusted operating earnings and EPS are also ahead of expectations but below the prior year as expected, due to the same factors from the second quarter.

Year-to-date free cash flow of $244 million is a first-half record and is the result of focused inventory and other working capital initiatives started in the second quarter of 2024. Now we'll look at each reporting segment starting with our propulsion business, which reported a 7% increase in sales resulting primarily from strong orders from U.S. OEMs. Operating earnings were below the prior year primarily due to the impact of tariffs, lower absorption from decreased production levels, and the reinstatement of variable compensation, partially offset by cost control measures and the benefits from the increased sales. The propulsion segment sales and operating earnings both grew versus the first quarter of 2025.

Our aftermarket-led engine parts and accessories business had another solid quarter reporting a 1% increase in sales versus the same period last year, due to slightly stronger distribution sales. Sales from the products business were down 4% while the distribution business sales were up 4% compared to the prior year. Segment operating earnings were slightly down versus the second quarter of 2024 due solely to the enterprise factors discussed earlier. Note that first-half engine P&A earnings and sales are essentially flat to 2024, despite the challenging marine retail market conditions and overall unseasonable weather for a significant portion of the early year.

This performance reinforces our well-stated view that our continued focus and investment in this aftermarket recurring revenue and earnings business is critical to driving stable financial and shareholder returns. Navico Group reported a sales decrease of 4% versus Q2 of 2024, while sales to both aftermarket channels and marine OEMs were down modestly, partially offset by benefits from new product momentum. Segment operating earnings decreased due to the lower sales, tariffs, and the variable compensation reset. Finally, our 7%, resulting from anticipated cautious wholesale ordering patterns by dealers, was only partially offset by the favorable impact of modest model year price increases.

Freedom Boat Club had another strong quarter contributing approximately 12% of the segment sales including the benefits from recent acquisitions. Segment operating earnings were within expectations as the impact of net sales declines and the variable compensation reset was partially offset by pricing and continued cost control. This slide shows an updated view of our 2025 tariff impact should the current tariff rates continue for the remainder of the year. This slide shows the approximate percentage of COGS affected by tariffs currently in force along with our anticipated 2025 net tariff impact for each category after planned mitigation measures are considered.

The largest tariff impact remains China, and while less than 5% of our COGS could represent $20 million to $30 million of tariff expense at current rates, for product and component importation into the U.S. These incremental tariffs are in addition to the approximately $30 million of Section 301 tariffs that were included in our initial guidance for the year. Mexico and Canada supply accounts for approximately 15% of U.S. COGS, but most of the supply from these two countries is imported under the USMCA, meaning that our tariff exposure here remains small assuming the continued USMCA exemption. Finally, there are other smaller tariffs on rest-of-world imports.

Not included in this analysis are other impacts or potential impacts, both positive and negative to the enterprise. Including potential retaliatory tariffs from the EU and Canada on U.S. manufactured boats and possibly engines and parts, tariffs on boats imported into the United States by our European OEM partners that use Mercury engines and parts, Mercury engine competitors, are paying tariffs on the importation of engines from Japan, or other non-U.S. manufacturing locations, and maybe most importantly, the continued disruption of the capital markets and the corresponding impact on our consumer.

As everyone is aware, this is an extremely dynamic situation and the entire Brunswick Corporation team is committed to minimizing the overall impact that tariffs ultimately have on our enterprise. My last slide shows our updated full-year guidance. Taking into account the anticipated net tariff impact and continued market and consumer uncertainties, but also our strong operational performance and the recent market momentum. Despite a slightly softer marine market than initially anticipated to start the year, we remain confident in our ability to deliver our full-year plan, with the result being us holding the midpoint of our guidance with anticipated sales of approximately $5.2 billion and adjusted EPS of approximately $3.25.

However, given our exceptional first-half cash generation, we are raising our free cash flow guidance by $50 million to greater than $400 million for the full year. This will allow for increased debt reduction efforts, which we discussed earlier, and should enable us to repurchase no less than $80 million of shares at a time when we believe that our share price remains severely dislocated from our performance in a challenging market.

As Dave mentioned earlier, retail conditions in July have improved from the early part of the season, giving us more confidence in steady wholesale for the remainder of the year with Q3 expected to deliver sequentially slightly lower revenue and earnings driven by the annual seasonality of our businesses. I will now pass the call back over to David Foulkes for concluding remarks.

David Foulkes: Thanks, Ryan. As we wrap up, I want to highlight some of our recent exciting new product launches, announcements, and awards. Navico Group's SIMRAD brand recently launched AutoTrac technology for its HALO radar portfolio that enables automated tracking of multiple targets and provides unrivaled situational awareness to voters. Our boat brands across the globe have been busy launching many new products, all featuring Mercury power and Navico Group technology. Our Harris Pontoon brand launched the 2026 Sunliner Series, with a very stylish and contemporary new exterior and interior. The Sunliner is affordable but also aspirational, with many thoughtful features, premium finishes, and uncompromised quality.

Our Ray Glass brand in New Zealand unveiled the all-new Protector R edition range, a bold evolution with its iconic high-performance ribs, leading with the 330 Targa R edition, the first vessel in New Zealand powered by Mercury Racing's 400 R V10 outboard engines. And Sea Ray launched its all-new SDX 230 lineup, available in sterndrive, outboard, and surf configurations, with a SURF version featuring the innovative NexWave SURF system designed to create consistent rideable wakes for every skill level. The system integrates an exclusive Sea Ray interface with Mercury's smart tow system, Bravo Four S drive, and dual SIMRAD touchscreen displays offering easy control and visualization.

Freedom Boat Club recently announced an exciting new franchise in Dubai, our first location in the attractive Middle East boating market. The flagship location will open this fall and feature many Brunswick Corporation boats with additional locations to follow in 2026. At a time when several other smaller boat clubs are experiencing difficulties, Freedom continues to grow and thrive, globally supported by the ready availability of Brunswick Corporation's broad portfolio of boats, Mercury engines, rapid availability of P&A and accessories from our global P&A and distribution businesses, and a variety of financing, insurance, marketing, and IT services also provided by Brunswick Corporation. In return, Freedom generates substantial synergy sales while showcasing our exceptional products.

And finally, Mercury reinforces its position as the industry leader in the high horsepower outboard market this week, with the introduction of the new 425 horsepower and refreshed 350 horsepower outboard engine, delivering performance, smoothness, quietness, and lightweight far ahead of the competition. During the quarter, we received significant recognition for our people, products, and commitment to innovation, putting us well on track to surpass 100 awards again in 2025. Among the highlights, Brunswick Corporation was named by Time Magazine as one of America's best mid-sized companies for the second year in a row. We also earned six Boating Industry Magazine product awards.

These awards highlight the marine industry's best new and innovative products, and our awards underscore the breadth and depth of our innovation. On the topic of innovation, the Experiential Design Authority also honored us with an award for our impressive and engaging exhibit at CES 2025. For the third consecutive year, Newsweek named Brunswick Corporation one of America's most trustworthy companies, placing us in the top 10 within the manufacturing and industrial equipment category. And we were recognized for the first time on Newsweek's list of America's greatest workplaces for parents and greatest workplaces for women, reflecting our commitment to being an employer of choice. Congratulations to all those who contributed to these awards.

Finally, this quarter, we released our 2024 sustainability report, which describes our work to reduce our environmental impact while making our businesses more efficient and supporting the communities in which we live and work. That's the end of our prepared remarks. We'll now turn it back over to the operator for questions.

Operator: Thank you. We will now be conducting a question and answer session. Our first question is from James Hardiman with Citigroup. Please proceed. James, your line is live. Please check if you're on mute. We will move on to the next question. There you go. Go ahead, James.

James Hardiman: Sorry. AirPod fail. I apologize. Thanks for taking my question. So you know, obviously, the tariff impact came down I get to about a 60¢ benefit versus last time. Guidance is unchanged. And so is the right way to think about this you know, that the ex-tariff guidance came down by about that amount. And, ultimately, from here, how should we think about it? Is there more risk of upside versus downside just based on sort of the changes you've made there?

Ryan Gwillim: Hey, James. It's Ryan. Good morning. Yeah. I mean, so if you remember back to April, we gave a tariff that impact potential of $225 million. And then when we translated that to the EPS bridge, we only put a dollar on the bridge. And it was for really two reasons. One, we anticipated we'd probably mitigate better than anticipated and indeed, we have. And second, if you remember when we reported earnings back in April, it was literally the height of all tariff rates. China was at 145%. Others were at extreme high levels. We didn't know if Canada and Mexico would be receiving USMCA exemptions.

So really, the dollar of tariff impact that we put on the bridge hasn't really changed that much. I think maybe it's lower on the margins a little bit. But on balance, think what we saw in April has kind of come through, that the tariff impact we think it's going to be certainly lower than we thought, but that dollar is still relevant is still pretty reasonable. The markets unfolded a little bit softer than we thought, although premium core is holding up. So no, I wouldn't think that the rest of the business was down $0.50 and that's what we're guiding.

It's just really the years coming in relatively similar to what we thought in April with $325 million still being the midpoint of balancing the risks and opportunities.

David Foulkes: Yes, James, it's David Foulkes. I would add that you know, given the dynamics of the are all around us, it is very difficult at a moment to take things to the bank. You know, really nice to see the trajectory in July, and we're very hopeful. But, you know, that's that is a know, four or five-week trend. We just need to see a little bit more of that before I think we can flow through.

James Hardiman: Got it. Makes sense. And then as I think about sort of the phasing that you've laid out here, it looks like we should be expecting a significant decrease in Q3 earnings then a significant increase in Q4. Remind us, if memory serves, I thought that Q3 was the big inventory reduction quarter a year ago. Which would have created a really easy comp this year, assuming we weren't Again, undershipping Q3. So I guess is it is it safe to say that we're now going to be again, undershipping in Q3 and maybe I don't know, maybe there was a shift between shipments between Q2 and Q3 because, obviously, Q2 was a was an outperformance quarter.

So how do we think about all that?

Ryan Gwillim: Yes. It's pretty hard, James, to delineate Q3 and Q4. I certainly wouldn't read much into it. Again, as Dave said, giving guidance in a dynamic environment like this is pretty challenging. I would say, as a reminder, production was down in the third quarter last year and then even more so in the fourth. Both in propulsion and in our boat businesses. So there will be pickup there, goodness, if you would, in both. Wholesale shipments in both of those businesses. Together with a very consistent P&A business, which obviously continues to perform extremely well in this environment. So no, I think we're looking at Q3 and I think we're off to a good start with July certainly.

But I wouldn't read much into the difference between Q3 and Q4. Although, the production increased in Q4 of last year will be greater than the production increase in Q3. But again, although there's a lot of timing impacts that go in there, and then we're still thinking about a pretty strong second half of the year.

James Hardiman: Makes sense. Thanks, guys.

Operator: Our next question is from Xian Siew with BNP Paribas. Please proceed. Your line is live. Please check if you have yourself muted. Okay. We will move on to the next question. Which is Craig Kennison with Baird. Please proceed.

Craig Kennison: Hey, can you hear me?

Ryan Gwillim: Yes. Yes, Craig. Good morning.

Craig Kennison: Good morning. Thanks for taking my question. I wanted to start with Navico. Guess big picture, when the market normalizes, whenever that is, and then your innovation pipeline matures. Where should Navico revenue and profitability settle feels like that's a big needle mover when you think about some of the out-year earnings potential?

David Foulkes: Yes, Craig, thank you for the question. I think as our expectations in the long term for Navico Group are still in kind of low to mid-teens operating margin range. So we've got quite a bit to go. And we you know, we should with a little bit of tailwind have top line CAGRs in the mid to high singles. So we have a there's a lot of potential in that business. I think we're doing a lot of great work both in refreshing the product lines, which are now regaining share even against the, you know, strong and capable competition. So we're very excited about that.

But also just getting the structure of the business reset or rightsized if you like. And optimized for a market that is certainly smaller than we originally anticipated. And as you can see and as we gave some examples, in the release in the slides, we are continuing to work our way through that. That all of our businesses had some headwinds as year, as you know, from the reset of variable comp. We didn't really pay any meaningful variable comp last year. Tariffs, bit of absorption in the first half. But if you net those out, I think we're in a really you know, getting ourselves in really good shape in Navico Group.

I'm very excited about the trajectory of the business. And the reception of the new products. Pretty much everything that we have brought out has been a hit in the marketplace. So, yeah, very excited for that business, and it will be an engine of growth for us in the medium term.

Craig Kennison: Great. Thanks, Dave. And Ryan, if I could ask you just on the tariff question. Slide 17 is super helpful as it relates to 2025, but it's been such a noisy environment that it's hard to get a feel for the true run rate. Have you done any work to look at '26, like, current policy persists we should think about the full year kind of run rate for tariff policy as it stands today?

Ryan Gwillim: Yes, Craig. Obviously, we anticipate getting the question this morning. So we have played around with what '26 would look like. The answer is still pretty uncertain given all the variables. So not only are we paying the tariffs, right? You pay the cash tariffs, but it flows through the various financials in a different way, right? It goes on the balance sheet, as an inventory cost and then flows out through the P&L over time. And then there's counteractions on duty drawback and benefit that we get to counteract those tariffs.

So it's a big basket of things that we think about supply chain team, trade compliance, finance, everyone's kind of figuring out what the best course of action is that it changes. Right? Because the tariffs change every couple of weeks and then our response needs to change. I would say as we sit here today, don't see a huge change over next year It's probably somewhere in the same magnitude. This year, we had a ten-month impact, right? But some of that was at higher rates. We also had some of the cost being hung up on the balance sheet by the end of the year.

But next year, we'll have a little bit more duty drawback and some of the other financial benefits. So tough to tell. I don't think it'll be greatly different from the 2026 impact, but I definitely need to get closer to the end of the year. To really see what a run rate looks like. And certainly, we'll provide that guidance once we get to the January call. But certainly, I don't see a huge step change at this date.

Craig Kennison: Yeah. Thanks, Ryan.

David Foulkes: Maybe just to add, Craig, I think, I mean, clearly we are working to onshore as much as we can at the moment. So the rates are one component of what the tariffs will be, and certainly, are balance sheet and other implications here. But broadly, our basis should be going down significantly as we move supply onshore into the U.S. And we're doing that at a pretty rapid clip as you can tell from the way that our exposure even this year is reducing I would say, though, and it was a little bit difficult to say this, earlier, that and we did state it. We are in competitively a pretty advantaged position.

The U.S. market is by far the biggest marine market We are very largely a domestic company here with a very large manufacturing footprint with a lot of vertical integration. And we believe that, you know, even though we'll be impacted by tariffs directly, our competitive position is strengthening.

Craig Kennison: Thank you, Dave.

Operator: Our next question is from Noah Zatzkin with KeyBanc Capital Markets. Please proceed.

Noah Zatzkin: Hi, thanks for taking my questions. I guess first just on the decision to rationalize kind of the value fiberglass model lineup for 2026 by 25%. How should we think about maybe structurally the boat group, whether from a margin perspective or volume potential perspective, given that rationalization? Thanks.

David Foulkes: Yes, thank you. Yes, good question. So really, the amount of complexity that you can tolerate in a product line depends on the volume. And with volumes reducing, we can tolerate less complexity So we take out those models that are obviously selling less, and that's the kind of rationalization process. We want to leave ourselves with a good progression in the product portfolio, but not excess complexity. And that's really what we've been doing.

There are other actions that we are taking that will be able to talk about a bit later in the year to further ensure that we have stronger profitability in that part of the market, but that's really the way to think about it reducing complexity in a market that is smaller. I would say, though, I think everybody understands this, that the profit contribution of all of our Brunswick Corporation boats The boat group margin is only one component of it. All of those value boats have Mercury engines on them. A lot of them contain Navico Group technology. And so this the margin stack even in our value product lines remains pretty good.

And so we want to make sure that we are thoughtful as we approach this. And that we consider the entire Brunswick Corporation margin impact.

Noah Zatzkin: Really helpful. Maybe just one more quick one. Any color on the tariff impact in the quarter? And then apologies if you already said this, but how should we think about maybe the distribution of that impact across segments at a high level? Thanks.

Ryan Gwillim: Yeah, I could take that, Noah. I mean, again, it's a bit different because the cash tariffs paid obviously, much greater than what's on with that's what's flown through the P&L. Through the P&L, it's somewhere in the mid-teens for the quarter millions. But again, there's all kinds of offsets and duty drawbacks that kind of net against that number. And then about 75%, 80% of the tariff impact is on Mercury, is on the Mercury segment. I'm sorry, on propulsion, mostly a little bit on engine P&A. With Navico having kind of the rest of it and boats having a very small amount.

One other item, just and obviously, is late breaking from earlier this week or late last week. We're obviously monitoring the 15% tariffs coming from Japanese imports. As Dave mentioned, we are the only U.S. engine manufacturer with our main competitors primarily manufacturing in Japan and almost none in the U.S. And so one thing we'll be monitoring, and this is not in the tariff number and obviously a benefit is the impact of that on Mercury sales and our ability to continue to take market share as obviously we believe our products are already market leading And this is just another input for the for the costing profile.

Operator: Our next question is from Tristan Thomas Martin with BMO Capital Markets. Please proceed.

Tristan Thomas Martin: Hey, good morning. Did you update your full-year industry retail assumption for Boats?

David Foulkes: No. I don't think we didn't specifically do that. I think that the trend that we are seeing really that we called out is you know, solid performance in premium and core, which is you know, 75% or more of what we make. And weaker performance in the value part of the segment, which is the value part of the market, which is down about 20% I see a really strong reason to deviate from that kind of profile. I don't think we specifically updated any numbers yet.

Tristan Thomas Martin: Okay. And then what are your channel inventory weeks on hand? And then how are you expecting to manage that? Or what's your target by year-end? Thanks.

Ryan Gwillim: Yes. So on the boat side, we are in the low 30s today, weeks on hand. By the end of the year, it's going to be around 40, give or take. But, really, remember that is looking at backwards looking retail, so rolling 12 backwards. If you look at just pure units, right now, we are basically in the lowest inventory position we've been outside of COVID since the GFC. And by the end of the year, both global and U.S. field pipelines will be kind of at historical lows.

So we're going to take out a couple of thousand or so boats in the U.S., and about that globally as well, maybe plus or minus depending on how the back of the year shapes up. Just remember again, this is just remember this is this is all value stuff we're talking about here. This is our pipelines and premium lower than that.

Tristan Thomas Martin: That's right. Okay. And then the thousand, was that a full-year target or is that a second-half target?

Ryan Gwillim: No. That'd be a full-year target.

Operator: Great. Thank you. Our next question is from Xian Siew with BNP. Please proceed.

Xian Siew: Hey guys, sorry about that earlier. It's okay. Good morning. How's it going? On propulsion, it was up 7%, including, I think, 11% outboard engines versus retail. For outboard a bit down, like, six. And then I guess like what's kind of going on there You mentioned kind of the OEMs pulling orders ahead of tariffs on the Japanese side. Are you kind of matching that? Should we kind of expect things to kind of moderate from here? Is it just kind of the market share gains that are kind of offsetting? I guess, retail weakness?

Ryan Gwillim: It's actually a little bit of pipeline. So it's something we really talked too much about. I know we have a little bit on the engine side. But over the last call it, six quarters or so, we have taken out substantial pipeline inventory on the engine side. Call it 25 ish percent, maybe plus or minus even more on high horsepower. And that's at a time when, like you said, some of our competitors were pushing engines into the U.S, whether it's in advance of tariffs or other But that's certainly the wholesale trend.

But so what you're seeing is now kind of a matching of our continued retail share gains with our OEM customers that are actually producing a little bit more of this time of year than they were last year. At this point, even in June, May and June, a lot of our OEM partners were taking fewer engines because they had them in stock and were gonna produce fewer boats on the, you know, in the outlook months. And that ended up happening So today, at a time where production is pretty stable, and pipeline is lower, they're needing engines and we're fulfilling them.

I can you know, we've we've done like a entire review of all of our OEM customers. There is we are not losing share in any of them. Any of them that are kinda dual sourced, if you would. And we plan to continue to gain retail share for the full year just as we've done the past several years. So it is really a pipeline. It's a pipeline game and that's right now at a really healthy point where we'll probably be able to add engines here into the, you know, make sure that wholesale exceeds retail over the coming quarters.

Xian Siew: Okay. Got it. That's super helpful. And then maybe so then on that point, where does the pipeline kind of end for engines and by the end of the year? And how do you think about kind of the margin progression from here? In propulsion?

Ryan Gwillim: Yes. As we currently sit, by the end of the year, pipeline will be down about 25% from the beginning of 2024. And it's kind of in the mid-thirties down percentage-wise on engines greater than 175. And, you know, a lot of what it does from there is dependent on kind of the OEM patterns as we start all the way into '26 and the and the and the you know, the next retail cycle. But as we sit now, I don't we're going to take much more out. I would say the second half this year, second half is not anticipating a whole lot of takeouts.

So what you what we've taken out is kind of is where we'd set. But a little of that depends on where retail lands.

Xian Siew: Got it. Super helpful. Thank you, guys, and good luck.

Operator: Our next question is from Stephen Grambling with Morgan Stanley. Please proceed.

Stephen Grambling: Hi, thank you. You mentioned the initiatives to improve inventory and working capital and I know you talked about it a little bit on the call, but maybe you could just expand on what some of the initiatives are and how specifically investors think about the impact of free cash flow conversion longer term particularly if the retail cycle does start to turn here? Thank you.

David Foulkes: Yeah. Maybe we could tag team it up. So, yeah, a lot of work going on particularly with our supply chain and it's been a very dynamic time. Obviously, we've we've been a time when we have done some banking of inventory. But, essentially, it has been very diligent management of incoming supply chain to make sure that we aligned the weapon overall inventory levels with the production requirements. That is not an easy process. It does require us to work very closely with the supply base, and our team has done a wonderful job of doing that. And managing to make sure that we keep a very healthy supply base, but that we don't oversupply ourselves.

I think there's more room to run. There and we continue to see from that and we have very clear targets both in the short term and long term for our inventory levels. But that those inventory levels have come down, I think, $100 million in the last in over the first half of the year end.

Ryan Gwillim: Yeah. The significant reduction in production in the second half of last year balancing the income inventories really a helpful driver of that. And the businesses, as Dave said, have done a really nice job of ensuring the balance. And that will then move forward as we look at the second half financials and gives us a nice benefit because we will be producing and wholesaling more in both engines.

Stephen Grambling: Got it. Thank you.

Operator: Our next question is from Joe Altobello with Raymond James. Please proceed.

Joe Altobello: Thanks. Hey, guys. Good morning. Just go back to the engine commentary for a second. If we assume a 15% tariff on Japan, I would think the impact here is pretty straightforward, right? And that would obviously significantly improve your competitive positioning. So I guess, first, is that showing up yet in OEM orders? And second, is that baked into your outlook at all?

David Foulkes: Hi, Joe. Kind of I guess, no and no really. It well, first of it's not baked explicitly into our outlook. Although, obviously, it's it's gonna be helpful to us. It's it is not particularly showing up yet because of the amount of engines that were shipped in the second quarter in particular. I don't think it's something like this was not a surprise. So I think that our competitors still have stock of pre-tariff engines. But obviously, over time, those will kind of bleed out. And we have not explicitly baked an uplift in Mercury share into our forecast at the moment. But obviously, it's going to give us good momentum.

Joe Altobello: Okay. Very helpful. And maybe secondly, you referred to a certain rationalization and manufacturing capacity optimization efforts. Maybe could you elaborate on that? What businesses? It sounds like Navico and Boats is part of that, but maybe are there others as well?

David Foulkes: Yeah. I think, know, it's certainly we need to continue the process of ensuring that we have good productivity and efficiency and that our overall capacity is aligned with our expectations for the market. We've been continuing to work on that. And I gave a few examples in the in the commentary that we previously provided. But there is more work to do And honestly, Joe, we'll we'll be able to share a bit more explicitly probably in the third quarter call on that or maybe in an some kind of intermediate basis. But there are various things that we're continuing to progress that will think, materially address fixed costs in those in those businesses.

Joe Altobello: Okay. Understood. Thank you.

Operator: Our final question is from Jamie Katz with Morningstar. Please proceed.

Jamie Katz: Hey, good morning. Thanks for squeezing me in. So I'm curious about the second half projection for both sales and it implies basically that we're returning to growth. And I'm wondering if part of that is just mix from higher-priced boats or if you guys have seen know, interest or rising commitments from dealers, that may help us see if we are at the trough.

Ryan Gwillim: Yes. Good morning, Jamie. I think it's kind of two things. One, good news in July has given us some momentum here as we get into the back half of the year, and we believe we'll continue to spur dealer orders. But certainly, the year-over-year comps versus the second half of last year really are a bit of a driving factor. We took substantial production out in the 2024 in order to keep inventory fresh and at the right levels. This year, just to match retail and wholesale, the wholesale will be stronger, right, in the second half.

And so yes, premium and core, we plan on being up more than value, as Dave and I have said on the call. But really, if you go back and look at production rates, it's just matching wholesale and retail and comparison versus an extremely light back half of 2024.

Jamie Katz: And then can we just focus on value? Obviously, are some value products that are moving. Do you guys have any insight into, like, what consumers what is facilitating conversion of those sales? And then maybe what we should be looking for, to determine when, those sales may return outside of interest rates perhaps?

David Foulkes: Yeah. A couple of things. Obviously, you know, that's just broader economic sensitivity in that by a population, if you like. So any uncertainties about, you know, inflation employment, other things tend to be more acute in that population. It is an area where we see more financing at the point of sale. So more sensitivity to interest rates certainly. I think we're doing a pretty good job in that segment, but it does require more promotions. You need to provide a reason for somebody to make that purchase. We try and do that by having the freshest inventory, the newest products, and other things in the marketplace.

But in the current environment, it, you know, also takes a bit of an economic push as well. So I think hopefully, we'll begin to see some interest rate reductions. In the back half of this year that will provide a bit more momentum We'd hope to see something earlier in the year, but those didn't materialize But I would say that those interest rate reductions are probably going to disproportionately benefit the buyers of value or entry-level product.

Jamie Katz: Thanks.

Operator: We have no further questions at this time. I would like to turn the conference back over to David Foulkes for some concluding remarks.

David Foulkes: Well, thanks for your questions, everyone. Much appreciated. It was another solid quarter for Brunswick Corporation, lots of new products. Very diligent operational work leading to our performance really across all of our businesses and segments. A couple of things probably stand out. Our cash performance and also the fact that our revenue was slightly up over the second quarter of 2024. It was nice to see that inflection. So great to see. As we noted, we're continuing to work hard and in a smart way to mitigate the direct impact of tariffs. But as we discussed in some of the questions here, our footprint and vertical integration, do provide us with a fundamental competitive advantage.

In the presence of persistent tariffs We are still we are working really tirelessly on further to re-expand margins. In the business, and we really have very tangible actions lined up to achieve that. And then finally, although we are beyond the midpoint of the selling season, we do get a real sense that the market wants to rebound. With just a little more kind of normalization of the macro backdrop maybe later in the season, some tailwind from interest rates. So as we enter the second half, we do enter it with some cautious optimism. Thank you very much.

Operator: Thank you. That will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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DATE

• Thursday, July 24, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

• President and Chief Executive Officer — Priscilla Sims Brown
• Chief Financial Officer — Jason Darby
• Chief Banking Officer — Sam Brown

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RISKS

• Nonperforming assets increased: Nonperforming assets rose to $35.2 million in Q2 2025, or 0.41% of total assets at Q2 2025, with a $2.4 million increase in residential nonaccrual loans cited as the primary driver.
• Exposure to consumer solar loan portfolio stress: Management noted "we expect our consumer solar portfolio to continue to experience stress as we explore strategic portfolio options," with 7.26% reserve coverage at period-end.
• Criticized and classified loans up: Criticized and classified loans increased by $13.9 million to $97.8 million, driven by downgrades across four C&I loans, one multifamily loan, and others.
• Syndicated C&I credit under review: Jason Darby stated, "the situation with this loan is fluid and could result in further reserves as the workout progresses," referring to a commercial and industrial business loan to a consumer solar originator.

TAKEAWAYS

• Shareholder Recognition: Amalgamated Financial (NASDAQ:AMAL) was ranked No. 38 out of 338 banks by American Banker for performance in the $2–$10 billion asset range, based on the last three years of performance results; labeled "number one most improved bank" among those already in top 100.
• Net Income: $26 million, or $0.84 per diluted share (GAAP), and core net income of $27 million, or $0.88 per share as a non-GAAP measure.
• Net Interest Income: Net interest income was $72.9 million, up 3.3% from the linked quarter and in the middle of the Q1 guidance range.
• Net Interest Margin: Held steady at 3.55% with a three basis point increase in cost of deposits to 1.62% due to interest-bearing deposit growth.
• On-Balance Sheet Deposits: Increased $321 million, or 4.3%, to $7.7 billion, including $112.3 million temporary pension funding; excluding temporary balances, deposits grew by $208.9 million, or 2.8%, to $7.6 billion.
• Political Deposits: Rose $137 million, or 13%, to $1.2 billion, and grew an additional $30 million in political deposit inflows through July 17, 2025.
• Not-for-Profit Deposits: Increased by over $100 million as new market share was gained.
• Loan Growth: Net loans receivable by June 30, 2025, increased by $35.5 million, or 0.8%, compared to the linked quarter, with multifamily, CRE, and C&I loans growing $60.8 million, or 2.1% from the linked quarter, offset by declines of $11 million in consumer loans and $11.8 million decrease in residential loans. (Segment loan increases do not sum to total, due to offsetting declines in other categories.)
• Loan Portfolio Composition: Net loans receivable were $4.7 billion as of June 30, with PACE (Property Assessed Clean Energy) loans at $1.2 billion. The PACE portfolio grew at over a 22% compound annual growth rate from the end of 2021 to the end of Q2 2025.
• Tangible Book Value per Share: Increased $0.82, or 3.5%, to $24.33; Tangible book value per share grew 18% over the four quarters ended June 30, 2025.
• Core Return on Average Equity: Core return on average equity was 14.61%, down from 15.23% in the prior quarter; core return on average assets at 1.28% due to a larger balance sheet.
• CET1 Ratio: 14.13%, down 15 basis points, but remains at a high industry level.
• Share Repurchase: 327,000 shares bought back for $9.7 million, the largest in company history, with $30 million of authorized repurchases remaining.
• Dividend: Board authorized a $0.14 per common share dividend to be paid in August 2025; targeted combined payout ratio of at least 20%-25% including buybacks and dividends.
• Allowance for Credit Losses: The allowance for credit losses on loans increased by $1.3 million to $59 million at the end of the first quarter. Coverage was 1.25% of loans at the end of the first quarter, due to a $2.3 million reserve for a C&I borrower in consumer solar originations.
• Noninterest Income: Core noninterest income was $9.3 million, primarily driven by higher commercial banking fees, partially offset by lower trust income.
• Core Noninterest Expense: Core noninterest expense was $40.4 million in the second quarter, down $1.1 million from the linked quarter, with professional fees declining by $1.5 million, while advertising expense rose by $400,000.
• Efficiency Ratio: Core efficiency improved to 49%, but is projected to rise in Q3 2025 due to staff additions and the digital transformation platform launch; The annual OpEx target remains at approximately $170 million for the year.
• Growth Initiatives: Added key hires in Western regional banking, CRE, and climate lending; new data-first integrated digital platform set to go live in Q3.
• 2025 Guidance Reaffirmed: Full-year 2025 core (non-GAAP) pretax, pre-provision earnings projected at $159 million–$163 million; net interest income targeted at $293 million–$297 million for the full year 2025.
• Third Quarter Outlook: Projected balance sheet growth to approximately $8.6 billion; net interest income guidance at $74 million–$76 million, with net interest margin expected to stay near flat due to continued DDA to IBA mix shift.

SUMMARY

Amalgamated Financial management signaled confidence in meeting full-year 2025 targets, reaffirming guidance for both pretax, pre-provision earnings and net interest income despite pressures in select portfolio segments. Strategic expansion efforts are focused on California, highlighted by new senior banking hires and targeted growth in multifamily, CRE, and C&I portfolios. The integrated digital monetization platform is on track for launch next quarter, with an expected near-term rise in expenses but targeted longer-term improvements in efficiency and revenue per share. Shareholder capital return increased through record repurchase activity, while dividend policy remains intentionally paced relative to overall company growth.

• Political deposits and not-for-profit client balances drove significant deposit inflows, positioning the company to fund new loan originations and support balance sheet growth strategies.
• Higher provisioning and criticized asset trends were attributed to isolated events and portfolio run-off in specific segments, with management emphasizing robust allowance coverage and active remediation efforts.
• Amalgamated's recognition by American Banker as the "number one most improved" among top 100 institutions underscores its three-year performance trajectory and market positioning in the sector.
• The board maintains flexibility to adjust buyback and dividend activity in response to share price or market conditions, stating it will "stand ready to be opportunistic at any time."

INDUSTRY GLOSSARY

• PACE: Property Assessed Clean Energy, a financing structure allowing property owners to fund energy efficiency or renewable energy projects through tax assessments.
• Core Efficiency Ratio: A non-GAAP measure reflecting operating efficiency by dividing core noninterest expense by core net revenue, excluding certain one-time or nonrecurring items.
• DDA: Demand Deposit Account, a non-interest bearing deposit account primarily used for business or consumer transaction purposes.
• IBA: Interest-Bearing Account, a deposit account that pays interest on balances, often used in reference to political or other large customer funds.
• CET1 Ratio: Common Equity Tier 1 Capital Ratio, a key regulatory capital measure for banks, representing core equity capital as a percentage of risk-weighted assets.
• CRE: Commercial Real Estate, referring to bank lending collateralized by income-producing properties, typically non-residential.
• CECL Model: Current Expected Credit Losses, the accounting methodology banks use to estimate future credit losses over the life of a loan.

Full Conference Call Transcript

Jason Darby: Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me today is Priscilla Sims Brown, our President and Chief Executive Officer. Additionally, Sam Brown, our Chief Banking Officer, is also here for the Q&A portion of today's call. As a reminder, a telephonic replay of this call will be available in the Investors section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available in the Investors section of our website. Before we begin, let me remind everyone that this call may contain certain statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We caution investors that actual results may differ from the expectations indicated or implied by any such forward-looking information or statements. Investors should refer to Slide 2 of our earnings slide deck as well as our 2024 10-Ks filed on 03/06/2025, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. We will also discuss certain non-GAAP measures during today's call, which we believe are useful in evaluating our performance. Presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with US GAAP.

A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release as well as on our website. Let me now turn the call over to Priscilla.

Priscilla Sims Brown: Good morning, everyone, and thank you for joining us. I'd like to start by talking about how Amalgamated continues to perform well regardless of the prevailing federal narrative and related headwinds. We again delivered solid results this quarter that continue to show the power and sustainability of our earnings and profitability highlighted by core earnings per share of 88¢. Reaching this EPS mark is something we're proud of, not simply because we hit our target, but rather because we now compete amongst some of the best-run banks in the country in terms of performance and results. And we are achieving our results because our banking model is flexible.

We have many levers we can pull to drive performance, and that creates reliability and predictability for our shareholders, our customers, and our employees. Our Q2 results featured a balanced scorecard for both strong deposit gathering and solid loan origination from our commercial growth portfolios. This type of balance makes us optimistic for a great second half of 2025, and let me share some more details with you. Starting with deposits, we recognized $209 million of on-balance sheet deposit growth through the second quarter, which does not include $112 million of temporary ordinary pension funding deposits which were received on the last day of the quarter but withdrawn the following day.

As a reminder from our Q1 call, we moved a majority of our Q1 off-balance sheet deposits on-balance sheet to fund loan originations and security purchases as we focus on driving net interest income growth. Our political deposits were a bright spot yet again, increasing $137 million or 13% to $1.2 billion in the quarter as fundraising begins to accelerate looking to the midterm which are just fifteen months away. Through 07/17/2025, we have had a further $30 million of political deposit inflows. Our not-for-profit segment also grew deposits by more than $100 million as our mission-oriented bankers brought new customer relationships to the bank and took market share.

Turning to assets, loan growth was balanced at over $60 million across our growth mode portfolios. Those are the multifamily, CRE, and C&I, and that drove about 2% loan growth. I was pleased to see these results, knowing that we also encountered a higher level of early payoff and paydowns on loans. We do expect this rate of payoff activity to begin to slow in the third quarter. All in, despite the solid numbers, we were still modestly behind our 1.5% to 2% target across the entire loan portfolio due to declines in our consumer solar and residential real estate loan portfolios which we have been deemphasizing and will continue to run off over time.

Going forward, I think we have built the team we need to achieve our loan growth targets, and I'm excited to share more about that with you now. Since joining Amalgamated more than four years ago, I have been focused on expanding our lending platform through recruiting performance-oriented bankers. This expansion has led to improved loan growth; we have increased our loan portfolio at a 10% compound annual growth rate from $3.1 billion at the end of 2021 to now $4.7 billion at the end of the 2025 second quarter. Additionally, our PACE portfolio has grown at over 22% compound annual growth rate to $1.2 billion over that same period.

While I'm very pleased with our success growing our team and our portfolio, I see an opportunity to further expand our lending platform as well as our presence in large and growing markets. For example, California is a market where we currently have a presence in San Francisco, but we see the whole state as a large growth opportunity for both loans and deposits. To accomplish this, Sam Brown and John Salkos, our director of commercial banking, have been recruiting experienced bankers and they have made great strides during the second quarter. And so I'd like to make a few key introductions this morning.

Leading off, Brian Choi has joined the bank as our Western Regional Director, where he will lead our banking efforts in the West. Brian has twenty-five years of banking experience in California where he was most recently the vice president of lending strategy and sales at First Republic Bank. Next, Ken Gaitan has also joined Amalgamated as a senior relationship manager in charge of growing our commercial real estate portfolio in the West as well as leading our strategic efforts to further grow our customer base in California with a focus on the Bay Area. Ken has more than twenty-five years of CRE lending experience on the West Coast and ascending leadership roles at multiple financial services firms.

Additionally, Ken Edens has joined as our director of climate and C&I lending. Ken brings more than two decades of lending experience on the West Coast. Most recently at East West Bank where he led that organization's project finance practice in multiple asset classes including renewable energy. Ken will lead our climate and C&I lending team nationally to help us accelerate our overall C&I lending growth. I emphasize overall C&I lending in reference to my earlier point about our flexible business model. The recently passed budget law will add pressure on areas of the renewable sector that rely on tax credits.

And while we expect a minimal impact on our business, given that tax credits will not be phased out until 2027, and that the projects we have in our pipeline are shovel-ready and will fund prior to that, we nevertheless seek additional C&I channels and healthy risk-adjusted returns that are mission-aligned and Ken is the right person to lead us. Hopefully, you're picking up my themes for growth and optimism. If you recall, we entered this plan year with a bit of negative operating leverage, as we said we needed to make investments for the purpose of growing revenue. And we've been doing just that.

We've mainly spoken about producer investments to open up markets and channels, but now I'd like to talk a bit about our progress on infrastructure investments. Which are critical for scalable growth that prioritizes revenue per share in the future. When I first started, I introduced our four pillars strategic framework to guide our team. As part of our driving effectiveness and efficiency pillar, we have been investing in data-first fully integrated digital monetization which will drive improved productivity, provide a holistic view of our customers to better understand their needs, and provide more customized solutions and ultimately deliver improved revenue growth. This platform will go live in the third quarter.

And it's absolutely essential to remain competitive and to drive loyalty. When the platform comes online, it will drive an uptick in our second half expenses, which we've expected. But as I discussed on our first quarter call, we are carefully managing our investment spend to ensure we maintain core efficiency at an outer band of approximately 52%. This is part of our modernization roadmap as we make the necessary investments to drive organic growth and ready Amalgamated for our eventual move through the $10 billion mark in assets. Closing my remarks, we are seeing a normalization in the political narrative as the rhetoric has started to subside.

While mission-oriented businesses increasingly see Amalgamated as a destination with a strong financial foundation. Our mission alignment is the reason customers choose to do business with the bank, and perseverance continues to build for many of our core customer segments, which bodes positively for the second half of the year. I would also note that we are seeing a strong level of new customer with a healthy pipeline of new potential relationships as we look forward to the back half of the year. This provides confidence in our ability to deliver on our earnings guidance once again this year.

And one last thing, I mentioned that we now compete against the best banks in the country in terms of performance results. Jason will have some interesting stats to share with all of you. So with that, let me turn the call over to Jason.

Jason Darby: Good morning. Thanks, Priscilla. Something a little fun before we dive into the numbers. The American Banker just released their list of the top-performing banks in the $2 billion to $10 billion asset size range. Amalgamated Bank was ranked number 38 out of 338 banks. That's a pretty darn good number in itself. But more importantly, Amalgamated was the number one most improved bank out of those already in the top 100 as we moved up nearly 50 spots in one year. And this is the culmination of the last three years of performance results and also validation that we're in the upper echelon of bank performance in the US.

And moving to our results, we again had another solid quarter. Starting off with key highlights on Slide 3, Net income is $26 million or $0.84 per diluted share, and core net income, a non-GAAP measure, was $27 million or 88¢ per diluted share. Our net interest income grew by 3.3% and was right in the middle of Q1 guidance range at $72.9 million as we grew our balance sheet by 2.8% to our target average of $8.45 billion. Please note that our period-end balance sheet includes $112.3 million of temporary deposits that were not part of our managed target and had almost no impact on our average balances. Our net interest margin held steady at 3.55%.

And although we did not meet our target for modest margin expansion this quarter, we're pleased our margin held because a significant majority of our net deposit growth came from interest-bearing deposits which drove a three basis point increase in our cost of deposits. Also, most of our reported loan growth booked towards the end of the quarter, and as a result, we did not receive the NII and yield benefit of those loans. That said, it does set up a solid base for the second half of the year to reach our NII targets. And have decent margin expansion likely in the fourth quarter. Lastly, we hit our leverage target of 9.2% pretty much on the nose.

We are particularly happy with this result as during the quarter, we executed the largest repurchase of shares in the bank's history. I'll have more on this in a little bit. Continuing to slide four, we look at some of our key performance metrics during the second quarter. Starting on the left, our tangible book value per share increased $0.82 or 3.5% to $24.33 and that has grown 18% over the past four quarters. And our core revenue per diluted share was $2.67 for the second quarter, a 10¢ increase from the prior quarter. This increase was due to a combination of higher net interest income and the effect of our share repurchases.

Moving across to our returns, Core return on average equity was 14.61%, a decline from 15.23% in the prior quarter. Which was expected as organic capital built another $18 million through earnings generation. That said, we remain near the top of the pack and are well positioned to continue returning more capital to shareholders. Our core return on average assets declined to 1.28% given our planned larger balance sheet size.

Regarding capital, our CET1 ratio modestly decreased 15 basis points to 14.13%, remains at an industry-leading level, demonstrating the strength of our balance sheet and the conservative risk-based allocation of our capital while still generating high-level earnings. As previously mentioned, tier one leverage maintained at 9.22%. Yet during the second quarter, we also ratably repurchased 327,000 shares or $9.7 million worth of our common stock. This is a big step for Amalgamated and shows our board of directors is committed to returning capital to shareholders. Additionally, our board authorized a 14¢ per common share dividend this week to be paid in August.

Looking forward, we expect the pace of buybacks to moderate in 2025 particularly if our share price rises to a level we feel more adequately reflects our forward earnings projection. But we stand ready to be opportunistic at any time as we still have over $30 million of authorized availability. We will continue to target a quarterly payout ratio of at least 20 to 25%, which includes both share repurchases and dividends. However, similar to Q1 and Q2, we may opportunistically choose to exceed that target. Turning to slide five.

On-balance sheet deposits increased by $321 million or 4.3% to $7.7 billion which includes $112.3 million of temporary pension funding deposits received on the last day of the quarter and withdrawn on the following day. Excluding these deposits, total deposits increased $208.9 million or 2.8% to $7.6 billion. We also held $41.4 million of off-balance sheet deposits at the end of the quarter. Our non-deposits decreased to approximately 38% of average deposits and 36% of ending deposits, resulting in a three basis point rise in our cost of deposits to a still low 162 basis points for the second quarter.

A driver to the decline in our noninterest-bearing deposits is the growth in our political deposits, skewing more towards interest-bearing than DDA. It is not a surprise given that interest rates have remained persistently high. That said, we do not anticipate any significant upward changes in our posted rates going forward, which should drive margin reliability. Turning to slide eight. Net loans receivable at 06/30/2025, are $4.7 billion an increase of $35.5 million or 0.8% compared to the linked quarter.

Our loan growth in the quarter was primarily driven by a $34.2 million increase in multifamily loans, and a $13.5 million increase in commercial and industrial loans, and a $13.1 million increase in commercial real estate loans partially offset by an $11 million decrease in consumer loans and an $11.8 million decrease in residential. It's important to remind that our consumer solar and residential loan portfolios are primarily in run-off mode, and we do not expect to grow those portfolios in the near future. Our growth portfolios, which include C&I, CRE, and multifamily, $60.8 million or 2.1% from the linked quarter, which is healthy growth.

The yield in our total loan portfolio increased five basis points despite a $35.6 million decrease in average loan balances as diversified commercial loan origination was offset by paydowns and payoffs on commercial and industrial loans, lower-yielding residential loans, and consumer solar loans in the quarter. Additionally, our loan growth occurred at quarter-end, which suppressed our average loan balances during the quarter. Turning to slide nine. Core noninterest income was $9.3 million compared to $9.1 million in the linked quarter. This increase was primarily related to higher commercial banking fees, partially offset by lower income from trust fees.

As we've discussed on prior calls, improving the consistency of our trust business performance will take time, and we do not expect meaningful improvement until 2026. Core noninterest expense is $40.4 million in the second quarter, a decrease of $1.1 million from the linked quarter. This is mainly driven by a $1.5 million decrease in professional fees, partially offset by a $400,000 increase in advertising expense. And while our core efficiency ratio declined to 49%, we expect that ratio to rise in the third quarter due to costs related to the added sales staff and expected digital transformation deployment that Priscilla discussed, and we will keep our target of approximately $170 million for annual OpEx.

Moving to Slide 10, nonperforming assets totaled $35.2 million or 0.41% of period-end total assets at 06/30/2025 representing an increase of $1.3 million on a linked quarter basis. The increase is primarily driven by a $2.4 million increase in residential nonaccrual loans, partially offset by a $500,000 decrease in nonaccrual loans held for sale. Net charge-offs in the quarter were 0.3% of total loans and consisted of $2.6 million in charge-offs on our consumer solar loans, and $900,000 in charge-offs for small business C&I loans. Going forward, we expect small business loan charge-offs to ease as we have paused new loan origination. And the outstanding portfolio balance is now $7.4 million of which 82% are pass grade.

However, we expect our consumer solar portfolio to continue to experience stress as we explore strategic portfolio options, We remind investors that Amalgamated is well reserved for this portfolio with 7.26% coverage at period-end. Our criticized and classified loans increased by $13.9 million to $97.8 million largely related to the downgrades of four C&I loans totaling $9.7 million, the downgrade of one multifamily loan totaling $2.8 million, additional downgrades of small business loans totaling $1 million, and an increase of $2.1 million in residential and consumer substandard loans. Turning to slide 11, the allowance for credit losses on loans increased $1.3 million to $59 million.

The ratio of allowance to total loans is 1.25% at the end of the first quarter, an increase of two basis points from 1.23% in the prior quarter. The increase was primarily the result of a $2.3 million increase in reserves from one commercial and industrial loan as well as increases in provision related to the macroeconomic forecast used in the CECL model. The loan associated with the increased reserve is a commercial industrial business loan to an originator of consumer loans for renewable energy efficiency improvements. During the quarter, $2.5 million of debtor in possession or dip financing was put in place a portion of which was advanced that increased our outstanding exposure from $8.3 million to $9.3 million.

Additionally, during the third quarter, the remainder of the debt financing was advanced bringing the total exposure to $10.8 million as of the date of this call. And while there remains collateral value, the situation with this loan is fluid and could result in further reserves as the workout progresses. We believe this to be an isolated situation, not reflective of our broad and diverse renewable energy commercial portfolio, something we think is well reflected in our allowance coverage ratio. Finishing on slide 12.

We are maintaining our full-year 2025 guidance of core pretax, pre-provision earnings, of $159 million to $163 million and net interest income of $293 million to $297 million which considers the effect of the forward rate curve of 2025. Additionally, we estimate an approximate $1.9 million in annual net interest income for a parallel 25 basis point decrease in interest rates beyond what the forward curve currently suggests. Briefly looking at the third quarter of 2025, we target modest balance sheet growth to approximately $8.6 billion dependent on projected deposit balances.

As a result, we expect our net interest income to range between $74 million and $76 million in the third quarter, and we expect our net interest margin to stay near flat relative to our Q2 mark as we believe our DDA to IBA ratio may continue to decline from Q2 given the current interest rate environment and Fed stance. Wrapping up, we're delighted to deliver another solid quarter of results for our shareholders and driving towards being in the top 20 in next year's American Banker rankings. And now, operator, please open up the line for any questions.

Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad.

Mark Fitzgibbon: Our first question is from Mark Fitzgibbon with Piper Sandler. Hey, guys. Good morning and good luck with the American Banker poll next year.

Priscilla Sims Brown: Good morning, Mark.

Jason Darby: Good morning.

Mark Fitzgibbon: Priscilla, first question I had, I heard your comments around the expansion in California. And I guess I was curious, is it likely that expansion will be all organic or do you envision some M&A potentially playing a role in that or maybe some combination of the two?

Priscilla Sims Brown: Well, we're not making an M&A announcement on this call, Mark. I would say that we see significant opportunity organically. In fact, in California, a good portion of our business today on the books, excuse me, is in the LA area. So adding one banker there and the ability to expand there seems logical. We also have currently in our San Francisco office, bankers who do work in the East Bay and we're looking at organic expansion into the East Bay in a bigger way. So those are some of the activities we have underway. Anything else will evolve over time as appropriate.

Mark Fitzgibbon: Okay. And then secondly, Jason, I heard your comments on that syndicated C&I credit. I guess I was curious what industry it's in, maybe some sense of how long you think the resolution might take and any other, you know, color you could share with us would be helpful.

Jason Darby: Yeah. Absolutely. And again, it's part of our commercial solar portfolio, but it is to an originator of consumer solar renewable fixtures, if you will. And the distribution of those loans is broadly throughout the United States. So there's quite a bit of collateral value that's out there relative to this provider of credit. The industry in general from a consumer point of view has had some stress. You've seen that flow through in our numbers, and this originator is obviously having an impact as a result of that. Now from the standpoint of a resolution, it's difficult to say right now.

I think we took a haircut on our collateral value assessment at the end of the second quarter based on some new events that have come up. What I can share is the lending group is actively working on sourcing credit bids to facilitate an orderly transition and keep all the remaining servicing intact. There have been some developments that have called into question the bid process and what some of the excess cash would end up being, which is why we drove that reserve.

But where we are right now is trying to figure out a way where all parties can recognize that the interest or the best interest of everybody is to have the originator remain intact and have the servicing continue. And so those are ongoing active negotiations that are happening as we speak, literally. And probably we'll have more information over the coming weeks. But with regard to the probability of outcome, it's a little too early to say other than we'll come back and remind that there is good collateral there. And that the bid process, we think, is going to be the most likely outcome once it gets back on track from a negotiation perspective.

Mark Fitzgibbon: Okay. Great. And then somewhat related, I guess, is it fair to expect that provisioning may run at a slightly higher level than what we've seen recently? Given some of the pressures and things like multifamily or the green energy space? Do you feel like you know, it's it's gonna be necessary to run at a little bit higher level?

Jason Darby: We really take that quarter by quarter and almost loan by loan from an assessment of provisioning. And I think the reflection of our provision decisions this quarter is pretty indicative of how we feel about the overall portfolios right now. I think in our multifamily and our CRE portfolios, we've been through a large portion of the maturities that would have driven us to have to really raise provision rates at this time. And we feel good about how we preserve for that at the moment. On the C&I side, we actually had pulled out the specific reserve a bit of a decline in coverage ratio went from about 129 to 123.

On the overall C&I portfolio, which includes the renewables. And that's just our best show for you as our view of the credit quality of the portfolio. And looking forward, there's some new things that are coming up. Obviously, there's some potential pressure from the mayoral change in the New York City market. And there's some other things that we're keeping our eye on relative to the budget bill and how that might affect our pipeline and portfolio going forward. But we'll always be very transparent, Mark, that the coverage ratios in quarter will be the best indicator of where we see things trending.

And what I can say right now is we feel very comfortable with the portfolio as it is. There's always a possibility it could increase in the future, but right now, we feel pretty good about how we've reserved for the portfolio as of the quarter.

Mark Fitzgibbon: Thank you.

Jason Darby: You're welcome.

Operator: Our next question is from David Conrad with KBW.

David Conrad: Yeah. Good morning, everyone. Had a couple questions. One on NIM and the NIM outlook. I mean your deposit base is so strong and tough to get a lot of leverage now there. But in terms of the loan yields and stronger EOP balance, just trying to figure out what the loan yields coming on are towards the end of the quarter and kind of build that into our outlook.

Jason Darby: Yep. Certainly. I'll take that, and maybe Stan can pop in on the Outlook for productivity. But on the bring-ons, we were really in the high five to 6% range on the CRE and multifamily. We came in about six, 70% on C&I. And our PACE portfolio was about 7%. So decent bring-ons, I think, the upcoming quarter on the multifamily CRA maybe. 30 basis points higher, bring-on opportunity. And maybe 15 basis points or so higher on the C&I's. I think pace would be relatively similar, around 7%. Although opportunistically, it could get a little bit higher depending on certain types of deals. So I think on the asset side, there's good opportunity for lift.

When we gave our guidance for the margin for Q3, and we're saying it's remaining flat, I think there's a couple of things that's driving that. The first is that there's a bit of an outsize in our securities portfolio and we try to maintain structural credit integrity. So we're not going high, high up on the yield there. So as we have a little bit more of that volume, coming through, and going for reset, we're gonna end up dragging some of the gain we'll have in the loan yield in the third quarter. So we think that's just going have a neutralizing effect for the most part on the asset yields.

And to your point, we think the cost of funds is going be pretty stable, and we're not really modeling a tremendous amount of benefit from any type of rate reduction on cost of funds going forward because we just are assuming a higher I'm sorry, a lower beta on that. Now going forward to Q4, though, that's where we think there's going to be an opportunity for margin expansion because we'll eventually see a flip into probably more DDA from IBA as the political deposits continue to ramp up. And so when we get towards the end of the third quarter and into the fourth, we hope that there'll be a little bit of a shift there.

That'll put a little bit of reduction of pressure on the cost of funds side. And then as we continue to trade out of the securities portfolio to fund new loan originations, that's where we think we're going to get that asset yield pick up because the loan yields will sort of run the table, and the securities won't drag as much.

David Conrad: Got it. Thank you. And then maybe a little bit color of the run rate for next quarter expenses. It sounds like you're going to tick up a little bit based on what you said in the full-year guide.

Jason Darby: Yeah. The expenses, I do think we're going to pick up to the extent that it's 3 and a half million or so more than the 40.4 we came in. I don't exactly know. I'm really happy with the levers that we were able to pull and the discipline that we showed in this quarter to be able to create some room in our expense profile for the back half of the year. Do know we're gonna have added compensation expenses Priscilla mentioned before all the new producer bankers that we've hired. Obviously, there'll be a call to that, but we're excited about the revenue capabilities that they'll bring into the following year.

Then this digital transformation process that we've been undergoing for the better part of a year, and there's a decent amount of accumulated balance expenses that are going to start to roll through. That's gonna also have a revenue benefit. But what we're seeing right now is keeping the $170 million target for the end of the year I think we'll be starting to look ratably between the two quarters if we're going to hit that $1.70. But, David, I think the other thing is if there's room for us to surprise on the pretax pre-provision guidance we're given, it will be on a betterment of expenses through the back half of the year.

David Conrad: Got it. And then last one for me, just on the capital. Appreciate your comments about being opportunistic on the buybacks. So just maybe a little bit thought on the dividend and maybe you know, the longer term you know, thoughts on a, a dividend payout ratio.

Jason Darby: So I always try to be wrapped in my comments about the overall payout rate between the buyback and the dividend. And we've targeted 20% to 25%. But the other thing that I target is generally a two to two and a half percent yield. And the reason why I think of it that way is because we still view Amalgamated very much as a growth stock. And so we don't wanna be over-indexed on the yield. But what I do point to is we've been moving up the dividend scale more frequently than we have in the past. If we went back to when we IPOed, we were really every two years doing roughly a 2¢ dividend increase.

Last year, we moved to one year on a $0.02 dividend increase. And I would think we'll continue pace in that way and potentially be able to increase the penny or so that we've talked about maybe more than 2¢ going forward, but I don't have an exact target for you yet. Other than that we're very conscious of the actual dividend yield and needing to be a little bit higher up on the scale there.

David Conrad: Great. Perfect. Thank you.

Jason Darby: You're welcome. Thank you.

Operator: There are no further questions at this time. I'd like to hand the floor back over to Priscilla Sims Brown for any closing comments.

Priscilla Sims Brown: Great. Thank you for those questions and your engagement. Thank you all for your time. We appreciate all of those questions, and we look forward to the opportunity to discuss these more with you, in the one-on-ones. I also would like to thank our employees as always for their hard work and dedication to the bank and our customers. Our success would not be possible without the commitment and determination of our talented team. We look forward to updating you on our progress on our third-quarter call. Thank you again for your time today.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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DATE

• Thursday, July 24, 2025 at 10 a.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Frank Sullivan
• Vice President and Chief Financial Officer — Michael LaRoche
• Vice President – Treasurer and Investor Relations — Matthew Schlarb
• Vice President and Controller — Rusty Gordon

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RISKS

• Management expects higher net interest expense due to increased M&A-related debt, guiding to a range of $105 million to $115 million for FY2026.
• Raw material and packaging inflation, particularly in metal packaging and propellants, is projected to be a margin headwind, with a negative 4%-5% tariff-related impact potentially unmitigated for FY2026.
• Sustained low or negative DIY activity and a forty-year low in housing turnover have resulted in eight consecutive quarters of flat or declining consumer segment volumes, particularly impacting the Rust Oleum business, as reported for Q4 FY2025.
• Temporary negative price/cost dynamics in Q1 FY2026, primarily due to inflation and lagging price implementation, will offset operational efficiency benefits.

TAKEAWAYS

• Sales Growth: Consolidated sales increased by 3.7%, setting a Q4 FY2025 record, with growth led by systems and turnkey solutions, repair and maintenance products, and recent acquisitions.
• Adjusted EBIT: Adjusted EBIT rose by 10.1% to a record in Q4 FY2025, benefiting from MAP 2025 initiatives, higher volumes, and improved fixed cost leverage.
• Adjusted EPS: Adjusted EPS (non-GAAP) reached a record in Q4 FY2025, driven by improved EBIT performance.
• Geography: Sales growth in Q4 FY2025 was led by Europe, driven by Performance Coatings and M&A; North America by high-performance building solutions; Latin America and Africa/Middle East grew, while Asia declined.
• Segment Performance: Construction Products Group and Performance Coatings Group achieved record sales and adjusted EBIT in Q4 FY2025, while Consumer Group sales declined slightly but reached a record adjusted EBIT margin due to MAP 2025 benefits.
• Acquisitions: FY2025 marked RPM's largest M&A year, with recent acquisitions of TMPC and Pink Stuff; debt increased by $519.5 million year over year due to acquisition funding.
• Cash Flow and Liquidity: Operating cash flow reached $768.2 million for FY2025, the company's second-highest, enabling $39 million (13.5%) higher shareholder payouts and supporting increased M&A activity.
• MAP 2025 Benefits: The operating improvement program is expected to deliver $70 million in incremental benefits for FY2026; since FY2022, adjusted EBIT margin has expanded by 260 bps, and working capital efficiency has improved by 320 bps.
• Cost Actions: SG&A streamlining actions completed in Q1 FY2026 are expected to yield $15 million in annual savings, with about one-third redeployed to higher-growth initiatives.
• Capital Expenditure: CapEx is expected to be in the $220 million to $240 million range for FY2026, up due to facility expansions and plant consolidations, with major projects in Belgium and India.
• Organizational Change: The company shifted to a three-segment structure, with Specialty Products Group operations reallocated to existing segments for improved efficiency and synergy realization.
• Outlook: Fiscal 2026 guidance calls for low- to mid-single-digit consolidated sales growth and high-single- to low-double-digit adjusted EBIT increases, with margin expansion.
• Tariff and Inflation Outlook: Inflation in Q1 FY2026 is projected at 1%-2% (mainly in Consumer), with tariff-related impacts comprising a significant share of input cost pressures; price actions are scheduled for later in the summer and early fall.
• Working Capital: Management expects an additional 200-300 basis point improvement in working capital as a percent of sales going forward, with progress expected in FY2026.

SUMMARY

RPM International (NYSE:RPM) reported record Q4 and FY2025 results, highlighting continued gains from MAP 2025 operating initiatives and its largest M&A year to date. Management announced a structural shift to three operating segments aimed at accelerating revenue synergies and SG&A efficiencies, with immediate $15 million in cost actions and redeployment to growth investments in Q1 FY2026. The executive team anticipates $70 million in incremental operating improvement benefits for FY2026, while also projecting higher net interest expense from increased M&A debt and near-term gross margin headwinds due to raw material inflation and tariffs. Explicit guidance details low- to mid-single-digit sales growth and high-single- to low-double-digit adjusted EBIT growth for FY2026, with improving working capital and capital reallocation set to support further organic and inorganic expansion.

• Frank Sullivan said, We anticipate the ability to consistently generate two to three points of organic growth on a consolidated basis for FY2026. reinforcing a focus on organic growth despite challenging market conditions.
• The consumer segment faces eight quarters in a row of no or negative, DIY takeaway, and we've never seen anything like that, signaling sustained demand pressure.
• The company clarified that Inflation is largely concentrated in our consumer business in early FY2026, particularly around packaging, propellants, and some pigments, but expects price increases to help offset these pressures later in the year.
• Frank Sullivan emphasized that Most of that Q4 FY2025 pickup was from M&A. A significant portion is from Pink Stuff, which has a disproportionate share of its business in the UK and Europe.
• The new three-segment operating model is expected to create both “operational … [and] revenue side” synergies, particularly in industrial coatings and color businesses.
• Working capital improvement opportunity remains, with a target of another 200 to 300 basis points of improvement in FY2026, or potentially extending into FY2027.
• The company reiterated its long-term EBIT margin target, with Frank Sullivan stating, “We are going to get to that 16% market margin target [in the next two or three years],” though not yet expecting that level in fiscal 2026.

INDUSTRY GLOSSARY

• MAP 2025: RPM’s multi-year operating improvement program launched to drive margin expansion, working capital efficiency, and cost savings across businesses.
• Turnkey Solutions: Comprehensive, system-based offerings where RPM provides both products and application services to customers, often emphasizing high-performance buildings.
• SG&A: Selling, General, and Administrative expenses; non-production operating costs subject to streamlining initiatives discussed on the call.
• DayGlo: RPM’s fluorescent pigment brand, highlighted for strategic consumer segment integration and marketing leverage.

Full Conference Call Transcript

Frank Sullivan: Thank you, Matt. I'll begin today's call with a high-level review of our fourth quarter and full year results and some additional details on our newly announced three-segment operating structure. Then Michael LaRoche will cover the financials in more detail. Matthew Schlarb will provide an update on cash flow and the balance sheet. And finally, Rusty Gordon will then conclude our prepared remarks with our outlook for fiscal 2026 full year and the first quarter. As always, we'll be happy to answer your questions after our prepared remarks. Highlights from our fourth quarter results can be found on slide three.

Thanks to the hard work of RPM associates, we demonstrated the power of RPM as we combined solid top-line growth with improved operating efficiency that has been enabled by our MAP 2025 operating improvement initiatives. This resulted in fourth quarter sales, adjusted EBIT, and adjusted EPS all at record levels. We generated positive volumes led by systems and turnkey solutions for high-performance buildings as well as our focus on maintenance and repair. The volume growth resulted in improved fixed cost leverage and allowed us to better realize the financial benefits of our MAP 2025 operating improvements.

All segments increased adjusted EBIT with the largest growth coming from our Construction Products Group and Performance Coatings Group, which generated volume growth that leveraged MAP '25 benefits to the bottom line. Additionally, three of four segments generated record Q4 adjusted EBIT. Turning to slide four, the record results we generated in the fourth quarter reflected a strong and consistent trend as we had delivered record adjusted EBIT in 13 of the last 14 quarters. In fact, we generated record annual sales, adjusted EBIT, and adjusted EPS in each year since we began the MAP 2025 program in what can be best described as a mixed economic environment. Additionally, in fiscal 2025, we generated a record adjusted EBIT margin.

Moving to slide five, in addition to the consistent progress we've achieved, the cumulative impact of these improvements during MAP-twenty five has been significant. Compared to our baseline fiscal year of 2022, we expanded gross margins close to our 42% goal, adjusted EBIT margin by 260 basis points, and improved working capital as a percent of sales by 320 basis points. These improvements in margins and working capital efficiency strengthen our cash flow and allowed us to complete the largest year of acquisition in RPM's history in fiscal 2025. Importantly, our balance sheet remains strong with credit metrics still close to our best ever. These results are a testament to the dedication and relentless persistence of our associates.

And I want to thank them for their execution of our operating improvement initiatives and commitment to RPM during this challenging low growth, no growth environment. As we look to the future, we are focused on realizing the full power of RPM, essentially building on the efficiencies we have ingrained into our businesses and accelerating growth to take full advantage of those efficiencies. To accelerate growth, we are taking a more strategic approach to allocating capital to both organic and inorganic opportunities. This includes leveraging the progress we have made in data analytics through MAP-twenty five to capture true profitability so we can focus investments on the highest potential opportunities and then aggressively pursue growth in those areas.

We are starting to see this take hold as we begin fiscal 2026. As an example, we recently implemented million dollars in SG&A streamlining actions and a portion of these savings are being reallocated into our highest growth opportunities in attractive end markets like turnkey engineered solutions, cleaners, and international markets in the developing world. These investments are in areas such as technical sales force expansion, marketing, new products, and new facility build-out. One other key element of our growth plan that has been enabled by our MAP 2025 initiative is a cultural shift that has taken place to allow our businesses and associates to collaborate more closely or what we call connections creating value.

This will drive additional organic growth opportunities and synergies in 2026 and beyond. To accelerate this shift towards realizing the full power of RPM, we've changed our operating structure to three segments: Construction Products Group, Performance Coatings Group, and the Consumer Group. As you can see, this new structure on slide six, businesses that have previously been part of our specialty product group are now reorganized under the three groups mentioned above. This new structure will allow us to achieve additional operational and administrative efficiency and enable our businesses to work more closely to realize synergies in new business generation, product development, and sourcing.

For example, our industrial coatings group of businesses has joined the performance coatings group and will benefit from improved collaboration on high-performance coatings development with our Carboline division as well as a broad distribution network, which will improve customer service levels. The color business has now joined the consumer group which through insourcing has become Dayglo's largest customer. The new structure will allow cooperation more closely and efficiently in color specifications, a critical component of our consumer products, in particular Rust Oleum. This change will also allow the Color Group to operate with a more streamlined overhead structure and leverage our Consumer segment's strong marketing know-how to raise the profile of our well-known DayGlo fluorescent pigment brand.

Importantly, this will not change what has served our RPM so well throughout our history. Having an entrepreneurial culture that serves our customers with leading brands, products, and services and staying true to our core values of operating with transparency, trust, and respect. We are pleased with the fourth quarter results our associates achieved in a continuing low to no growth environment which continues to be unsettled due to the ongoing tariff uncertainty. We are optimistic about our opportunities to continue this positive momentum into and throughout fiscal 2026. I'll now turn the call over to Michael LaRoche to cover our financials for the quarter in more detail.

Michael LaRoche: Thanks, Frank. On Slide seven, consolidated sales increased 3.7% to a fourth-quarter record led by systems and turnkey solutions for high-performance buildings, a focus on repair and maintenance solutions, and acquisitions. Q4 adjusted EBIT increased 10.1% to a record as volume growth allowed us to better leverage MAP 2025 initiatives and overcome headwinds from temporary cost inefficiencies from plant consolidations and raw material inflation which was driven by metal packaging. Profitability headwinds included higher M&A expenses, higher variable compensation associated with the sale of technical products, and the SG&A from acquired businesses, partially offset by SG&A streamlining actions. Fourth-quarter adjusted EPS was also a record driven by the improved adjusted EBIT. Turning next to geographic results on Slide eight.

Growth was led by Europe, where growth in Performance Coatings and M&A benefited sales. In North America, sales growth was driven by system and turnkey solutions serving high-performance buildings. Emerging market sales were mixed. Latin America grew excluding FX, Africa and the Middle East grew modestly in addition to solid prior year sales, and Asia declined as economic conditions in the region remained soft. Next, moving to the segments on Slide nine. Construction Products Group sales increased to a record driven by systems and turnkey roofing solutions serving high-performance buildings. This was in addition to strong prior year results. MAP 2025 and higher sales of Engineered Systems and Services that expanded margins drove record adjusted EBIT.

This was partially offset by temporary inefficiencies from plant consolidations. On Slide 10, Performance Coatings Group achieved record sales, led by Turnkey Flooring Solutions serving high-performance buildings, fiberglass reinforced plastic structure growth, and M&A. Adjusted EBIT was a record as higher volumes improved fixed cost leverage, which was aided by MAP 2025, and as a result of sales mix improvement. Moving to Slide 11. Specialty Products Group sales improved as specialty OEM showed signs of stabilization after a cyclical downturn. Food Coatings continued to perform well and was aided by a prior acquisition. Demand was soft in the Fluorescent Pigments and Disaster Restoration businesses.

Adjusted EBIT increased thanks to MAP 2025 benefits, partially offset by a $2.5 million bad debt expense due to a customer bankruptcy and higher start-up expenses at our resin center of excellence. On Slide 12, the Consumer Group sales declined modestly as new product introductions, and one month of the Pink Stuff acquisition were more than offset by continued DIY softness. We also continued rationalizing SKUs which had a negative impact on sales, but helped improve the adjusted EBIT margin. Adjusted EBIT increased to a record driven by MAP 2025 benefits, which more than offset the sales decline and raw material inflation. Now I'll turn the call over to Matt who will cover the balance sheet and cash flow.

Matthew Schlarb: Thank you, Mike. Our strong cash flow in fiscal 2025 was enabled by MAP 2025 profitability and working capital improvements allowed us to continue returning cash to shareholders in the form of dividends and share repurchases. Overall, these increased $39 million or 13.5% over the prior year. Operating cash flow for fiscal 2025 was $768.2 million, the second-highest amount in the company's history, surpassed only by the prior year when there was a large working capital release when supply chains normalized. During fiscal 2025 fourth quarter, inventories increased as we made strategic purchases of raw materials to mitigate the impact of future tariffs.

This strong cash flow also contributed to the funding of several acquisitions in 2025, which is the largest M&A year in RPM's history. This momentum has continued in the New Year with the acquisition of Ready Seal, a leader in high-quality and easy-to-use exterior wood stains during the first month of fiscal 2026. Debt increased by $519.5 million year over year, primarily driven by the funding of TMPC and the Pinkstuff acquisitions. Despite this debt increase, our leverage ratio is near all-time best levels and liquidity remains strong at $969.1 million.

CapEx increased $15.9 million over the prior years as we invested in growth projects, including the Residence Center of Excellence and a distribution center, both of those facilities being in Belgium, a new production and research facility in India. The consolidation of eight plants through our MAP 2025 program also contributed to the higher CapEx. Now, I'd like to turn the call over to Rusty to cover the outlook.

Rusty Gordon: Thank you, Matt. Moving to our full-year outlook on Slide 14, we expect another year of record sales and adjusted EBIT in 2026 including margin expansion, as we benefit from MAP 2025 carryovers as well as from recent acquisitions. We expect sales to increase low to mid-single digits and adjusted EBIT to grow in the high single to low double-digit range. We will leverage the things within our control including implementing additional efficiency initiatives, and focusing on turnkey and system solutions for high-performance buildings. Our new three-segment organizational structure will contribute to improved collaboration and SG&A streamlining. Overall, SG&A streamlining actions completed throughout the first quarter will save around $15 million on an annualized basis.

With most of the benefit coming in future quarters. Approximately one-third of these savings will be reallocated into higher growth business platforms for technical sales force expansions, and increased marketing activities. Additionally, we are in the process of consolidating eight less efficient plants while opening three plants in fast-growing international markets that will be shared by multiple RPM businesses. We expect higher pricing in response to inflation, particularly the tariff-related inflation we are unable to otherwise mitigate. We will also benefit from the businesses we have recently acquired. Interest rates are an important variable that we will be watching. They have remained elevated.

Which has pressured existing home sales and DIY activities and have also been a headwind to some new build nonresidential construction. Higher debt balances from M&A will also contribute to increased net interest expense which is expected to range between $105 million and $115 million for the year. Our first quarter outlook can be found on slide 15. We expect sales growth and record adjusted EBITDA in the quarter led by systems and turnkey solutions serving high-performance buildings, as well as a focus on repair and maintenance which customers tend to gravitate toward during times of economic uncertainty.

Additionally, we will benefit from a full quarter of the Pink Stuff acquisition and the ReadySeal acquisition which closed a couple of weeks into the first quarter. We also expect inflation to continue increasing in the quarter particularly in metal packaging. Which has been rising in response to tariffs. This will temporarily cause price cost to be negative during the quarter as not all price increases were fully implemented at the beginning of the quarter. These profitability headwinds are expected to offset operational efficiency benefits during the quarter. Overall, we expect consolidated sales and adjusted EBIT to both increase by low to mid-single digits in the quarter.

By segment, we anticipate similar sales growth among the three groups with consumer slightly higher because of their acquisitions of the Pink Stuff and Ready Seal. That concludes our prepared remarks, and we are now happy to answer your questions.

Operator: We will now begin the question and answer session. Our first question today is from Michael Sison with Wells Fargo. Please go ahead.

Michael Sison: Really nice quarter and outlook. Frank, I'm just curious in terms of what underlying demand or organic growth do you see this year? I know you have some acquisitions. Within your outlook for low single-digit growth in sales. But just a little bit of color on what you think the organic growth can be in this difficult environment?

Frank Sullivan: Sure. Broadly speaking, and you've heard this on some of our more recent investor calls, as we were approaching the end of our MAP-twenty five initiative which formally ended at 05/31/2025, we've been talking within RPM about a pivot to growth. And we're starting to see that take hold. I think we anticipate the ability to consistently generate two to three points of organic growth on a consolidated basis. For the year. I think the two biggest challenges, that are kind of the dynamic factors is to whether things could be better are certainty and finality around the tariff issues or not.

And the worm turning for the consumer DIY business which is, see twenty four months of no or negative growth on a on a pretty regular basis and something extraordinary in our history. But you're seeing a really solid organic growth out of CPG and PCG. And things move in the right direction after a challenging eighteen months in the industrial coatings group. So more OEM coatings that was the largest piece of our specialty products group. I think those are the key factors that give us confidence that we're going to see modest organic growth quarter by quarter for the year.

Michael Sison: Great. And a quick follow-up. The new three segments structure, does that enable you to generate more productivity cost savings down the road? And how do you think about that? With the new segments?

Frank Sullivan: Absolutely. So at the start of our MAP initiatives, seven years ago, so in the fall of twenty eighteen, our Specialty Products Group was about 11% of consolidated revenues. And somewhere in the 18 or 19% of consolidated EBIT. They, through economic challenges, and some underperformance in a few units, shrunk to this past year where they're slightly less than 10% in each case. And so we saw that in conjunction with the retirement of the group president, Ronnie Coleman, who's been with us for more than three decades. To consolidate those specialty products group businesses into the other parts of RPM. Benefit from upfront about $15 million of expense reduction or efficiency actions taken in Q1.

Will benefit from the synergies both operationally, internally, and externally. I mentioned in my prepared remarks the opportunities to coordinate better the activities of our industrial coatings group with Carboline, which will now both be part of the Performance Coatings Group. We think that not only is our things improving in our color group, but on a $100 million business, their largest single customer is $8 million of sales to Rust Oleum. Rust Oleum is in the color business, and so it's a combination that we think will move our color business and our Day Glo business forward better than had it continued to operate as an independent company.

So those are just some examples of the synergies we see both on cost side as well as on the revenue side.

Michael Sison: Right. Thank you.

Operator: The next question is from John McNulty with BMO Capital Markets. Please go ahead.

John McNulty: Good morning, John. Congratulations. Hey, Frank. Great results. I guess I two questions. One is on the map 25 program, and I know I know it sounds like there may be a new one coming soon, but I guess, you help us to understand how much in terms of incremental savings in 2026 you may be expecting just so we can kind of have a good baseline to work with? And then the other question is just you made some pretty significant improvements on the working capital front. In the MAP '25 program. I guess how much of that do you feel like you still have left to go?

Because I think in the prior couple quarters, were at least implying that there's still some pretty heavy lifting going on there. So can you help us to think about both of those?

Frank Sullivan: Sure. I'll give you a couple, data points, which really highlight why we feel you know, we'll have a choppy first quarter in terms of poor leverage because of the cost price mix dynamic that we're facing. But a combination of price increase in a number of our businesses or product lines that are rolling out the July and into August and early September will help. Specific to your question, the MAP 2025 benefits in fiscal twenty six should be about $70 million across the full year.

And then I think the last area will be the benefit of the one expense reduction actions associated with the consolidation from four segments to three which will start benefiting from in the future quarters. Those are the key elements in terms of how we think about it. Relative to working capital. There is still a 200 or 300 basis point improvement that we expect. You will see forward progress in fiscal twenty six whether or not we get all of that in 2026 or it bleeds into '27, time will tell. But we will make forward progress this year. And our goals, which we intend to meet, are to gain another 200 or 300 basis points of improvement.

John McNulty: Got it. Okay. No, that's great. And then just as a follow-up, it seems like the dams kind of opened up a little bit with regard to M and A. I guess, you help us to think about the M and A pipeline as you're looking out to 2026 at this point? I know you've completed a bunch, but you still the middle, you still have a really strong balance sheet and more cash flow to come in. So how should we be thinking about that?

Frank Sullivan: Sure. I'll tell you both culturally, but also in terms of metrics, the benefits of the MAP initiatives that our people have executed over the last seven years through a improved EBITDA margin, which is a that the rating agencies and banks look at and a sustainably improved cash flow including Ready Seal and the pink stuff and TMPC the last twelve months. We've completed over $600 million of debt funded acquisitions. A decade ago that would have challenged your balance sheet a little bit. Today, it modestly moves those ratios. And so we've got plenty of dry powder. We're also seeing in these transactions and you and it happened later than you would have expected.

But we went through a period of incremental debt cost of capital for big companies of almost zero. To a period where the cost of capital, even on an incremental basis, is in the 5% or 6% range. And you would have expected that to bring down M and A valuations. It has. It took longer than maybe you would have expected. But the transactions that we're being successful on today are at historically high multiples for us, but two or three multiple turns below where, transactions were happening. Maybe two or three years ago.

And, we're in a good position to take advantage of that and I would expect our traditional acquisition growth machine to deliver more revenue growth and more deals this year and in subsequent years.

John McNulty: Great. Thanks very much for the color. Congratulations on the quarter.

Frank Sullivan: Thank you.

Operator: The next question is from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Kevin McCarthy: Good morning, Kevin. Thank you and good morning. Good morning, Frank. Congrats on the results and particularly nice to see the strength in consumer Construction Products against the current macro backdrop. On slide seven and eight, you talk a little bit or reference at least your success in systems and turnkey solutions. So just wonder if you could frame that out a little bit in terms of you know, maybe the size of what you're doing there, the growth rates, and my impression is you were a first mover in that regard. And I'm curious as to whether any of your competitors are adopting that sort of turnkey model.

Or whether you have a lot of runway, in terms of first mover advantage there?

Frank Sullivan: Sure. I can't really speak to competitors, but I can tell you that we have had in our Construction Products Group a very deliberate effort over the last, let's say, five years maybe even a little bit longer, but it's really starting to take hold in the last year or two. Of moving from selling components to selling systems. And so with the advent, so Drive It was a own business a decade ago selling exterior finishes and eaves Tremco sealants sold their sealants into construction projects via distribution and through specifications. Today, they're really focused on six sides of the building. Through acquisition and internal development.

We've acquired things like Nudura, so ICF, panelization, And so when you think of a wall system a decade ago, we were providing all of the high margin sealants, gaskets, and the elements around window door penetrations, roof connections to walls, Today, we have a much larger share of that wall. We have high performance building solutions in New York. We have opportunities now to be more of an add maintainer with some of our big customers instead of just doing reroofing or owning roofing. We now have PureAir, which allows us to address maintenance and rehabilitation of big HVAC units, which we've been asked for decades by customers, hey, while you're on a roof, can you fix this?

We didn't have a very good answer. We do now with PureAir. So we've really been thinking about both asset management and what that means and system solutions. And how we own a bigger piece of the wall not just the sealant or gasket or, you know, unique components. So that's been one critical area. I think the other critical area in our StoneHard flooring business in particular in Trentco roofing is we've had for decades a unique supply and apply model. And in a labor challenged environment, that gives us an advantage in some circumstances and we're seeing those benefits as well.

The last comment in this area and highlights some of the outperformance of our Performance Coatings Group and our Construction Products Group they have essentially teamed up in a what we call a platform approach to the developing world. Five years ago, we did a full blown analysis with our board on acquisitions. And the one area that stood out is not being successful was what we deemed small and far away. A strategy of planting a flag you name it in Indonesia, in Dubai, in Poland, wherever, in different places. And we really weren't following up. So, you know, we had these small operations, but there wasn't a lot of synergy and attention paid to them.

We have reorganized developing world approach under one leadership team. Get the same attention as each of our groups in terms of monthly performance and outlook. And so I think we have a strategy to grow in the developing world particularly across our industrial and commercial product lines. That's starting to come to fruition that quite candidly five years ago wasn't working. So you put all of those together, and I think it explains the outperformance in our CPG and PCG businesses and why we think that's gonna continue.

Kevin McCarthy: Very interesting. My second question is for Rusty. Would you comment on what the passage of the one beautiful bill act means for RPM? For example, you know, do you anticipate lower cash taxes given the provisions related to accelerated depreciation and R and D expensing?

Rusty Gordon: Sure. Yeah. We are still sorting through that, Kevin. In general, it's good news that the corporate tax rate is not going to 28%, which was proposed in the last administration. Also, mentioned bonus depreciation. Yes, that should spur investment, and that would be great, as you can imagine, for RPM. Manufacturing, of course, is one of many sectors of construction that we service. And in terms of I understand is that yes, from a tax perspective, is looking like that the depreciation on our $220 million a year of capital spending can be basically, we can expense the purchase of tangible property at 100%, not 40%. Which was the case prior to January.

So nothing but good news, but still a lot to sort through.

Kevin McCarthy: Thanks very much.

Operator: The next question is from Patrick Cunningham with Citi. Please go ahead.

Patrick Cunningham: Good morning. Hi. Good morning. Can we maybe unpack the sort of price cost, particularly in 1Q and then expectations for the balance of the year? And are the biggest pricing opportunities more in these turnkey systems where you're seeing strong demand and have the value proposition? Or is it is there anything more broad based there?

Frank Sullivan: I think broadly, we look at pricing and have better discipline through our MAP initiatives across all our businesses. Specific to Q1, our big challenge is in consumer. There's a couple of commodity chemicals that are actually showing deflation. One exception, which hurts our industrial businesses is a epoxy resins, which we're a huge buyer of. Those were up low double digits. But specifically to consumer, metal packaging is a real challenge. Plastic packaging is up modestly. Pigments are up double digits. Propellants are up 13% or 14%, And so when you look at our Rust Oleum business in particular between metal packaging, and propellants. It's a real challenge. And they're managing on the operating side to find efficiencies.

But we're going to need some price there and have plans to get it at the end of the summer and early fall. So that explains kind of the challenge in Q1 where I would expect us to demonstrate like we did in Q4 real solid growth. Positive organic growth in our industrial and commercial businesses. But a lack of leverage because of some of the segment consolidation activities that are driving some cost. Some of the MAP initiatives that are driving some duplicate cost, as for instance we're closing a major Tremco plant and in the of moving all that production into two plants in The United States. We have some similar activities in Europe.

Which cannot be adjusted out. And then I think those are the key elements of what will drive a lack of leverage in Q1. But as I said earlier, expense reduction actions in Q1 in relation relationship to the segment consolidation price increases that are scheduled here for the July into August and early September. And then broadly, the benefits of MAP-twenty five on the rest of fiscal 'twenty six will show some nice leverage to the bottom line of the growth that we put forward in the quarters after Q1.

Patrick Cunningham: Great. Very helpful. And then in the prepared remarks, you talked about potential headwinds to non resi construction. Can you speak to the health of the project backlogs and Construction and Performance Coatings? Are you starting to see any commitments slow or maybe delays impacting the conversion of the existing backlog?

Frank Sullivan: No. The backlogs for those businesses are really strong. The challenges that we'll face are just difficult comps, both PCG and CPG had really strong years in fiscal twenty five. Really strong years in fiscal twenty four. So you know, it's it's we're rounding some more challenging comps. But as you saw in Q4, we're generating some pretty solid low single digit mid single digit organic growth. And a lot of it's around the systems, a lot of it's around the advantage of the supply and apply model. And we expect that to continue. The other thing that they were working at is in our consumer DIY business.

We have been introducing in our DAP business and our Rostolian business new products. There's a low odor product, water based low odor product just introduced at Rust Oleum. There's some new single component foams that were introduced in the past six or nine months at DAP. The move into cleaners with the paint stuff really puts us on the map. Where previously we had somewhere in the $50 million to $70 million range. Of kinda niche cleaning products. Now we'll have north of $250 million in the cleaning category. And importantly, the pink stuff gets us into channels that we didn't have much of a presence in.

Grocery, discount, drug, And so these are thousands of outlets where the pink stuff is a broad cleaning category versus the niches we had in the crud cutters and the concrobiums. And so a very deliberate strategy to diversify into new channels and into a new cleaning category with some of the disciplines our consumer group has. And hopefully, will begin to pay off in fiscal twenty six despite you know, the lack of housing turnover and its impact on DIY markets, which is not really which has been bad for the last couple of years.

Operator: The next question is from Michael Harrison with Seaport Research Partners. Please go ahead.

Michael Harrison: Good morning, Mike. Hi, good morning. Congrats on a nice quarter and pretty good looking guidance. I was hoping that you could maybe help us take a step backwards and just help us understand in the fourth quarter, you guys were pretty meaningfully ahead of your expectations. I was hoping you could walk through what areas specifically were better than you anticipated? Where do you feel like you were right to be more cautious? And can you help us understand how demand trends in some of your key segments or product lines were playing out in April into May into June. I think your press release referred to some momentum on the outlook.

And I'm just curious what specific areas you guys are seeing this momentum?

Frank Sullivan: Sure. So a couple of things. One is the new products in consumer that I mentioned, a lot of which were introduced this spring and so that's starting to take hold. And is helping us fight an otherwise broad economic challenge in that area. Another one is what we're doing in the developing markets. We're seeing double digit growth and EBIT margin improvement that's meaningful in local currencies. Currencies didn't help us last year. Looks like currencies might actually be a tailwind in fiscal twenty six, so that's good news. And then I will tell you that if you see the detail in our press release on PCG, and CPG.

As I indicated earlier, I think we can generate a solid two or three points of real unit volume growth. We had better than that Q4. Some of that was weather related, delays from the Q3, which we had talked about in Q3. And thankfully, the great momentum that we built from Q1, Q2, and through Q4 that we continue to see back to your question as we get into '26, Q3 was really a odd winter interruption. You know, our fiscal year end helps us in some ways and hurts us. In this case, the calendar didn't help. Our Q3 was December, January, February. And the weather was terrible.

Had our Q3 been a January, February, March on a calendar quarter like most of our peers, our results would have been better. And so I think it's a combination of those things that explain the strong fourth quarter, but the continuing momentum, if you really think Q3 as an aberration, we're showing momentum from Q1 Q2, Q4, and we see that continuing as we enter fiscal twenty six.

Michael Harrison: Alright. Very helpful. And then I'm just curious in terms of the inflation that you're seeing would you categorize that as being normal supply and demand fluctuations? Or do you think it's driven more by tariff impacts? I think we're just trying to get a sense of whether we could still expect some further changes in what you're seeing around input costs depending on what happens with, with trade policy?

Frank Sullivan: Sure. Our best guess and we look at it pretty in great detail, of the unmitigated impact of tariffs as they stand today. And of course, can all change next week or next month. But our best guess today is a negative 4% to 5% hit in fiscal twenty six. You know, we have some mitigation activities in terms of agreements with vendors. We have some opportunities to as we talked about, for instance, pink stuff, moving production for the pace that they sell in The US to adapt plants. So we're working on that. That's just one example. And then the final area would be in price increases.

From an inflation perspective, I would tell you that this is a rough guess, and this is Frank Sullivan. But I think half to two thirds is truly tariffs. And half to one third is the response of domestic suppliers taking advantage of the tariff regime to raise prices. Steel is a great example. You know, tinplate does come a lot from overseas, not a lot of production in The U. S. But the aggressive pricing of steel companies because they can. It's a challenge for anybody to buy steel these days.

Michael Harrison: Alright. If I could sneak one more in, just curious if you can give any guidance on depreciation and amortization for fiscal twenty six as well as the CapEx outlook?

Rusty Gordon: Thank you. Sure, Mike. Yes. So for depreciation and amortization, it should be around $200 million for fiscal year 'twenty six. The increase really driven by the M and A we've done. Also some of the higher CapEx spending we've had. And then when we look at CapEx for the full year, too, we have should be about $220 million to $240 million. That would be the range. And just also, mentioned this on the call, but just to reiterate, interest expense will be higher this year because of the additional debt that's been used to fund these M and A. So we expect net interest expense to be between $105 million and $115 million for the year.

Operator: The next question is from Matthew Ioey with Bank of America. Please go ahead.

Matthew Ioey: Good morning. I'm not sure I've ever heard that last name pronunciation. I like that one. But congratulations, I guess, it was a good quarter and obviously some of this organic growth. I wanted to touch a little bit on the flooring side of the equation. I mean, some of this reflective of the data center AI build out. Is that manifesting into critical mass here or is this still an opportunity to come as it relates to like?

Frank Sullivan: Still more opportunities there. We are seeing some benefits in certain areas, in particular our fiber grade business and FRP grading and its non-conductive nature in data centers. We're seeing some in flooring and coatings. I would say we're getting our share. I would not say yet we're getting, more than our share and we're working on that. And in general, you know, we're just seeing a nice uptick in small to medium-sized flooring projects along with some of the larger, more headline projects that are out there. And some of it's a really focused sales force, and I do believe some of it is our supply and apply model which in a challenging labor environment is helping us.

Matthew Ioey: I appreciate that. And, think by our estimate we have something like $230 million in top line contribution to deals next year. Is that right? And what do you expect EBITDA contribution from that? And kind of related SG and A was up because of some of this deal some of the deal activity that mostly just one-time legal banker fees? How with the streamlining, how should we expect SG and A to kind of flow through the year?

Rusty Gordon: Sure. Yeah. I can take that one. In terms of acquisitions, we've announced the pig stuff acquired at the May. And annualized, that's £150 million. And then we just acquired Ready Seal in the June. We disclosed that at 40 million US dollars. So you can model those in. And you're Matthew. On acquisition, deal costs, they were elevated. In Q4. And they'll continue to be elevated in Q1. As Frank indicated on the last call, that's actually a favorable indicator for RPM when those costs are up, activity is robust. And we would expect that to hopefully continue.

Matthew Ioey: I appreciate it. Thank you.

Operator: The next question is from Josh Spector with UBS. Please go ahead.

Josh Spector: Good morning, Josh. Hi, good morning. Frank. Just a couple of quick follow-ups. First, on raw materials, I apologize if I missed this, but previously, you said mid single digit inflation is where you thought we'd get to. Your latest view there?

Frank Sullivan: Yes. In general, I think as we start the year, we're seeing broadly on a consolidated basis inflation in the 1% to 2% range. But it's kind of heavily weighted towards what's happening in our consumer business. Around packaging, propellants, and some pigments. And I'm hopeful that as this tariff issue gets some certainty and is settled down, that we'll see that simplify. You know, as I indicated earlier, unmitigated, we see a 4% to 5% impact of the tariff regimes and our ability to offset some of that through moving manufacturing and or agreements with some of our suppliers will help.

And, it would be nice to get through half of this year and have some of that VUCA uncertain, volatile, changing every week provide some certainty in which people can plan around. And as Rusty mentioned, that and some of the positive impacts of the one big bill on manufacturing investment I think we'll get people off the sidelines in terms of making decisions on additional projects with will help us.

Josh Spector: Okay. I guess what I was trying to figure out is, so does that 1% to 2% inflation peak earlier in the year? Is that the mitigated impact? Or do you expect that to increase as we go through the year?

Frank Sullivan: The 1% to 2% inflation is what we are seeing in Q1. And it's disproportionately weighed towards consumer.

Josh Spector: Okay, thanks. I'll leave it there.

Operator: The next question is from David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter: Thank you. Good morning, Good morning. Frank, just on in consumer, the organic down 3.8% in the quarter. How much was due to the SKU rationalization? If you remainder, are you seeing greater pressure on the consumer as we speak? Or is it pretty much just the same?

Frank Sullivan: It's pretty much the same. We just finished our second year or eight quarters in a row of no or negative, DIY takeaway, and we've never seen anything like that. It's an unprecedented. And it seems to be flatlining, if you will, but there's no real dynamic here. We're at a forty year low in housing turnover. And certainly others have lamented that and that's a challenge in this area. It's predominantly in our Rust Oleum business. And small project paints in part because of their size and their market share. DAP continues to build momentum and show some positive momentum throughout '25 and as we get into '26.

They have more of a contractor customer base than our Estonian business does. We're actually performing pretty well in European marketplace. However, in Europe, we are in the process of discontinuing a lower margin product line and closing a factory there. And so that was part of the negative impact. On an annualized basis, the SPS business was $50 million and most of that will go away. And we're in the process of transitioning that into weather plan and then we are looking to sell the facility.

David Begleiter: Got it. And just back on raws, on Tuesday, one of your Cleveland based peers lowered their back half raw material guidance. They're seeing reductions in solvents and resins. Why did it disconnect with what you're seeing? Or is it just more packaging related costs? Or maybe you can help us there.

Frank Sullivan: Sure. So to the last question, which I was really trying to get at the same thing in terms of where we see inflation going. I don't know. All I can tell you is that in Q1, our inflation on a consolidated basis going to be 1% to 2% and it's mostly in consumer. And it is so metal packaging as we sit here today is up 11% or 12%. Propellants up 13 or 14%, plastic packaging is up 1% or 2%, pigments are up 10%. Those are there are some solvent areas that are going down. The one exception, which is a meaningful raw material for RPM across the board is epoxy.

So we're big producers of epoxy floor coatings, epoxy coatings, epoxy sealants, And so that's up about 11%. Certain solvents and other things are moving in the right direction. If oil prices move in the right direction, that'll be good. But given the impact that tariffs have and the uncertainty from one way to the next, other than being able to forecast a 1% to 2% inflation and give you the details we just did, We don't really have a clue as to you know, where things are going post this fall and into next year. Thank you.

Operator: The next question is from John Roberts with Mizuho. Please go ahead.

John Roberts: Thanks, and I'll add my congrats. Is there a home for all of SPG in the other three segments?

Frank Sullivan: Yes. So if you look at the Color Group, roughly $100 million $8 million of that is intercompany sales from our Color Group to Rust Oleum. And the color group is about color. It's a great fit. And there's opportunities with our best consumer marketers to do things with the Day Glo brand that up until now we have not. Our Legend Brands business is really asset management. And as we get into businesses like PureAir, which is the refurbishment and rehabilitation of major rooftop HVAC units. It really fits into that same thing. That's about a $100 million and then the balance of the $700 million SPG prior segment is the industrial coatings business and the food business.

Food business the food coatings business, not a lot of synergies. It's just a great business higher than RPM margin profile at the gross margin and EBIT margin level good solid growth. It had to go somewhere. So it's going to the performance coatings group. But the other three elements all have really good strategic fits.

John Roberts: And then you had a customer bankruptcy in SBG last quarter, and prior you had a bankruptcy in the consumer segment. I know you said the backlog is relatively strong, but are you seeing signs of stress across other areas of your customers?

Frank Sullivan: Not that we're aware of today. The dynamics in the air handling, air moving, rehabilitation Legend Brands business are changing. And it's moving a little bit from distribution to direct sales. And so there's a lot of dynamics along the lines of what you're asking. That's about a 100 a $100 million business for us. Other than that, you know, we don't see any signs of stress from our customer base or any expectations of further bankruptcies.

John Roberts: Okay. Thank you.

Operator: The next question is from Frank Mitsch with Fermium Research. Please go ahead.

Frank Mitsch: Good morning, Frank. Good morning, Frank. To you as well. I'd love to get invited to one of the local Cleveland business meetings where you get together with some of the steel guys. I'm sure it's I'm sure it's a very light environment. I wanted to follow-up on the MAP savings for fiscal twenty six. And confirm the $70 million that you referenced that from MAP would go into '26, that's an incremental number. Correct?

Frank Sullivan: That's correct. So you know, we formally concluded the MAP 25 program at May 31, but there were activities throughout fiscal twenty five and trends in plant closures and some other activities on operating efficiencies within our plants that will benefit and including some plant closures that are in process but not completed in fiscal twenty six. That will positively impact this new fiscal year. And that 70,000,000 is incremental. That's That's correct.

Frank Mitsch: Alright. Terrific. So I if I basically add that to fiscal twenty five, assuming that's incremental, then you're basically at the low end of the guide for the full year. So hopefully, have a better economic environment And then, on Europe, to get to the high end and beyond.

Frank Sullivan: Let me just address that Frank. Not just doesn't flow to the bottom line, the inflation that we have on talked about is on the non material side. Wages are up, and salaries are up about 3.54%. We're seeing huge increases in insurance costs and in medical costs. So there's a lot of moving parts in any business and sort of a lot of moving parts at RPM. But you got to offset a portion of that 70,000,000 with a wage salary increase in the 3 and a half to 4% healthcare costs and insurance costs that I mentioned. So, are tens of millions of dollars of rising costs across our business that are not associated with raw materials.

That we're also managing.

Frank Mitsch: That's a that's a good qualifier. Appreciate it. And then lastly, Europe, obviously, impressive performance. Part of that M and A related. Can you talk about the sustained how much of that 15% was coming from M and A and how sustainable that improvement in Europe? Have you seen the bottom there? And how is the outlook, please?

Frank Sullivan: Sure. Most of the growth was M and A. We're seeing a nice improvement in profitability through bringing the MAP initiatives maybe later than we started in North America to Europe. Dave Bensdead, who was President of our Performance Coatings Group moved his family to Europe a couple years ago to oversee and drive a lot of these operating improvement initiatives. So on a core basis, our revenues have been relatively flat. Most of that fourth quarter pickup was M and A. A big chunk of that is the pink stuff, which is disproportionate chunk of its business in Europe, UK and Europe. The margin profile there is improving.

And the cash flow there is improving and there's more to come on that.

Frank Mitsch: Very helpful. Thank you.

Operator: The next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews: Good morning, Vince. Thanks. Good morning. Most of my questions have been answered. So I'm just going look for some clarification on something that I'm hearing different points of view on in the investment community. Which is, is there gonna be a formal MAP three point o program And if so, when do you think you'll you'll introduce it to us? And I think from your prior comments, it seems like if so, it'll it'll be much more of a revenue oriented or growth oriented program from a revenue perspective rather than a lot more on the cost side of the equation. So any thoughts on that would be helpful.

Frank Sullivan: Sure. The answer is yes. There will be a new program what we call it is still up for debate I think given the uncertainty around tariffs and the stock starts change next week. And the decision that, you know, we came to over the last six months or so to think about, alright, what's the right structure going forward in this move from four segments to three segments? Think all those are dynamics that we wanna get settled. And so I would expect a new map program, probably to be unveiled in the spring or summer of next year.

But we are absolutely working on, a, continuing the operating efficiencies that we gained through MAP, We've got 200 or 300 basis points, as I mentioned earlier, of additional improvement in the pipeline on working capital, which will enhance cash flow. And we fully intend to implement a new three year plan And then at some point in the next, call it, six to nine months, figure out, you know, what the appropriate communication on that is externally.

Vincent Andrews: Okay. Thank you.

Operator: The next question is for Ghansham Panjabi with Baird. Please go ahead.

Ghansham Panjabi: Good morning, Ghansham. Good morning. Good morning, Frank. I'm sorry if I missed this, if you already said this already, but what are you embedding for consumer volumes for fiscal year 2026? And how should we think about the sequencing of that in context of doesn't sound like there's much improvement, but you have some from an underlying standpoint, but you have some new products, etcetera?

Frank Sullivan: I think that's right. Rusty can comment on some of the outlook we provided by segment, but we're introducing new products. We're focusing on cleaning as an entirely new category. Along with our small project paints and spray paints, caulks and sealants, abrasives. So we've got a we're broadening the breadth of the product categories that we're involved in very deliberately. Introducing new products, And I think when you look at our performance versus our performance by itself is has been flat to down for eight quarters in a row in terms of volume, not a happy thing.

But to their credit, we have performed at or better than many of our peers in terms of what's been a very difficult environment.

Rusty Gordon: Yes, that's right. I would say that if you look at the outlook for depot and Lowe's and the performance of our biggest competitors at those two accounts, I think our results hold up pretty well. We are not expecting a lot of growth. But like Frank says, we try to outrun it with innovation and bringing new products and new platforms to the retailers. And so one last comment I'd make there is that Pig Stuff's a real dynamic brand. It gets us into new channels, but there's things in cooperation with Rust Oleum that we could do to accelerate The US growth of that brand. Ready Seal, great business, great franchise.

In partnership with Rust Oleum, things that we can do to accelerate organic growth of that acquired business beyond what they could do on their own. And so acquisitions will also play into improved results for our consumer segment.

Ghansham Panjabi: Got it. Thanks for that, Frank. And just one final one. Obviously, your guidance for fiscal year twenty six sales low to mid single digits and then significant operating leverage on EBIT, almost 2x that. Is that a function of your confidence that the volume outlook is better for the company? You know, perhaps versus your thoughts coming into fiscal year twenty five? Or is it on the cost side that you have a lot of confidence on? Or both? How would you have us think about that?

Frank Sullivan: Sure. It's a mostly a function of our efforts throughout fiscal twenty five, mostly internally, although I referenced this on a couple of our calls. To pivot to growth We've spent seven years not only, executing the MAP initiatives, consolidating production, bringing lean manufacturing disciplines on an effective and sustainable basis into our operations, working on what was an obvious opportunity to improve cash flow with better working capital performance. But the cultural shift that we've made to greater collaboration and to a leadership level that thinks as much about our as they do their individual businesses.

And then really a pivot to growth to really focus on how can we allocate more dollars to what's working and be a little more deliberate that way. Leads us to believe that we'll be able to generate a year of organic growth in the two to 3% range complemented by acquisition activity complemented at least in the first part of the year by some additional price. And as we start the year, some favorable FX. So there's a, you know, a lot of things that are lining up as we sit here today. I would just caveat that with the two dynamics I mentioned earlier. Certainty, finality around this tariff issue seems to be in sight. Who knows?

And so if that gets worse instead of better, that could temper all of this. And at some point, the worm is going to turn for the consumer DIY. Because while we're looking at m and a and while we're introducing new products, the negative performance in the DIY markets broadly is existed for almost eight quarters and we've never seen that before. And eventually, the broader economic dynamics there, I think, will improve. Couldn't tell you when, but when does happen, we'll be ready.

Ghansham Panjabi: Thank you so much.

Operator: The next question is from Jeffrey Zekauskas with JPMorgan. Please go ahead.

Jeffrey Zekauskas: Good morning, Jeff. Hi, good morning. You expect your EBIT to grow roughly 10% next year? Do you think of that as about half from acquisition benefits and half from organic and other factors?

Frank Sullivan: I'm not sure I would cut it. I can tell you from a revenue perspective, it will be about half acquisition and half organic growth. And so I suppose that you could think of EBIT growing that way. As we get into quarter by quarter, it will really be a balance of how those acquisitions grow, what we can do with them, also how organic growth leverages to our bottom line. If we get to the high end of our range, it's we will be generating better unit volume growth. Than we anticipate. And if that happens, you'll see a nice leverage from our core operations.

Jeffrey Zekauskas: And then in the quarter, your cost of goods sold went up a little bit less than 2%. And your revenues went up I don't know, 3.7. So cost of goods sold rose less than revenues. And really, a lot of your revenue growth was acquisitions and organic volume. And, you know, you talked about raw materials being higher cost inflation for employees being higher. How did you achieve the lower rate of cost of goods sales growth And did you say how much the MAP initiative helped for this year?

Rusty Gordon: Sure. Yeah. We in terms of the MAP initiatives, we've been running roughly throughout the program at about $100 million a year run rate for incremental MAP initiatives. And Jeff, what was your question on?

Frank Sullivan: While Rusty's looking at that, the in the MAP initiatives, you know, you're looking at meaningfully improved conversion cost both from consolidating production and closing plants as well as introducing lean manufacturing discipline that are driving a higher level of throughput. And so all those have been meaningful in terms of our gross margin improvement. Some of it, Jeff, is driven dramatically by mix. And, you know, across RPM, we could spend hours on this, I'll just give you one good example in terms of where mix improves gross margin in ways that has nothing to do with raw material costs. In our roofing business, we have a straight material component and then our WTI contracting component.

And while their EBIT contributions are roughly equal, the gross margin in our material sales is dramatically higher than the gross margin in our WTI contracting business, which is lower than RPM's average. So construction products, roofing, the mix between WTI contracting and material can drive a meaningful difference in gross profitability the segment level and then marginally for RPM. So lot of moving factors in that question.

Jeffrey Zekauskas: Okay. Great. Thank you so much.

Operator: The next question is from Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.

Aleksey Yefremov: Good morning. Good morning. Fiberglass grew 20% this quarter. Can you keep growing in this range in fiscal 'twenty six? And could you size this business for us? Please?

Frank Sullivan: Sure. I don't know the specific detail on that. I don't know that we've disclosed a specific fiber grade growth rate, but I can tell you that our fiber grade business has been growing. It's it's part of our performance coatings group. It's been growing at a level higher than RPM, most certainly in double digits. A lot of it is the benefits of some acquisitions in the past. We put Bison with our fiber grade business. That's the rooftop decking, commercial decking. We acquired a business in the middle of the year in Europe, which is the Bison of Europe. Called TMP Convert. And they do a lot of DIY stuff, but also commercial.

But, organically, we're also seeing really strong growth. That business has benefited most from data centers of any of the businesses that RPM because of the nonconductive nature versus steel of their products. And our team's ability to meet the specifications and the speed requirements once these things start in terms of construction. So it's been a real bright star for us both in terms of acquisition growing that business from what was predominantly a U. S. Business to something more global. Entering into DIY, actually, through a partnership with our DAP business, And then also broadly not only organic growth, but their benefit in the data center activity.

Aleksey Yefremov: Thanks, Frank.

Operator: The next question is from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Arun Viswanathan: Good morning, Arun. Arun, your line is open on our end, perhaps you haven't muted.

Arun Viswanathan: Apologies for that, guys. I was on mute there. Sorry about that. Yes, congrats on the strong results. Maybe I'll just ask one question on the MAP savings. So for a little while there, Frank, I think you were alluding to the fact that you guys had taken out a lot of costs. But unfortunately, the volume environment was such that you couldn't really the benefits drop to the bottom line. You are starting to see that now. Margins are obviously rising in the right direction. But maybe you can just comment on how much more margin growth you expect to see if you do kind of hit that mid single digit organic growth that you just spoke about.

And if any leverage that would come from the acquisitions as well? Thanks. And how much I e, how much more, improvement in margins we could expect over the next little while? Thanks.

Frank Sullivan: Sure. I appreciate that question. So, as most on this call knows, we've been talking about a 16% EBIT margin since the fall of twenty eighteen. And our efforts to attain that had been interrupted by COVID, chain, supply chain challenges, inflation, you name it. But it is still a target that is very deeply embedded within RPM. Think if you try and average out all the crazy volatility that the whole world and certainly business has been through in the last seven or eight years. We've been able to sustain about a 40 or 50 basis point improvement in margin year by year.

And I fully expect over the next two or three years that we're gonna get to that 16% market margin target. It didn't come as quickly as we wanted, but it's still front of mind still has some incentive compensation tied to it. And it's still a goal that we expect to achieve. We will not get to a 16% EBIT margin in fiscal twenty six, but we'll make progress.

Arun Viswanathan: Thanks for that, Frank. And then just one more quick one if I could. You know, you guys have often noted M and A as maybe a principal area for capital allocation. But that's been a focus mostly on bolt ons. Is that still the expectation that we should expect you guys to kinda head in that direction, or would you consider larger deals and maybe some adjacencies into, say, more gallon oriented paint. Maybe you can just offer your thoughts on where you're headed M and A wise? Thanks.

Frank Sullivan: Sure. I think the pink stuff is a good example of opportunities that we see that are in adjacencies or new product categories that fit with some of our strengths. And so we're very excited to be a bigger player in the cleaner space. Our consumer group. So we will continue to look for acquisitions like that are a little more sizable than what we've done in the past. But the pipeline for bolt on is pretty good. And particularly in places like our construction products group where they're out looking for components they can add to these system sales.

We'll continue to go look for 10 and $50 million product lines that not only help us complete that more complete wall system sale or additions to asset management, but where we think that our sales force can double or triple the revenues in relatively short period of time, And so hopefully, Dan answers your question. You know, we don't see paying huge multiples for billion dollar deals. But where there are 4 and $500 million nice sized businesses, like the Pink Stuff acquisition, we're gonna go after them. And in the meantime, the bolt on pipeline's pretty good.

Arun Viswanathan: Thanks a lot.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Frank Sullivan for any closing remarks.

Frank Sullivan: Thank you to everybody for your participation on our investor call today. With our fiscal calendar, we have the opportunity to celebrate the New Year twice at RPM. And so I would like to wish everybody a happy RPM New Year. And we look forward to talking to you about our 26 results in October when we report our first quarter results in have our annual meeting of stockholders. Thank you and have a great day.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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DATE

• Thursday, July 24, 2025, at 10:00 a.m. EDT

CALL PARTICIPANTS

• Chairman & Chief Executive Officer — James M. Cracchiolo
• Executive Vice President & Chief Financial Officer — Walter S. Berman

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TAKEAWAYS

• Assets Under Management, Administration, and Advisement: Reached a record $1.6 trillion, reflecting positive client flows and market appreciation.
• Adjusted Operating Net Revenues: Adjusted Operating Net Revenues increased 4% to $4.3 billion, driven by asset growth across business segments.
• Adjusted Operating Earnings Per Share: Adjusted Operating Earnings Per Share increased 7% to $9.11, supported by both margin strength and expense control.
• Return on Equity: Maintained at 52%, among the highest in the industry, according to management.
• Consolidated Operating Margin: Held at 27% for the quarter.
• Expense Management: G&A expenses declined 3% year to date and are expected to remain at this level for the remainder of 2025.
• Wealth Management Segment: Client Assets: Increased 11% to $1.1 trillion, reaching a new record high.
• Wrap Net Inflows: Wrap Net Inflows totaled $5.4 billion, with $14 billion in draft flows year to date.
• Advisor Productivity: Rose 11% to $1.1 million revenue per advisor.
• Advisor Recruiting: Added 73 experienced advisers, with management noting a strong recruiting pipeline.
• Bank Assets: Grew 6% sequentially in advisory wrap assets as of June 30, 2025, compared to the quarterly average, aided by new product launches in certificates of deposit.
• Wealth Management Margin: Recorded at 29% for the quarter.
• Retirement & Protection Solutions (RPS): Pretax Adjusted Operating Earnings: Pretax adjusted operating earnings increased 9% to $214 million, attributed to favorable life claims and strong interest earnings.
• RPS Sales: Achieved $1.4 billion in retirement and protection solutions sales.
• Asset Management Segment: Assets Under Management: Increased 2% year over year to $690 billion, up 5% sequentially.
• Asset Management Operating Margin: Achieved 39% asset management margin (non-GAAP), at the top end of the target range, driven by expense control.
• Asset Management Flows: Experienced $8.7 billion of net outflows, primarily from institutional redemptions and the previously disclosed Lionstone outflow.
• Operating Earnings (Asset Management): Operating earnings increased 2% to $222 million, reflecting positive expense management and market impacts.
• Capital Return: Returned 81% of operating earnings to shareholders, and plans to increase the payout ratio to 85% for the second half of 2025.
• Excess Capital: Reported $2.3 billion above regulatory requirements, and $2.1 billion in available liquidity.
• Industry Recognition: Received the 2025 Kiplinger’s Readers Choice Award for advisor quality and Fortune’s Most Innovative Companies 2025 recognition.

SUMMARY

Ameriprise Financial (NYSE:AMP) reported a new all-time high in assets under management, administration, and advisement of $1.6 trillion. while achieving solid year-over-year and sequential growth in both wealth and asset management client assets. Management attributed adjusted operating EPS gains and sustained high margin performance to rigorous expense discipline and technology investments. The company highlighted favorable sales and profitability trends in Retirement & Protection Solutions. Capital allocation priorities were emphasized, with Ameriprise returning the majority of earnings to shareholders and targeting an increase in the payout ratio. New product development, platform launches, and awards for client experience and innovation were cited as strategic differentiators positioning the company for ongoing productivity and market share gains.

• Management explained that seasonal tax payments, client caution, and the liberation day law contributed to slower wealth management flows, but noted early signs of improvement in July.
• Distribution expenses in Advice & Wealth Management rose due to higher advisor production and movement to higher payout levels, with only a minor increase attributed to recruitment packages.
• Asset Management net outflows, which included the Lionstone business, were described as primarily driven by institutional redemptions and elevated industry-wide retail redemptions in April.
• Bank spread income improved as maturing securities were replaced with higher yielding assets. management outlined additional funding through retail liability product launches, including new CDs and planned checking accounts.
• The company reaffirmed its approach of prioritizing quality advisor recruitment and organic growth within its adviser base, declining to follow competitors into aggressive, short-term roll-up strategies.
• Expense optimization continues to leverage technology, data analytics, and automation, with management indicating further productivity improvements as digital and AI tools are more widely adopted by advisors.
• Leadership reiterated succession planning and confidence in management continuity, while emphasizing the long-term stability and performance of the diversified business model following the company’s 20-year public milestone.

INDUSTRY GLOSSARY

• Wrap Assets: Client investment accounts managed for a single all-inclusive fee, typically including advisory and transaction services.
• LIBERATION DAY LAW: External event referenced during the call as contributing to client flows volatility; defined in context as a factor impacting client behavior and asset movement in Q2.
• Structured Annuities: Insurance products offering a blend of downside protection and market-based growth, commonly used for retirement and principal preservation strategies.
• CLO: Collateralized Loan Obligation, a type of structured credit product composed of pooled loans and managed for institutional investors.
• Alpha Flows: Internal term for client net flow performance exceeding industry benchmarks, particularly in EMEA retail channels.
• RAP Assets: Refers to managed "wrap" advisory program assets, frequently cited by the company as a core product in wealth management.

Full Conference Call Transcript

On slide three, you see our GAAP financial results at the top of the page for the second quarter. Below that, you see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. Many of the comments that management makes on today's call will focus on adjusted operating results. And with that, I'll turn it over to Jim.

Jim Cracchiolo: Good morning, everyone, and thanks for joining our call. As we shared in our release, Ameriprise had another good quarter and first half of 2025, continuing our record of generating strong results over many years in market environments. We feel very good about the strategic direction and competitive strengths of our business, and importantly, our ability to help clients achieve their long-term goals. Reflecting externally, equity markets moved around quite a bit in the quarter, and investors paused and kept more cash on the sidelines. That said, markets proved to be remarkably resilient given ongoing trade dynamics. As we saw, economic conditions were on a firm footing in the first half.

However, questions remain around the next steps and impact of tariffs. With that backdrop, our assets under management, administration, and advisement grew to a new high of $1.6 trillion. In terms of financials, adjusted operating results were also good. Total revenues increased 4% from asset growth and strong transactional activity. Earnings per share increased another 7%, and our return on equity remains among the industry's best at a very strong 52%. Across the business, we continue to implement a significant investment agenda. That includes investments in our leading client experience, technology, digital capabilities, advanced analytics, and AI. And this is made possible by our consistent expense discipline and ongoing transformation efforts across the firm.

On the wealth side, we're delivering strong value through our quality client advisor engagement centered on our goal-based advice experience. And we see this reflected in the excellent client satisfaction that we can consistently earn a 4.9 out of 5. We had strong client engagement, and client assets grew nicely again in the quarter to a new record of $1.1 trillion, up 11%. Total wrap assets were also up, increasing 15%. Wrap net inflows were $5.4 billion and reflected the higher market uncertainty and seasonal impact of client tax payments. And transactional activity was also good. Client total cash holdings increased in the quarter and remained very high. As we would expect based on the market situation and near-term rates.

And these assets on the sideline represent a future growth opportunity. We continue to provide exceptional support and capabilities to our advisors and teams. They're staying closely connected with clients and benefiting from the investments we're making. For example, our intelligence dashboards provide in-depth analysis of key areas of advisor practice like client contact, prospects, and acquisition. We're also using automation analytics to drive efficiency, help advisors enhance personalization based on client needs, and identify opportunities for deepening engagement. And in June, we made a significant addition to our wealth management capabilities with the launch of Signature Wealth, which we feel will help advisors to manage client assets even more holistically and efficiently.

It brings the best of our current advisory platform into a flexible unified management account and frees up capacity for our advisors to further focus on client engagements and practice growth. With the excellent platform we built and the integrated support we provide, our advisors continue to be highly productive and engaged, and productivity grew another 11% to $1.1 million per adviser. Regarding recruiting, we continue to bring in good recruits. Another 73 experienced advisers joined Ameriprise in the quarter, and we feel good about our pipeline as well as our differentiated adviser value proposition. These advisors appreciate our reputable brand, practice support, and financial strength and stability.

We're also hearing how their clients feel overwhelmingly positive about moving to Ameriprise, which is terrific. The bank is also doing well. Total assets were up 6%, and we're earning good spread. Loan growth at the bank is also good, driven by pledge. As we've shared, we're launching new products like our new CD that came out in the second quarter. And in the coming months, we'll be bringing out Helox and checking accounts to add to our product offering. And I would highlight that our wealth business consistently delivers best-in-class margin. It was 29% for the quarter. As part of our larger solution set, our retirement income and protection products help serve clients' full financial picture.

We're driving good sales in our targeted areas, like variable universal life, variable annuities without living benefit riders, and structured annuities. In fact, we saw a nice pickup of 25% from the first quarter within our structured solutions. Advisors appreciate having these strong consistent offerings on the platform that have been developed and seamlessly integrated with our client experience. And we're working closely to support them to engage clients to meet more of their needs. It was another strong quarter for RPS. The business consistently generates good returns for the company and strong free cash flow. The RPS business is one of the most profitable insurance businesses in the industry. Turning to asset management.

We continue to deliver attractive earnings and drive operational efficiencies. Total assets under management administration increased to $690 billion, up 2% year over year and 5% sequentially. Our investment performance continues to be strong across both equity and fixed income. We had excellent long-term performance. More than 70% of our funds were above the median on an asset-weighted basis for the five-year period and more than 80% over ten years. Regarding the one-year, equity performance slipped a bit. However, short-term fixed income performance is very strong at more than 80% above the median. And 99 of our funds were rated four or five stars by Morningstar.

Regarding flows, we had $8.7 billion of outflows in the quarter, largely driven by higher institutional impacts. In global retail, gross sales increased about 10% year over year, but like others, we had higher underlying redemptions. April was especially tough for the industry given the markets. Looking at a flow rate in the US versus active peers, we're a bit ahead in terms of equities and a bit below in fixed income. But we've narrowed the gap. And in EMEA retail, high redemptions also affected that it drove Alpha flows in the quarter, although we did see a nice pickup in UK multi-asset strategies.

On the retail product front, we're adding to our active research enhanced index ETF lineup in the US and gaining flows. And in coming months, we will be extending this capability in EMEA with the launch of a series of active ETFs in the UK and Europe. In terms of the institutional business, we have some higher redemptions that included the previously announced Lionstone outflow. As we move forward, we're adding more CLOs and earning key equity, fixed income, and hedge fund mandates across regions as we had some good results in terms of cross-selling and deepening relationships with current clients. In asset management, we continue to manage expenses extremely well.

We're driving efforts to realign resources, streamline systems, and enhance our processes in the US and globally. We're significantly transforming the business while at the same time maintaining our fee rate. Asset management margin was 39% in the quarter, at the top end of our target range, up nicely from our expense discipline. For Ameriprise overall, our complement of businesses has enabled us to perform very well over different environments and market cycles. Overall, we continue to generate very strong free cash flow, and we have one of the highest returns on equity at more than 50%. We're also having a good balance of share buybacks and dividends.

And we continue to return to shareholders in a significant way and we'll be looking to increase and targeting an 85% payout ratio for the balance of the year. I'd highlight that Ameriprise received some new recognition that adds to the portfolio of accolades that we've earned. We were recently recognized in 2025 by Kiplinger's Readers Choice Award for outstanding overall satisfaction, quality of advice, trustworthy advisers, and for being the most recommended among wealth managers. And second, Ameriprise was also named one of America's most innovative companies 2025 by Fortune. Looking forward, we feel very good about our ability to continue to manage and adjust for the environment.

We're staying focused on our strategic priorities and generating good returns for the business. Now Walter will provide additional color on our financials. Walter?

Walter Berman: Thank you, Jim. Ameriprise delivered continued solid performance with exceptional balance sheet strength in a volatile and uncertain environment. Adjusted operating EPS increased 7% to $9.11 with a strong margin of 27%. Adjusted operating net revenues increased 4% to $4.3 billion from asset growth absorbing the market and rate impacts across our businesses. Expense discipline remains strong from our ongoing firm-wide transformation initiatives. Year to date, G&A expenses improved 3% and we will maintain G&A expenses at this level for the remainder of the year. It was a solid quarter across our businesses and we'll get into the details of our segment results on the upcoming slides.

As we exited the quarter, our balance sheet fundamentals remained very strong and we are well positioned to navigate potential volatility going forward. A stable 90% across our segments combined with our strong balance sheet fundamentals enabled us to return 81% of operating earnings to shareholders in the quarter. We remain committed to returning capital to shareholders at a differentiated pace and plan to increase our payout ratio to 85% for the second half of the year. On slide six, you'll see the EPS growth of 7% was impacted by the market dynamics in the quarter.

Assets under management, administration, and advisement increased to a record high of $1.6 trillion, benefiting from strong wealth management client flows over the past year and equity market appreciation. We delivered strong profitability with a consolidated margin of 27% from 4% revenue growth and continued expense discipline. We continue to generate a best-in-class return on equity of 52%. On slide seven, you see the solid metric results from wealth management given the elevated market volatility and normal seasonal tax payment trends. Revenue per advisor grew 11% to a new high of $1.1 million. This resulted from an 11% increase in client assets to $1.1 trillion with client net inflows of $34 billion over the past year.

RAP assets were up 15% to $615 billion with RAP closed at $33 billion over the past year, representing a 6% annualized flow rate consistent with the prior year. With the volatility in the early part of the quarter and tax season in April, we saw slower flows in the second quarter following a strong first quarter. In total this year, draft flows have been $14 billion consistent with the prior year. In addition, transactional activity levels remain strong. Cash sweep balances were in line with expectations at $27.4 billion compared to $28.6 billion in the prior quarter, reflecting normal seasonal tax payments. We are seeing nice momentum in our experienced adviser recruiting.

Being affiliated with a firm that has an excellent reputation and strong balance sheet fundamentals is attractive to advisors, particularly in the volatility and uncertain environments we've seen this year. Advisors find our value proposition to be compelling and we are focused on making sure our transition packages are attractive to experienced advisers that share our values and commitment to the client experience. On slide eight, you'll see strong financial results from wealth management. Adjusted operating net revenues increased 6% to $2.8 billion. Revenue growth benefited from strong cumulative wrap net inflows and market appreciation over the past year, which more than offset lower spread revenues and the impact from unfavorable markets within the quarter.

Adjusted operating expenses in the quarter increased 9% with distribution expenses up 10%, reflecting growth in adviser productivity. G&A expenses increased 6% to $435 million in the quarter, which was a result of higher growth investments and volume-related expenses due to business growth. However, for the year, we expect low to mid-single-digit growth in G&A. Pretax adjusted operating earnings were $812 million, which included the impact on wrap assets from the dip in equity markets in April. However, we saw a substantial recovery in the equity markets by the end of June, which positions us well as we entered the third quarter. In fact, advisory wrap assets on June 30th were 6% higher than the average for the second quarter.

We saw continued strong contributions from both core and cash earnings in the quarter. Our core earnings grew in the low to mid-single-digit range after absorbing the market impact in the quarter. Cash earnings saw a high single-digit decline from the impact of the Fed funds effective rate reduction since the latter part of 2024. Our strategy leveraging Ameriprise Bank has been important in minimizing the impact from Fed funds effective rate reductions on our AWM business. In fact, we continue to see a modest increase in net investment income in the bank this quarter. Margins remain best in class at 29%. Turning to asset management on Slide nine. Financial results were solid in the quarter.

Operating earnings increased 2% to $222 million. This strong quarter reflected equity market appreciation and the positive impact from expense management actions partially offset by the impact of net outflows. Total assets under management and the buy increased to $690 billion, up both year over year and sequentially from higher ending market levels. Revenues were $830 million with a stable fee rate of 46 basis points. Adjusted operating expenses improved 3% and importantly, G&A expenses improved 5%. As Jim said, we are proactively driving operational transformation across our global footprint, including leveraging capabilities across Ameriprise. We and the benefits from these initiatives is evidence in our G&A expense reductions.

Margins reached 39% in the quarter, which is at the high end of our target range. Let's turn to Slide ten. Retirement and Protection Solutions continue to deliver strong earnings and free cash flow generation, reflecting the high quality of the business that was built over a long period of time. Pretax adjusted operating earnings in the quarter increased 9% to $214 million. The strong and consistent performance of the business reflects the benefits from favorable life claims, strong interest earnings, and higher equity markets. These high-quality books of business continue to generate strong free cash flow with excellent risk-adjusted returns and continue to be an important contributor to the diversified business model.

Overall, retirement and protection solutions sales were solid at $1.4 billion. Structured annuity sales remained strong but were down relative to a very strong level in the prior year. Turning to the balance sheet on Slide eleven. Balance sheet fundamentals and free cash flow generation remain strong. We have an excellent excess capital position of $2.3 billion above regulatory requirements, and we have $2.1 billion of available liquidity, and our investment portfolio is diversified and high quality. We have diversified sources of dividends from all of our businesses, enabled by strong underlying fundamentals. This supports our ability to consistently return capital to shareholders and invest for future business growth. Ameriprise's consistent capital return strategy drives long-term shareholder value.

In summary, on Slide twelve, Ameriprise delivered solid results in the second quarter, which is a continuation of our long track record navigating various market environments. Over the last twelve months, revenues grew 8%, adjusted EPS increased 13%, return on equity grew 240 basis points, and we returned $3 billion of capital to shareholders. We had similar growth trends over the past five years, with 8% compounded annual revenue growth, 17% compounded annual EPS growth, return on equity improving 16 percentage points, and we returned over $12 billion of capital to shareholders. These trends are consistent over the long term as well.

This differentiated performance across multiple speaks to the complementary nature of our business mix as well as our focus on profitable growth. With that, we'll take your questions.

Operator: Thank you. We will now begin the question and answer session. If you have a question, please press star one on your touch-tone phone. Before pressing the numbers. Our first question comes from Steven Chubak from Wolfe Research. Please go ahead. Your line is open.

Steven Chubak: Hi. Good morning, and thanks for taking my questions. So Jim, it's encouraging to hear commentary on the recruitment backlog improving. I was hoping you could speak to some of the drivers of the softer flows in Q2, recognizing a lot of that related to the liberation day law. And are you seeing any indications of NNA reaccelerating back to that more normal mid-single-digit growth rate?

Jim Cracchiolo: Yes. So, really, at the beginning part of the quarter, between the combination of the tax payments but also the liberation day, you know, those the flows, you had the tax payments out, but then the flows did not bounce back because of the liberation and people a bit more on the sidelines. That started to recover as you got later in the quarter, but was still seeing that pick up a bit more as we get into July. There was also some lumpiness between, you know, the net inflow from some of the recruiting coming in versus some of the terms. I think there are some big checks that were a little irrational given.

So it impacted a little lumpiness there. For some of the ALPS that we had. Overall, we feel good about the overall positioning. The core client base continues to do well. But our base doesn't react so quickly to, you know, the markets. And so it's more of an on average over time, and we'll see that recover.

Steven Chubak: That's great. And since you alluded, Jim, to some of the irrational behavior in this space, as I look at distribution expense within AWM that has steadily higher year on year. At the same time, one of your peers had alluded to some indications that there's some more maybe less aggressive recruitment packages, at least from some of the sponsor-backed firms in particular. Just curious if that's consistent with what you're seeing in the marketplace. And how should we be thinking about that year-on-year trajectory for the AWM distribution expense line in particular?

Jim Cracchiolo: Yes. So I think it's a common issue. Let me explain the distribution, and then I'll get to the recruiting. On the distribution, when we look at the average gross production that we have at the adviser base, it's up nine and that's what they get compensated on. And so if you look at that, that's up 9% versus the idea of total revenue being up six. And because you got the cash business, etcetera. When you look at the production, that match and then you had a little more increase because people moved to higher production levels, so their payout rates go up a bit. And so that's a bit the difference.

Regarding the packages itself, that only had a small incremental piece of it year over year. It's a little bit, but it's not to the extent of what you're looking at as the total. Most of that's production-based. In regarding to the recruitment package, you're right that there are some rationally but there's still some people irrational, particular for certain advisers that you know, unless you have a perfect market going forward and high short-term rates, etcetera, the economics that'll look a little iffy. But, you know, sometimes people will take a huge check of particularly if it's way above what the normal economics will call for.

Operator: Very helpful, caller. Thanks for taking my questions. Our next question comes from Wilma Burdis from Raymond James. Hey, good morning. Just to follow-up on the last question. Talk a little bit more about the recruiting strategy going forward. How you're seeing the market, how you expect to grow there. Thanks.

Jim Cracchiolo: Okay. Yes. So the pipeline looks like it again nicely going through the And we are really focused on selling our total value prop which is helping their credit. Activity. Have average higher productivity on our core adviser base, than most that just associate advisers out there and say, you know, provide a network service We do a lot in capabilities that we provided, but technology. AI support, etcetera. In addition to the coaching training support we provide. So we feel good about that, and we do look to track certain types of advisers. We're not just looking to associate anyone by giving them a big check.

And so we do have to we have to raise a our packages a bit to be based on the competitive frame. But that's where we bring it in alignment with how we can help people really grow and become more successful.

Wilma Burdis: Thank you. And can you talk a little bit more about plans you're thinking right now? I know you talked a little bit about annuity being popular. How are they kind of positioning themselves, and are you seeing them wanting to Thank you.

Jim Cracchiolo: Yes. So if it's on the annuity, business, what we see is a continuation of people being interested in the structured annuities as well as annuities because of the you know, just the overall tax environment, etcetera, and annuities without living benefits. And those are the only two that we really have in the marketplace right now. We're not playing in the fixed annuity area. I know that's might have been an area We have other people on the shelf that we sell. But that regard, we're focused on just those two areas, and they are complementary as a people look at their retirement and long-term income that they're looking to achieve.

Operator: Thank you. Our next question comes from Jeffrey Schmidt from William Blair. Please go ahead. Your line is open.

Jeffrey Schmidt: Hi. Good morning. With top line growth slowing in wealth management, is there an opportunity to maybe get more aggressive on some of the outsourcing deals or to do larger outsourcing deals or even just get more aggressive on recruiting in general. You know, how do you think about that?

Jim Cracchiolo: Yes. So I think what I would say is we are focused on the recruiting channel. And as I said, we have increased the kind of pedal packages etcetera, that we put in the marketplace just because of the competitive frame. In regard to I don't know if you meant outsourcing. I'm not exactly sure. I mean, as far as the institutional business, that continues to do well and we're continuing to focus there as well as incremental. We are focused on also some of our centralized channel business where we could work with clients beyond the locales of our current advisers, and that we're starting to increase our activity there. And so those are the areas we're focused on.

You know, we have not looked at just rolling up a adviser networks, etcetera, like others, because we wanna continue to maintain a very strong focus on how do we deliver a very good client experience, associate people who actually want to use the advice value proposition appropriately, etcetera, etcetera. Okay.

Jeffrey Schmidt: That's helpful. And then on share buybacks, you mentioned your targeting a payout ratio of 85% in the second half. Historically, it's actually moved higher than that in certain years. Know, probably closer to 90%. Should we expect it to stay up at that level or maybe even move higher if top line weakness sort of continues next year?

Walter Berman: So as we indicate, our target is the 85%. We certainly have the capacity to, and we'll we'll evaluate that on an optimistic basis. And see what's an investment for the shareholders. But that is the current target that we have elevated for the second half.

Jeffrey Schmidt: Okay. Thank you.

Operator: Our next question comes from Thomas Gallagher from Evercore ISI. Please go ahead. Your line is open.

Thomas Gallagher: Good morning. I'm Tim. Just coming back to the competitive environment in AWM, would you and how just considering what's going on with competition you know, it sounds like you think there's some irrationality to it. Would you expect to shrink overall advisers in the next year or so. Or would you still expect to be able to grow?

Jim Cracchiolo: Yeah. I mean, even now, Tom, we are growing. I mean, we're not four others don't report, but our NetEvise account is actually up. That's not a concern that we have per se. I think what I would probably say is, listen, people will put out more to buy up what they would call, you know, people putting on the system. We look at it as a long term. We have a very strong business over time. I have ten thousand advisers that I look to really help them grow and keep their productivity strong through all market environments.

We have good profitability of what we do where the adviser does well, the firm does well, etcetera, in a in a very consistent balance proposition, and we deliver very strong value to That's what we're looking for. We're not just looking to, like, add people because we can show you short term top line growth and then suffer the consequences later on or have some issues with the type of people being associated. So, I mean, others have different philosophies. I'm not saying their philosophy is incorrect. I'm just saying that's that's where we are. We always stick to this knitting. In the past, we never even recruited externally. We always developed internally. We're still doing that.

But we do now a combination of both. And that's the way we look to maintain our ourselves. And, again, we'll be very competitive, but we will when people get a little over the top, you know, they can do that. Maybe it works for them, but we don't look at it that way.

Thomas Gallagher: Okay. That's that's helpful. And then just follow-up on RPS. The results in the quarter looked quite strong, I guess. Net investment income was up a lot sequentially. Any anything in particular going on there? It looks like mortality was favorable on the life insurance side. Just curious what you're seeing there. And then finally, any updates on potential risk transfer? You've had a bunch of peers doing different deals on long term care, well priced variable annuity deal, Any updated thoughts there? Thanks.

Walter Berman: Good. That's Walter. Tom, so as it relates to strong fundamentals, as you indicated, we did have improvement on life claims which certainly contributed to the increase. So we feel very good about certainly the overall underlying profitability drivers within the business. And as it relates to risk transfer, again, the same thing we talk about is the business is solid. It really does contribute, and we just haven't seen that bid ask change at all. That really makes any sense from a shareholders standpoint. And, Tom, what I would say is and you really studied the industry. Well.

And so what I would say is that this is one of the most profitable insurance businesses and protection businesses out in the industry. These are excellent books. They generate great free cash flow. The returns on equity are really high. The margin is very strong because we built good books over time. We only play in areas that we feel about appropriate for us to be in, but we have all the other providers and the channel that, you know, have all of the other alternatives that people want to use. And so listen, if there's a good strategic relationship or something that makes sense, we will entertain it.

But right now, I would probably say we generate a very good return on it that only complements the business.

Operator: Our next question comes from Alexander Blostein from Goldman Sachs. Please go ahead. Your line is open.

Alexander Blostein: Hey. Good morning. Thank you. Two questions for you guys around the bank. It's kinda related, but one, was hoping you guys can give us a sense of roll on roll on, roll off dynamics in the bank securities portfolio right now. Walter, as I recall, you guys put this in place in sizable amounts couple years ago. Spreads were wider. So curious as that securities portfolio rolls over the next call it, year or two, what kind of a spread difference you're seeing on the money you're putting on versus what's coming off? And secondly, heard you guys on the loan strategy. Obviously, that's an important part of the bank belt bank build out going forward.

What's the funding structure for that? The deposits are running relatively light on balance sheet at this point. So you're sort of thinking about growing the loan book, how are you guys planning on funding it? Thanks.

Walter Berman: Sure. So on the portfolio, as we see a pay downs in maturities taking place, you should see a spread increase as it relates to that. That is certainly contributing towards the net interest income improvement year over year. So we feel comfortable with that, and that's part of our strategy that we talked about, that we been executing, certainly, we talked about in the fourth quarter of the last year. As funding for it, we are certainly launching liability products that will fund it, but and so we feel very comfortable with our ability to have that increasing diversification of our liability portfolios, that grows, and matching wealth onto the asset. Strategy that we have.

Alexander Blostein: And the liability product you're launching, is that kinda high yield savings, CDs, things like that?

Jim Cracchiolo: Yes.

Walter Berman: Yes. We have from that standpoint, yes. Alrighty. Great. Thank you very much.

Operator: Our next question comes from Craig Siegenthaler from Bank of America. Please go ahead. Your line is open.

Craig Siegenthaler: Hey. Good morning, Jim. Hope everyone is doing well. My question is on recruiting in the wealth management business, and I know you got a few on this topic, a new source reported that Ameriprise is offering up to 125% of trailing revenue commonwealth advisers. So I'm curious you can comment on Ameriprise's ability to take advantage of current MA disruption and if we could see a pickup in recruitment from us.

Jim Cracchiolo: Yeah. We don't comment on represent the marketplace of what people comment. What we would say is we continue to recruit out in the environment more broadly. And we offer relatively appropriate competitive packages. But as I said, we sell the entire value proposition for people that really want the support, the technology, the capabilities, When advisors join us from the competitors, no matter who they are, They rate everything they get from a member nine times out of ten as being better than where they came particularly on our technology suite, the support, etcetera. Our availability of technology, the idea of even how to get onboarded and uptake what we do that helps their business.

The people we brought onboard their productivity improvements have been tremendous coming to us. So after being here for a few years. So that's what we would say, and that's what we recruit on.

Craig Siegenthaler: Thanks, Jim. Just for my follow-up, another wealth manager question. But can you update us on your bank and credit union pipeline? I'm just curious if we could get some lumpy wins announcements in the second half. Thanks.

Jim Cracchiolo: Yeah. The pipeline looks good. I won't comment on any anything in particular, but we feel good about our position in the in the business there. And we continue to, as I would say, build that pipeline and try to execute and get some deals done.

Craig Siegenthaler: Thank you.

Operator: Our next question comes from John Barnidge from Piper Sandler. Please go ahead. Your line is open.

John Barnidge: Good morning. Thank you for the opportunity. My question is around asset management and flow performance. I know there were some comments about higher redemptions even when reflecting the lion's stone a on that left. Can you maybe talk about large client breakage in the quarter distribution environment, what your outlook is for the pipeline converting? Thank you.

Jim Cracchiolo: Yeah. So on the if you reference a little bit on the institutional, as you know, the institution is always gonna be a little lumpy, and we did experience some outflows as you mentioned from the Lionstone termination of that business some LDI, things like that, some move to people repositioning their portfolios, including some that moved a little more to the passive arena. But we are getting some nice underlying wins. In good products in the various equities, and portfolios like that. But the redemption increase that we did see in the second quarter sort of out strip that from some of those other things I just mentioned.

Now on the retail side, we did see we've been really good on the gross sales pickup for the first quarter. Again, what happened is through that April period, things on the gross slowed down, redemptions picked up, now sales have picked up again on the gross side, but the redemptions strip that. I think you saw that in the pure active space. I'm not talking about where people have ETFs and stuff like that picked up a little quicker. Because of the trading they do. But we see a pickup there. And, overall, we feel good about some of the things that we're doing in the market some of the products we're putting.

We're launching some additional ETFs even in Europe now. We're gonna do that. We're putting out a bit more on the CLOs. You know, we just launched an interval fund. So we're we're starting to do some more product development and launch. In combination, and SMAs continues to build for us. So those are the areas, but I would say it was a little more volatile period on the redemption side. And as I looked at the competitive frame, it was no different against the pure actives there. You for that answer.

And my follow-up question, with the focus on the recruitment environment and being competitive and package that need to come over, and clearly a focus on general administrative expenses. Can you maybe talk about how the company weighs adding human capital versus automating an AI? Is there an internal process to determine whether you wanna add it or it can be automated or using a offshore center of excellence to kinda fund that more competitive recruitment environment. Thank you.

Jim Cracchiolo: Yeah. It's a it's a good question. What we consistently do is, in invest in technology And what we try to really do in that regard, like, it investments in AI and giving our advice is more informed dashboards about their practice, what they can do, where the opportunities may be. We also do intelligent automation. For processing and other activities that we do. We invest in what I would call more on the data analytics side on the information that we can process and how to bring that information to bear. And so all those things have been adding to our capabilities. As we do that, we've been able to adjust some of our expense base.

Some of it is offshore. Some of it is just where we then use that money for the investments that we've been making. And so our investment base is very strong. We have driven good productivity improvements. We think there's still good opportunities for further improvements as we get our advisers to uptake more of the tools and capabilities more fully. And use some of the servicing that we put in place. So that's the way we look at it. We don't necessarily just do a one for one trade off, but over time, we continue to transform, adjust the business, and reinvest you.

Operator: Our next question comes from Michael Cyprys from Morgan Stanley. Please go ahead. Your line is open.

Michael Cyprys: Hey. Good morning. Thanks for taking the question. Maybe just circling back on recruiting. I was hoping maybe you could elaborate a little bit on how you're seeing the pipeline up opportunities that across the different affiliations channels where you operate in the marketplace. How you see the mix of that business evolving as you look out? And then just related to that on the distribution expense, certainly back to the Cheubak's question, just on that expense distribution expense ratio right relative to the revenue has ticked up compared to, like, below 60% years ago. You know, I think it's getting to, like, high sixties now, nearly 67% in the quarter. Up 120 basis points or so year on year.

Maybe just remind us, like, what's driving that mix over a multiyear arc of time, and how do you see the different contributing factors And if you look out from here, is this a good run rate to be thinking about, or what would drive that higher as we move forward?

Jim Cracchiolo: Okay. So let me I'll take the first and part of the second, and then we'll look and complement that. On the first, we have a broadway that we do look to recruit. So a combination of independence, wires, regionals, etcetera. Both independent and employee type things as well as you mentioned in the a figure institutional channel. And so we just look for appropriate advisers that really can really, uptake our type of value proposition, want that, wanna grow their productivity, and that's what we focus on. We just don't gobble up and roll up people and just associate network or big checks that just put people on. So that's what we do.

The pipeline looks very good for the third quarter. And that's proceeding. And so we feel good about that. In regard to the distribution expense, some of the distribution expense has picked up because of a lot of, you know, what you would first of all, manage it expenses. So SMAs, other things that we the expense for that is in the in the bottom line. There's a lot more trading activities from all the wrapped type activities, all that. So all of that is booked in the volume. You got FDIC insurance, all that shit stuff that goes on there. And I'll turn it over to Walter for some of the other stuff. So basically, it is consistent.

And when you it is impacted on mark to market on the above deferred comp, and that's what takes it up and down. But we are staying fairly consistent within that point. The sixties. Point 66%. As we indicated, you correlate it. So it is consistent, but it does go up and down based on movement on deferred comp.

Michael Cyprys: It sounds like you wouldn't expect that. To move meaningfully higher from here from that 66, 67% level.

Walter Berman: It should stay in that range. Definitely. For sure. Again, subject to deferred comp, which we'll take it Okay. I'll put that down. Thank you. Thank you. You're welcome.

Operator: Our last question today will come from Suneet Kamath from Jefferies. Please go ahead. Your line is open.

Suneet Kamath: Hi, Great. Thanks. I appreciate all the questions on recruiting on the call, but if I think back to some of your comments in the past, I had always thought that most of the growth in A and WM comes from your existing advisers, you know, selling business to their existing clients and then existing advisers finding new clients, and then the third piece was the new advisers. So I'm not expecting to give me specific numbers, but is that the right way to think about it in terms of order of magnitude any additional color you can give us on the mix? That would be helpful. Thanks.

Jim Cracchiolo: Yes. Any you're a hundred percent correct. That has not changed. The core growth our business comes from the organic part of adding new business from our advisors, new clients, flows from current clients, etcetera. The on the top of that, you always have some lumpiness of where when you add recruits versus where you have some terms, etcetera, where those things happen. And on that basis, it's always been more positive. What I'm saying in the second quarter, you had some undue level of volatility that affected the flow picture because second quarter is usually weaker anyway with the tax payments etcetera.

So you had that, plus you had the weakness because of the you know, the tariff situation at the beginning of the month. As that starts to had an effect. And then on top of that, as I said, we had a little more lumpiness on the competitive frame. But the underlying consistent then if you look at it over quarters, it's been very consistent and strong. So I think as Walter even said, if you look at the first half of the year, it looks fine. We you look at the second quarter, it looks a little lower.

Suneet Kamath: Okay. That makes sense. And then I guess the maybe a bigger picture question to end the call If I think about the Ameriprise over time, I mean, I think we're approaching twenty year anniversary from the spin, and notwithstanding today's stock price, I think by all measures, it's been a incredible success I guess the question is how is the board thinking about the next five to ten years? Is the next layer of management sort of identified and in place? Does Ameriprise do any significant strategic pivots in terms of perhaps partnering with a larger organization or joint ventures?

Just trying to think about you know, what we're at a pivot point here with this twenty year anniversary Thanks. Does anything dramatically change as we move forward?

Jim Cracchiolo: No, Sunid. Actually, it is a twentieth in September, our twentieth year anniversary. And if you think about it, know, when we came public and all through the financial crisis, etcetera, people really didn't continue to believe that we would be one and since to that time, we've been the number one best performing financial out of the S and P financials. Five hundred financials out of all of them and all the sectors there. Our combination that we always get challenged on, the combination of our business has been very successful. Higher earnings and lower volatility than any one of these individual segments.

So you go through market environments where one business segment does a little better because people hop on it. But overall, we generate very strong returns through shareholders. Very strong cash flow we generate, The business itself is very good and strong for against it. We have one of the premium value proposition and premium brands out in the marketplace for the business that we're in. We created a global asset manager from a proprietary house. I mean, if you look at it, you know, there's always questions quarter to quarter or what competitive frame, etcetera. But go back to all those years you've been a strong follower of us, and you've had it right for a long time.

I would say, the board feels very good about that position that we're in today. We're stronger than we ever been before. We're at a fifty billion dollar market cap from being, you know, coming out at six or eight or whatever the number was at the time. And so a lot of the larger competitors at the time, who were much larger, are now either smaller than us or not as strong. So I would probably say we're in a great position. And that's the way I think both myself and the board. We do have succession. We always look at the next levels of talent, not just one level, but down. So no. We feel very good.

And all the accolades we can get, one of the best managed companies, most innovative companies, all these things just proved to our strength. We got rated one of the best wealth managers again, trust for the advisers, serving our clients well. All those things that people miss them that we're focused on whether it's a recruit or this or that per quarter. But I think if you follow us long term, you'll find that this is a very good strong company. Satisfaction. That operates with high level of focus, integrity, client service, and client satisfaction.

Suneet Kamath: Yeah. I appreciate that. I mean, that's certainly been our view, and it good to hear you express that. So very much very much. Thank you, Sunita.

Operator: We have no further questions at this time. This concludes today's conference. Thank you for your participation. At this time,

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DATE

• Thursday, July 24, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• Chairman, Chief Executive Officer, and President — Lane Riggs
• Executive Vice President and Chief Financial Officer — Jason Fraser
• Executive Vice President and Chief Operating Officer — Gary Simmons
• Executive Vice President and General Counsel — Rich Walsh
• Senior Vice President, Alternative Fuels and International Commercial Operations — Eric Fisher
• Vice President, Investor Relations — Homer Bhullar
• Vice President, Refining Planning and Analytics — Greg Bram

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

• Net Income: $714 million in net income attributable to Valero's stockholders (GAAP) for Q2 2025, or $2.28 per share, down from $880 million, or $2.71 per share, in the prior year’s second quarter.
• Refining Segment Operating Income: $1.3 billion in operating income for the Refining segment in Q2 2025, up from $1.2 billion in the second quarter of 2024.
• Renewable Diesel Segment Operating Loss: $79 million operating loss in the Renewable Diesel segment for Q2 2025, versus operating income of $112 million in Q2 2024.
• Ethanol Segment Operating Income: $54 million in operating income for the Ethanol segment in Q2 2025, down from $105 million in the second quarter of 2024.
• Refining Throughput Volumes: 2.9 million barrels per day in Q2 2025, equating to 92% throughput utilization.
• Refining Cash Operating Expenses: $4.91 per barrel for Q2 2025.
• Diesel Sales Volumes: Up approximately 10% year-over-year in Q2 2025, while gasoline sales remained flat.
• Shareholder Returns: $695 million returned in Q2 2025, comprising $354 million in dividends and $341 million in buybacks, with a 52% payout ratio.
• Record Gulf Coast Refining Throughput: All-time quarterly throughput achieved in the U.S. Gulf Coast region in Q2 2025.
• Net Cash Provided by Operating Activities: $936 million in net cash provided by operating activities for Q2 2025; adjusted to exclude working capital and minority JV share, $1.3 billion.
• Capital Investments: $407 million in total capital investments in Q2 2025, with $371 million allocated to sustaining business operations and the remainder toward growth projects; $399 million attributable to Valero after JV adjustments.
• Total Debt: $8.4 billion in total debt as of Q2 2025, with $2.3 billion in finance lease obligations and $4.5 billion in cash and equivalents.
• Available Liquidity: $5.3 billion, excluding cash.
• FCC Optimization Project: St. Charles refinery upgrade with a $230 million expected cost and 2026 startup, targeting higher yields of high-valued products.
• Dividend: Declared a quarterly cash dividend of $1.13 per share on July 17, 2025.
• Refining Throughput Guidance: Q3 2025 expected ranges — Gulf Coast: 1.76–1.81 million bpd; Mid Continent: 430,000–450,000 bpd; West Coast: 240,000–260,000 bpd; North Atlantic: 465,000–485,000 bpd.
• Renewable Diesel Guidance: The 2025 sales volume outlook remains at 1.1 billion gallons for the renewable diesel segment, with operating expenses of $0.53 per gallon, including $0.24 per gallon in non-cash costs.
• Benicia Refinery Depreciation: $100 million in incremental D&A expense recognized in Q2 2025, affecting earnings by about $0.25 per share per quarter for the next three quarters as operations wind down.

SUMMARY

Valero's (NYSE:VLO) distillate demand and margins were cited as key strengths, with diesel cracks expected to remain elevated due to persistent low inventories and strong export pull. The Renewable Diesel segment reported a $79 million operating loss for Q2 2025 and faced operational headwinds. Management is awaiting policy clarity from the EPA prior to any margin recovery expectations. The company’s capital allocation strategy remains focused on a non-discretionary annual payout ratio of 40%-50% of adjusted cash flow (non-GAAP), with all excess free cash flow designated for share repurchases. Seasonal product transitions and moderating gasoline margins were noted, and management indicated that crude quality differentials are expected to widen in Q4 2025 as OPEC+ and Canadian production rise. Infrastructure investments, particularly the St. Charles FCC project (expected to cost $230 million and start up in 2026), underpin the strategic focus on capturing value from high-margin products.

• Rich Walsh said, "nothing has changed in our plans regarding Benicia right now," following public speculation over its potential sale; Incremental depreciation for Benicia will continue for the next three quarters.
• Eric Fisher indicated Full PTC (production tax credit) capture on eligible renewable diesel feedstocks improved segment results sequentially in Q2 2025 but margins remain challenged awaiting policy updates.
• Greg Bram attributed improved North Atlantic results in Q2 2025 primarily to strong commercial margins and high operational performance despite maintenance impact on throughput.
• Homer Bhullar stated that bonus depreciation under recent tax legislation should reduce near-term cash tax liabilities, particularly for growth CapEx, but turnaround-related spend is already expensed.
• Gary Simmons affirmed that record quarterly throughput was achieved in the U.S. Gulf Coast due to operational performance after heavy maintenance and favorable commercial conditions.

INDUSTRY GLOSSARY

• FCC (Fluid Catalytic Cracking): A refinery process unit that upgrades heavier hydrocarbon fractions into high-value light products such as gasoline and alkylate.
• DGD (Diamond Green Diesel): Valero’s joint venture facility for renewable diesel production.
• PTC (Production Tax Credit): A U.S. federal tax incentive awarded for the production of certain renewable fuels, including renewable diesel.
• RIN (Renewable Identification Number): A tracking number for renewable fuel credits under the U.S. Renewable Fuel Standard program, important in the pricing and economics of renewable diesel.
• LCFS (Low Carbon Fuel Standard): Regulatory regimes requiring reductions in the carbon intensity of transportation fuels, such as those in California.
• SRE (Small Refinery Exemption): A provision under the U.S. Renewable Fuel Standard program allowing small refiners to petition for relief from annual obligations due to economic hardship.
• RVO (Renewable Volume Obligation): The amount of renewable fuel that refiners and importers are required to blend under the U.S. Renewable Fuel Standard.
• SAF (Sustainable Aviation Fuel): Renewable jet fuel produced to reduce lifecycle greenhouse gas emissions relative to conventional jet fuel.
• Capture Rate: The percentage of available margin (usually against a reference benchmark) realized by the refiner, driven by product yields, feedstock selection, and other factors.
• Arb (Arbitrage Opportunity): A situation where different prices for the same commodity between two markets allow for profitable trading between them.
• CI (Carbon Intensity): A measure of greenhouse gas emissions associated with producing and using a fuel.

Full Conference Call Transcript

Lane Riggs, our Chairman, CEO and President; Jason Fraser, our Executive Vice President and CFO; Gary Simmons, our Executive Vice President and COO; Rich Walsh, our Executive Vice President and General Counsel; and several other members of Valero's senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted financial mentioned on this call. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call.

I would now like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our earnings release and filings with the SEC. Now I'll turn the call over to Lane for opening remarks.

Lane Riggs: Thank you, Homer, and good morning, everyone. We are pleased to report solid financial results for the second quarter, driven by our strong operational and commercial execution. In fact, we set a record for refining throughput rate in our U.S. Gulf Coast region in the second quarter, demonstrating the benefits of our investments in growth and optimization projects. Refining margins were supported by strong product demand against the backdrop of low product inventories globally. In particular, early July U.S. Diesel inventories and days of supply are at the lowest level for the month in almost thirty years.

We continue to see strong demand with our quarterly diesel sales volumes up approximately 10% over the same period last year and gasoline sales about the same as last year. On the financial side, we continue to honor our commitment to shareholder returns with a payout ratio of 52% in the second quarter, and last week we announced a quarterly cash dividend on our common stock of $1.13 per share. On the strategic front, we continue to progress the FCC unit optimization project at St. Charles, which will enable the refinery to increase the yield of high-valued products, including high-octane alkylates. The project is expected to cost $230 million and start up in 2026.

Looking ahead, we remain optimistic on refining fundamentals with several planned refinery closures this year and limited announced capacity additions beyond 2025. Additionally, we expect our sour crude oil differential to widen as OPEC plus and Canada continue to increase production during the third and fourth quarters. In closing, we remain committed to maintaining our track record of commercial and operational excellence, which has been the hallmark of our strategy for over a decade. Our commitment remains underpinned by a strong balance sheet, which also provides us plenty of financial flexibility. So with that, Homer, I'll hand the call back to you.

Homer Bhullar: Thanks, Lane. For the second quarter of 2025, net income attributable to Valero's stockholders was $714 million or $2.28 per share, compared to $880 million or $2.71 per share for the second quarter of 2024. The Refining segment reported $1.3 billion of operating income for 2025 compared to $1.2 billion for the second quarter of 2024. Refining throughput volumes in 2025 averaged 2.9 million barrels per day or 92% throughput capacity utilization. Refining cash operating expenses were $4.91 per barrel in the second quarter of 2025. The Renewable Diesel segment reported an operating loss of $79 million for 2025 compared to operating income of $112 million for the second quarter of 2024.

Renewable diesel sales volumes averaged 2.7 million gallons per day in the second quarter of 2025. The Ethanol segment reported $54 million of operating income for 2025 compared to $105 million for the second quarter of 2024. Ethanol production volumes averaged 4.6 million gallons per day in the second quarter of 2025. For the second quarter of 2025, G&A expenses were $220 million, net interest expense was $141 million, and income tax expense was $279 million. Depreciation and amortization expense was $814 million, which includes approximately $100 million of incremental depreciation expense related to our plan to cease refining operations at our Benicia refinery by April.

Net cash provided by operating activities was $936 million in the second quarter of 2025. Included in this amount was a $325 million unfavorable impact from working capital and $86 million of adjusted net cash used in operating activities associated with the other joint venture member share of DG. Excluding these items, adjusted net cash provided by operating activities was $1.3 billion in the second quarter of 2025. Regarding investing activities, we made $407 million of capital investments in 2025, of which $371 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and the balance was for growing the business.

Excluding capital investments attributable to the other joint member share of DGD and other variable interest entities, capital investments attributable to Valero were $399 million in the second quarter of 2025. Moving to financing activities, we returned $695 million to our stockholders in the second quarter of 2025, of which $354 million was paid as dividends and $341 million was for the purchase of approximately 2.6 million shares of common stock, resulting in a payout ratio of 52% for the quarter. Year to date, we have returned over $1.3 billion through dividends and stock buybacks, a payout ratio of 60%. And as Lane mentioned, on July 17, we announced a quarterly cash dividend on common stock of $1.13 per share.

With respect to our balance sheet, we repaid the principal balance of $251 million of 2.85% senior notes that matured in April. We ended the quarter with $8.4 billion of total debt, $2.3 billion of total finance lease obligations, and $4.5 billion of cash and cash equivalents. The debt to capitalization ratio net of cash and cash equivalents was 19% as of June 30, 2025. We ended the quarter well-capitalized with $5.3 billion of available liquidity, excluding cash. Turning to guidance, we still expect capital investments attributable to Valero for 2025 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts, regulatory compliance, and joint venture investments.

About $1.6 billion of that is allocated to sustaining the business and the balance to growth. For modeling our third quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.76 to 1.81 million barrels per day, Mid Continent at 430,000 to 450,000 barrels per day, West Coast at 240,000 to 260,000 barrels per day, and North Atlantic at 465,000 to 485,000 barrels per day. We expect refining cash operating expenses in the third quarter to be approximately $4.80 per barrel. With respect to the renewable diesel segment, we still expect sales volumes to be approximately 1.1 billion gallons in 2025, reflecting lower production volumes due to economics.

Operating expenses in 2025 should be $0.53 per gallon, which includes $0.24 per gallon for non-cash costs such as depreciation and amortization. Our ethanol segment is expected to produce 4.6 million gallons per day in the third quarter. Operating expenses should average $0.40 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization. For the third quarter, net interest expense should be about $135 million. Total depreciation and amortization expense in the third quarter should be approximately $810 million, which includes approximately $100 million of incremental depreciation expense related to our plan to cease refining operations at our Benicia refinery by the end of 2026.

We expect this incremental depreciation related to the Benicia refinery to be included in D&A for the next three quarters, resulting in a quarterly earnings impact of approximately $0.25 per share based on current shares outstanding. For 2025, we still expect G&A expenses to be approximately $985 million. That concludes our opening remarks. Before we open the call to questions, please limit each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits to ensure other callers have time to ask their questions.

Operator: Thank you. The floor is now open for questions. Our first question is coming from Theresa Chen of Barclays. Please go ahead.

Theresa Chen: Good morning. Now that we are halfway through the summer driving season, how is refined product demand trending in your footprint? Maybe just unpack some of Lane's opening remarks about sales across your system. Are there any noticeable patterns or shifts? And additionally, what kind of signals are you observing in the export market?

Gary Simmons: Hey, good morning, Theresa. It's Gary. Overall, I'd tell you the fundamentals around refining continue to look very supportive. Total light product inventory remains below the five-year average range, below where we were last year at this time. And demand for transportation fuels remains robust, not only here in the U.S., but also into our typical export markets. Our view is gasoline demand is relatively flat to last year. It looks like vehicle miles traveled are up slightly year over year, but probably only up enough to offset efficiency gains in the automotive fleet, not up enough to really create incremental demand. If you look at our wholesale volumes, they would also indicate flat year-over-year gasoline demand.

In addition to relatively strong gasoline demand domestically, we've also seen good export demand to Latin America. And then on the supply side, you know, the Transatlantic arb to ship gasoline from Europe to the United States has been closed for much of the year. So when you combine relatively good demand with less supply coming from Europe, you would kind of expect inventory to be a little lower than last year, and that's what we saw in the second quarter. So those factors ultimately resulted in a little stronger gasoline margin environment this year compared to last. Going forward, the Transatlantic arb is marginally open. So supply seems adequate to meet demand.

We're kind of getting to the end of the driving season. We'll start RVP transition in some regions soon. So it's hard to see a lot of support for gasoline crack moving forward. Absent some type of supply disruption, we kind of expect cracks to follow typical seasonal patterns, remain around mid-cycle levels, through the end of the year. Distillate, the story is much different, though. You know, where gasoline demand is expected to fall off some, we expect distillate demand to pick up. First, we'll start to get into harvest season, see agricultural demand pick up. And then we'll transition to heating oil season. Overall, diesel demand has continued to trend above last year's level.

Really strong demand in the first quarter due to colder weather. And then increased demand for refinery-produced diesel with less imports of bio and renewable diesel. In our system, diesel sales are currently trending about 3% above last year's level. Again, while domestic demand has been good, we see a strong pull of U.S. Gulf Coast distillate into the export markets. The exports really have kept inventory down near historic lows during a time where restocking typically occurs. We have seen diesel inventory gain in the last couple of weeks, but really that's just a result of an incredibly strong export market in early June. As exports got really strong, freight rates spiked.

And so it closed some of those export ARBs. Freight rates have come back off, so the ARBs are open to export both to Latin America and Europe. With those ARBs open, it's difficult to see how we get the normal build in diesel that occurs in the third quarter. So diesel cracks have been strong with low inventory. We expect diesel cracks to remain strong. Heading into hurricane season, if we have some type of supply disruption, I think you'll see a pretty significant market reaction with inventories as low as they are.

Theresa Chen: Thank you, Gary. And what is your near to medium-term outlook for light-heavy differentials, taking into account the tailwind from incremental OPEC plus barrels coming to market, but also considering potential headwinds from Mexican production volatility, the unavailability of Venezuelan barrels, GAM crude quality issues, and so on? How do you think these factors play out?

Gary Simmons: Yes. So far year to date, I think the quality differentials have certainly been a headwind for us. We thought coming into the year, you'd see less demand with Lyondell going down. But that was kind of offset. The Venezuelan sanction pulled about 200,000 barrels a day out of the U.S. Gulf Coast market. You had the wildfires that took about 5 million barrels of June supply off the market. But going forward, we do think things will get better. It'll probably be the fourth quarter before you really see that. Canadian production has not only recovered from the wildfires, but it continues to grow.

And as you mentioned, OPEC unwinding their 1.9 million barrels a day of cuts by August. Really, it appears that much of the ramp-up in the production we haven't seen on the market yet so far because there was crude oil burn in the region for seasonal power demand. As we move out of summer, more of those barrels will make their way to the market. And then, you know, early summer tensions in The Middle East also caused some countries to front-end load fuel purchases that they use for power demand also. Again, that will unwind fuel coming back off to the market. As fuel comes back, that'll support wider differentials as well.

Additionally, in the fourth quarter with turnaround activity, you should see less demand for those barrels. So all of those should really contribute to wider differentials in the fourth quarter. I think the only unknown here is really what happens with the Russian sanctions. Thus far, you know, we haven't really seen much of an impact, but if the sanctions are effective and cut some of the Russian barrels, that would obviously embarrass the differentials.

Theresa Chen: Thank you very much.

Operator: Thank you. The next question is coming from Manav Gupta of UBS. Please go ahead.

Manav Gupta: Team, just wanted to understand what's your outlook for the net capacity additions for the remaining part of this year and for 2026? Are you still seeing major capacity additions globally? Or do you think those things are slowing down and given the demand growth, we should be better positioned going ahead, if you could talk about that?

Gary Simmons: Yeah. Manav, this is Gary. You know, I think definitely when we look out on the horizon, there's not a lot of new capacity coming online and a lot of what new capacity there is, is really more geared towards petrochemical production rather than making transportation fuels. If we look at next year, it looks like just over 400,000 barrels a day of new refining capacity coming online. You know, initially, most consultants were forecasting around 800,000 barrels a day of total light product demand growth, which would have indicated, you know, significant tightening starting next year.

With some of the economic uncertainty, especially around tariffs, you know, forecasts have fallen off to where a lot of people are only forecasting around 400,000 barrels a day of total light product demand growth. And then a lot of consultants are showing a lot of that demand growth being filled by a step change in renewable production. And I'm confident we'll see tighter supply-demand balances. The question really is when does this occur? Is it next year? Do we actually see some type of economic activity slow down? And it isn't until 2027 that things really start to get tight. Thus far, you know, our view is the economy has been fairly resilient.

Demand for transportation fuels has remained strong. So I guess I'm a little more optimistic about the economy. And we'll have to see with all the uncertainty on renewables whether we see a ramp-up in renewable production or not. The other big factor in all this is, you know, will we see additional refinery rationalization? Although some refinery closures have been announced, you know, certainly, the recent announcement around the Lindsey refinery in The UK was fairly unexpected. Hard to believe there aren't others facing a similar situation with other refinery closures too. Things could really tighten up a lot faster.

But the big driver here is really what happens to the economy, and you're probably in a better position to assess that than I am.

Manav Gupta: A quick follow-up is I was looking at your Gulf Coast capture. Now that's where heavy light narrowness should hit the capture the hardest. But the capture actually was over 92%. I'm trying to understand a few dynamics, what allowed you to deliver such strong capture. And then coming back to the first question, if heavy lights do widen out, should we expect a tailwind to the Gulf Coast capture because the way your benchmark is constructed, those do not get reflected in the benchmark. So if you could talk about that.

Greg Bram: Yeah, Manav. This is Greg. So I think you hit on some of the points related to heavy light and capture because we do include heavy grades in our reference, you know, for the Gulf Coast. So as those move out and contract, that's picked up in the reference crack that we use. So not as big of an impact on capture rates because it's built into the indicator margin that we use. On our performance in the second quarter, you know, a lot of the improvement was driven by really strong operating performance coming out of the heavy maintenance we had in the first quarter.

And that was really highlighted, if you remember, by Lane's comment about record quarterly throughput in that region. So good operating performance. We had strong commercial performance as well in that region. Particularly on the product side. Good exports, great wholesale performance in that part of our business as well. So those were the primary drivers for the Gulf Coast in the second quarter. And again, as those crude differentials widen out, the extent that they're in the indicator that we use, probably not as much of a factor when you think about the capture rate relative to our indicator.

Manav Gupta: Thank you.

Operator: Thank you. The next question is coming from Neil Mehta of Goldman Sachs. Please go ahead.

Neil Mehta: Yes. Good morning, team. I want to spend some time on return of capital. You returned $633 million in the first quarter or second quarter. With the payout of worth of 70%. So just your perspective on, you know, the sustainability of capital returns and how we should be thinking about the buyback in the back half of the year?

Homer Bhullar: Yes, Neil. Hey, it's Homer. I mean, maybe I'll just start with just a framework around buybacks, right? It's guided by a number of things. Obviously, first and foremost, we've got our stated minimum commitment to an annual payout of 40-50% of adjusted cash flow. Right? And so you should continue to consider that as non-discretionary. We'll honor that in any sort of environment. Then we've got our target minimum cash position of $4 to $5 billion, and we're right at the midpoint there. So we're not looking to build more cash. Right?

And as a result of that, because consistent with what we've been saying for quite some time, we'll continue to use all excess free cash flow to buy back shares. And as you highlighted, the second quarter resulted in a payout of 52%. Keep in mind, though, that we also used $251 million towards the notes that matured in April. In addition to $325 million that was consumed while working capital. Right? So, you know, looking forward, with the balance sheet where it is, and discipline around capital investments, I think you can continue to expect us to maintain this posture where all excess free cash is aimed at share buybacks.

Longer term, I mean, I don't know, you know, if you have the investor deck handy, but we've got a slide in there, I think it's slide 11, that puts all of this into, you know, context, actually reflecting our actual results. So if you look at the last ten-year period through 2024, total cash flow from operations was around $61 billion, and that includes changes in working capital, which is roughly $6 billion a year. If you think about run rate CapEx, right, two to two and a half billion dollars, so $2.25 billion at the midpoint with $1.5 billion sustaining and then $500 million to a billion of growth.

And layer on top, you've got $1.4 billion or so to fund the dividend. Right? So $6 billion of annual cash flow from operations, $2.5 billion CapEx, a billion 4 to dividend. That leaves over $2.3 billion for buybacks based on our actual results over the past ten years. Hopefully, that gives you some context.

Neil Mehta: Really helpful, Homer. And it's just the follow-up is around DGD. Obviously, a lot of moving pieces and appears to be pretty tough, if not trough conditions. What's the path back to mid-cycle here? How do you think about the evolution of the business? And, can you talk about your commitment to it?

Eric Fisher: Neil, this is Eric. I think, you know, you've already said that, you know, that it's in a lot of policy clarity. You know, vagueness right now. I think, you know, you can see really the linchpin in all of this is gonna be what the EPA says post their comment period. That are due by August 8. And so what they do in terms of setting the RVO and what they do in terms of SREs and if in any reallocations, we'll set the four RIN market. And then, consequently, hopefully, set how the rest of the other markets will react versus the d four RIN.

So, I mean, we see the LCFS market in California, California, is slowly moving up after they passed their 9% obligation increase effective July 1. We see that a lot, you know, Europe continues to support its mandate for the 2% staff requirement. We see the CFR in Canada is gonna continue to go forward. So, you know, long term, there's still enough tailwind out there that says this segment will continue to be in demand. It's really just a question of when we see these credit prices start to move. You're starting to see the d four RIN move up. You're starting to see it separate from the d six.

The big question is gonna be when you see fat prices adjust to these policies once these policies are clarified. And so once those fat prices start to disconnect, then I think you'll see the margins open up for DGD and you'll see, you know, more, you know, more demand for DGD and renewables, with the ongoing policy years.

Neil Mehta: Fair.

Operator: Thank you. The next question is coming from Doug Leggate of Wolfe Research. Please go ahead.

Doug Leggate: Well, good morning, everyone. So guys, I think I gotta go back to refining school because you guys are embarrassing us here with your distillate yields versus your light sweet crude throughput. I wonder if you could help us reconcile what's going on there. Obviously, margins were better than gas for, you know, for most of Q2, I guess. But when we look at the line basically, since 2024, I think your light crude input is about 10% higher, but your distillate yield is up materially as well. So great result, but can you help us understand what's going on there? It's my first question. I've got a quick follow-up for Eric.

Greg Bram: Yeah, Doug. This is Greg. So I would tell you it's pretty simple. We've been, for the most part, in that period in max distillate production mode. When you think about how we're adjusting the operation, we're maximizing the yield of jet fuel and diesel fuel. So even though you've got a crude slate that might be a bit lighter, we can do some adjusting within the downstream operation to try to make sure we get all the distillate molecules into that pool that can. And we've been pretty successful and effective at doing that in that time frame.

Doug Leggate: I'm sorry for the part b here, but would I assume that's part of the reason why your capture is doing so well?

Greg Bram: Certainly helps it. Certainly, it's helped when you get that strong distillate crack and then you're maximizing that yield that certainly will have a positive impact on capture.

Doug Leggate: Thank you for that. So Eric, wanted to on the other question, if you don't mind, on renewable diesel. I see if you can dumb it down for us. When you roll everything together, and you guys are obviously the lowest cost producer with the best feedstocks setup. Do you see DGD net to Valero as free cash flow positive on a sustainable basis?

Eric Fisher: I think the answer to that is yes. We're like I said, but it's going to take a little bit of clarity on what the EPA is going to do with RINs. Because, you know, the numbers they're talking about doing will put a positive tailwind into DGD's production. And so, to your point, you know, we still have the best market access both from a feedstock standpoint, a certification of products, access to all the different markets. And it's still a low CI game. I think one of the things that everyone needs to keep in front of them is that Europe and The UK really only accept waste oil low CI feedstock, certified feedstock.

So, you know, as much as there's been a lot of talk about the support of domestic production and soybean oil and Canada's canola oil, those are not acceptable feedstocks to most of the customers that are really interested in lowering their carbon footprint. And so we're still the most advantaged from a feedstock standpoint. I think once you start to see these credit prices move, like I said, we have seen LCFS and RIN prices moving higher. Those factors and credit prices will continue to make DGD an advantage platform. And long term, it'll be a positive cash flow into Valero.

Doug Leggate: If you can't make money, nobody can in this business. So thanks so much, guys. I appreciate the time.

Operator: Thank you. The next question is coming from Ryan Todd of Piper Sandler. Please go ahead.

Ryan Todd: Thanks. Eric, maybe one more follow-up on that side of the business. I mean, it seems so far that your staff operations have been going well. Can you maybe you're eight or nine months into, you know, post start-up of the conversion there, the expansion there. Can you maybe talk about what you've seen so far either operationally, what you've seen in terms of, you know, what's maybe surprised or been as expected in terms of the geographic mix of demand, pricing, etcetera, and how that market is evolving?

Eric Fisher: Yes. Thanks. I think one thing we discovered operationally that I might say was a pleasant surprise was our unit made SAF very, very well, and it blended very, very well. There were, you know, prior to our startup, we'd heard through, you know, others that had gone down this journey that it was very difficult to make. It was very difficult to blend. It was very difficult to make the certifications and satisfy logistics. We, you know, with the combination of DGD's gear, the quality of our project startup team, and our overall project design, we've got a lot of capability on staff as well as, you know, everything between staff and call it traditional RD.

So operationally, this thing has been a positive. The logistics and blendability have been a positive. The ability to move this product through the Valero jet fuel system has been very effective. You know, I think, you know, if there is any sort of downward surprises, we thought there would be much more interest in this product, particularly from airlines. I think everyone is still feeling out this market. We're seeing, you know, a lot of interest in sales. Obviously, the mandate in The EU and The UK, some potential that they have underbought for the first half of the year.

And they may come back and try to make sure they're hitting their 2% blend in the back half of this year. So we may see some sales pick up in the second half of this year as they stare at their end-of-year compliance target. So, you know, I think this market continues to grow. The demand continues to grow. The interest continues to grow. The interest in the voluntary credits associated with this continues to grow. That is, very small volumes, but everyone's trying to explore that as a way to simplify their carbon offset plan by just going direct to DGD. So there's I still see a lot of upside in that.

The project is still returning the returns on our project are still meeting our threshold targets, so that's going very well. And the credit prices have supported the making of the product. And so, you know, if I add on to that and because the next question, well, the recent reconciliation bill, narrowing the benefit of SAF to equal to RD, we still see premiums above that, coming out of the market. And so, you know, as everyone figures out, you know, how to readjust with the changes in the PTC, we still see premiums for SAF over RD from the customer standpoint.

Ryan Todd: Great. Thank you. And then maybe a question for you, Lane. Sorry to ask, but, I mean, the reports that the California government envisions themselves kind of, like, brokering a sale of the Benicia refinery, any comments or any thoughts on anything that could potentially change what would you that would change your mind to close that asset next year?

Rich Walsh: Hey. This is Rich Walsh. You know, first, yes, we don't respond to speculation in media reports along those lines. And nothing has changed in our plans regarding Benicia right now. But, look, you know, there's been a lot of public discussion about the market and, in particular, the regulatory environment in California to head off refinery closures. And, you know, I think you guys all know the CEC has been tasked with evaluating refinery capacity on behalf of the state, and I think they're working very hard to see what, if anything, they can do. And, you know, for our part, we've been in discussions with the CEC and other elected officials and policy officials regarding Benicia's future.

And I think there's a genuine desire for them to avoid the refinery closure, but there's no solutions that have materialized, at least not from our perspective.

Ryan Todd: Great. Thank you.

Operator: Thank you. The next question is coming from Paul Cheng of Scotiabank. Please go ahead.

Paul Cheng: Hey guys, good morning. The question that adds Saudi is putting more barrels in the market, I assume there's going to be more than medium sour gray like the Arabic medium. I'm wondering how you think it's going to impact on the global distillate yield as more of the medium sour is available? That's the first question.

Greg Bram: Hey, Paul. It's Greg. Yeah. So obviously, right, those grades have more distillate typically in them than some of the lighter grades. So as we see those come into the market, you would expect that to have an impact on distillate yield overall. And as a result, distillate production would work up a bit. I don't have a good feel for the exact numbers for that, but there's no doubt that those are grades that are more rich in distillate than most of the other, you know, crudes that we have run in their place over the last few years.

Paul Cheng: I know that it's difficult. I agree. To pinpoint an exact number. Any field that you say they 2% increase 5% or anything that you can share?

Greg Bram: Yeah. Yeah, Paul. I don't have those numbers off the top of my head. I'm sure you can contact Homer and we can talk about that more offline. But I don't remember the numbers off the top of my head.

Lane Riggs: But this is Lane. I think the one thing to add to that is you gotta think about the markets you're putting diesel into and the specs around it, whether they're high cetane or ultra-low sulfur diesel. So in a global sense, the incremental diesel does is there open capacity for the higher valued markets, where the stuff's pointed versus does the incremental diesel is produced in the world as these grades get more sour and more heavy? You know, they end up just sort of as heavy or, you know, in the marine market, because that's the sort of one of the things you gotta consider with your the way you're thinking about it.

Paul Cheng: Okay. Great. The same question, I think, is for Eric. Eric, I mean, with PPC and everything that is more in favor of domestic production and also keeping in local market, I assume. So is that still economic that force that you export out the from DGD into I know that previously, you guys went on quite a lot to Europe. So are those still economic or that the economic now saying that it's going to be majority of the RV production will be staying local?

Eric Fisher: Yeah. I think so we do see the markets in Canada, EU, UK, and California are still attractive for foreign feedstocks. The challenge that we have is we haven't, you know, most of this is still trading on news. So you've seen as the EPA will talk about what they're doing with the RIN, you'll see most of the fat prices are tracking the d four RIN. So even though fat prices have moved up, credit prices are slowly moving up, they haven't separated yet to reflect the impacts of some of the other policy comments on lower PTC, half RIN in the RVO, and really a lot of the tariffs that have been placed on foreign feedstocks.

So at some point, those markets will have to adjust. I think as the policies get finalized and papered, and you'll see there will have to be some reflection in foreign feedstock prices versus domestic feedstock prices to continue to keep, you know, to continue meeting the demand of all those other markets. And so like I said before, it's still a low CI game and a lot of the customers do not want vegetable oil as their feedstock base. So, you know, there will be an increase in the RIN. There will be support of vegetable feedstocks feeding into the RIN.

But when you go into LCFS markets or markets that are based on LCFS and CI, it's still gonna want to pull low CI feedstocks. And so you'll have to see the market adjust for that. And I think, you know, we're starting to see some of those prices move, but it's probably gonna take some time for these credit prices to increase based on the length in the credit banks for both RINs and LCFS. So I think, you know, as those banks slowly start to get consumed, the credit prices will move up. You'll start to see foreign feedstocks disconnect from domestic feedstocks.

Both of them need to disconnect from the d four RIN in order for anyone to increase production, particularly you look at the a lot of the Vedula BD players, if soybean oil and the d four RIN just track, there is no margin to run yet. And so I think, you know, once you see whatever the EPA comes out with RBO and SREs, that will determine when you start seeing BD and RD start to increase in production.

Paul Cheng: Hey, Eric. Can we confirm that, what percentage of your DGD, how these currently export? To Europe and Canada?

Eric Fisher: Yeah. We're not gonna share that level of detail, Paul, but we are the largest exporter and really, you know, one of the largest producers of SAF. And so we're definitely maxing out what we can sell into those markets. But, yeah, you know, that will always shift around based on feedstock prices and credit prices.

Paul Cheng: Okay. Will do. Thank you.

Operator: Thank you. The next question is coming from Paul Sankey of Sankey Research. Please go ahead.

Paul Sankey: Good morning, everyone. Can you hear me?

Lane Riggs: Oh, I can hear you. Yeah. We can.

Paul Sankey: Everyone. We've had good high levels of throughput in US refining this year. Despite the shutdowns. Can you just talk a little bit about that? It's been very fairly steady and very high, and I just wondered what the components of that were as well as the outlook for the second half in your view, perhaps ignoring hurricane risk and stuff, but just the general turnaround outlook for the second half. And the follow-up is a very interesting moment in history with The US becoming a net exporter to Nigeria. Could you just the oil could you just talk a little bit about the impact of Nigerian refining on Atlantic Basin markets. Interesting stuff.

Greg Bram: Hey, Paul. Paul, it's Greg. I'll think I'll talk about the first one. Go just repeat that for me again. What part of are you looking at?

Paul Sankey: Well, it's just so much shutdown of with the shutdown of Lyondell and stuff, we've just seen, you know, what is it, 17 and a half million of throughputs, and you're refining seems like a high number. That's been very steady, actually. You know, I just it's a good thing. I just wondered, you know, how come we're so high and holding so high if it you know, from your perspective and from an industry perspective. And the follow-through is the second half turnarounds and, you know, whether or not we'll really sustain this kind of throughput. Thanks.

Greg Bram: Right. Okay. Yeah. I think throughput's been real strong, particularly in the Gulf Coast. Probably a good indication of people coming out of turnaround and running well. You know, one of the things we look at a lot of times is it's been a relatively mild summer weather-wise, which, you know, a lot of times as you get hotter and hotter, you start to hit some limitations operationally. At lower rates. And so we haven't seen that. I think you've been able to see the industry hold that, at pretty strong performance. Obviously, not a lot of things have been breaking, so that keeps utilization up.

And as we get to later parts of the summer, we'll see if warmer weather starts to creep in and we start to see some of those rates tail off. As far as turnarounds in the third quarter, you know, it's always hard to see where the industry goes. I don't think we have any unique insight into that relative to what you can read out, but it looks like today, turnarounds are probably pegged to be a little bit below average. What we typically see, though, is as we get closer, you know, more work starts to get known and identified in plan. So we'll see where that ultimately lands.

And I think probably you wanna take the other half, Gary?

Gary Simmons: Yeah. Nigeria, think, you know, it's been there's a lot in the press that, obviously, the Dangote refineries had a lot of trouble bringing up their resid FCC. You know, they're running WTI. We see them continue to be in the market, marketing atmospheric tower bottoms, which is, you know, an indication that resid FCC is not running right. So, you know, whenever that's the case, they're probably gonna push themselves to the lightest diet they can because they don't have that resid destruction capability. Ultimately, you know, when they get the resid FCC fixed, you would expect them to start to transition to a little heavier diet and run more Nigerian grades.

Paul Sankey: Well, so they're still sucking in gasoline then?

Gary Simmons: Yes.

Paul Sankey: Cool. Doug Leggett's got me thinking about the school of refining. I think it's the school of refining hard knocks. Right? Thanks, guys.

Paul Sankey: Thanks, Paul. Thanks.

Operator: Thank you. The next question is coming from Philip Jungworth of BMO Capital Markets. Please go ahead.

Philip Jungworth: Thanks. Good morning. You mentioned in the earlier comments, Gary, gasoline demand being flat despite vehicle mileage being up. Not a new story here, but wondering if there's been any shift in your medium-term outlook for efficiency gains in light vehicle fleet given consumer preference or government policy incentives? Any reason we could see a slowdown in gains here?

Gary Simmons: I think it's definitely a potential. You know, you'd you should see less EV penetration than what we have been seeing. Overall though, you know, the bigger impact in our models has always been kind of the impact of the CAFE standards and vehicles becoming more efficient. We don't see that, you know, changing drastically going forward.

Philip Jungworth: Okay. Great. And then, we're all familiar with the affordability in California and the state's tone towards shifting to ensure supply. I know you just have Pembroke in The UK, but wondering what is the affordability or converse supply conversation look like here or in broader Europe given we continue to see closures here too? And you mentioned the Lindsey bankruptcy earlier. Really just trying to think about it in terms of the competitive dynamic given I know you don't have a huge footprint here.

Gary Simmons: Yes. So I would tell you, The UK is a net importer of diesel. So the Lindsey refinery closure probably doesn't impact that much because diesel price is largely set by import parity. But at least it looks to us like Lindsey made about 50,000 barrels a day of gasoline. About 60% of that remained in The UK. Certainly, for our Pembroke asset, you know, some of our net back best netback barrels are those that we sell into the local market. And so as Lindsey exits, we'll be trying to fill that void, which will make less available for exports to markets like California.

Philip Jungworth: Thanks.

Operator: Thank you. The next question is coming from Joe Laetsch of Morgan Stanley. Please go ahead.

Joe Laetsch: Great, thanks. Good morning and thanks for taking my questions. So Eric, I want to go back to RD and results in the first excuse me, in the second quarter, they were still challenged, they improved quarter over quarter. I was hoping you could unpack some of the drivers here know the indicator was lower, but I think that was offset by a greater recognition of the PTC and continued ramp in SAP sales. So just hoping you could unpack that.

Eric Fisher: Yeah. So I think one thing in the first quarter, we had a couple outages on DGD one, DGD two for catalyst changes. So there was a you know, we had better volume in the second quarter as part of that. But I think, you know, we also had a full quarter of PTC capture on eligible feedstocks. Versus the first quarter. We adjusted our operation to capture the begin capturing the PTC about mid-Feb. You only got about half a quarter in the first quarter, but the second quarter had full PTC capture. For the eligible feedstocks and for our staff. So, you know, we'd had a lot more income related to those factors in the second quarter.

And so, I think the, you know, the offset there is, you know, we're still adjusting to all the different tariffs that'll be throwing that are constantly moving around. And so I we do see that, the quarter on quarter is continuing to improve. And like I said, as we continue to see these credit prices creeping up, I'm hoping you'll see in the third quarter that we'll continue this trend, for the rest of the year.

Joe Laetsch: Great. Thanks. Then with the passage of the tax bill a couple of weeks ago, can you talk to any benefits to Valero that we should be mindful of anything around bonus depreciation? Thank you.

Homer Bhullar: Yeah. Hey, Joe. It's Homer. So the reinstatement of full expensing should lower our overall cash tax liability in early years versus, you know, typical maker's depreciation schedule. So growth CapEx should definitely be eligible for bonus depreciation. A lot of our sustaining CapEx should also be eligible with the exception of turnaround capital, which we already expense. The magnitude of the benefit, obviously, depends on our CapEx going forward, but that would be one, at least from a tax standpoint, benefit. Rich can talk about some of the other stuff.

Rich Walsh: Yeah. I mean, there's, you know, the other things that are out there, they're just kinda directionally helpful is, you know, the federal EV tax credits, you know, go away. And so and then I think you also see limitations on the CAFE penalty for the autos. Which I think kinda opens the door for them to really just try to meet consumer demands, which is, you know, generally for bigger vehicles and puts ICE engines on a more, you know, footing to EVs.

And so you don't have that same level of pressure to lower fuel economy in that should also directionally be a collateral benefit that comes out of this bill that we would expect to see manifest over. Over the, you know, following years.

Joe Laetsch: Great. Thank you, guys. I appreciate it.

Operator: Thank you. The next question is coming from Matthew Blair of Tudor Pickering Holt. Please go ahead.

Matthew Blair: Thanks and good morning. We thought the results in the North Atlantic were pretty strong and definitely better than our expectations. I think capture moved up quarter over quarter. Despite tighter Syncrude diffs and the Pembroke turnaround. So could you talk about what helped you out in the North Atlantic in Q2?

Greg Bram: Yes. This is Greg. So we did have a fair amount of maintenance in the second quarter. Most of that maintenance impacted throughput and you could see that in the lower throughput that we had for the quarter. Not so much on capture. And then we had, like we talked about in the Gulf Coast, we had really strong commercial margins and contributions in that region as well that created the kind of consistent results versus what we had seen in the prior quarter.

Lane Riggs: But our turnaround in Quebec, right, it went Turnaround was in Quebec. Yeah. Pembroke Ran well. Actually, kind of it's a theme for our system. Our operations really was strong across the system, including North Atlantic.

Matthew Blair: Sounds good. And then the RVL for proposal, you know, it has this potential SRE regal where the larger refineries would have to essentially pay for the SREs granted to the smaller refineries. You know, it seems like it could be, you know, extra hundreds of millions for Valero if that goes through. So you know, I guess, one how likely do you think that proposal would be to actually be in the final proposal? And then, two, you know, it's generally accepted that the RVO is passed along in the crack. Do you think that the extra reallocation cost would also be passed along in the crack as well?

Rich Walsh: Yeah. This is Rich Walsh. Let me take an effort to respond to that. I think without you getting too deep into this, I think you need to the SREs were originally coming out of an exemption that was expired in 2011. And, you know, following that expiration, the Department of Energy was obligated to look at whether or not these, you know, SREs were necessary because the RFS was creating disproportionate harm or impact to the small refiners. And the DOE concluded that it was not impacting small refiners.

So today, you know, what we're talking about is extensions from a 2011 exemption, and it requires that these small refiners show a unique and disproportionate economic harm caused by the RFS at itself. And like what you're alluding to here, you know, in today's market, the rent obligation is equally applied across the whole sector and it's embedded in all the refinery margins. So I think EPA and DOE have repeatedly confirmed this with their own analysis. So, you know, while the EPA can't categorically deny all SREs, I believe it's gonna be really challenging for these small refiners to make their legal case for the RFS. Is uniquely harming them.

So, you know, my thought process is that you're not gonna see a lot of SREs, be granted by EPA or at least if you do, you're going to see a lot of legal challenges to that. You know? And in terms of the, you know, in terms of the RVO, I mean, remember that the RVO, you know, came out. And right after it came out, there were a whole bunch of changes that happened. You know, we had tariffs, we had restriction on foreign feedstocks, you know, RINs for foreign imports having to be cut in half. I think, you know, you're gonna see a lot of, you know, a lot of comments coming in the proposed process.

And I think EPA is gonna have to look really hard at, at, at, you know, this the RVO and have to think about what they gotta do to revise it to make it realistic. And so I think those are the things that are kinda play out.

Matthew Blair: Sounds good. Thanks.

Operator: Thank you. Our final question today is coming from Jason Gabelman of Cowen. Please go ahead.

Jason Gabelman: Yes, hey, morning. Thanks for taking my question. I wanted to go back to the commentary that you provided on the distillate outlook and appreciate all of the discussion around North American dynamics. But it seems like some of the output from other regions is a bit lower. And I wanted to get your thoughts on the extent that's transitory in nature, things like lower net exports out of Spain because of the power outages? It seems like Middle East diesel exports are down a lot. Not sure if that is structural or not. So just wondering if you could provide your thoughts on things going on in other parts of the world.

Gary Simmons: Yeah. Jason, this is Gary. I think, you know, obviously the strength in diesel is due to low inventories. In July, we've been trending at historic low type inventories and I would say a lot of that really started late last year. Late last year, we had a relatively weak refinery margin environment. Based on where inventories were, you know, I would say that the margin environment was too weak. And that led lower refinery utilization, which limited diesel inventories from restocking as they typically do. Then we had a colder winter, which raised heating oil demand and further depleted inventory heading into the first quarter.

We have had some refinery shutdowns and then some of the new capacity that come online has really struggled to come up to full rate. So I think, you know, supply-demand balances are certainly tighter than expectations based on projected net capacity additions. A shift we've had in 2024, you know, as jet demand increased, it's incentivized refiners to produce jet, which has come at the expense of diesel. In general, you know, one of the things we've been talking about is refiners are running lighter crude diets. You know, that was exacerbated by the Venezuelan sanctions and Canadian wildfires. So with tight quality differentials, the incentive to run lighter crude results in lower distillate yields.

And then, you know, another factor here is with the poor renewable and biodiesel margins, they resulted in lower production of those products which has increased the demand for conventional diesel as well. So I think all those factors have come into play to where you know, where we are on the low inventories today.

Jason Gabelman: Okay. Thanks. And then my other one, I'm going to ask something else that's already been asked, but a bit more specific. On the crude quality differentials that you expect to widen out with OPEC adding barrels and I guess there's been some reporting recently that China wants to stockpile crude inventories in the back half of the year, and OPEC tends to price things more attractively to Asian markets than to US markets. So how much of these Middle East barrels do you think will flow to North America and really influence crude quality dips in the back half of the year?

Gary Simmons: Well, Jason, I can't say we have a lot of insight into what's going on in China. So I don't know their plans in terms of restocking inventory. I can tell you that we really haven't been buying much crude from historic partners in The Middle East for quite some time, but we have reengaged with them. So, you know, the fact that they're-engaging with us tells me that they plan on some of the production making its way to The US. So I'm confident we will see some of those barrels.

Jason Gabelman: Okay. Great. Thanks for the answers.

Operator: Thank you. I'd like to turn the floor back over to Mr. Bhullar for closing comments.

Homer Bhullar: Thank you, Donna. Appreciate everyone joining us today. As always, please feel free to contact the IR team if you have any additional questions. Again and have a great day everyone.

Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.

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DATE

Thursday, July 24, 2025 at 2 p.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Tony Labozzetta

Senior Executive Vice President and Chief Financial Officer — Tom Lyons

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Net Income: $72 million, or $0.55 per share, reflecting improvement over Q2 2024 and Q1 2025 (GAAP).

Return on Average Assets (ROA): 1.19% annualized for Q2 2025.

Return on Average Tangible Equity: 16.79% annualized for Q2 2025, adjusted for intangible amortization.

Pretax Pre-provision Return on Average Assets: 1.64% annualized for Q2 2025.

Revenue: $214 million, a record for Q2 2025, driven by net interest income of $187 million and noninterest income of $27 million.

Net Interest Margin (NIM): 3.36% in Q2 2025, up two basis points versus the prior quarter; projected in the 3.35%-3.45% range for the remainder of 2025, assuming two 25-basis-point rate cuts.

Loans Held for Investment: $318 million increase, or 6.8% annualized, led by commercial, multifamily, and commercial real estate growth.

C&I Loans: Annualized growth rate of 21% in Q2 2025, reflecting increased origination and line usage.

Commercial Loan Portfolio Growth: 8% annualized commercial loan portfolio growth, with 20% of originations in commercial real estate and 80% in commercial and industrial loans.

Deposit Growth: $260 million increase, or 5.6% annualized. Average cost of total deposits decreased to 2.1%.

Allowance for Credit Losses (ACL) and Reserve Release: ACL coverage was 0.98% of loans, following a $2.9 million reserve release due to improved economic forecasts.

Asset Quality: Nonperforming assets declined to 44 basis points of total assets; net charge-offs were $1.2 million (three basis points of average loans); total delinquencies at 65 basis points of loans; Criticized and classified loans down to 2.97%.

Tangible Book Value per Share: Tangible book value per share increased $0.45 to $14.60, with tangible common equity ratio up to 8.03% from 7.9% last quarter.

Efficiency Ratio: Improved to 53.5%. with annualized noninterest expense to average assets at 1.89%.

Dividend: Quarterly cash dividend of $0.24 per share declared, payable August 29.

Commercial Loan Pipeline: Pull-through adjusted pipeline of $1.6 billion at a weighted average interest rate of 6.3%.

Fee-Based Businesses: Provident Protection Plus revenue up 11.3%, income was up 10.1% compared to Q2 2024; Beacon Trust revenue declined 5.2% due to lower average market value of AUM, with end-of-quarter AUM at $4.1 billion, flat sequentially.

Noninterest Expenses: $114.6 million, including approximately $750,000 to $1 million in nonrecurring severance charges; Full-year core operating expense guidance reaffirmed at $112 million to $115 million per quarter.

Tax Rate: Effective tax rate of 29.7%; projected at approximately 29.5% for the remainder of 2025.

CRE Ratio: Commercial real estate exposure was 444%. Merger-adjusted CRE ratio was 408%, improving from 475% a year ago.

SUMMARY

Management highlighted strategic loan mix diversification, with significant growth in commercial and industrial segments and reduced reliance on commercial real estate, following planned objectives. Executives noted robust commercial loan pipeline momentum and affirmed confidence in sustaining current loan growth trends for the remainder of 2025. Management stated that Beacon Trust hired a chief growth officer, targeting expansion and deeper integration with other business lines. Executives confirmed a neutral balance sheet position, with margin guidance for Q3 2025 and the full year factoring in two 25-basis-point rate cuts, and explained that upside in net interest margin depends on funding-side dynamics in a competitive deposit environment. Leaders stated business deposit funding remains stable and growing; approximately 30% of commercial loan production is funded by business deposits, with municipal deposit inflows expected in Q3 2025.

Tom Lyons said, "About 40% of the pull-through adjusted pipeline is in CRE. About 55% is in the commercial categories. And about 5% consumer."

President Tony Labozzetta noted, "our main focus is on organic growth, but we're not closing the door to M&A at all."

There was a discussion that nonrecurring expense impacts included $750,000 to $1 million in severance, with additional expense variation possible due to incentive accrual adjustments later in the year.

Executives clarified that net interest income (NII) growth is prioritized, and management may tolerate modest NIM fluctuation if NII continues to improve.

Competition for consumer deposits was described as elevated, with less stress seen in municipal and business deposit categories.

Asset repricing and accretive new loan production were cited as key drivers for NIM upside in Q3 2025 and the remainder of 2025, as roughly $6 billion of the back book is set to reprice within twelve months as of Q2 2025.

INDUSTRY GLOSSARY

CECL: Current Expected Credit Losses, a forward-looking reserve methodology for estimating future credit losses on financial assets.

CRE Ratio: The ratio of a bank’s commercial real estate loan exposure to its total risk-based capital, used to monitor CRE concentration risk.

Pull-Through Adjusted Pipeline: The loan pipeline figure adjusted for estimated deal closure rates, reflecting the realistic likelihood of loans being funded.

ABL: Asset-Based Lending; commercial loans secured by company assets.

AUM: Assets Under Management, the total market value of assets managed by a financial institution on behalf of clients.

NII: Net Interest Income, the difference between interest earned on assets and interest paid on liabilities.

NIM: Net Interest Margin, a measure of the difference between the interest income generated and the amount of interest paid out to lenders, relative to total earning assets.

ACL: Allowance for Credit Losses, the reserve set aside for estimated future loan losses.

CET1: Common Equity Tier 1 capital, a key measure of a bank's core equity capital compared to its risk-weighted assets.

Full Conference Call Transcript

Tony Labozzetta: Thank you, Adriano. Welcome everyone to the Provident Financial Services earnings call. The Provident team delivered an impressive performance this quarter. Our team gained momentum with solid earning asset growth, improved margins and asset quality, record earnings, and expansion of tangible book value. During the quarter, we reported net earnings of $72 million, or $0.55 per share. Our annualized return on average assets was 1.19% and our adjusted return on average tangible equity was 16.79%. For the second quarter, pretax pre-provision return on average assets was 1.64%. These core financial results improved from the trailing quarter and the same quarter last year, and we are confident in our ability to sustain this momentum throughout the remainder of 2025.

We continue to build our capital position, which comfortably exceeds levels deemed to be well-capitalized. For the quarter, our tangible book value per share grew $0.45 to $14.60, and our tangible common equity ratio expanded to 8.03%. As such, this morning, our board of directors approved a quarterly cash dividend of $0.24 per share, payable on August 29. During the quarter, our deposits increased $260 million, our annualized growth rate of 5.6%. We continue to improve our average cost of total deposits, which decreased to 2.1%. During the second quarter, our commercial lending team closed approximately $764 million in new loans, bringing our production to a record $1.4 billion for the first half of the year.

As a result, our commercial loan portfolio grew at an annualized rate of 8%. This quarter's production consisted of 20% commercial real estate and 80% commercial and industrial loans. Our strong capital formation combined with our production mix has reduced our CRE ratio to 444%. Adjusting for merger-related purchase accounting marks, the CRE ratio is actually 408%. Notwithstanding the high level of loan closings this quarter, our loan pipeline remains robust at approximately $2.6 billion, and the weighted average interest rate is stable at 6.3%. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.6 billion.

We remain confident about the strength of our pipeline and our ability to achieve our commercial loan growth expectations for the rest of the year. Our credit quality is strong relative to our peer group, with a modest improvement in our nonperforming assets and a decline in delinquencies and classified loans. Our net charge-offs decreased this quarter to just $1.2 million or three basis points of average loans. These numbers demonstrate our commitment to prudent underwriting and portfolio management standards. Overall, Provident's fee-based businesses performed well this quarter. Provident Protection Plus maintained its strong performance with an 11.3% increase in revenue for the second quarter, and its income was up 10.1% compared to the same period in 2024.

Given market conditions early in the quarter, Beacon Trust revenue declined 5.2% due to a decrease in average market value of assets under management. However, asset valuations have recovered, and Beacon closed the quarter with $4.1 billion in AUM, which is consistent with the trailing quarter. The Beacon team is focused on building AUM, and I am pleased to report that Beacon has hired a new chief growth officer to further this objective, with a projected start date late in the third quarter. Overall, we are proud of our performance this quarter. We have a dynamic team and a solid foundation to grow our core businesses, expand profitability, and create even more value for our stockholders and customers.

Building on our strong results, we believe we will continue this momentum and achieve our desired goals for the remainder of 2025. Now I will turn the call over to Tom for his comments on our financial performance.

Tom Lyons: Thank you, Tony, and good afternoon, everyone. As Tony noted, we reported net income of $72 million or $0.55 per share for the quarter, with an ROA of 1.19%. Adjusting for the amortization of intangibles, our return on average tangible equity was 16.79% for the quarter. Pre-tax pre-provision earnings for the current quarter were $99.6 million or an annualized 1.64% of average assets. Revenue increased to a record $214 million for the quarter, driven by record net interest income of $187 million and noninterest income of $27 million. Average earning assets increased by $383 million or an annualized 7% versus the trailing quarter, with the average yield on assets increasing five basis points to 5.68%.

Our reported net interest margin increased two basis points versus the trailing quarter to 3.36% while our core net interest margin remained stable. We currently project a NIM in the 3.35% to 3.45% range for the remainder of 2025. Our projections include 25 basis point rate cuts in September and November. Period-end loans held for investment increased $318 million or an annualized 6.8% for the quarter, driven by growth in commercial, multifamily, and commercial real estate loans, partially offset by reductions in construction and residential mortgage loans. C&I loans grew at an annualized 21% pace while total commercial loans grew by an annualized 8% for the quarter. Our pull-through adjusted loan pipeline at quarter-end was $1.6 billion.

The pipeline rate of 6.3% is accretive relative to our current portfolio yield of 6.05%. Period-end deposits increased $260 million for the quarter, however, average deposits decreased $278 million versus the trailing quarter. The average cost of total deposits decreased to 2.1% this quarter. Asset quality remained strong with nonperforming assets declining to 44 basis points of total assets. Net charge-offs were just $1.2 million or an annualized three basis points of average loans this quarter. In addition, total delinquencies declined to 65 basis points of loans, criticized and classified loans fell to 2.97% of loans.

This strong and stable asset quality, coupled with an improved economic forecast used in our CECL model, drove a $2.9 million reserve release this quarter. This brought our allowance coverage ratio to 98 basis points of loans at June 30. Noninterest income was steady at $27 million this quarter, with solid performance realized from core banking fees, insurance, and wealth management, as well as gains on SBA loan sales. Noninterest expenses were $114.6 million with annualized expenses to average assets totaling 1.89%, and the efficiency ratio improving to 53.5% for the quarter. We reaffirm our previous guidance of quarterly core operating expenses of approximately $112 million to $115 million for 2025.

Our effective tax rate for the quarter was 29.7%, and we currently expect our effective tax rate to approximate 29.5% for the remainder of 2025. Our sound financial performance supported asset growth and drove strong capital formation. Tangible book value per share increased $0.45 or 3.2% to $14.60, and our tangible common equity ratio improved to 8.03% from 7.9% last quarter. That concludes our prepared remarks. We would be happy to respond to questions.

Operator: If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, hit 1 to join the queue. And our first question comes from the line of Mark Fitzgibbon with Piper Sandler. Your line is open.

Mark Fitzgibbon: Hey, guys. Good afternoon.

Tony Labozzetta: Hey, Mark. How are you?

Mark Fitzgibbon: Good. First question I had for you, Tony, is on the Beacon business. I heard your comments about, you know, growth starting to ramp with some new people. I guess I was curious, is there any change in strategy or is it just simply you brought in some new people that will go out and market and grow the business? Or are you trying to market to a different audience?

Tony Labozzetta: Great question. I really don't think that I would call it much of a strategy. I think our focus has been growing the AUM. Beacon is a really strong platform. I think one of the things that we're looking to enhance is the sales and service more the sales side. Right? I think we're trying to build a bigger force that could easily work with our business line partner on the other commercial, retail, treasury, insurance so that we can penetrate not only our existing business, but we can also get new to bank or new to Beacon clients as well. So it's a forward strategy with, and also a focus on retention.

And so integrating it better into our businesses is what we're trying to do, and I think the individual we hire for this role is going to be key to that initiative.

Mark Fitzgibbon: Okay. And then a couple questions around provisioning. You mentioned in the release that, you know, part of the reason for the reserve release was improved sort of the economic forecast. Assume is that Moody's? Their assumptions changed?

Tom Lyons: That's correct, Mark. Moody's baseline and primarily in our case, the main driver in terms of macroeconomic variables is the commercial property price index. That drove most of the release.

Mark Fitzgibbon: Okay. And then it's kinda related. I guess I was curious. Your bottom line ROA and ROE estimates kind of imply that provisioning will be pretty modest in the back half of the year. Am I thinking about it the right way? Because you've given really good guidance on most of the other items, and that's the one that kinda sticks out.

Tom Lyons: I think that's the case, Mark. If you look at asset quality, we saw some nice improvement in terms of criticized and classified and don't see it in the release, but the watch list credits have improved as well. And for good economic reasons, we saw improved lease-up in both the retail commercial real estate space as well as the multifamily space. So feeling pretty good about credit quality overall.

Tony Labozzetta: Barring any shift in market conditions or some global event, I think that's a good outlook.

Tom Lyons: Yeah. And I'll note, Mark, even though you saw a small increase in dollars of NPLs, there's no loss content in the driver of the increase. There was one loan in excess of $10 million that was really almost, I guess, a technical nonmaturity in the sense that there's some ownership concerns among the owners of that business as to the disposition of the property. But really strong valuation. So we're not concerned about losses there.

Mark Fitzgibbon: Okay. And then last question, Tony. Last quarter, I had asked you about sort of M&A, and you said you're focused on organic growth. But open to M&A. However, your stock price wasn't, you know, didn't fully reflect the strength of the company, etcetera. Your stock is up maybe 10, 12% since then. Do you feel like the currency gives you capacity to be able to seriously consider M&A at this point?

Tony Labozzetta: Well, you know, you just say, you know, always clear last time. I think we're always in a place where we have to evaluate all our strategic options. We continue to do that. I think right now, our main focus is on organic growth, but we're not closing the door to M&A at all. In fact, if there was the right opportunity to meet the strategic things that I talked about last quarter, came up. We would have to entertain, observe it, and evaluate it to what it means for our shareholders as we go forward.

But I think the price is starting to reflect a little bit more of what we think Provident is, and I think there's still some more room that we can move there.

Mark Fitzgibbon: Great. Thank you.

Tony Labozzetta: Yep.

Operator: And our next question comes from the line of Steve Moss with Raymond James. Your line is open.

Thomas M. Lyons: Hey, guys. This is Thomas on for Steve. Thanks for taking my question. Just wanna start it off with loans here. C&I growth was really strong. What's driving that right now? Is it more line utilization? Or is it, you know, new originations? And maybe what additional hiring opportunities are you seeing for C&I lenders these days? Thanks.

Tony Labozzetta: Well, I would characterize our organizational capacity as where we want it right now. And, you know, additional hirings will come from the standpoint of expansion and what we're thinking about. I think that growth is because of the book. I think that growth, not only the book, but also Phil Fink being here, the team's focus on C&I. You know, we have a very diverse set of products today that we have three years ago. We have the ABL, and healthcare lending, mortgage warehousing, SBA is ramping up. So we have all these businesses. They've all contributed nicely to our production this year, this quarter. And our pipeline shows that they'll continue to contribute nicely.

But our focus is not away from CRE. I just wanna be careful, and not to express that. We're growing our CRE book. We're doing it. It's just that those other lines are moving at a much faster pace. And so we're pleased with that. They're bringing in some great deposits with it. We do have the capacity, but we'll just keep going when we need to. And we have a good plan on expansion both from a capacity numbers and to your geography. So I think I'm pretty pleased with the general direction of where we are with the commercial bank.

Tom Lyons: And I would agree with Tony that it was primarily driven by a rich origination, but we did see increased line usage over the last number of months. We call it normalization. We were traveling in a low territory for a long time as I guess was much of the industry. We're back up around 45% line utilization.

Thomas M. Lyons: Okay. And I'd add also in terms of the pipeline, Tony talked a little bit about the mix going forward. About 40% of the pull-through adjusted pipeline is in CRE. About 55% is in the commercial categories. And about 5% consumer.

Tony Labozzetta: I just would like to round out that comment by saying it's not accidental. I think part of our strategic objective was to kind of diversify our commercial book so we're not CRE heavy. And as you can see by the reported number that if you adjust for the merger-related charge, we're at 408%. That's a pretty solid number. And it'll continue to improve as we continue to build our other lines of business.

Tom Lyons: Especially when you consider we were at 475% a year ago.

Tony Labozzetta: Correct.

Thomas M. Lyons: That's all great color. I really appreciate that. If I can get one more in, you know, wealth management fee did feel a little light at, you know, 68 basis points of EOP AUM. Was that driven by maybe lower average AUM from market volatility? Or maybe something else?

Tom Lyons: Yes. That is the case. For the quarter. Like, as Tony noted, I think, his opening comments, the average balance was down impacted revenue for the quarter, but we did see a market recovery, and we're back up actually a little bit ahead of where we were at the end of the period at the first quarter. So client count has remained constant. We're actually at plus three on the client count. The AUM per client has gone up a little bit. So nice recovery by the end of the period.

Thomas M. Lyons: Okay. Great. That makes sense. That's all for me. Thanks, guys.

Tony Labozzetta: Thanks, Eric.

Operator: And our next question comes from the line of Feddie Strickland with Hovde Group. Your line is open.

Feddie Strickland: Hey, good afternoon. Just wanted to start on the expense guide. Last quarter, I think you mentioned you might be able to come in potentially at the lower end of the range. Do you still feel like maybe that's achievable and we could see the quarterly expense line even come down a little bit in the back half of the year?

Tom Lyons: I do, Feddie. You know, so there was a little bit of unanticipated what I would consider nonrecurring costs in terms of some severance charges about $750,000 to a million dollars, let's say, in nonrecurring there. That said, the back half of the year is usually when we take a closer look at some of our incentive accruals for the current period as we get greater visibility into where we might end the year. So the various incentive programs throughout the different disciplines in the bank we try to get a finer point, a little more precise, and that can affect the accruals either positively or negatively. So that's why we're given a range of $112 million to $115 million.

Feddie Strickland: Got it. Appreciate that. And just wanted to talk through the municipal deposit flow seasonality, kind of what your expectations are there? And am I thinking about that correctly that maybe the increase in brokered deposits is really to replace some of that outflow and then we maybe see those broker deposits come back down as maybe have some seasonal inflows in municipal deposits?

Tony Labozzetta: Yeah. I think that's a fair statement. I would kind of expand on that to say, we also allowed some high-yielding CDs that we had, you know, on our books from pre-merger. During the liquidity times. And that was just a trade-off between the broker deposits or, you know, the consumer CDs, which were high yield. And we thought that a good trade. And it also made up the delta in funding needs because of the municipal outflow. So there was a combination of those two things.

If you look at our municipal pipeline now, not only do we expect the flows, which are strong in the third quarter, particularly this month, and we're starting to see that, but you also are now seeing the pipeline of municipal potential new municipal business is also there. So that should come along nicely as we achieve those wins.

Tom Lyons: You are correct, though, that the municipal deposits the trough is the deepest in the second quarter historically.

Feddie Strickland: Alright. Great. Thanks for the color.

Tom Lyons: Thanks. Welcome.

Operator: And our next question comes from the line of Tim Switzer with KBW. Your line is open.

Tim Switzer: Hey, Tim. Hey, good afternoon. For taking my questions. With you guys a little bit less interested in M&A right now, do you have, like, a target capital level you're trying to get to? And how does that play into your appetite for more share repurchases?

Tony Labozzetta: I don't think it's a significant strength. I kinda like around 11 and a quarter for the CET one.

Tim Switzer: Okay. Okay. And sorry if this has already been asked, but for the NIM trajectory, you guys took up the high end of the guide a little bit. Can you talk about what's helping drive that? And, you know, how would Fed rate cuts impact your margin?

Tom Lyons: The balance sheet's fairly neutral. So, I mean, the two cuts 25 basis points are built into that margin expectation. You know, there's we run a whole number of models and working on the most likely, though, but it looks like around a 3.40 in Q3. Maybe exiting as high as 3.45, 3.47 even at the end of the year. But, you know, again, to exercise a little caution in that, and, again, that's two rate cuts in September and November.

Tim Switzer: Great. Okay. That's good to hear. And the last one for me, the loan pipeline moved down just slightly lower, but you obviously had pretty good growth in Q2. Is there any, like, slowdown or uncertainty causing borrowers to be more cautious at all? Or, you know, everything still looks pretty good. People aren't too concerned about tariffs or anything like that.

Tony Labozzetta: Yeah. Actually, that's one of the real bright spots. You know, while the pipeline went down, it did go down because of some what I would call, very strong loan closings in the quarter. Right? And I think the key is we scrub our pipeline incredibly well. So the stuff that's in there, we feel pretty good about it. And so we also in all the conversations with our verticals, don't see any signs of anything slowing down immediately. The replenishment appears to be happening. We do expect to have a nice pull-through in the third quarter. And continue to replenish it. And so again, I don't see anything right now that I'm concerned.

I think it's a bright spot for us moving forward.

Tim Switzer: Okay. Great. Thank you, guys.

Operator: And our final question comes from the line of Manuel Navas with D.A. Davidson. Your line is open.

Manuel Navas: Hey, I appreciate that commentary on the NIM in the back half of the year. Is the main driver there, the accretive, new loan production? With deposits kind of being more flat, or could you see some deposit costs decline as well? I guess you do include two cuts, so that's part of it as well.

Tom Lyons: Yeah. I would put more emphasis on the asset repricing though. You got about $6 billion of the existing back book repricing over the next twelve months? You know, about $5.1 billion is floating. So you know, as the rates move, we should see that benefit. Then the new loan production coming on at accretive levels as well. I would be cautious about taking too much credit even with the rate cuts on the funding side just because the competitive environment, I think, is a little bit more challenged now. Deposits are a hot commodity.

Tony Labozzetta: I would add one dimension to that. I think certainly, there's a lot of accretive loan production. I think whether we're in the high end of the range or low end of the range, it's gonna be dictated by the funding side. But I also want to preface us that while we make managerial decisions, we're focusing a lot of our energy around the NII. So we'll be willing to give away one or two basis points if our NII can grow. So I just want you guys to remember that for the next earnings call. That'll be management decisions that we'll make to drive better earnings and that's part of the management game. Right?

Tom Lyons: That's a really good point. And you saw some of that even on the investment portfolio side. I think I mentioned last quarter, I'd be very comfortable taking the investments back up to about 15% of assets. Still a little bit under that now. But the leverage growth obviously gives you a little bit less spread, but good income with very little credit losses because we're buying high-quality treasuries and agency securities.

Tony Labozzetta: Right. But we're feeling pretty good because some of the funding growth that we're seeing, and if that manifests along with the loan production, it should be well in the range of what Tom is saying.

Manuel Navas: I definitely sense the optimism on NII growth. Could you speak a little bit more to that competition you're seeing? Just in some of that commentary? I mean, that's also because there's more demand out there, but just could you just speak to that for a moment?

Tony Labozzetta: Yeah. I think a lot of the competition we're seeing now Tom could jump in at any moment, we're on the consumer deposit side, we're seeing more of stress. Right? Whether they're the deposit accounts moving into money markets or other banks are starting to get a little bit more competitive for the space, particularly with CD products. Our business deposits are stable and growing. Just a fact point, for everybody on this call. We're probably funding about 30% of our commercial production commercial funding is being done with business deposits, and that's a pretty good ratio. And so if we can have the municipals come back, we're not seeing a lot of stress there in terms of competition.

We're seeing the competition more on the consumer side. Not that the municipals don't have it, but the biggest level of competition is happening on the consumer deposits. Tom, would you like to add on that?

Tom Lyons: I think you covered it just to accentuate that it's not just banks. The availability of viable investment alternatives for folks as well, and they can get a decent return.

Manuel Navas: I really appreciate the commentary. Thank you.

Tony Labozzetta: You're welcome.

Operator: And that concludes our question and answer session. I will now turn the conference back over to Mr. Tony Labozzetta for closing remarks.

Tony Labozzetta: Well, thank you, everyone, for your questions and joining the call. We hope everyone has an enjoyable summer, and a great rest of the year. We look forward to speaking with you soon. Thank you very much.

Operator: And, ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.

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DATE

• Thursday, July 24, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Hal Lawton
• Chief Financial Officer — Kurt Barton
• Executive Vice President & Chief Supply Chain Officer — Colin Yankee
• Executive Vice President & Chief Stores Officer — Seth Eastep
• Executive Vice President & Chief Technology, Digital Commerce & Strategy Officer — Rob Mills
• Executive Vice President, General Counsel & Corporate Secretary — John Ortiz
• Senior Vice President, Investor Relations & Public Relations — Mary Winn Pilkington

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TAKEAWAYS

• Net Sales: $4.44 billion in net sales for Q2 FY2025, up 4.5%, marking the largest sales quarter in company history.
• Comparable Store Sales: Increased 1.5% in Q2 FY2025, with 1% transaction growth and a 0.5% rise in average ticket.
• Diluted EPS: 81¢, representing a 2.8% year-over-year increase.
• Gross Margin: Expanded 31 basis points to 36.9%, benefiting from disciplined product cost management and supply chain efficiencies.
• Selling, General & Administrative (SG&A) Expenses: Increased 51 basis points to 23.9% of sales for Q2 FY2025, primarily due to planned investments in strategic growth initiatives and higher depreciation, including last year's opening of the tenth distribution center.
• Operating Income: Rose 2.9% to $577.8 million.
• Net Income: Net income (GAAP) was $430 million for Q2 FY2025, up 1.1% year over year.
• Merchandise Inventory: Merchandise inventories totaled $3.1 billion at the end of Q2 FY2025, with a 1.5% lift in average inventory per store to support in-stock levels.
• Customer Loyalty: Neighbor’s Club membership hit a record 41 million in Q2 FY2025, accounting for over 80% of sales.
• Digital Sales: Delivered mid-single-digit growth in digital sales for Q2 FY2025, with nearly 80% of digital orders fulfilled by stores.
• Physical Footprint: Opened 24 new Tractor Supply stores in Q2 FY2025 and two Petsense stores while closing one Petsense; acquired 18 Big Lots locations for future expansion.
• Final Mile Rollout: Covered 15% of stores by midyear (Q2 FY2025), with plans to reach approximately 25% coverage by year-end FY2025; markets with Final Mile showed an average order size near $400.
• Shareholder Returns: $196 million returned in Q2 FY2025 via dividends and repurchases; full-year repurchase guidance for FY2025 lowered to $325–$375 million (from $525–$600 million), citing capital reallocation to inventory and tariffs.
• 2025 Guidance Reaffirmed: Net sales growth of 4%–8% for FY2025, comparable sales flat to up 4% for FY2025, operating margin of 9.5%–9.9% for FY2025, net income (GAAP) between $1.07 and $1.17 billion for FY2025, and EPS range of $2–$2.18 for FY2025.
• Tariffs: Management reported Q2 FY2025 tariff impacts on direct imports with "limited impact on the average unit retail," and expects greater effects in the second half of FY2025 and beyond.

SUMMARY

Tractor Supply (NASDAQ:TSCO) reported record sales of $4.44 billion for Q2 FY2025, margin improvement, and continued transaction growth in its largest-ever sales quarter, while reaffirming full-year guidance for FY2025 despite macro and tariff pressures. Management noted sequential improvement in comparable sales throughout the quarter, with momentum extending into July and early Q3 FY2025. Inventory levels were increased to improve in-stock rates for key categories, and the company advanced its strategic Final Mile initiative, already exceeding early expectations for order size and operational benefits in core rural markets. New store growth and acquired real estate underpin an expanded pipeline, while disciplined capital reallocation informed a more conservative pace of share repurchases.

• Lawton stated, "Each period performed better than the one before it in Q2 FY2025, and that momentum has continued into early Q3," highlighting comp sales acceleration.
• Barton said, "After experiencing six consecutive quarters of pressure on our comparable sales from deflation, the impact in Q2 FY2025 was essentially neutral," indicating deflation headwinds have stabilized.
• Yankee reported, "In markets where Final Mile is active, we're seeing an average order size of nearly $400 ... a higher customer satisfaction score, a 10 times lower return rate, and stronger repeat engagement from high-value big barn customers," underscoring the strategic impact of the initiative.
• Management expects inflationary effects and increased ticket growth from tariffs and cost pass-throughs to materialize further in the second half of FY2025, driving balanced gains in transaction count and ticket size.

INDUSTRY GLOSSARY

• Final Mile: Last-leg delivery operations, tailored for high-weight and large-item rural merchandise, from Tractor Supply stores directly to customer locations.
• Q Products: Consumable, usable, and edible goods (e.g., animal feed, pet food, bedding)—core recurring purchase categories at Tractor Supply.
• Neighbor's Club: Tractor Supply’s proprietary customer loyalty program, driving repeat purchases and tracking high-value customer activity.
• Big Barn Customers: Core segment of large-order, multi-species animal and landowners who frequently purchase in bulk across multiple categories.
• Infusion Remodel: Store remodeling process intended to support assortment localization and drive incremental sales productivity.

Full Conference Call Transcript

Hal Lawton, our CEO, Kurt Barton, our CFO, and Colin Yankee, our Chief Supply Chain Officer. In addition to Colin, we will also have Seth Eastep, Rob Mills, and John Ortiz join the call for the question and answer portion. Following our prepared remarks, we will open the floor for questions. Please note that a supplemental slide presentation has been made available on our website to accompany today's earnings release. Let me now reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company.

In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that these statements will remain operative at a later time.

Tractor Supply undertakes no obligation to update any information discussed in the call. As we move into the Q and A session, please limit yourself to one question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation. We will also be available after the call for any further discussions. Thank you for your time and attention this morning, and it's my pleasure to turn the call over to Hal. Good morning, everyone, and thank you for joining us today.

Hal Lawton: To kick off today's call, I'll begin with a high-level overview of our second quarter performance, then I'll turn it over to Kurt for a more detailed review of the quarter and our outlook going forward. After that, Colin Yankee, our EVP and Chief Supply Chain Officer, will join to share an update on our Final Mile initiative, one of the most exciting and impactful transformations underway at Tractor Supply. I'll then return to close out the call with some final thoughts before Q and A. Before we dive into the results, I want to take a moment to thank our 52,000 plus Tractor Supply team members.

Their dedication, resilience, and passion for serving life out here continue to set us apart. Truly, it's through their dedication and their legendary customer service and deep product knowledge that we continue to earn our customers' trust and loyalty. Their efforts are the foundation of our leadership in rural retail and central to how we deliver value every day. Overall, we are pleased with the record results we delivered in the quarter. Despite ongoing macroeconomic uncertainty and a tepid start to spring, our sales performance exceeded our modest expectations. This performance reflects continued strength in our core needs-based categories and share gains across key seasonal businesses. Before getting into the details of Q2, I'd like to highlight four trends.

First, we delivered comp transaction growth in the quarter, which is a hallmark of Tractor Supply. Second, customer engagement was exceptional. We hit numerous all-time highs across key customer metrics, including Neighbor's Club membership, customer satisfaction, total customer shopped, new customer growth, and record sales of live birds. And I could go on and on. Customer loyalty is a hallmark of Tractor Supply. Third, average unit retail turned positive, right in line with the inflection point that we called out at the beginning of the year and last quarter. This shift supported comp ticket growth in the quarter and positions us well for the back half of the year.

And fourth, and perhaps most importantly, we saw sequential comp sales improvement across the quarter. Each period performed better than the one before it, and that momentum has continued into early Q3. These trends underscore the resilience of our business model and the relevance of our offering, especially in today's environment. Our team's disciplined execution and deep connection to our customers continue to drive performance across the business. Now jumping into some of the details. These strengths translated into solid financial results for the second quarter. We grew net sales by 4.5% with a comparable store sales increase of 1.5%. This was our largest sales quarter ever, reaching $4.44 billion. Diluted EPS was 81¢.

Our comparable store sales performance was driven by a 1% increase in transactions and a half percent increase in average ticket. In many ways, the quarter played out as expected once spring arrived across our markets. While April was impacted by wet weather and a slow seasonal start, May and June delivered comp sales above the quarterly average, with June marking our strongest comp month of the quarter. We are pleased with the momentum exiting Q2, as customers reengage with seasonal categories and our core needs-based assortments. Turning to category performance. Our consumable usable and edible or Q products led the way with solid unit growth that consistently ran above our chain average.

These demand-driven essentials remain a cornerstone of our business. A standout within Q was Chick Days. This year's event was our most successful to date. More customers than ever are turning to Backyard Poultry. And we saw strong growth across both new and existing customers. From LiveBirds to Coops, feed and supplies, we saw strong broad-based demand across the category. Chick Days is retail theater at its best. Uniquely Tractor Supply, and reinforces the position we have in rural retail. In pet food, we believe the market has passed the trough of the downturn and is entering a recovery cycle, albeit slow and modest.

We introduced new brands in both dog and cat across the spectrum of value to super premium with a focus on what differentiates Tractor Supply. We're actively refining our space allocation resets to adjust product assortment and relevant brands to ensure we're meeting the evolving needs of pet parents. At the same time, we're seeing momentum and continue to invest in our complementary pet initiatives. Allied Vet is expanding our reach in pet pharmacy. While pet wash stations and mobile vet clinics continue to deliver strong customer growth and loyalty. Seasonal merchandise performed well, including goods, and we saw positive contributions from apparel, gift, and decor.

Our garden centers and seasonal live good tents supported strong growth in the lawn and garden category. We have more than 650 garden centers in operation and activated over 250 seasonal tents this spring. These efforts reflect a meaningful gain in merchandising capability and helped us to meet our customers' passions for gardening and tending to their property. Big ticket performed better than we anticipated. Customers continue to rely on the trusted advice of our team members when navigating larger purchases. A testament to the legendary service that defines the Tractor Supply in-store experience. We also believe we somewhat benefited from the bathtub effect as seasonal demand shifted from Q1 into Q2 and has continued on into Q3.

In total, these were moderated by some softness in select discretionary categories, including pet hardlines, gun safes, air compressors. Additionally, certain later cycle spring businesses such as chemicals, sprayers, and pressure washers performed below expectations in the quarter but picked up as we've moved into Q3. These areas of pressure were not unexpected given the broader consumer sentiment and how the spring season unfolded. Now let's turn to customer engagement. Our Neighbor's Club loyalty program remains a key driver of customer engagement and a meaningful competitive advantage. In Q2, we hit all-time highs across several customer metrics. We ended the quarter with a record 41 million members, who accounted for over 80% of our total sales.

We also saw record total customer count and an all-time high in high-value customers. And that's defined as those who shop frequently and spend more across categories. As part of our Neighbor's Club, we just celebrated the second anniversary of our hometown heroes program with a $1 million donation across 10 charities focused on military service members, veterans, and first responders. Hometown Heroes received top-tier Neighbor's Club status and benefits. Notably, about 15% of the hometown heroes are new to Tractor Supply. Highlighting the program's reach and appeal. Shifting to the digital front, our digital sales grew at a mid-single-digit rate for the quarter.

Orders fulfilled by our stores remain the most popular fulfillment option, accounting for nearly 80% of digital orders, a reflection of the convenience and strategic placement of our more than 2,300 stores across rural America. Our store footprint continues to be a powerful enabler of digital growth. We saw robust performance in deliver from store and same-day delivery, which reinforces the unique advantage of our local presence in the communities we serve. Together, these capabilities enhance convenience for our customers and drive continued momentum in our digital ecosystem. Turning to the physical footprint. In the second quarter, we opened 24 new Tractor Supply stores and two Petsense by Tractor Supply stores, and we closed one Petsense store.

We have a robust pipeline of low-risk organic growth opportunities ahead of us. Our recent acquisition of 18 Big Lots locations gives us great confidence to start 2026 with our new store pipeline and a strong position as we anticipate stepping up to 100 new stores next year. Over the past two years, we have significantly enhanced our real estate development capabilities, improving new store economics and fusion remodel returns. We continue to make progress on our fee development program, which gives us greater control over the timeline and cost of new stores. And allows us to capture approximately 15% rent savings over the lease term of a new store.

All in, we're pleased with the progress we've made across the business in the first half of the year. Our performance in the second quarter reflects solid execution, continued resilience in our core categories, and strong alignment with our long-term strategic priorities. Looking ahead to the second half of 2025, we recognize the uncertainty that remains from macroeconomic pressures to evolving tariffs. That said, our business model is built for resilience. Given our performance year to date and our outlook for the balance of the year, we are reconfirming our guidance for 2025.

With a predominantly US-sourced assortment, trusted vendor relationships, and a scalable flexible supply chain, we believe we are well-positioned to navigate near-term volatility and to continue driving long-term value. And with that, I'll turn it over to Kurt.

Kurt Barton: Thank you, Hal, and good morning, everyone. Echoing Hal's remarks, we are pleased with our second quarter financial results, which delivered record sales and net income. As Hal noted, the quarter began more slowly than anticipated largely due to a delayed start to the spring season. Based on my experience, when spring arrives later, especially when accompanied by favorable moisture levels, we typically see a more compressed peak selling window, but also a shift in demand to later in the season. That's exactly what we observed this year with spring-related sales activity effectively pushed back roughly a month. From a regional standpoint, six of our seven geographic regions delivered positive comparable sales. All within a tight band.

Notably, every region posted positive comps in the month of June, and we're encouraged to see this momentum continuing in the third quarter. As we indicated last quarter, we expected the second quarter to mark the turning point from the deflationary headwinds we've been facing and that outlook proved to be on target. After experiencing six consecutive quarters of pressure on our comparable sales from deflation, the impact this quarter was rather neutral. Moving down our income statement. Gross margin expanded by 31 basis points to 36.9%. Driven by disciplined product cost management and consistent execution of our ongoing everyday low price strategy. I want to thank our merchant team who continues to play a critical role in delivering results.

Through our product cost management initiatives even in a dynamic environment. We're seeing meaningful benefits from their disciplined execution. Combined with the ongoing efficiencies we're capturing across our supply chain. These efforts continue to drive our gross margin performance and improve our overall cost structure. Selling, general and administrative expenses as a percent of sales increased by 51 basis points to 23.9%. This increase reflects planned investments in strategic growth initiatives which included higher depreciation and last year's opening of our tenth distribution center. Additionally, we experienced a modest deleverage of fixed costs given the level of comparable store sales. We remain laser-focused on cost control and ongoing productivity initiatives.

Highlighted by continued high performance of our distribution center network which has increased productivity for the last three years and delivered its highest second quarter efficiency results. Operating income grew 2.9% to $577.8 million. Net income increased 1.1% to $430 million and diluted EPS grew 2.8% to 81¢. Our balance sheet remains strong and is a clear competitive advantage as we navigate an evolving macro environment. Merchandise inventories totaled $3.1 billion at quarter end representing a modest 1.5% increase in average inventory per store. This increase supports improved in-stock levels in key queue categories to meet customer demand while also reflecting the impact of tariffs on second-quarter direct import receipts.

We're very pleased with both the positioning and quality of our inventory, our consistent thoughtful approach to inventory management continues to be a key differentiator for Tractor Supply. Returned $196 million to shareholders this quarter through dividends and share repurchases. For the full year, we now anticipate share repurchases will be in the range of $325 to $375 million below our original outlook of $525 to $600 million. Reflecting a more measured pace of repurchases as we manage capital allocation with discipline. As Hal shared, we are reaffirming our fiscal 2025 outlook. We continue to recognize the evolving macroeconomic environment and are closely monitoring indicators of consumer spending. We continue to expect net sales growth of 4% to 8%.

Comparable store sales are projected to be flat to up 4%. Reflecting a balanced view of the current environment and our ongoing initiatives to drive traffic and anticipated ticket gains. Our operating margin is anticipated to be between 9.5-9.9% with net income between $1.07 billion and $1.17 billion. This translates to EPS in the range of $2 and $2.18. As we noted last quarter, the current tariff landscape is creating some added cost pressure. We're proactively addressing this by working closely with our supply chain, and vendor partners to mitigate the impact. As to timing, we have seen the tariff impact begin to come through on our direct imports. There have been modest cost concessions on the non-direct inventory.

At this point, there has been limited impact on the average unit retail. All of this aligns with our expectations that the impacts related to tariffs will primarily occur in the second half of this year and beyond. Given the ongoing developments and the dynamic nature of tariff policies, we are reaffirming our guidance to encompass what we see as a range of possibilities. That said, as we shared on our last call, we're thoughtfully managing the business toward the midpoint of that range. While remaining agile as the situation evolves.

Looking to the second half of the year, we expect to see an acceleration in comparable sales performance supported by transaction growth, gains in average comp ticket, and soft compares in the second half of the year. It's also worth noting that the prior year had minimal weather-related sales benefit. With only one notable hurricane and limited winter weather. In addition, the lower mix of big-ticket items in the second half of the year creates less reliance on big-ticket sales. These factors give us cautious optimism as we move into the back half of the year. We continue to anticipate gross margin expansion in the second half of the year.

Albeit at a lower rate of expansion compared to the first half. As we have previously shared, we begin to lap the transportation cost benefits from the new DC and we anticipate shifting from favorable compares to modestly higher year-over-year transportation costs. Additionally, tariffs are anticipated to create some slight pressure on gross margin as we balance cost increases with maintaining competitive everyday low pricing. On the SG and A front, while we do foresee some deleverage in the back half, it is projected to be less pronounced than what we experienced in the first half.

Reflecting the anticipation of leverage on fixed costs with stronger comp sales performance, lapping the opening of the new DC in the prior year, as well as our ongoing focus on disciplined expense management. We remain confident in our ability to execute our strategic plan and deliver long-term value for our shareholders. With that, I'll turn it over to Colin to provide more details on our final mile initiative. In my 25 plus years with Tractor Supply, this stands out as the natural next evolution in our supply chain. In my view, it's a true differentiator that strengthens our position and enhances how we serve our customers. And now, Colin, I'll turn it over to you.

Colin Yankee: Thank you, Kurt. I get into the details of our final mile expansion, I want to take a moment to recognize the remarkable progress our team has made. Just a few short years, we've transformed our supply chain from a solid operation to a nimble, purpose-built, digitally enabled, customer-facing network. One that not only supports growth but fuels a competitive advantage for Tractor Supply. Supply chain is uniquely designed for life out here. We built the network to support our specialized store format, ensuring that our customers have access to the products they need to take care of their land, their livestock, their livelihood, and their lifestyle. Over the last five years, we've invested in our supply chain.

Those investments have driven material returns, That includes our direct-to-customer capabilities using our own distribution network. Our next step is fully integrating our Final Mile solution with our end-to-end supply chain to support our delivery needs whether those sales are generated in-store online, or through our direct sales business. It's important to recognize that every element of our supply chain is tailored to the demands of our compact store footprint. In rural communities and the specialized assortment our customers depend on. We move a lot of tonnage and a wide variety of products through our small store footprint. And that means we have to be precise in how we flow product and anticipate demand patterns.

There isn't much room for error, and we built a supply chain that uses world-class technology and data analytics to make all that happen. To achieve that, we've scaled machine learning across 90% of our replenishment forecast. Added new logistics nodes, launched gig-enabled and team member delivery capabilities, are now moving more volume greater precision and flexibility than ever before. Our teams move quickly, using their knowledge of our assortment, the complexity of operating in these rural locations, and applying our operational excellence principles to deploy new final mile capabilities across more markets in the first half of 2025.

And I have gone out and done deliveries with our drivers, and that experience quickly demonstrates that this is about more than dropping a parcel on a front porch. We can and we will handle more of those small items with the capabilities we're putting in place. But we're also doing things that others can't. We're delivering dozens of stall mats that weigh 94 pounds each. 16-foot fence panels, stock tanks, and multiple piles of animal feed on a recurring basis to the same customers. These are high-weight, high-volume goods, that don't fit in the back of a sedan or a van.

Many of these deliveries involve driving down gravel roads, navigating through pasture gates directly onto properties where our customers live and work. In many cases, our team members are trusted to enter our customer property and have their gate codes. As well as specific details about where to place the product. Extending that legendary service we strive for in our stores, out onto our customers' land. With our eyes on direct sales, we know we need to scale this network and integrate it with our end-to-end supply chain. Today, we have nationwide DC coverage where every DC replenishes stores and also serves as a fulfillment center for direct-to-customer orders. Our mixing center network provides just-in-time replenishment for our fastest-moving products.

And with 90% of digital deliveries ending up within 40 miles of an existing Tractor Supply store, we have the foundation in place to scale a Final Mile network capable of serving our customers. Whether that's for a single bag of product or several pallets. To support this, we're leveraging a fleet of Tractor Supply delivery drivers equipped with pickup trucks and trailers or stake bed trucks capable of handling these orders to these types of properties. But they're also capable of delivering smaller items while out on their delivery routes. Like the rest of our supply chain, this delivery network is built for the realities of rural living.

With that backdrop, let me take a moment to update you on our final mile rollout. A powerful competitive differentiator and a key strategic enabler of our direct sales and digital growth initiatives. Each of which we see as $1 billion incremental sales opportunities. Since January, the team has been incredibly busy with our phased rollout. This is a highly coordinated effort involving store operations, supply chain, and technology all working together to ensure a seamless customer experience. I often compare our approach to that of the auto parts retailers. Leveraging their existing store networks to enable last-mile delivery without building costly new distribution infrastructure. We're implementing a hub and spoke model.

We are currently in market across 145 hub stores with an additional 220 stores covered as spokes. This brings our total final mile coverage to about 15% of stores covered at the halfway point of the year. By year-end, we anticipate having about 25% of the chain with Final Mile capabilities. All of this is in addition to the existing same-day delivery capabilities we have in all of our stores with third-party delivery partners. The early results from our final mile rollout are exceeding expectations. They're proving out the value of this initiative as a meaningful growth driver.

In markets where Final Mile is active, we're seeing an average order size of nearly $400 which is a multiple of our average basket. Our largest order has been valued at more than $40,000. A higher customer satisfaction score than other delivery options, a 10 times lower return rate, and stronger repeat engagement from high-value big barn customers. Our Final Mile is more than a logistics upgrade. We are playing offense, where we have the infrastructure, the density, and the trust to handle these types of deliveries in rural markets. Our drive for legendary service now extends beyond our stores and into our customers' barns, workshops, and fields.

Reinforcing why Tractor Supply is the most dependable supplier for life out here. To wrap up, what sets our model apart is the integration of our distribution centers, mixing centers, and local store hubs. Enabling cost-effective fulfillment, of more inventory without the need for massive standalone infrastructure build-out. This gives us a clear operational edge in the hard-to-reach final mile that's so critical in rural America. Now I'll turn it back over to Hal to close out our prepared remarks.

Hal Lawton: Thank you, Colin. I hope Colin's update on our Final Mile progress conveyed the excitement and confidence we have in this strategic investment. And the role it will play in further differentiating Tractor Supply from the competition. As we enter the back half of the year, we're focused on delivering highly relevant seasonal events, product innovation, and exclusive brand launches, that reinforce our leadership in rural lifestyle retail. From hardlines to lifestyle, pet to poultry, and digital to in-store, we're strengthening our position as the most dependable supplier for our customers living life out here. Over the next several weeks, we'll be celebrating Purina Days in-store and online. Purina's iconic red checkerboard and track supplies deep rural roots.

Share a heritage built on trust, quality, and commitment to animal care. Together, we offer a partnership that no other retailer can replicate. Granted in decades of serving the needs of life out here. Nearly 90% of our customers own a pet or animal, and approximately half have both. Purina days allow us to deepen our connection with customers, by showcasing expert knowledge, trusted nutrition solutions, and exclusive offers to support their health and well-being across all their animal species. This event reinforces our leadership in animal nutrition and care from backyard chickens to show cattle and from barn cats to beloved family dogs. Looking ahead, one of the marquee moments this fall would be our deer net.

A signature seasonal activation that continues to gain traction with our customers year after year. This event is designed to meet the needs of outdoor enthusiasts and landowners, preparing for the fall hunting season and wildlife season. We'll be featuring a curated assortment that includes deer feeds and attractants, wildlife and animal management products, trail cameras, and seasonal apparel. All designed to help our customers prepare their land and gear up with confidence for the season. Importantly, the Deer event drives cross-category engagement and reinforces our authority in outdoor, wildlife, and hardlines. It also aligns seamlessly with our broader merchandising cadence and marketing strategy as we transition into fall. We're also excited to build out our Field and Stream offering.

A long-term commitment to an iconic outdoor brand with a deep connection to the rural lifestyle. This move unites two names with a strong heritage for customers who love the outdoors, We're expanding the assortment to include wildlife, safes, and outdoor gear. Thoughtfully curated for the needs of our customers. Field and Stream is a natural fit within our portfolio and we believe it will become a cornerstone of our long-term merchandising strategy. On the hardline side, we're very pleased with the introduction of Lincoln Electric. This line includes welding tools and accessories that enhance our hardlines assortment and complement existing brands like Hobart and JobSmart. Giving customers a wider range of price points and performance tiers.

Lincoln positions Tractor Supply as a serious destination for rural tradespeople, farmers, and DIYers who demand performance and reliability. Looking further ahead, our Halloween holiday and winter seasonal set are coming together with a thoughtful mix of function and festivity. From cold weather gear to seasonal decor and gifting, our assortments are designed to deliver both inspiration and utility as our customers prepare for colder months. Beyond seasonal execution, we remain focused on our new growth opportunities, including our direct sales and final mile solutions, our pet and animal RX platform through the Alabad acquisition, fusion localization remodels, and our growing retail media network.

Each of these represents meaningful incremental value drivers as we continue to evolve our live Out Here strategy. Our stores and online platform are ready for the second half of the year. We've invested in inventory, service, and capabilities to help our customers live life out here. As always, our team remains focused on what we can control, investing with purpose, managing costs with discipline, and most importantly, serving our customers. Thank you for your time today. With that, operator, we're now ready to open up for questions.

Operator: Thank you. We will now begin the question and answer session. You would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. Our first question comes from Simeon Gutman with Morgan

Simeon Gutman: Good morning, everyone, and congratulations on the turn in comps. Hey, Kurt. How should we think about the second half?

Kurt Barton: We were you know, prevailing. We had a little stronger traffic.

Simeon Gutman: Does the complexion of traffic and ticket change at all in your mind versus where we were a quarter ago? And then is there anything to call out with the traffic in the second quarter were there certain categories that got better, meaning transaction count got better versus getting a little bit worse? Thank you.

Kurt Barton: Hey, Simeon. Yeah. Thank you for the question. Good morning, everybody. In regards to the second half comps, as I indicated in my prepared remarks, and I'll share a little bit of extra color, First, on transactions, have had consistent solid transactions throughout the 2% transaction growth in Q1, 1% in Q2. Our transaction growth continues to be solid We expect that to continue and to be a contributor to the second half of the year. It's the consumable side of the business and the growth in customers and Neighbor's Club members that are driving that. So we do not anticipate seeing those trends changing.

In regards to the ticket side of it, we continue to see the evolution from and the shift from the deflationary impact moving to inflationary and then some of the other pressures, including tariff driving some benefit to the ticket. In summary, for the second half of the year, we see demand solid. Our customer's in a strong position. The expectation for the second half of the year would be balanced between both ticket and transactions, and it would continue to have a bit of a balance as you saw in the second quarter. We are expecting, as I indicated, inflection and stronger comp sales in the back half of the year than the first half.

Simeon Gutman: K. Thank you. Good luck.

Operator: Next question comes from Robert Ohmes with Bank of America. You may proceed.

Robert Ohmes: Good morning. Thanks for taking my question. I wanted to just follow-up on other drivers in the back half. The I know that there were some key seasonal items that were drivers in the second quarter. How are you guys thinking about a seasonal as a driver in the back half? And also, did July shrink, was there any pull forward in that from your customers, supporting big ticket or anything related to concerns about tariff pricing? Thank you.

Hal Lawton: Hi, Robbie, and, thanks for joining the call today and for the question. Just kind of doubling down on Kurt's comments about the second half. I'd start out by just saying, we continue to be optimistic about a step change in our comp performance in the second half. You know, we anticipated this really all the way back to our investor conference day. We foreshadowed that. Had reiterated it in our Q4 earnings call, talked about it again in our Q1 earnings call. And what we kind of foreshadowed and we're optimistic about is what is playing out.

As it relates to the back half of the year, as Kurt said, we fully expect comp transactions to continue to be strong, and we expect we will have positive average ticket in the second half as well. Those two coming together to lead to a step change in our comp run rate from the first half of the year to the second half of the year. I'd say in addition to just the natural math we have a number of things that are kind of playing to our advantage in the second half. The first is we have some favorable lapping.

Last year, it was a really warm July with a lot of drought, It's the exact opposite this year with a lot of moisture in the ground. And continued very strong momentum in the month of July. So your point, Ravi, did we pull things from July into June? Absolutely not. In fact, the momentum, as I mentioned in the call from June, has continued and even strengthened into July. So we have favorable momentum in July lapping. As you look into the balance of the year, we've got likely favorable lapping with the lack of emergency response last year. There was really only one notable storm last year. And it kinda split a little bit across Q3 and Q4.

Then we had really no winter in our Q3. So we have a lot of favorability in kind of last year lapping as well. And the final thing I'll add is rural America is doing very well right now. There is strong consumer confidence in rural America. We continue to see domestic migration into rural America. Rural America has disproportionately benefited from the job creation that going on. If you look at the 2.2 million gross jobs that have been created this year, there's disproportionate of those in rural America and ex-urban America. And life out here is doing very well. So as we look towards the back half of the year, we've got favorable kind of just math dynamics.

We've got favorable lapping. We've got a lot of events in place, and we've got rural America doing well. So we feel very good about our half and the inflection that we're optimistic about, and we're already seeing it, as I said, in our July numbers.

Robert Ohmes: Great. Thank you.

Operator: The next question comes from Chris Horvers with JPMorgan. You may proceed.

Chris Horvers: Thanks. Good morning, and thanks for taking my question. So my question is do you think that the weather was a net headwind in the second quarter perhaps that the right trend is 2% as we're building into the back half. And as you think about the acceleration that you mentioned in June and July, it seems like maybe June was running mid-single digit if you were flat heading into June, and July would be better. So you know, the other way to ask the question would be you look at March to July in its entirety? In terms of the base of comp and as we think about the acceleration in the back half?

And any comment on explicit inflation expectations in the back half? Thanks so much.

Hal Lawton: A couple just a couple of follow-ups on that. Yeah. I mean, I think spring, first off, plays out different every year. And so there's kind of a natural starting point to spring and a natural kinda endpoint to spring every year, and it know, kind of just those are different every year, and you have different peaks every year. This year, spring started significantly late. I mean, you know, arguably, even in the deep South, it was mid to late March before you even saw the spring uptick. And it was early May in the North, arguably even a little later that you saw it. So I would say it shifted back four to six weeks, on the start.

And then on the end, I don't think it's finished yet. You know, a lot of times it'll end July 4, sometimes Father's Day. This year, it's extended beyond. We have a lot of moisture in the ground. Grasses are green. Bugs are out, weeds are out. There's a lot of mowing, a lot of weed control, a lot of pest control still occurring. All that said, our Q business continues to be very strong. Poultry, equine, bedding. You look across the board, lubricants right now, propane sales, forage, those businesses are doing very, very well. So it's not just seasonal. Final point, your comment on the 2% comp. I guess well, we're not getting quarter to quarter comps.

What I would say is that what's implied as Kurt said, we're guiding the business to the midpoint of our annual guidance. And that certainly implies higher than a 2% comp for the back half of the year, and that is what we are, looking for.

Kurt Barton: Chris, this is Kurt. I will I will just add on the on the inflation question that you asked for. That does imply with ticket increase. That we are seeing not just in the commodity. That's not the expected inflation is, but there will be incremental inflation across the entire entirety of the product category. So, yes, we do anticipate having some inflationary benefit in the back half of the year versus the historical deflation that we've been, seeing in the last two years.

Operator: Following question comes from Seth Sigman with Barclays. You may proceed.

Seth Sigman: Hey, good morning, everyone. Actually, I was going to follow-up on that last point around the inflation. Can you talk a little bit more about the cadence of the price changes that you're planning here that drives that inflation in the back half of the year? I think at some point, we may have talked about low to mid-single digit. Type of tariff-driven inflation. Is that still your expectation for the second half of the year? And then just finally, elasticity, what have you embedded here for the guidance? Any thoughts on that? Thank you so much.

Hal Lawton: We're roughly planning for a balanced ticket and comp transactions for the back half, as Kurt said. You can kind of reverse engineer that on what our implied comps are and what our implied average ticket they would meet for the second half. And there's a little range in We feel very confident in looking what our average ticket's gonna be for Q3. And Q4 on our Q products. Those we have great visibility to on current average unit retail, what our average unit moving average unit cost are. And how that's gonna play out in the second half.

That's been the underlying inflation that we've been calling out for two or three quarters, and that we still, have very good visibility to. On the tariff-related, products, we have excellent visibility into what that pricing will be for Q3 and have good into, how that'll affect our AUR, and we'll be watching we have good visibility into, but are still, being very, for elasticities very closely. Q4, flight maintaining a lot of flexibility, with all of our eyes on the August 1 tariff deadline, and we've, put in place a number of to give us a lot of flexibility in Q4 on pricing.

And you know, we've got a lot of draft spreadsheets on pricing, and that a lot of that will be determined, post August 1. We've got a lot of flexibility on that. But net, there's there's, you know, a relative level of implied inflation on all of our Terra products. It's just, you know, varying ranges, and we leverage our portfolio strategy for that.

Operator: The following comes from Steven Zaccone with Citigroup. You may proceed.

Steven Zaccone: Great. Good morning. Thanks very much for taking my question. Lot of focus on same-store sales. I wanted to shift to margins. Because, you know, you're calling for this step change in comps in the back half of the year. Can you just help us think to the flow through to margins and then EPS Maybe what drives upside to the gross margin in the back half? And then on SG and A, Kurt, just help us think through the level of same-store sales growth you need to leverage SG and A.

Kurt Barton: Yeah. Hey, Steven. On the operating margin, the first half for this versus the second half is very much two different stories, and I'll try to give you a bit of additional color. In regards to the reference points that I already had in my prepared remarks. But in the gross margin, we had easier compares and we start to lap some of those benefits in the second half of the year. So as we said in the beginning of the year going into this year, we saw stronger gross margin performance in the first half than the second half.

So of our range on gross margin, the second half of the year will be at the low end of that range on gross margin. On the SG and A side, as we've now the opening of a distribution center, and have higher comps expected for the back half of the year, while we see the gross margin below the first half in the second half, we also see SG and A really almost half of the level of deleverage in the second half that you saw in the first half. So, operating margin in our if you look at the base case, there's some operating margin decline year over year. We said we're making investments in these strategic initiatives.

On the gross margin, mix is a little bit stronger pressure this year. Tariffs puts a little bit of pressure, but we believe we can still maintain even at these elevated comps, we can maintain the operating margin rate that we gave in our guide.

Operator: Next question comes from Michael Lasser with UBS. You may proceed.

Michael Lasser: Good morning. Thank you so much for taking my question. I one for Seth and one for Colin. My question for Seth is the nature of the inflation that tractor is gonna benefit from in the back half of the year is gonna be different than the market has been accustomed to where it's gonna be more on the non q item So what have you seen already from an perspective, and how are you planning that? And then my question for Colin is on the new capabilities. Obviously, Amazon is making a big push in the rural areas. Does Tractor's new capabilities make it more of a competitor to this other big player?

And is that change the complexion of the business? Thank you very much.

Seth Sigman: Yeah. Thanks, thanks, Michael. This is Seth. Thanks for the question. To hit your first question first on elasticities and kind of the nature of inflation, in the back half. To piggyback some of Hal's comments, first and foremost, I would just say we have a portfolio pricing approach to how we can manage both our margin dollars and margin rate as we approach pricing in the back half. I would just say the merchants have been working with our suppliers to assess where we can go find alternative sources of supply.

We have had a tariff task force quickly stood up to where we can navigate some of the cost or cost pressures that might be coming through And at this time, they are moderate in nature with the ability to, approach those with a partnership approach. In the past, when we've seen similar inflationary factors, that aren't just Q related, specifically in times like we're navigating right now, whether it be tariffs in 2018, 2019, as well as just the inflationary period coming out of COVID. When the entire market tends to have to make strategic pricing moves and move, typically, elasticities tend to go down slightly as well. We are we have a bunch of different modeled.

Feel good about the tools and the team we have in place. And I'm confident in the belief that we'll be able to appropriately manage the margins as we look to the back half.

Colin Yankee: Yeah. Michael, for the second part of the question there, I'd say is what we're doing is we're taking a contemporary approach to rural delivery with all the systems and sophistication that you expect from Tractor Supply. As we compete with regional competitors, coops, your local fencing company We have great confidence in this initiative because we've got the locations where our customers live, we have the inventory our customers need, and we have the supply chain built for this rural terrain. Just a little bit of color commentary on what we're doing. In Q2, our team did 75,000 deliveries. Out there in the market.

75,000 times, we've been able to go out in people's properties, and engage with them and extend that legendary service out there. We're able to get a wider variety of products using our final mile delivery out there in greater quantities. But also, we're seeing customers choose that for the more convenience types of deliveries that they need as they're managing their lifestyle and their jobs as they as they live their lives there. I cannot understate the power of the trust and relationship between our drivers and the customer and the relationship that's there that is different than other kind of delivery providers. What I'll say is we're only gonna get better as we continue to build this out.

We're gonna keep you updated on it. But we're really looking on how we're extending our legendary service from our stores out onto our customers' properties, not a fundamental change in the business model.

Operator: The following comes from Chuck Grom with Gordon Haskett Research Advisors. You may proceed.

Chuck Grom: Hey. Thanks. Good morning. Can you discuss early results in Pet Rx How many Neighbor's Club members were already using Pet Rx? Then many Neighbor's Club members, I guess, can you add to it? And just on the weather as we move into the back half of the year, can you remind us how much in lost sales you think you saw last year in November and December? Obviously, the weather wasn't good, but the forecast for November and December is much better for you. So just curious on that thought. Thanks a lot.

Rob Mills: Alright, Chuck. This is, Rob Mills. First thank you for the question on Alivet. You know, I first wanna kinda begin just talking a little bit and sharing, you know, just a great appreciation across both Alivat and the TSC teams. On this focus, you know, strategic initiative. This is a new category for us. We've seen strong cross collaboration between the two organizations. And, you know, big picture, we're in very nicely. You know, in early May, we launched the Rx and OTC categories onto Tractor Supply platform. As well as our mobile property. The launch went really well. You know, we're seeing really strong momentum in the growth of orders and customer adoptions.

You know, prior to this, the neighbors Club penetration was low, but we're putting extreme focus on leveraging our Neighbor's Club data, the capabilities, driving specific campaigns, and we're seeing good adoption rate. We haven't shared any kind of formal numbers. We're early into this journey, we're getting a lot of learnings out of the way. But with that being said, we have strong momentum. know, when we think about the customer growth, I could tell you in Q2, we strong we saw the strongest customer acquisition growth that we've seen in many years across the Rx and OTC category, especially when you look at the Alivet business. Looking ahead briefly, Q3, we're putting investments on that customer experience.

We got in some great learnings and feedback from our Neighbor's Club customers. You'll see us focus on even more ease of how we transfer that script. Driving in-store training, adoption with our team members, to drive education with our customers, and then just overall awareness. Through Neighbor's Club messaging, you know, promotional testing, and then you know, leveraging the tools that we have with pet washes, mobile clinics, and just in-store signage. So, you know, big picture, we're we're excited. We're early in this journey. We're seeing great adoption. More to come. We'll keep you updated. But we have a positive trend. And week over week, we're growing.

Kurt Barton: Hey, Chuck. This is Kurt. And on regards to the second half weather last year, the two biggest pressure points where we last year in the second half, landed really or produced really about a flattish comp, we said, weather and some of the pressure on discretionary spend last year. Q3 had the biggest west weather pressure and, we saw no real favorable weather with the heat and the drought. So we are cycling two quarters where weather was a net negative We didn't quantify the specifics then, so I won't try to go ahead and project that. But we know, as Hal said, that's a it's a favorable compare, that we'll be lapping this second half. Thank you.

Operator: Next question comes from Steven Forbes with Guggenheim. You may proceed.

Steven Forbes: Good morning, everyone. Hal or maybe Colin, maybe just a follow-up on the Final Mile initiative. A two-parter here. So you mentioned AOV is of 100. I'm curious if you can comment on who the early adopters are. Right? As we think back to sort of your customer segmentation work, that you did during the analyst day, And then second part, right, how should we frame the ROI ramp of this offering? Given the comments around fleet and driver investments 75,000 quarterly deliveries in the second quarter. But, like, what's a what's, like, the breakeven number of deliveries, and how do we think about sort of the unlock of ROI? Thank you.

Hal Lawton: Yeah. Hey, Steven. I appreciate the question, and, thanks for joining the call. Two things. On, on the customer side, it's very much the big barn customer that we laid out in our investor conference day. You know, these are landowners. Animal owners, multispecies animal owners, and, you know, their needs are on a weekly basis or more so, and they buy in high order volumes. And as Colm was laying out, the competition that we're facing as we go out and start to call on these customers is a really fragile fragmented set of competition. I whether it's the local co ops, we're seeing a lot of fencing sales.

There's a lot of local fencing contractors and those sorts of things that we're competing with. But we're finding the market to be exactly what we anticipated it to be from a customer perspective. As it relates to the ROI, first off, I'll remind you that the delivery is expense based. And so we can throttle our investment up and down whether it'll an enterprise level or at an individual hub and market level based on the demand that we're seeing. I'll also remind you that there's three ways, three lever levers of demand that the final mile is delivering. The first is direct sales, and oftentimes those two are getting inextricably linked and should be.

But there's also two other levers. Our online bulk orders, which is well over a 100, 100 and nearly $200 million of sales, those will are will now flow through our final mile as well. We will no longer be relying on third-party delivery for that. Those have really low customer SAT, high return rates. So there's a lot of ROI that comes along with those. And then finally, it enables delivery of items in-store. When the store sells them and we're unable the customer's unable to get them home. So there's three means for that. There's revenue generation, shipping revenue generation that comes along with each as well as, obviously, product demand fulfillment.

We haven't shared the ROI across each one of those, but as time goes on, you can expect to hear more from us on each of those pieces. But we remain as bullish on them now as we did six to seven months ago when we had our IC day, if not if not even more. Thanks for the question.

Operator: Thank you. The following comes from David Bellinger with Mizuho. You may proceed.

David Bellinger: Hey, good morning, everyone. Thanks for the question. It's on the buyback being notched lower. Can you walk us through why the magnitude of the change this year is so dramatic? Where is that capital shifting does it say anything at all on how you view your stock and the valuation that's currently attached to it? Thank you.

Kurt Barton: Kurt here. We've in our long-term guidance, I think it's it's helpful to first just state in our long-term guidance, we've said in our capital allocation, after the commitment to the dividend, we are opportunistic in share repurchases We are committed to being a buyer of our stock. Our target is to remove one to 2% of that shares out annually. Our guidance originally put us at the high end of that. As we see the capital investment, particularly in inventory, and how tariff cap the cap will be spent on tariffs that'll go on the balance sheet. In an environment with higher interest rates, we're being very prudent and wise in our capital allocation.

And just deciding we're gonna make that investment. And as we're in a time of tariff increases, to spend the capital there. We have the ability to still remove 1% of the float out of the stock and be able to do that and re and just shift some of that capital spend, from share repurchase into our working capital on inventory and put us in a great position. So it does not change our guidance, in regards to this year's net earnings per share. And so, therefore, we think it's the right prudent thing to do for this year.

And, again, I'll just reiterate it does not take us outside of what we've said would be our parameters of how we engage in share repurchases. Thank you.

Operator: The next question comes from Peter Benedict with Baird. You may proceed.

Peter Benedict: Hey, guys. Good morning. Thanks for taking the question. I guess just there was a comment I think maybe it was Hal, when you mentioned the term in the pet category or pet food. I just was maybe, Seth, I don't know if it's for you. Could you expand on that? What exactly are you seeing? And how, what's your what's your outlook, around the pet category? Thank you.

Seth Sigman: Hey, Peter. Yes, Seth. Thanks for the question. Hey. On pet performance in the categories, Hal mentioned in the prepared remarks your point, we do believe that we're at the point of basically some of the trough where demand had slowed, and we're starting to see that we were gonna have and believe we have some tailwinds as we kinda look ahead, albeit potentially at maybe a little slower rate than, historically, we have run, but really are leaning in some of the key core capabilities, and are continuing to take market share And I've just I'd touch on a couple other quick things quickly. And where we're where we're investing in pet. First is Rob articulated of Pet RX.

We're pleased with how that's getting started. Our service offerings, we're seeing tremendous demand for in our in-store, like, vet service clinics that we have as well as our thousand pet washes. Over the course of this past month, all of our dog food, our cat food, several accessories, this week, our pet treat categories all gone through a major reset activity where we are introducing, new brands, expanding brands that we're seeing traction in. As well as introducing new products across, like, four health, whether it be with shreds or a new untamed product that we have out there.

And then finally, throughout the course of the first half of this year, when we went through our localization project, we created a newer format for what we were seeing. We were putting infusion, and we have even retroed, gone back in what we were calling our fight calling it the five g plus format. And at this point, we have over 500 stores that we have gone and put this new format in. It has a couple 100 incremental SKUs. We should have over 800 by the end of the year. And we're seeing very positive results, coming out of that outpacing the balance of the chain.

So a lot of work going into pet to make sure it's such an important category for us as well as just our customer ownership with animal ownership and I believe we're gonna continue to take share.

Operator: The following comes from Scott Ciccarelli with Truist. You may proceed.

Scott Ciccarelli: Good morning, guys. Thanks for squeezing me in. I know you've been asked about the this already with the last mile delivery, and I think Michael mentioned Amazon. But can you just provide, Tom, maybe your broader latest thoughts around the competitive environment? Because it's not just Amazon. Right? We've had Walmart expanding their delivery capabilities. You've had Lowe's expanding their rural assortment expansion. And obviously, these are much larger companies than some of your historical competitors. Thanks.

Hal Lawton: Yeah. Hey, Scott. Thanks for joining the call. I appreciate the question. Stepping back, I'd say, farm ranch channel has always been a channel that people have had, an eye towards and have looked to invest towards or rural America, as well. You know, I can think back you all know, I worked at a big box home improvement store, and I can think back to three or four times, that we tried to make an entrance into the farm and ranch channel. During my tenure there, I think about in my tenure here at Tractor Supply, there's been, you know, more than handful of companies that have announced entries into to farm and ranch as well.

What I'd say is that we compete against thousands of locations and hundreds and hundreds of companies each and every single day. We've got a track record of being pretty successful in our market while doing that. I our focus is really always around just serving our customers in the best way we can. And, you know, that's really around our legendary service. Having all the products they need in a very convenient format. And making sure we leverage our scale to price it as the best value in the market that can get out there. And I, you know, I think we are just such an integral element of rural retail We don't take that for granted.

We know that's a responsibility we have to embrace every single day, but I think a pretty good position to be in. And, you know, we're we're very confident in our ability to leverage that as we grow and our initiatives on top of it moving forward. So much for the question.

Operator: Thank you. This concludes the Q and A session of the call. I'll now pass it back to Mary Winn closing remarks.

Mary Winn Pilkington: Thank you, everyone, for joining our call. We'll look forward to talking to you at our Q3 call in October. We're around this afternoon and for any follow-up as needed. So thank you again for your time and attention today.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect your line.

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DATE

• Thursday, July 24, 2025, at 8:30 a.m. EDT

CALL PARTICIPANTS

• President and Chief Executive Officer — Ralph Andretta
• Senior Executive Vice President and Chief Financial Officer — Perry Beberman

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TAKEAWAYS

• Adjusted Net Income: $149 million for the second quarter of 2025, with adjusted earnings per diluted share of $3.15, excluding the $10 million post-tax impact of debt repurchase expenses.
• Return on Average Tangible Common Equity: Return on Average Tangible Common Equity was 22.7% in the second quarter of 2025.
• Credit Sales: $6.8 billion, up 4% year over year for Q2 2025, with more than 50% of credit sales driven by expanded co-brand and proprietary products.
• Average Loans: $17.7 billion, reflecting a 1% decrease, attributed to softer consumer spending and elevated gross credit loss impacts.
• Revenue: $929 million in revenue, a 1% decline year over year in Q2 2025, primarily due to lower finance charges and late fees, partially offset by lower interest expense.
• Net Loss Rate: 7.9%, down 70 basis points year over year in Q2 2025 and 30 basis points sequentially, including a 30 basis point headwind from hurricane actions taken in Q4 2024.
• Delinquency Rate: 5.7%, down 30 basis points year over year, and 20 basis points sequentially.
• Reserve Rate: 11.9% reserve rate at Q2 2025 quarter-end, improving by 30 basis points sequentially and year over year.
• Direct-to-Consumer Deposits: $8.1 billion at Q2 2025 quarter-end, a 12% increase year over year compared to the same quarter last year, accounting for 45% of average total funding, while wholesale deposits declined from 34% to 29% compared to the same quarter last year.
• Total Net Interest Income: Decreased 1% year over year in Q2 2025, affected by lower billed late fees and changes in risk/product mix, partially offset by lower interest expense.
• Expenses: Total non-interest expenses rose $12 million, or 3% year-over-year in Q2 2025, due primarily to the $13 million debt extinguishment cost; Adjusted non-interest expense remained essentially flat year over year.
• Capital and Liquidity: Common equity tier 1 (CET1) ratio at 13.0% for Q2 2025, up 100 basis points sequentially, and total risk-based capital at 16.5% for Q2 2025.
• Balance Sheet Optimization: Completed a $150 million share repurchase in April 2025 and a $150 million tender offer for 9.75% senior notes during Q2 2025; announced an additional tender offer for the third quarter of 2025.
• Guidance Revisions: Upgraded full-year 2025 net loss rate outlook to 7.8%-7.9% from 8.0%-8.2% based on first-half credit outperformance.
• Partner Programs: Multi-year extension signed with Caesars Entertainment; top ten programs secured into at least 2028.
• Product Launches: Introduced Caesars Rewards Prestige Visa Signature and Crypto.com co-brand credit card providing up to 5% crypto rewards, both designed to enhance customer engagement and loyalty.
• Loan Yield and Net Interest Margin: Loan yields reached 26.0% for Q2 2025 and net interest margin was 17.7% for Q2 2025, both down sequentially and year over year due to seasonal and mix trends.

SUMMARY

Bread Financial (NYSE:BFH) reported adjusted net income in Q2 2025, reflecting an improving credit outlook and continued deposit growth, while revenue and average loans slightly declined amid persistent macroeconomic headwinds. Management emphasized prudent risk management, operational discipline, and dynamic product innovation, including partnerships and new card offerings. The company executed significant capital return and debt reduction initiatives in Q2 2025, resulting in improved liquidity and capital ratios for greater balance sheet flexibility.

• Perry Beberman stated, "we anticipate higher marketing and employee-related costs in the second half of 2025 versus the first half following typical seasonality."
• The company’s total liquid assets and undrawn credit facilities stood at $7.7 billion, representing 35% of total assets at the end of Q2 2025, supporting ongoing liquidity management priorities.
• Ralph Andretta said, "With this renewal, our top ten programs are secured into at least 2028." signaling stability in key partner relationships.
• Direct-to-consumer funding comprised the majority of deposit funding at the end of Q2 2025, shifting the mix away from wholesale sources and indicating a strategic funding transition.
• Perry Beberman confirmed, "we are projecting lower billed late fees for the remainder of the year, modestly pressuring our full-year revenue outlook."
• Improved credit reserve quality and a higher proportion of prime customers were cited as drivers of stable or improving loss absorption capacity in Q2 2025.

INDUSTRY GLOSSARY

• CECL: Current Expected Credit Losses; an accounting standard requiring anticipated lifetime credit loss recognition for financial instruments.
• Co-brand Credit Card: A credit card issued in partnership between a card issuer and a brand, offering special rewards or benefits tied to the partner’s products or services.
• Private Label Credit Card: A credit card branded for a specific retailer, usable only within that retailer's ecosystem and not on general credit networks.
• BNPL: Buy Now, Pay Later; point-of-sale financing that allows consumers to pay in installments.
• PPNR: Pre-Provision Net Revenue; a measure of revenue less non-interest expenses but before provisioning for credit losses.
• Gross Credit Loss: Total loan charge-offs before accounting for recoveries.
• CET1 Ratio: Common Equity Tier 1 capital divided by risk-weighted assets, used as a regulatory capital adequacy measure for banks.

Full Conference Call Transcript

Ralph Andretta: Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong second quarter 2025 results. We delivered adjusted net income of $149 million and adjusted earnings per diluted share of $3.15, which excludes the $10 million post-tax impact from expenses related to the debt we repurchased in the quarter. Return on average tangible common equity was 22.7% for the quarter. Our results reflect notable progress in advancing operational excellence while at the same time achieving responsible growth and practicing disciplined capital allocation. Enabled us to deliver strong returns. Credit sales grew 4% year over year for the second quarter.

Spending continues to be more heavily weighted towards non-discretionary purchases enabled by our expanded co-brand and proprietary products. These product offerings represent more than 50% of our credit sales. Additionally, lower gas prices have positively influenced retail spending, particularly for prime and near-prime customers. We are encouraged by these spending trends as well as a gradual improvement in our credit metrics as a result of prudent risk management.

Perry Beberman: Given the outperformance of our net loss rate in the first half of the year, we updated our full-year outlook to an improved range of 7.8% to 7.9%. While the net loss rate remains elevated compared to historic levels, the improving trend is encouraging. We will continue to closely monitor consumer health, purchasing, and payment patterns and adjust our credit strategies accordingly to achieve industry-leading risk-adjusted returns. Our focus on expense discipline and operational excellence is producing the desired result. As adjusted total non-interest expense were essentially flat year over year despite continued technology-related investments, inflation, and wage pressures.

We will continue to invest in technology modernization, digital advancement, artificial intelligence solutions, and product innovation that will drive future growth and efficiencies. We continue to make progress on our ongoing initiatives to optimize our balance sheet with the completion of a $150 million share repurchase program in April and a successful $150 million tender offer for our senior notes in the second quarter. These actions and the strong capital and cash flow generation of our business offer enhanced opportunities to deliver additional value to our shareholders. Additionally, our direct-to-consumer deposits continue to grow steadily, increasing to $8.1 billion at quarter-end, up 12% year over year.

We are pleased to announce the multi-year extension of our long-term relationship with Caesars Entertainment, a leading travel and entertainment partner. With this renewal, our top ten programs are secured into at least 2028. Furthermore, we recently launched an additional new fee-based Caesars Rewards Prestige Visa Signature credit card that gives members more ways to earn rewards and enjoy unique experiences. Also during the quarter, we launched the Crypto.com co-brand credit card program offering up to 5% in crypto rewards delivered through a frictionless user experience that is natively integrated into the Crypto.com app. This new program is another example of Bread Financial's leadership in loyalty innovation and flexible tech-forward payment solutions.

Ralph Andretta: We are proud of the progress we have made in strengthening our balance sheet while providing increased value to our brand partners. Our strong results reflect the continued commitment and hard work of our dedicated associates. We remain confident in our ability to successfully execute our strategic objectives and operational excellence initiatives. In summary, we are well-positioned to deliver strong returns which we expect to translate into sustainable long-term value for our shareholders. I'll pass it over to Perry to review the financials in more detail.

Perry Beberman: Thanks, Ralph. Slide three highlights our second quarter performance. During the quarter, credit sales of $6.8 billion increased 4% year over year driven by new partner growth and higher general-purpose spending. Average loans of $17.7 billion decreased 1% as compared with historical trends. Continued macroeconomic challenges drove softer consumer spending and the cumulative effect of elevated gross credit loss over the past twelve months adversely impacted loan growth. More recent improved payment behaviors as evidenced by higher payments also pressured loan growth. Revenue was $929 million in the quarter, down 1% year over year primarily due to lower finance charges and late fees partially offset by lower interest expense.

As Ralph mentioned, in June, we completed a $150 million tender offer for our 9.75% senior notes due 2029 using excess cash on hand to reduce higher-cost debt. The repurchase increased our total non-interest expenses by $13 million, which is the primary driver of the $12 million or 3% year-over-year increase in total non-interest expenses in the quarter. On an adjusted basis, expenses were nearly flat year over year. Income from continuing operations increased $6 million primarily due to a lower provision for credit losses and lower income taxes. Looking at the financials in more detail on slide four.

Total net interest income for the quarter decreased 1% year over year resulting from a combination of a decrease in billed late fees resulting from lower delinquencies and a gradual shift in risk and product mix. Leading to a smaller proportion of private label accounts, which generally have higher interest rates and more frequent late fee assessments. These headwinds were partially offset by lower interest expense, the gradual build of pricing changes, and an improvement in reversal of interest and fees related to improving gross credit losses. Non-interest income was up $3 million primarily as a result of the recent paper statement pricing changes partially offset by lower net interchange revenue driven by higher profit share.

Looking at the total non-interest expense variances, which can be seen on slide eleven in the appendix, employee compensation and benefits decreased $2 million despite merit increases and other inflationary pressure as a result of our increased focus on operational excellence. Card and processing expenses increased $4 million primarily due to higher network fees driven by our gradual shift in product mix and information processing and communication expenses increased $4 million driven by elevated software license renewal pricing. Other expenses increased $8 million primarily due to the $13 million of debt extinguishment cost. Looking ahead, we anticipate higher marketing and employee-related costs in the second half of 2025 versus the first half following typical seasonality.

Adjusted pre-tax pre-provision earnings or adjusted PPNR, which excludes gains on portfolio sales and impacts from repurchase debt, decreased $7 million or 1% primarily due to lower net interest income. Turning to slide five. Both loan yields of 26.0% and net interest margin of 17.7% were lower sequentially following seasonal trends. Net interest margin, which decreased 30 basis points year over year, was impacted by the net interest income drivers I noted earlier as well as an elevated cash mix position in the quarter. On the funding side, we are seeing funding costs decrease as savings account and new term CD rates decline.

Additionally, our cost of funds should continue to improve as we opportunistically repurchase $150 million of our highest cost 9.75% senior notes during the quarter. We are pleased with our ongoing direct-to-consumer deposit growth represented in the chart on the bottom right of the slide, which increased to $8.1 billion at quarter-end. Further improving our funding mix. Direct-to-consumer deposits accounted for 45% of our average total funding, up from 40% a year ago. Conversely, wholesale deposits decreased from 34% to 29% year over year. Moving to slide six. We continue to optimize our funding capital and liquidity levels as a key strategic initiative. Our liquidity position remains strong.

Total liquid assets and undrawn credit facilities were $7.7 billion at the end of the second quarter of 2025, representing 35% of total assets. At quarter-end, deposits made up 74% of our total funding with the majority resulting from direct-to-consumer deposits. Given the success of our oversubscribed second quarter senior notes tender offer, we announced an additional tender offer this morning, which is expected to be completed in the third quarter. Shifting to capital. We ended the quarter with CET1 and Tier 1 ratios at 13.0% and total risk-based capital at 16.5%.

Over the past twelve months, in addition to the more than 200 basis point positive impact on our total risk-based capital ratio from our subordinated debt issuance in March, our capital ratios were impacted by the repurchase of $194 million in common shares as well as the repurchase of 99% of our original $316 million convertible notes outstanding. As a reminder, the last CECL phase-in adjustment occurred in the first quarter of 2025 resulting in a 74 basis point reduction to our ratios. The impact from the last CECL phase-in adjustment along with the repurchase convertible and senior notes accounted for more than 180 basis points of adjustment to CET1 since the second quarter of 2024.

Our CET1 ratio increased 100 basis points sequentially from the first quarter. Looking ahead, we expect to build capital further in the third quarter placing us within our medium-term CET1 ratio target of 13% to 14%. As a result, we are well-positioned to strategically focus our capital and sustainable cash flow generation on supporting responsible profitable growth and generating additional value for our shareholders. Finally, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 25.7% of total loans, a 40 basis point increase compared to last quarter. Demonstrating a strong margin of safety should more adverse economic conditions arise.

We have a proven track record of accreting capital and generating strong cash flow through challenging economic environments. We're well-positioned from a capital liquidity and reserve perspective. Providing stability and flexibility to successfully navigate an ever-changing economic environment while delivering value to our shareholders. Moving to credit on slide seven. Our delinquency rate for the second quarter was 5.7%, down 30 basis points from last year and 20 basis points sequentially. Our net loss rate was 7.9%, down 70 basis points from last year and down 30 basis points sequentially. Despite the approximately $13 million or 30 basis point negative impact from the customer-friendly hurricane actions taken in the fourth quarter of 2024.

There will be no further impact to our credit metrics as a result of those actions. Credit metrics continue to benefit from our multi-year credit tightening actions, product mix shift, and general stability in the macroeconomic environment. We anticipate the July net loss rate will be in line to slightly better than the reported June net loss rate of 7.8%. With the third quarter in the 7.4% to 7.5% range and then increasing sequentially in the fourth quarter following typical seasonality. The second quarter reserve rate of 11.9% at quarter-end, a 30 basis point improvement year over year and sequentially, was a result of our improving credit metrics and higher quality new vintages.

We continue to maintain prudent weightings on the economic scenarios in our credit reserve modeling given the wide range of potential macroeconomic outcomes. We expect the reserve rate to remain relatively steady in the third quarter before dropping at year-end following normal seasonality. On the bottom right chart, our percentage of cardholders with a 660 plus prime score improved by 100 basis points sequentially to 58% in line with our expectations. Our credit risk strategy remains unchanged, managing risk while delivering industry-leading risk-adjusted returns. Our segmented underwriting models incorporate recent performance data, baseline macroeconomic variables, and various stress scenarios ensuring appropriate returns for us and value for our partners.

At this time, we remain balanced in our consumer outlook and related credit actions given uncertainty regarding the potential downstream impacts on consumer spending and employment from recent monetary and fiscal policies, particularly tariff and trade policies. Turning to slide eight, and our full-year 2025 financial outlook, we continue to expect average loans to be flat to slightly down. Our outlook for total revenue excluding gains on portfolio sales is anticipated to be flat versus 2024 as a result of our implemented pricing changes offset by interest rate reductions by the Federal Reserve, flat to lower average loan balances, and continued shift in risk and product mix.

Given improving delinquency trends and payment behaviors, we are projecting lower billed late fees for the remainder of the year, modestly pressuring our full-year revenue outlook. We continue to expect to generate nominal full-year positive operating leverage in 2025 excluding portfolio sales and the pre-tax impact from our repurchase debt, which includes both convertible and senior note repurchases. We are confident in our ability to deliver on our operational excellence initiatives by investing in the business while maintaining expense discipline. Given the better-than-expected improvements in credit metrics in the first half of the year, we adjusted our 2025 net loss rate guidance to a range of 7.8% to 7.9% from the previous range of 8.0% to 8.2%.

Current consumer resiliency despite concerns in how the macroeconomic environment may evolve in the future provided us with confidence in our revised net loss rate guidance for this year. Finally, our full-year normalized effective tax rate is expected to be in the range of 25% to 26% with quarter-over-quarter variability due to the timing of certain discrete items. In closing, our second quarter results and capital actions underscore our confidence in our ability to achieve solid financial results in 2025 and deliver strong long-term returns. Operator, we are now ready to open up the lines for questions.

Operator: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. Please standby while we compile the Q and A roster. Our first question comes from the line of Mihir Bhatia from Bank of America. The floor is yours.

Mihir Bhatia: Hi. Thank you for taking my question. I wanted to start maybe with just the health of the customer, particularly with an eye on, you know, credit sales and loan growth, I guess. It sounds like you said they are pressed health of the consumer is pretty stable and you're seeing, you know, you saw 4% growth in credit sales. But maybe just talk a little bit about the monthly trends that you're seeing. Was that steady throughout the quarter? Any update on July? And then how does that 4% credit sales growth translate down to loan growth?

Ralph Andretta: Yeah. So, Mihir, I'll start and, you know, to your point out, I'd like to start just, you know, framing a little bit on the economy because I think that's the key driver of credit sales and what we're thinking for the rest of the year. You know, and to your point, I think, you know, the consumers overall have remained, you know, I think we think they're in a pretty stable spot and pretty resilient, which is really encouraging. With that said, you know, the overall economic environment is a little mixed in terms of what's coming in from the economic data. Right?

I mean, some of the hard data is showing that resilience where on the other hand, sentiment and confidence indicator has been more volatile. So we think there's gonna still be there's still a lot of uncertainty out there of what the impacts of trade, immigration, tax policy may end up for the tax policy to resolve. But so when we look at it, you know, we're still feeling very encouraged with the hard data, with the unemployment steady, you know, that 4.1%. So we don't think there's gonna be pressure on jobs. Wages have been growing at above 3%, which is outpacing inflation at seven out of nine of the last nine quarters.

And for us and our consumers who we serve, that's really important. That's the thing we said in order for things to turn for us. We needed that to occur. So when we look at it, we think about the back part of the year and the I'll say the better improvement or continued improvement in sales that we've seen that's gonna be important.

And that's why when we think about we look ahead, the things that are happening with trade policy are so important because if this turns out to be inflationary, that's gonna probably slow down the progress that we've seen with our consumers where they've been increasing spend, payments have been improving, and it would just slow the improvement. I don't think it would, you know, reverse it. But that's what we're watching real carefully. You know, these trade deals just know, we don't know the outcomes and we're seeing some things every day.

I think some of them, if they're the good outcomes would be you get more jobs, to come and investment into the US, that could be a good thing. The other hand, if countries disinvest in us and it goes the other way, that could be bad. So there's a lot of moving parts but our expectation is continued gradual improvement with the consumer I think that's gonna happen. And it's gonna take you over a prolonged period of time. Now to your question, on what we're seeing so far in July, it's been a real positive trend. So there's momentum building from what we saw in this last quarter, and it's continuing on so far into July.

So we're optimistic. Can't really tell if it's a pull forward of purchases because of what could be consumers' concern about pending inflation. But that's a positive as well as we're seeing some good strength in our co-brand and higher quality customers. You know, so right now, I'd say we're in a very optimistic point but being very watchful of what's gonna unfold with the macro environment.

Mihir Bhatia: Good. Just to be clear, sorry, on July, are you seeing an acceleration from the 4%? I mean, you said I just wanna make clear on exactly what you said there.

Ralph Andretta: Yeah. We still continue to see a positive trend.

Mihir Bhatia: Okay. Maybe just turning then to capital plans and buybacks. Look. You have a healthy ROE. It doesn't sound like you're anticipating much loan growth. At least for the next couple of quarters. CET in a good place. I understand you're doing stuff on the debt side, but maybe just talk a little bit about buybacks, how you're thinking about those any thoughts to go get an authorization and do stuff there?

Ralph Andretta: Yeah. It's an excellent question. I'm not surprised we're getting that question. You know, as you know, we set those targets for our capital ratios, particularly CET1, which are currently our binding constraint. We stated that the medium-term target for that was in the 13% to 14% range. And as noted, when we hit 13.0%, we just hit the bottom end of that range. I would expect in the third quarter to continue to accrete capital and so we will continue to execute against our capital plan. We'll have discussions with our board around what's appropriate, looking at our pipeline as well as, you know, we do stress scenarios and, again, we'll follow the discipline. And we'll determine what's appropriate.

But first and foremost, we'll continue with our capital priorities that remain unchanged, which is the fund. Responsible profitable growth that meets the return hurdles. I'll generate more capital in the future. We're gonna continue to invest in our business. And again, a lot of that's being funded through our operational excellence efforts to contain expenses and reinvest that. And then, you know, we're obviously due to hit the capital targets that we've stated and then, return capital when appropriate. And again, we'll continue against that capital plan, but we'll optimize the balance sheet and capital stack into next year.

We might start to introduce preferred at some point next year, but still more opportunity and but we are very excited to be in the position that we're in right now.

Mihir Bhatia: Thank you for taking my question.

Ralph Andretta: Thank you for your question.

Operator: Our next question comes from the line of Sanjay Sakhrani from KBW. The floor is yours.

Sanjay Sakhrani: Thank you. Good morning. Perry, maybe you could talk a little bit more about that slightly tempered top-line view. I know you've got some crosswinds here with better credit, and that affects late fees. But you also have some of the mitigation impacts that would be rolling through over time. Could you just help us think about the progression of the top line, specifically NII, over the next, you know, whatever, six to twelve months?

Perry Beberman: Yeah. And thanks for the question. You're right. So what's occurred that drove us to tighten up our guide on revenue was really the improvement that we're seeing in delinquency and having lowered billed late fees. That happening faster than what we had expected is what's putting pressure on the top line NII. And to your point, there are other tailwinds in there, but, you know, we go down the list of things that I talked about in the past. Right? We've got headwinds in there. From prime rate reductions that are still pulling through this year. There could be more if the Fed actually starts to act sooner on some of the following primary reductions.

Because, again, we're slightly asset sensitive. The lower billed late fees coming through that we're now seeing, that's get related to delinquency. I'll take that all day for now. It just means we're gonna move towards a more normalized environment. The shift in a product mix that we have, we have a little bit more co-brand, and proprietary card. They have lower risk, which means you have a lower signed APR at the time of underwriting them, and I also come with lower late fees. Right now, we're running with a little bit higher cash mix, and that's honestly a result of a little bit lower loan growth.

So we're taking that cash and trying to, you know, action it in a prudent way, which is why we announced another tender this morning. So those are the headwinds and the tailwinds are some of the, you know, the pricing changes that we put in place. And they continue to slowly build. But, you know, those will reach a certain point because, you know, obviously, the late fee will change. It didn't go in effect, so we don't have to go as aggressive on some of those things. And then another tailwind as the gross losses improve, there'll be less reversal of interest and fees.

And so the fact that we're having lower billed fees now, I mean, you know, a few quarters out, say six months from now, that will have less reversals related to those accounts. You know, so then as you think about what's happening with each quarter, there's gonna be a lot of variability in terms of the seasonality, the timing of these things, and that's where it makes it really hard to give, you know, direction. I'll say, quarterly because it is fluid, and I think that's evidence by what we just saw with late fees, the billed late fees this recent quarter.

Sanjay Sakhrani: Okay. Maybe this is a question for both you and Ralph. Obviously, credits now, I think, going the right direction. You guys seem to have some control over it. The macro, you know, tariffs withstanding seems to be stable. It's not improving some, you know, now that those factors, which have been headwinds, are not the headwinds, how do you guys play offense from here? You know, you talked a little bit about the excess capital position you have. Maybe a little bit if you could talk about the growth prospects, etcetera, you know, how do we build, how do we lean in and grow from here?

Ralph Andretta: Thanks. Hey, Sanjay. It's Ralph. How are you doing? You know, I think a couple of things. You know, when you talk about capital, our priorities haven't changed. We're going to continue to invest in the business, strengthen the balance sheet, and return value to shareholders. And, you know, now we have the ability to do all three. So it's a nice balance. That's a nice position to be in. You know, in terms of growth, you know, I am pleased with the progress we've made on credit. We're not there yet entirely. We need to make more progress, and we'll continue to do that. Continue to manage it.

I'm pleased with the sales growth in the second quarter and what July's looking like. That's a real positive green shoots for us as we move forward. If you take a step back and think about our ten largest partners. They are secured to the end of the decade. So we have our ten largest partners where we could continue to, you know, drive value for them and for our customers there. That's our focus, to invest in that. We have an extremely robust pipeline, and, you know, we win more than our fair share. There's a lot of de novo opportunities in that pipeline that we can grow opportunities and move forward.

So, you know, if you look at all of that, you know, I remain optimistic about our closed opportunities as we move forward.

Sanjay Sakhrani: Thank you.

Operator: Thank you for your question. Our next question comes from the line of Moshe Orenbuch from TD Cowen. The floor is yours.

Moshe Orenbuch: Great. Thanks very much. Perry, maybe you could just put a little finer point on kind of the mix shift that you've been seeing with respect to kind of higher-end consumers and more general-purpose spend. Has that had an impact on balance growth in addition to yield? Like, what should we think about in terms of that? And are those consumers revolving on their balances?

Perry Beberman: Yeah. Wait, wait. Thanks for the question. So when we talk about mix shift, it's slow and gradual. I mean, you can see it in our vantage risk scores. When we talk about, you know, co-brand mix, I think people think about that super prime customer, those airline programs, hotels. You know, our co-brands are different. We underwrite those deeper than others. We certainly follow our mantra of underwriting for profitability. We look for programs that have good revolve behaviors and that's so we think about retail partner co-brands. They perform like high-end private label in a way.

And then you have other ones that are top-of-wallet co-brands, you know, like a AAA, you know, Caesars that maybe performed somewhere in between what you'd think of those traditional big co-brands. So it's not a tectonic shift in the portfolio. It's a slow gradual shift. And one that is giving us a little different type of behavior over time. And it will, as we said, it can influence loan yield somewhat, but not to the point where it's gonna be dramatically different because we do make sure that we're being disciplined in the value propositions that we have, that works with partner, works for us, and that will, yeah, it's delivering the right type of capital return.

But we do get more sales from that and the sales, you know, to your point, they do have a little higher payment rate in there. But often they do turn to revolve and they lead to loans.

Moshe Orenbuch: Gotcha. Thanks. Maybe, you know, you talked a little bit about the effects of the late fee mitigants and the pricing. Could you maybe flesh that out a little more? Like, where do you see yourselves in that and how is that gonna impact the margins, you know, kind of over the coming quarters and any discussions with retail partners about either pulling them back or reinvesting them elsewhere? Thoughts like that. Thanks.

Perry Beberman: Yeah. It's honestly, it's exactly what you kind of just said. Right? I mean, we are, you know, working with all the partners as we normally do. That's what we call business as usual type activity. We have a very engaged commercial team, a client partnership team that is meeting with them almost daily and trying to make sure that, you know, our shared interests are aligned and that we're trying to grow the program. Create the best value propositions we can for those customers. And then for us to be able to underwrite as deep as we do.

And, you know, some of the pricing that's in place is what was important in order for us to continue support the program the way we do. Now I'd expect, you know, much of the industry pricing to remain in place as everybody's dealing with the ever-changing macro environment and regulatory changes. And for us, it comes down to continual underwrite, provide access to credit while ensuring the competitive value. You know, I think you're gonna see continued accretion into the yield over the next year or so, but it's gonna be slow and gradual. And as this other things happening, that will offset some of that.

We talked about this earlier, as delinquency improves materially, that, you know, will have pressure on the yield on that front. So it may not be as evident as it was a steady state and just pure, you know, revenue accretion.

Moshe Orenbuch: Got it. Thanks very much.

Operator: Thank you for your question. Our next question comes from Terry Ma of Barclays. The floor is yours.

Terry Ma: Hey, thank you. Good morning. Can you maybe just expand a little bit more in terms of what you need to see before you kind of unwind some of those tightening actions? Is it kind of more on the performance side or just more kind of macro driven?

Perry Beberman: Yeah. Yeah. I think I heard your question right. You're asking what would it take for us to consider unwinding more?

Terry Ma: Yep.

Perry Beberman: Yeah. To credit. So it's very dynamic, and, you know, I don't wanna have an impression out there that we haven't been, you know, giving customers line increases who are worthy. We have. It's just as you think about a posture when it's been a tighter posture because of the environment and being cautious about what is ahead. So our team has been really disciplined in managing our credit strategies. We balance the goal of achieving our long-term loss rates and achieving our profitability goals.

So, you know, we continue to make targeted strategy adjustments on segments in our new account and existing account where we have some areas we've loosened a little bit, meaning we've put more lines out there or new accounts. We realize, hey, there's better performing pockets, so we're gonna give them higher line assignments when they're coming in the door. Others, you tighten up. So we've been dynamic. We've actually started to reintroduce some of that, but it's going to be very gradual. And if you think about it, I think there's an idea out there in the industry that when you think about loosening, it means you're gonna approve a lot more accounts.

Well, I can tell you on the margins, we're approving accounts that have a much higher loss rate than the average that we have today. So that's margin, which most means you have customers your pockets are 2% loss rates. You're gonna have those are much higher. Higher. So to go deeper means you're gonna go really out there. And, you know, for us, the reason one of the reasons why you can see a slow, steady, gradual improvement in our loss rate is because the new account vintages that we put on are trying to get something that's close to the target that we stated, you know, our long-term target around 6%.

If we really wanted to drive our loss rate lower, we could put on even smaller new account vintages and target a 4%, and some others do something like that. So we're being very disciplined in how we approach this, but I expect that, you know, our team will continue to offer credit, line increases, approvals as appropriate, and it'll help continue to aid growth. The biggest thing is seeing better consumers come in the top of the funnel, with improved credit, and as they perform better, it's gonna naturally, you know, correspondent credit actions will follow.

Terry Ma: Got it. That's helpful. And then maybe just to follow-up on credit. You called out last quarter improving roll rates. I think you mentioned it was kind of broad-based across FICO cohorts. Has that continued? And then can you maybe just quantify how elevated those roll rates are relative to kind of what you expect to be kind of normalized? Thank you.

Perry Beberman: Yeah. Our roll rates have been improving, and that's the thing that we talked about. It's one of the most important aspects for us to get comfortable in, you know, improving our loss guide. I mean, we're benefiting two things right now. Our roll rates have improved, so the mid to late stage roll rates is still elevated above pre-pandemic but improving. But another encouraging part though is that our entry rate into collections is now well below pre-pandemic levels due to the strategic actions that we have and the changing mix of the portfolio. So we still wanna see improving back-end roll mid to back-end roll rates, and I think there's still room for that to happen.

But a lot of that's gonna be macro dependent. So I'd say we're encouraged there. And again, some of what it's hard to, you know, put a fine point on what's happening, but there's been a little bit of a shift in how customers are using their tax refunds. So that's also as we look at roll rates throughout the months and quarters, that has shifted. You know, I'll give you a factoid on that. I mean, when you think about pre-pandemic levels, people talk about using 20% of their tax refund on everyday purchases, which means there's some more other refunds to pay down their debt.

So times like this, these months, you'd get more debt pay down, and that would improve your roll rates. Well, now more consumers, 35% to 37% is what I read recently, are using their tax refunds for everyday purchases. It's almost 2x. Which means there's less being used to put against their existing debt, which means you're getting a little different payment dynamic as, you know, in these months that you typically would have seen it. So I think that's somewhat what's also gonna affect some of the seasonality and month-to-month movement people are going back to compare to prior years.

Terry Ma: Would you like to add anything additionally?

Operator: Okay. Thank you for your question. Our next question comes from Reginald Smith from JPMorgan. The floor is yours.

Reginald Smith: Hey. Good morning. Thanks for taking the question. It's funny we're all kinda asking about growth and my question is related as well. I was curious in what you guys can share in terms of the trends you're seeing and just the volume of gross applications that come through for specifically for both the co-brand and the private label, if you could kinda segment that out, that would be great. I know one of you guys mentioned your approval rate. And I'm not asking for an exact number, but can you kinda contextualize where you are today and maybe what that approval rate would have looked like in a more bullish environment.

So I'm just trying to figure out, like, what the Slack potential is in there. And then finally, as you think about new accounts that come on, what can you tell us in terms of, like, engagement? Are they using a card versus maybe previous cohorts? Any type of metric or color you could give there would be great. And I have one follow-up. Thank you.

Ralph Andretta: Yeah. It was a lot of questions in that question. So, yeah, you know, obviously, it depends by partner. Right? So if you look at it by partner by partner, we're seeing, you know, application flows at the top of the funnel, and we're gonna see those still see in-store applications, we still see online applications. As we move forward. You know, it's a strong flow, and I think our approval rate is appropriate given the economic and macro conditions, and we continue to see that. You know, once we do approve a card, we're very focused on engagement. And in ensuring that the customer and the partner understand the opportunities that they get to spend on that card.

You know, we just we have a partnership with Crypto.com. That's our latest partnership. It is, you know, one where their customers could apply for the card in a native app. It's state of the art. It really works well. And once they apply for that app, there's really it's an opportunity for them to use the card appropriately, and to redeem for currencies that they like. And we are actually getting a halo effect with that because, you know, it is kind of state-of-the-art technology, and we're able to meet the needs of their customers and meet the needs of the partners. So we feel really good about all of that.

But again, it depends, you know, we see a good application flow. We see our approval rates based on we're on the economy well. Once we do issue a card, we're very focused on engagement. And in ensuring that the customer and the partner understand the opportunities that they get to spend on that card.

Reginald Smith: Got it. So I appreciate the hand of those. It sounds like there's nothing, like, you know, nothing hard you can tell us about those trends, which I guess is fine. I guess, my next question, you mentioned your top ten partners earlier, I think, in response to Sanjay's question. And is there a way to, you know, kind of frame your wallet here today with those partners and maybe know, what's your longer-term stretch goal could be there? Like, just to give us a sense of your penetration there and what you guys are driving to or how you would think about that longer term. Thank you.

Ralph Andretta: Yeah. So I mentioned our top ten partners, and that was just to be clear, that's based on, you know, loans and receivables. So that's how I review our top ten partners. And, you know, they're secured and I say till the end of the decade, but at least to 2028, obviously, varies going back and forth. You know, the opportunity there is to focus on deepening our relationship with their customers. You know, instead of negotiating new deals and stuff like that, that's behind us.

Now we're focused on how do we execute well on the partnership, drive new incentives, new technologies to make it easier for the partner to interact with the customer to interact with the partner and interact with us. So that's the beauty of having these big relationships locked up to the end of the decade. You focus on growing the business, not renewing the business.

Reginald Smith: Okay. Thanks for the color. I appreciate it.

Operator: Thank you for your question. Our next question comes from Jeffrey Adelson from Morgan Stanley. The floor is yours.

Jeffrey Adelson: Hey, good morning, Ralph and Perry. Thanks for taking my questions. Wanted to just circle back on credit a bit. I know you'd called out the hurricane impacts for the quarter about 30 basis points, I believe. And I think previously, you'd mentioned that June would be seeing the bulk of the impact. So if I kinda think about stripping that out, it seems like your charge-off trend for June was actually down quite a bit, maybe 100 basis points nearly year over year. So I guess why shouldn't that trend continue as we think about the back half of the year? It seems like maybe you're guiding to a little bit more of a moderate decline.

Is that just conservatism on the macro or maybe what are you seeing that would change versus the third quarter or the second quarter here? Thanks.

Perry Beberman: Thanks for the question. You know, as we did make sure we called out that we do anticipate the July net loss rate to be in line to slightly better than the reported June net loss rate of 7.8%, and that's then we gave the guidance for the third quarter and that's 7.4% to 7.5%. And then the fourth quarter is generally seasonally, sequentially higher. So, you know, I think that's the point we're trying to say. And, you know, we did share. I mean, we're still cautious with what's happening with the consumer. Those back-end roll rates, while there's been some near-term improvement that we've seen recently, that could reverse.

So I think, you know, we're giving a view which is, hey, if things hold steady, this is how we think the second half of the year could materialize. There's certainly, I think, as we talked about in the economic outlook, things that could go against us a little bit, but there's definitely positive momentum and things that could go to the favorable side. So, you know, again, we are encouraged by the trends, and for right now where we are at, this is our view for the second half of the year.

And I don't know if I wanna say it's cautious, but it's some of our best thinking, but probably more the cautious side than it is aggressive, if that makes sense.

Jeffrey Adelson: Yeah. That makes sense. Thanks, Brian. And if I could ask your question, you know, Ralph, you mentioned partners focused on growth, not renewing technologies, customer engagement. I'm curious, has BNPL come up more in the conversations lately? I know one of your peers has been introducing more of their Pivator product. You've obviously had that acquisition several years ago. Is that coming up more or are there any sort of, you know, key features and focal points your partners are looking at? And then as a follow-up to that, I know you just highlighted the crypto when you had last quarter. Any other areas of focus you're having in new prospective client conversations by any vertical? Thanks.

Ralph Andretta: Yeah. You know, the beauty of Bread is that BNPL is a product in a product set. Right? So we absolutely can accommodate BNPL. We can accommodate installment loans. We can accommodate co-brand. A private label, direct-to-consumer deposits, direct-to-consumer credit cards. We have a basket of products and BNPL is one of them. So we can lean forward on whatever is popular in the marketplace. We can move forward with our partners and fulfill the need of the customer and the partner. So we feel really good about that. You know, if you think about our pipeline, it is robust. And as I said earlier, we win more than our fair share.

We win more than our fair share because we have the right technology, we have the right offers, and we have the right team. That's a nice combination to have. And a lot of the things we're winning are de novo, so they get to grow with us, we get to grow as we move forward, and we've had great examples of that in the past, particularly with, you know, down in one of the verticals that we grew in beauty. We've grown beauty from a de novo to a really industry-leading vertical for us. There are verticals out there that we're yet to conquer, and we're excited about those. They're in the pipeline. You'll probably hear about them soon.

As time and contracts will allow. But we're excited about our pipeline in the future and what that will do for our growth.

Jeffrey Adelson: Okay. Great. Thank you, guys.

Operator: Thank you for your question. Our next question comes from Bill Carcache from Wolfe Research Securities. The floor is yours.

Bill Carcache: Thanks. Good morning, Ralph and Perry. Following up on the Caesars renewal and, you know, I guess any perspective that could offer on future renewals. Can you give some color on whether it was a competitive process? How did the pricing actions that you've taken impact the renewal discussions? You know, are there any changes to your risk-adjusted returns that you anticipate under the new terms?

Ralph Andretta: Yeah. You know, the market is competitive. There's always has been competitive. The beauty of what we do in our team is we're very proactive with our partners. So to the extent that we can, you know, integrate interact with our partners early and, you know, and sign a renewal that avoids us going to RFP. That's always a good process to take. And, you know, we tend to lean forward on there into that number of cases. If something does go to RFP, certainly feel that as the incumbent, we have a really good shot to get it. We don't become irrational. We focus on what's important, which is growing the business.

And ensuring that there, you know, that we can meet the requirements of the partners. So as I said, you know, our renewal rate is exceptional. And that renewal rate stands from being proactive with the partner and re-signing early to, you know, meeting, you know, looking at an RFP and deciding how we will move forward together. So either way, you know, there is always some compression in the marketplace. It's just that's competition does. But, you know, as long as they meet our hurdle rates, we're very focused on continuing to invest in those partners and moving their business and our business forward for the benefit of our mutual customer.

Bill Carcache: Thanks, Ralph. And then separately, can you discuss what you're seeing when it comes to penetration of retail partner sales? Any trends you're seeing across different categories that stand out and sort of any notable efforts to drive that higher, particularly, you know, to the extent that we see you guys maybe expand your credit box if, you know, macro conditions sort of support that? How does that look in terms of that penetration?

Ralph Andretta: You know, what I would say there is that if you think about where we were and where we are, you know, we have multiple different verticals now. We've had verticals in beauty. We have verticals in sports, travel, and entertainment. We're able and we have products that support all of those, whether it's a private label product, a co-brand product, a BNPL. Academy Sports, I'll give you as an example. They have private label, they have co-brand and BNPL, a full suite of products. That's in the sports area. So we're pretty much consistent across our top ten partners and what we offer and how we offer it. Data and analytics play a big part for us.

You know, we're able to, you know, use data and analytics with our partners to identify opportunities to increase penetration. We continue to do that across all channels, whether that's in-store, whether that's digital or any other channel that might be out there. So the most important thing is we're giving products that our customers want with the right value proposition and make it easy for them to apply and be acquired. And that partner becomes a lifetime partner for us because we have products that meet their needs. No matter where they are in the spending in the credit cycle.

Bill Carcache: That's helpful. Thank you.

Operator: Thank you for your question. Our next question comes from the line of Ryan Shelly with Bank of America Securities. The floor is yours.

Ryan Shelly: Hey, guys. Thanks for the question. I appreciate it. Mine is around the capital structure in today's tender. So you'd now offer out there for both the unsecured and the sub notes. The sub notes are relatively new issuance. I guess, could you give any color for the reasoning on going after the sub notes and just general thoughts around the capital structure as we move forward here would be much appreciated. I know you mentioned potentially doing some preferreds before. So just, you know, how should that investor specifically be thinking about this capital structure going forward? Thank you.

Perry Beberman: Yeah. Thanks for the question. Yeah. So right now, as I've we talked about, as I mentioned earlier, we're in an excess cash position well above a buffer that we want to maintain. So we were opportunistically, you know, looking at our debt structure. And to your point, the subordinated notes are a newer issue. When we initially issued that, we issued what we call, like, more of a benchmark size deal for our balance sheet optimization it was, you know, well above what it needed to be. But we have optionality on this particular tender. Right?

If you think about the senior notes, the ones that are 9.75%, we have an option to call those in February at a, you know, defined price. So right now, we're in a live offering and we're going to, you know, be appropriate with how we end up balancing the outcome.

Ryan Shelly: Got it. Thank you. Is it likely you mentioned the February call prices and likely wait till then, see exactly how this tender goes, or it's just up in the air?

Perry Beberman: Yeah. Look. We have optionality. Right? I think that's the point of when you have a call option, there's optionality. There's no decision definitively. A lot's gonna happen between now and then.

Ryan Shelly: Fair enough. Yeah.

Operator: Thank you for your question. Our next question comes from Vincent Caintic from BTIG. The floor is yours.

Vincent Caintic: Hey. Good morning. Thanks for taking my questions. Just some follow-ups. So actually, going back to credit, I just wanted to understand maybe a bit further what's baked into the loss expectations for the second half of the year. And also what's, you know, assumed in your credit reserve rate. You already provide a lot of helpful detail, you know, for the third quarter, and the fourth quarter, but I guess when I look at the second quarter, and if you strip out that 30 basis points of hurricane impact, you had a 60 basis points quarter over quarter improvement to, like, 7.6%.

And I guess the second half of the year kind of assumes that 7.6 stays there, in that range. So I'm kind of just wondering, you know, what maybe what's baked into that because it does seem conservative and maybe putting it another way. If we had the same kind of environment as we have today or as we had in the second quarter, could your net charge-offs be better than what you're regarding to? Thank you.

Perry Beberman: Thanks for the question. Look, when we're looking at things right now, what we're seeing is and we're trying to guide. I think we had a good handle on the third quarter and gave you our best thinking there. You know, we gave a range, so let's all hope it comes in on the lower end, but we'll see how things play out. And then, again, seasonally, things go you typically increase in the fourth quarter. We're trying to give you our best thinking. I mean, look, if we continue to see momentum in back-end mid to back-end roll rates, okay, could come a little better. Stay stable. We've kinda given you our view.

So and some of it's gonna be dependent on what type of seasonal loan growth we have in the fourth quarter. And then on top of that, as I stated earlier, we've seen a little bit softer tax refund season. So that's changing some of the seasonal views, and what our thoughts are on the third quarter at this point. So that's influence. I guess. And so that's a key point on the loss side. You know, as it relates to your question on CECL, I'm surprised it's the first time I'm getting a question on CECL. So that's pretty good.

You know, pleased with the progress there that we were able to lower the CECL rate by 30 basis points. Linked quarter and year over year. And what I'd share with you insight on that is that improvement in rate was solely due to credit quality. So in this environment, you know, I would have liked to have been in a position where we could start to ease back on some of our weightings on the adverse and severely adverse scenarios. But given the uncertainty that still is out there around tariffs and the downstream impacts to inflation, gotta wait, you know, another quarter or two to see how that, you know, pulls through.

But really, if we can continue to see momentum, I expect that, you know, a stable reserve in the third quarter then seasonally come down in the fourth. And, you know, we'll see if credit continues to improve. Maybe it a little better than that, but don't know until that plays out, because you get you run the models at the end of a quarter based on where things are at. But, you know, certainly more encouraged right now, and I just hope we get a fast resolution on the macro pieces because, again, the consumer's performing well, the portfolio's performing well, and we just need, for macro to resolve itself.

Vincent Caintic: Okay. Great. That's helpful. Thank you. And then follow-up kind of on the merchant discussions we had earlier. I mean, if you could talk about, you know, from the merchant engagement perspective, the environment, the pipeline, and also how are the economics of new business you're putting on doing versus, you know, prior business? Thank you.

Ralph Andretta: Yeah. You know, I'll go back to what I said previously. The pipeline is robust. We have a lot of terrific opportunity. We always win more than our fair share. We look at it on a by-partner basis, and the economics have to be right for us and the partner, we remain very disciplined in our economics and our returns and our pricing, and we'll continue to do that.

Vincent Caintic: Okay. Great. Thank you.

Operator: Thank you for your question. That concludes the question and answer session. I will now pass it back to Ralph Andretta for closing remarks.

Ralph Andretta: Thank you, and thank you all for joining our call today and your continued interest in Bread Financial. We look forward to speaking to you again next quarter. And everyone have a terrific day. Thank you all.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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DATE

• Thursday, July 24, 2025, at 8:30 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Richard Gelfond
• Chief Financial Officer — Natasha Fernandes
• Chief Legal Officer — Rob Lister
• Head of Investor Relations — Jennifer Horsley

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

• Installation Growth: IMAX system installations grew 50% year over year in Q2 2025.
• Box Office Performance: The global box office rose 41% year over year. This contributed to a global market share of 3.6% in Q2 2025 on less than 1% of screens and a 5.3% share of the domestic box office in Q2 2025.
• Systems Signed: 124 new and upgraded IMAX systems were signed year to date as of Q2 2025, nearing the previous full-year total of 130 in 2024.
• Revenue: Total revenue reached $92 million in Q2 2025, compared to $89 million in the prior year’s quarter.
• Gross Margin: Gross margin reached $54 million, up 22% year over year in Q2 2025, resulting in an overall 58% gross margin—an improvement of over 900 basis points in Q2 2025.
• Adjusted EBITDA: Consolidated adjusted EBITDA was $39 million, up 26% in Q2 2025, with a margin of 42.6% for both the quarter and first half, representing a 780 basis point increase year over year.
• Adjusted EPS: $0.26, an increase of $0.08 year over year, driven by operating performance despite a $0.09 tax headwind in Q2 2025.
• Content Solutions Segment: Revenue was $34 million in Q2 2025, up over 40% year over year. Gross margin was $22 million in Q2 2025, with a 66% margin, up 2,000 basis points year over year.
• Technology Products and Services: Revenue rose 9% to $56 million in Q2 2025; Gross margin reached $30 million at 54% in Q2 2025, up 360 basis points year over year.
• Domestic Box Office Indexing: The most recent seven “film for IMAX” releases averaged 15% of the North American box office on opening weekend on just 400 IMAX screens, achieving up to 20% for certain titles.
• System Installation Guidance: Management raised its full-year 2025 expectation to 150-160 systems worldwide.
• Backlog: 131 domestic systems in backlog year to date, up 46% year over year.
• Operating Expenditures: $30 million in the second quarter, down $3 million year over year due to efficiency measures and restructuring costs totaling $840,000 year to date.
• Cash Flow: Operating cash flow exceeded $30 million in the first half of 2025, up 25%, with growth CapEx totaling $15 million.
• Liquidity: Total available liquidity was approximately $490 million as of Q2 2025, including $109 million in cash as of Q2 2025 and $280 million in debt (excluding deferred financing costs) as of Q2 2025.
• Credit Facility: Amended and expanded revolving credit facility increased to $375 million with a term to 2030; convertible senior notes of $230 million mature in April 2026 with a $37 per share capped call.
• Geographical Expansion: France, the Netherlands, and Japan achieved their largest single-year IMAX network expansions in 2025, with at least 20% growth in Japan.
• Local Language Content: Approximately 40% of box office was attributed to local language content year to date in 2025, compared to around 20% in the prior couple of years.
• Upcoming Slate: Management announced a full pipeline of confirmed major global releases through 2027.
• Strategic Domestic Growth: Expansion agreements include first new Manhattan location in 15 years and a new LA Live Entertainment Complex site with an 80-foot screen.

SUMMARY

IMAX Corp. (NYSE:IMAX) reported its highest-ever domestic box office in Q2 2025. This contributed to record signings and installations, supported by robust global demand, particularly in high per-screen average markets such as France, Japan, and the U.S. The company credited its “film for IMAX” programming for driving significant opening weekend box office shares—up to 22% domestically for some titles, as discussed on the Q2 2025 earnings call.—while citing a replenished and expanding backlog with a clear path to years of network growth ahead. Management emphasized increased capital efficiency, successful cost containment initiatives, and a strengthened capital structure with expanded credit facilities, all while maintaining forward guidance for elevated margins and installations in upcoming periods.

• Natasha Fernandes stated that adjusted EBITDA margin (non-GAAP) is now expected to be in the low forties for the full year 2025, reflecting confidence in continued profitability improvements.
• CEO Richard Gelfond highlighted, “we have good reason to believe it will only get better.” referencing both current financial outperformance and long-term industry positioning.
• The company disclosed that signed agreements for the first half of 2025, totaling 124, nearly match the prior year’s total of 130, pointing to accelerating adoption among exhibitors and partners.
• IMAX’s emphasis on exclusive content windows and close collaborations with filmmakers was positioned as a competitive differentiator, as recognized by the statement: “Studios are competing more fiercely than ever to secure IMAX release windows” (Source: IMAX Q2 2025 Earnings Call)
• Management identified ongoing local language content success and an expanding alternative content pipeline as incremental growth levers.

INDUSTRY GLOSSARY

• Film for IMAX: Feature films specifically created or formatted to leverage IMAX’s expanded aspect ratio and immersive technologies, generally receiving dedicated marketing and minimum run windows.
• PSA (Per Screen Average): A revenue metric reflecting average box office receipts generated by each IMAX-equipped screen, used internally to benchmark screen productivity and pricing strategies.
• PLF (Premium Large Format): Competing theater formats providing larger screens and enhanced experiences, often referenced by the industry in contrast to IMAX’s proprietary offering.
• Backlog: The committed but not yet installed inventory of IMAX theater systems (signed agreements), serving as a leading indicator of future installations and revenue recognition.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Q2 2025 IMAX Corporation earnings call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jennifer Horsley, Head of Investor Relations. Please go ahead.

Jennifer Horsley: Good morning, and thank you for joining us for IMAX's second quarter 2025 earnings conference call. On the call today to review the financial results are Richard Gelfond, Chief Executive Officer, Natasha Fernandes, our Chief Financial Officer. Rob Lister, Chief Legal Officer, is also joining us today. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our earnings press release and the slide presentation have been posted on the Investor Relations section of our site. Our historical Excel model is posted to the website as well.

I would like to remind you of the following information regarding forward-looking statements. Today's call, as well as the accompanying slide deck, may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause our actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update those statements as a result of new information, future events, or otherwise.

During today's call, references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures as well as a reconciliation to non-GAAP financial measures are contained in this morning's press release and our earnings materials, which are available on the Investor Relations page of our website at imax.com. With that, let me now turn the call over to Richard Gelfond. Rich?

Richard Gelfond: Thanks, Jennifer, and thanks everyone for joining us as we review another outstanding quarter for IMAX. We delivered strong financial results in Q2 highlighted by installation growth of 50%, box office growth of over 40%, and adjusted EBITDA margin of 43%. We've opened a total of 57 new and upgraded IMAX locations year to date, compared to 39 during the same period of 2024. Given the demand for IMAX systems, moving higher in our range for full-year installations to between 150 and 160 systems worldwide. And we've now completed agreements for 124 new and upgraded IMAX systems worldwide year to date compared to 130 in all of 2024.

Q2 was our highest-grossing quarter ever at the domestic box office, as we remain on track to achieve our guidance of $1.2 billion for the full year. This is a direct result of our strategy to increase our global market share which at 3.6% of total box office on less than 1% of screens is up 19% year over year in the second quarter. And to ensure that IMAX is the platform of choice, filmmakers and studios want to deliver the best experience for the greatest films from around the world. Coming into the second quarter, we are focused on an unprecedented run of eight consecutive film for IMAX releases this summer.

Films shot with our cameras featuring exclusive IMAX expanded aspect ratio. Designed every step of the way to be experienced on our screens. With all seven of these films to date, we've averaged about 15% of the North American box office on opening weekend on just 400 IMAX screens. Soaring as high as 20% on Mission Impossible: The Final Reckoning, Thinners, and F1. That's a feat we've only achieved eight times in our entire history. And three of those milestones came in this second quarter. And with Superman, our 16% opening weekend indexing marked our highest market share ever on a domestic debut over $100 million. It's becoming increasingly clear for our market share.

10% used to be the high end of what we delivered on major tentpole releases. Now thanks to our film for IMAX strategy, the higher level is business as usual. In May, a New York Times feature posed a question, quote, why is IMAX suddenly everywhere? Unquote. And the preponderance of film for IMAX releases this summer along with our outside share of the global box office, demonstrates the importance of IMAX across the global center of business. More filmmakers are wielding our technology to create films designed to be experienced on our screens.

Studios are competing more fiercely than ever to secure IMAX release windows and make IMAX the centerpiece of their marketing campaigns to event the size of their films. Audiences are responding. Demonstrating a strong preference for seeing films in IMAX. And exhibitors are clamoring to get more IMAX systems into their networks. And fully capitalize on the very IMAX-friendly slate rolling out over the next several years. We're seeing that our strong system signings and installations this year, which is a powerful catalyst for our business. The more we grow our network, the more we grow sales, and box office revenue. And we maintain a strong capital position.

Our recent renewal and expansion of our revolving credit facility demonstrates the continued confidence in our financial growth model. Simply put, this is a fantastic time to be in the IMAX business. And we have good reason to believe it will only get better. Looking at our global network, installs came in at the high end of our projection. With 36 systems in the core. The full year is set to yield several milestones, including our largest single-year expansion ever in France with seven expected installations. Five of which have already been completed. Our largest single-year expansion in the Netherlands with four expected installations close to doubling our network in that country.

And our largest single-year expansion ever in Japan, with eight already installed and at least four to go. Representing network growth of over 20% in that country from last year. Our recent agreement with Regal will see us expand into our first new location in Manhattan in 15 years, as well as a new location at the iconic LA Live Entertainment Complex. With an 80-foot screen and an IMAX 70-millimeter film projector. With eight new domestic exhibition partners in 2024 and our record domestic box office in the second quarter. We remain keenly focused on growth in North America. One of our highest prescreen markets in the world.

We also recently completed another agreement with Wanda that will see IMAX Systems replace existing premium format auditoriums in up to 27 locations. A sign of our dominant competitive position in China. We continue to do brisk system sales in Australia where recent agreements with EVT Hoyt, and Village will help satisfy strong consumer demand and high PSAs for the IMAX experience. The second quarter offered strong evidence of our ability to elevate box office hits and drive results through our diversified global slate. One of Hollywood's biggest hits in years, it's easy to forget the questions that surrounded sinners in advance of its release.

As longtime partners of director Ryan Cougar, we encouraged him to make IMAX a centerpiece of the marketing. IMAX drove 21% of the film's global box office during its two-week IMAX run. Even bringing it back weeks later for an encore run-in IMAX film locations. Mission Impossible: The Final Reckoning made similar use of IMAX from the production through the marketing and the launch of the film. Final Reckoning includes more IMAX exclusive expanded aspect ratio than any mission film. And premieres from Tokyo to London to New York were hosted on IMAX screens.

We far outpaced our projections delivering over $75 million in global box office our best result ever of the Mission Impossible franchise and a double-digit percentage of the film's overall gross across its entire run. The third quarter is already off to a great start. F1 the movie was designed from top to bottom for the IMAX experience. Shot entirely in IMAX expanded aspect ratio by our long-term partner Joe Kosinski. And we exceeded our internal projections delivering more than $80 million accounting for a whopping 22% of the domestic box office and 18.5% of the global box office for the film. Superman will conclude its IMAX run this week with well over $50 million in global box office.

And in local language, the Demon Slayer sequel delivered our biggest opening weekend ever in Japan this past weekend. With $3 million and an incredible $48,000 per screen average. And in China, the much-anticipated film PrimeX release, Ganjay Rescue, opens next month. Our year-to-date local line is box office. Stands at nearly $230 million just shy of the $244 million full-year record we set in 2023. At the current pace, we expect to set a new record within Q3. The second half slate looks promising. This weekend, Marvel's long-awaited Fantastic Four opens worldwide. The Rotten Tomato scores and presales are pretty strong. Our film prime at slate continues into the fall with Tron Ares and Mortal Combat 2.

There are several IMAX-friendly gate genre releases including Predator Badlands, and The Running Man. Zootopia 2 is shaping up to be another big sequel for Disney animation. And holds significant global appeal particularly across our Asian markets. And the year concludes with the second installment of WICCEN and finally with Avatar Fire and Ash, which will be preceded with an IMAX re-release of Avatar The Way of Water in October. 2026 kicks off the year with the avatar carryover and features Christopher Nolan's The Odyssey as well as Avengers, Star Wars, Mandalorian, and Grogu, Super Mario Brothers, movie sequel, Toy Story 5, Greta Girl with Narnia, and two in part three.

And a very compelling 2027 slate continues to take shape including Star Wars Starfighter, from Deadpool and Wolverine director Sean Levy. Avengers Secret Wars, The Batman 2, and Spider-Man Beyond the Spider Verse. We continue to deepen our relationships with tech companies in the theatrical space as well. Our partnership with Apple has yielded excellent results to date on F1 and we're-releasing F1 on August 8. Amazon will release its first-ever film for IMAX title next year with Ryan Gosling's Project Hail Mary.

And we were very pleased by the announcement that June director Denis Villanue, a long-term partner of the company, who is called IMAX quote, the future of cinema, unquote, has been tapped to direct the next James Bond movie, for Amazon MGM. And we're working closely with Netflix on the rollout of next year's IMAX exclusive theatrical run of Narnia, from Greta Gerwig. including films, Furthermore, we continue to offer diversified content from music fans, including concert documentaries for the Grateful Dead Prince, and the Rolling Stones. To close, the fundamentals of our business are strong.

The strength and impact of our brand across the entertainment landscape have reached new highs, and we have tremendous runway with a strong slate and network growth prospects ahead. And we're focused on building on our momentum to strengthen our strategic position. Executing with financial discipline, continuing to provide the most immersive entertainment experience in the world. And delivering for our shareholders. Thank you. With that, I'll turn it over to Natasha.

Natasha Fernandes: Thanks, Rich, and good morning, everyone. IMAX's second quarter demonstrated the strength of our model and the discipline of our execution. IMAX delivered another quarter of record-breaking results driven by a 41% year-over-year increase in global box office strong installation growth of 50%, and an adjusted EBITDA margin exceeding 42% for the second straight quarter. These results are not just numbers. We believe they reflect the scalability of our platform the momentum in our business, and the growing demand for premium cinematic experiences. We believe we're not just outperforming the market, we're expanding it.

We're attracting more audiences to choose a theatrical experience capturing more value per screen, expanding our global footprint, and delivering consistent returns all while maintaining a sharp focus on capital efficiency and long-term shareholder value. Our results through the first half place us on track to meet or beat guidance for the full year including on box office, system installations now expected to be between 150 and 160 for the year. And adjusted EBITDA margin now expected to be in the low forties. Taking a closer look at our Q2 results, overall, we delivered revenues of $92 million compared to $89 million in the prior year second quarter.

And achieved a gross margin in Q2 of $54 million which grew 22% year over year. This reflects a 58% margin or over 900 basis point improvement year over year reflecting high incremental profit flow through from the stronger box office performance along with a more profitable mix of revenue. Looking at our results at the segment level, Content Solutions revenues of $34 million of over 40%, while the prior year benefited from the downstream sale of the Blue Angels documentary to Amazon. Content Solutions gross margin of $22 million increased $6 million at a 66% margin, up 2000 basis points year over year driven by strong incremental margins coming from the higher box office.

Overall, box office outperformed resulting in Q2 global market share of 3.6% on less than 1% of screens driven by a remarkable 5.3% share of domestic box office and 6% share of China's box office Technology products and services revenues of $56 million was up 9% year over year with a gross margin of $30 million up 17% year over year and at a 54% margin up 360 basis points year over year driven by growth in box office and system sales.

The quarter saw strong growth in installations, 36 systems versus 24 in the prior year, included a higher mix of sales type arrangements, Moreover, installations included eight systems that were signed earlier this year and already installed in the second quarter of 2025. This is a good indicator of the robust demand by exhibitors to install IMAX systems in advance of the exceptional IMAX slate in 2025 and beyond. For instance, in Japan year to date, we have installed eight new systems increasing our network there by 15% since the beginning of the year and domestically, our backlog of 131 systems is up 46% year over year.

And the momentum for signings continues with 28 signings in Q2 and 124 year to date. We are only halfway through the year and are close to equaling the 130 systems signed in 2024. We are seeing good geographic diversity in signings, including higher per screen average countries such as Australia, France, the US, and Japan. These signings are not only replenishing, but growing our committed backlog feeding the pipeline for future network expansion. Turning to operating expenditures, defined as research and development and selling, general and administrative expenses, excluding stock-based compensation, was $30 million in the second quarter.

Which decreased $3 million year over year reflecting our continued focus on gaining operational efficiencies and looking for better ways to use technology and scrutinizing work processes to find productivity opportunities. We continue to take proactive steps which led to year-to-date restructuring costs of over $840,000 to enhance operational efficiency and reduce annual costs while optimizing IMAX's organizational structure including eliminating redundant roles, leveraging technology for efficiency, and centralizing select functions which positively impacts both margin and OpEx. Overall, our strong operational performance led to a second quarter total consolidated adjusted EBITDA of $39 million from or 26% year over year driven by the higher revenues and gross margin.

This resulted in a strong adjusted EBITDA margin percentage of 42.6% up 780 basis points year over year and giving us a first-half adjusted EBITDA margin of also 42.6%. Second quarter adjusted EPS was $0.26 up $0.08 year over year. Driven fully by strong profit growth as tax expense year over year was a headwind of $0.09 given the tax benefit recognized as a result of the internal asset reorganization in the second quarter of 2024. Turning to cash flow and the balance sheet. Cash flow from operations continues to build and is just over $30 million through the first half is up 25% from the prior year period.

A very good first six months considering the cash flow has yet to capture collections on the larger box office titles this year and cash expenses around compensation and events tend to be first-half weighted. We expect cash flows to continue to grow and similar to total adjusted EBITDA, the dynamics of cash flow are quite positive as box office expands leading to incrementality particularly considering the cash flow characteristics of our joint revenue sharing arrangements where the capital expenditures the beginning of an average ten-year contract term.

Turning to investing cash flows, we continue to prioritize the use of our available capital to invest in the business, including $15 million spent on growth CapEx in the first half related to partnering with exhibitor customers to grow and upgrade the IMAX network through joint revenue sharing arrangements. Represents an attractive return on investment opportunity as numerous large partners including AMC, Wanda, and Regal are ramping up investment in IMAX as they upgrade their complexes including bringing IMAX in to replace other premium formats. As they look to capture more of the market share gains IMAX is delivering through our Film for IMAX program. We are also making progress strengthening further our capital structure.

With a significant announcement last week of our amended and enlarged credit facility which we expanded from $300 million to $375 million with a term that extends into 2030 and at an approved borrowing rate. This is a very positive development that not only increases our liquidity and strengthens our capital structure, also reflects the recognition of the momentum in our business long-term trajectory and support from our banking partners. Included in our capital structure is $230 million of debt from our convertible senior notes due in April 2026. That bear an interest rate of 0.5% per annum with a capped call leading to a $37 per share conversion price.

With our strong liquidity position and available facilities, we have the ability to be opportunistic as we assess the timing of when to address these notes and the nature of the instrument, whether that be our revolver or through new notes. Our capital position remains very strong with cash at $109 million dollars debt excluding deferred financing costs was $280 million and our current available liquidity is approximately $490 million. In conclusion, our team is executing well and our first half of the year exceeded our expectations on all of our guidance measures, IMAX box office, installations, and adjusted EBITDA margin.

Are focused on execution and the second half has started off strong with July box office pacing to one of our highest July's on record driven by the mix of Hollywood and local language blockbusters including the standout performance of F1 and Superman runs as well as the record Japan opening of Demon Slayer this past weekend and several larger budget local language titles in China and other countries, along with our first German and Brazil titles later in this year.

And looking beyond 2025, there is good visibility into IMAX's future installations as we have a significant and replenishing backlog with a clear path to years of network growth as IMAX location zones are less than 50% penetrated globally with potential for even more zones to be added to our addressable market. Similarly, the demand to secure an IMAX release window continues to grow resulting in filmmakers and studios building deeper and earlier partnerships. This is affording us a clear view into IMAX's film slate for 2026 and beyond. In short, the model is working.

Filmmakers and studios are partnering with IMAX to deliver the best movie experience consumers are noticing and choosing IMAX Exhibitors are looking to meet that demand by adding more IMAX systems to their circuits and it's translating to growth and expanding margins profits, and cash flows for IMAX that in turn will generate greater shareholder returns now and into the future. With that, I will turn the call over to the operator for Q and A.

Operator: Thank you. At this time, we will conduct a question and answer session. And wait for your name to be announced. To withdraw your question, please press star one again. Our first question comes from Omar Mejias Santiago with Wells Fargo. Your line is now open.

Omar Mejias Santiago: Good morning, and thanks for the question. Maybe first, Rich, given the strong demand for IMAX slots from studios, and filmmakers, do you see a future where all or almost all films you play across their circuit are film for IMAX films? Just curious on how you see the evolution of the number of film for IMAX moving across your network.

Richard Gelfond: I don't think it will evolve to that point, Omar. We want to make film for our net something really special. Including the right kind of content, the right visual, the right sound, So there are certain movies while they might be really good movies, They just don't demand that kind of treatment.

And as you know, when it's a film, it gets a two-week minimum run. And I just don't think that all the movies will be suitable for a two-week run. As you know, the slots are what's really valuable, like the IMAX playtime. And it's a little bit of a trade-off. When you do film IMAX, you get a higher index and you get the right property. But you're agreeing to two weeks before you've seen the movie. However, obviously, as you know, this quarter shows, the results were so strong. The indexing was so strong. So just to give you a sense, in 2026, we already have nine film Primax titles.

And for 2027, we already have at least eight. So it is something we're gonna lean into for the right content but we won't make it ubiquitous. No. That's very helpful. And maybe switching to some recent media reports that have been stating that US theater chains are under cost about joining marketing their PLF screens to better compete with the growing influence of IMAX. Do you view this as a competitive threat to your business or more of an opportunity to partner with US exhibitors to potentially work together and grow the pie? Just curious about your thoughts on that. Yeah. So, Omar, we've indexed an average of 15% on our FFI films this year.

On opening weekend, and more than 20% on three of them. That's a real uh-huh moment. For exhibitors who haven't been in the IMAX business before and they're kinda scurrying to come up with a strategy. A lot of people have tried to create competitors to IMAX over the years, but the fact is that our brand and relationships with filmmakers are unmatched. And our technology is superior. And audiences know it. Two of the three exhibitors mentioned in the story you're referring to have told us that they're not part of any discussions. We just signed a renewal for 40 locations, with Regal, and are opening new locations with them in LA. And New York City.

And, you know, if you've missed the boat, it's getting a little late. And I think these are kind of pathetic attempts to try and take a stand that is highly unlikely to work. That's very helpful. Appreciate it, guys.

Operator: Please stand by for our next question. Our next question comes from Chad Beynon with Macquarie. Your line is now open.

Chad Beynon: Hi, good morning. Thanks for taking my question and nice results. I wanted to piggyback on the back of that last question maybe from a slightly different angle. Rich, I recall from Investor Day several years ago, you laid out the IMAX difference in terms of the economics and the benefits of your partners that would earn your PSAs versus the PSAs they would earn on a non-IMAX screen. And I think the math was pretty compelling then. It seems like the results are diverging even further given the indexing and some of the results that you're talking about.

So my question is, in the future, could there be opportunities to improve pricing similar to what we see in the hotel industry as they've increased royalty rates showing their partners that it helps to be with the brand that has bigger scale and marketing benefits. Thank you.

Richard Gelfond: Thanks, Chad. I would say it definitely gives IMAX a stronger hand in our negotiations. With the content providers, whether it's studio or live content, But I think we're gonna use that carefully.

So you could see in the quarter, that the three of the biggest movies centers F1 and Mission Impossible, the studios really leaned in to the IMAX of it all and you know, we have Fantastic Four opening this weekend, and Disney has really leaned into that. And I think it's more beneficial for our overall results to get them to lean in more And when people ask to an up film products release or they want extra time in IMAX, You know, we've really used our negotiating style to look for things like IMAX Premiers, IMAX tagging, the filmmakers getting more involved. In the shout-outs, which has really been happening.

And I think it's a dangerous game to get into kinda different pricing for different movies. I think you send signals that audiences will get, that studios wanna give. Don't wanna give. And I think overall, you know, we think it's a fair result for both the studios and us. And you probably know that the entertainment business is one very driven by precedent. And I think you know, we're happy with where the rate is now. And we'll use you know, whatever extra negotiating power we might have. To try and make the experience better marketed and more accessible for people. Okay. Thanks, Rich. And then a quick housekeeping for Natasha.

You mentioned the tax or the tax impact from this quarter that was related to something last year. Is there anything else in the back half of the year, or should we assume kind of a normal tax rate as that flows into free cash flow for the back half of the year? Yeah, Chad. I mean, our internal asset or reorganization that we did last year, that's essentially what you're seeing come through this year. Q1 had a higher tax rate. Q2 has come down significantly, and we're aiming towards just simply having an effective tax rate for the entire year. As we've said before. And so that's our goal as opposed to where we've been historically. Great.

Thank you, Beth.

Operator: Thank you. And our next question comes from Eric Handler with Roth Capital. Good morning.

Eric Handler: Thank you for the question. Rich, big picture. Question for you. As you think about your ultimate product mix, between Hollywood movies, local language, alternative content, like, where are you with alternative content in, like, the number of events that you're doing a year? How are you seeing, like, the average revenue prevent scale higher? Know, just the opportunities there with those and, you know, where would you like to see the local language percentage be for overall box office as well?

Richard Gelfond: Yeah. So far, Eric, this year, our percentage of local language content it's around 40%.

Which is much higher than historically It's been closer to around 20. In the prior couple of years. But obviously, Nezhia too distorted that to the upside a little bit. But if you think about that, you know, look at, like, the North American exhibitors, for example. It's close to zero. Their percentage for local language content. And I think one of those superpowers of IMAX is our ability to get these films from all over the world and you know, your timing is good for the question because Demon Slayer I'm just open in Japan, and we set an all-time record for Japan And we're actually releasing Demon Slayer in 40 other countries.

And the last Demon Slayer did $30 million, and this one is a broader release pattern. Than the last one. So local language is a really important part of our diversity of content. And in a way, you see how Netflix has used it really intelligently. To grow their network. And I think you know, we're gonna continue to lean in a big way. Alternative content, while important, is less of a game changer, and there are a few reasons for that. One is you know, it generally has a shorter playtime And it also could conflict with studio offerings.

So for example, again, back to this coming weekend, with Fantastic Four opening, If we had a live event or a different kind of alternative content, The studios are obviously gonna wanna play what they've contracted to get. So it's more of a filler than it is kind of a something that's gonna carry the programming. With that said, I think we have something like seven music events coming up you know, in the next few months. So we have the dead end company coming up the next few weeks. We have a Prince concert we just announced. I believe we're gonna we haven't announced it, but we'll likely re-release the Rolling Stones movie later in the year.

There's just a lot of high-quality content And there's a lot of interest. In the music community. To have more of it. So I think it's good. You know, last year, we did League of Legends, in China. I think you'll see us do some other gaming things. Around the world now. And I think we're still in somewhat of a test phase. So we look at what the ROI is on each event, You know, we are leaning into it. For the right events. But I just don't think it'll have the same financial impact that either the Hollywood Slates does do or the local language slate. That's helpful.

And also, I mean, since you mentioned Dina Serum, and you've had good success with several anime movies in the past, but it seems a bit sporadic. I have no idea. How big the global market is for anime annually. But given the success you have, have you started talking with some of the anime companies about you know, collaborations in the future and maybe increasing the amount of anime that you're seeing on the screens. Well, Eric, you know, in going through the past, you didn't mention the job too. Which did $160 million in IMAX. And was an animated film as well. So you're right. We have had a lot of success. Particularly with anime.

On a global basis. So it originates in Japan, or most of it does. And then we've been successful not only in Japan, but in the US and China a number of other markets. With it. So we do a pretty good track record But again, we've done pretty well even with some Hollywood movies, the Illumination ones, we've done very well with Despicable Me and movies like that. And we've done really well with some Pixar, Disney movies, and others. So I think, you know, we're leaning into the right kind of animation. I don't when we look at a movie, we don't say, oh, that's an animated one. Let's go for that.

Think it depends on the kind of content. And we have you know, pretty good relationships with the anime studios and the animated studios globally. And we've always valued it, and for the right movies, we'll continue to lean into it. Great. Thank you.

Operator: Thank you. And to allow for everybody in the queue to participate, if you could limit yourself to one question. Our next question comes from Eric Wold with Texas Capital Securities.

Eric Wold: Thanks. Good morning. Hey, Rich. Quick question for you. I know there's been at least there was at CinemaCon and some a little bit since then of some call for lower pricing by some of the studios on tickets and we've had to move by AMC, you know, recently to kind of feel kind of add to the discount Tuesdays and move to either 50% off on Wednesdays. Just wanna get your thoughts on what you think that could do kind of for IMAX going forward?

Richard Gelfond: I think it's early. I know that their 50% just window effect at the start of this month or on the ninth of July.

Eric Wold: But do you think moving to lower pricing, if that becomes this kind of more the norm midweek across the board, not just with AMC, with more of your Dibber partners? Does that give more of an incentive to maybe that cohort of movie doors that may have been more not willing to pay up for IMAX previously and now made more incentive to try out IMAX given that the baseline price is cheaper and maybe the adding on IMAX may be more agreeable to them, and maybe you can kind of tap into a movie bar base that you may not have been able to before that could be maybe a little bit tailwind towards your market share potential kind of movie goer awareness kind of, you know, longer term.

Richard Gelfond: Eric, I think the IMAX consumer over the years has shown that it's willing to pay a premium price or a premium experience. And you know, look as at this year right now, I mean, I know we reported the quarter, but our business has been extremely strong since then. And, you know, we're around $700 million now. It's not even the end of July yet. So, you know, I think our pricing formula is working pretty well for us. And especially, another example I would give you is that as you know, the Odyssey tickets went on sale for a certain film theaters. And this is for a movie that's opening a year from now.

And especially film is something that the exhibitors don't really like to discount. And it virtually sold out you know, within 24 hours in some cases. You know, much shorter time than that, minutes. So I just don't think that the premise that lower prices or that I'll rephrase it, I don't think the price we charge is keeping people away. I think people recognize it's a premium experience, and they're willing to pay for it. And, you know, you look at analogies such as you know, sports ticketing or concert ticketing or you know, other kinds of entertainment. And I think the trends go the other way.

I think I understand why the exhibitors do it, You know, they have huge capacity. And in fact, you know, it in certain cities, probably overbilled, and I think they're competing you know, with other exhibitors for traffic in those markets, and that's what's driving rethinking the discount days. But the IMAX has exclusivity zones, You know, we buy Max film. We have filmmakers leaning in. Yep. Extra costs in making an IMAX film. And I just don't think I'm discounting this likely to change the dynamic.

Operator: Thank you. Our next question comes from Steven Frankel with Rosenblatt Securities.

Steven Frankel: Good morning, Rich. I want to go back quickly to the alternative content discussion. You had wired a group of theaters for live events. Maybe give us an update on how many are able to do that today, and do you have plans to grow that network any further?

Richard Gelfond: So we wired don't remember exactly the number. It's around 200 theaters. I think a little bit more. Because that was the way to distribute alternative content. Since we acquired SimWave, using their technology, we came up with an alternative way. To deliver alternative content. And that way is by streaming. And it's a much more cost-effective way than wiring it.

You don't have the upfront cost of having you know, to put all that you know, put the special cabling in And in fact, for the event we did in China, around the League of Legends, that was a completely streamed event. And we did wrap over 150 theaters and we were able to put that together really quickly. And that one virtually sold out at a higher price. So it's a long way of saying, I think, we are gonna do it for more theaters, but I don't think we'll have to put up the capital. Like we did at the beginning because we're able to find a more cost-effective way of doing it.

And I think you'll see the base expanding but not with a large cost associated with it.

Steven Frankel: Great. Thank you.

Operator: And our next question comes from Mike Hickey with The Benchmark Company.

Mike Hickey: Hey, Rich. Natasha. Jennifer, thanks for taking our questions, and congrats on a strong Q2, Rich. Just two from us. Film visibility, Rich, is I think probably the best it's ever been for you. Just curious as we sort of get into the second half of 25, your confidence level that you can grow your GVO in 2026. And I have a quick follow-up.

Richard Gelfond: Yeah, Mike. I mean, I have an incredible amount of confidence in that because our 2026 slate is almost all filled up, and you know, just some of the high points, we have the avatar carryover you know, in early 26 and got a number of other good films there. Including Project Hail Mary.

From Amazon MGM, The second quarter we've got Super Mario Brothers 2. We've got the new Star Wars, Mandalorian, We've got Toy Story 5. Supergirl in the third quarter. Obviously, the most anticipated one is the Odyssey from Chris Nolan We got Milana, back to Eric's question. We got minions 3. In the fourth quarter, we owe Narnia. We have Avengers. We have Dune part 3. So this far in advance, it's unusual to have a you know, virtually all locked in.

And then for 27, I think I said this earlier, you know, we not only have a number of films locked in, but we have at least that are IMAX film for IMAX films in that So I would say I've you know, there hasn't been a point in history where we've had this much locked in one and two years in advance. Obviously, we have our theater back on as well. And as we talked about in our remarks, you know, signings and installs are going very well. So I think that all of those things give us confidence about 26 and beyond.

Mike Hickey: Nice. Thanks, Rich. Then that's a good sort of segue to installations.

It looks like you raised your installation guidance for 25. Obviously, you're signing have been spectacular. Also nice to see some installation growth. From the US, which is obviously your strongest market. Do you think this momentum here, Rich, in installations can continue into 26 or are you sort of maybe pulling forward some demand here from your exhibitor partners just given the strength of 25, certainly the buzz of Avatar 3 and as you just highlighted, an exceptional 26 on slate?

Richard Gelfond: I think both. In a way, Mike.

So I think, yes, some people are installing earlier because they see you know, the back end of the year, which obviously you know, Avatar stands out, but also Zootopia is there, which especially internationally, has a strong following. And then you know, Wicked, Predator, Running Man, this a lot of things still to come. But by the same token, you know, we've almost equal to all the signings we had for the whole year. Last year. So while some are being pulled forward, the backlog is being replenished with the new theaters coming online. And you know, this the pace we're on is certainly very strong. So I think it's both.

I think it's new ones coming into the queue as well as ones moving forward.

Mike Hickey: Nice. Thanks, guys. Good luck.

Operator: Our next question comes from Drew Crum with B. Riley Securities.

Drew Crum: Okay. Thanks. Good morning, everyone. So you made a subtle upgrade to your adjusted EBITDA guidance for the year. You're sitting at just under 43% year to date. Can you discuss what the puts and takes are for margins in the second half and the drivers for achieving or perhaps exceeding that low forties threshold? Thanks.

Richard Gelfond: Sure, Drew.

When we look at adjusted EBITDA, I mean, for the first two quarters, we've been very consistent at our 42.6%, but there's puts and takes that go into each quarter and whether that be the incrementality we get from the box office as a positive and then our decision-making on how much to spend on marketing or a nature of mix between local language content and Hollywood content and the remastering costs that occur.

And so you know, Q1, for instance, was heavy on local language, which cost us less than create and leads to a significant EBITDA margin, whereas you come to other quarters like we'll have Avatar in Q4 and so there's an opportunity as we've done before where we would want to spend more on marketing for avatars that as it's such a huge film and not only is it a 2025 impact, but it has a 26 impact. And so all of that comes with a decision to just simply make on ebbing and pulling your marketing and how much content you push into each quarter.

Operator: Thank you. And our next question comes from David Karnovsky with JPMorgan.

David Karnovsky: Alright. Thanks. Rich, maybe I'll just go back and ask one more about kind of the press report last week on the PLF. You know, I suppose one of the takeaways, you know, from that report was that, you know, there's this undercurrent of tension between exhibitors and IMAX specifically around, you know, studios marketing towards the IMAX performance or even kinda your decision to play the Narnia film next Thanksgiving I just wanna give you a chance, like, to respond. Is that a fair assessment? And kinda how would you gauge your relationship with the kind of domestic exhibitor community currently?

Richard Gelfond: Thanks. I think it's excellent. Our biggest client, AMC, just signed a deal with us for additional theaters.

Including a bunch of new ones, and they're leaning in. And you know, I talked to Aaron after that story ran to get his perspective. And he basically felt that it was remote that any consortium was gonna be put together in any way and certainly said he had zero interest in that. We also spoke with a number of the other big exhibitors that were you know, in North America and they reassured us that they're either in the IMAX business or wanna be in the IMAX. Business. Regal just signed a big deal for us, thirty or forty theaters. I think it's really good. I mean, how could it not be good?

I mean, first of all, look at AMC's market share as everybody reports this week, and their market share is gonna be excellent because they're in the IMAX business. And I think look at the box office that we brought in for our partners. So I think what the story did was it you know, found people who aren't in the IMAX business and, obviously, if you were losing market share and losing money, you would be disgruntled So, you know, if I were them, I'd get into the IMAX business.

You know, rather than, you know, make up stories to try and convince investors they're gonna compete with IMAX one little one, and I don't need to pick on anybody, but this you know, an exhibitor in Europe called The View. That's actually been two restructurings in the last three years and missed the PLF boom And they're launching their own PLF, which they announced in the trades is gonna be a threat to IMAX. So, I mean, good luck with that. I mean, people have been trying this Timex has been in business for 55 years, and you know, we have technology. We have relationships.

We have lots of competitive advantages, and it's almost like and with no disrespect to Coke, if I came out, they said, I'm gonna start a new soda brand and I'm gonna band together with others, so we're gonna compete with Coke. I mean, the good news is if you have Coke, it doesn't work that way. And if you're IMAX, it doesn't work that way.

David Karnovsky: Thank you, Rich.

Operator: Thank you. And our next question comes from Patrick Scholl with Barrington Research.

Patrick Scholl: Hi. Thanks for taking the question. Just another question on the backlogs and signings of And with the regal agreement, they announced in May, You mentioned the 70-millimeter film projector. I was just wondering how many of those are in the backlog and, like, how those types of screens have performed for the with the film TriMax initiative. And just what other I guess it'd be puts and takes might go into that growth of that?

Richard Gelfond: So on the film theaters have done extremely well. When there are IMAX film releases.

So this year for centers, I mean, the numbers were incredibly strong because Ryan Coogler filmed the IMAX cameras and Warner Brothers put out film prints and you know, they would you know, extremely high capacity Remember, we did over 20% in each of the two weekends. On that initial weekends that we played it. So and, obviously, Oppenheimer, the last year, we all know, you know, how that movie performed very good and I mentioned the presales on pre-ticket sales. For Odyssey. So we're always looking for now we don't produce new film projectors because it's that older technology. And even though it brings in a lot of audiences, it's there are costs associated with it.

However, we've been scouring the globe and I do think for Odyssey, we'll have more film theaters than we had for the last film release centers or Nolan's last movie, Oppenheimer. So we're trying to address that issue, but there's a limited supply and the economics are terrific around.

Operator: Okay. Thank you.

Patrick Scholl: Our next question comes from Stephen Laszczyk with GS.

Stephen Laszczyk: Hey, thanks. Just one for Natasha on cash flow. Could you update us just around your latest thinking for cash flow conversion this year? Maybe relative to EBITDA Appreciate there's been some timing dynamics on the first half of the year that you called out in your prepared remarks. Just be curious how you think about that trending into the second half. And then as you look ahead on cash conversion, just be curious how you're thinking about cash generation as the business hits stride in 26 and beyond?

Richard Gelfond: Thank you. I see. And cash flow continues to strengthen.

I mean, we're looking as we look at the target, we're looking more similar right now to pre-COVID cash conversion levels our first half operating cash flow of $30 million is up 25% year over year. You know, our free cash flow continues to improve as well. We were historically at over around 50 and we're trending towards that as well. And know, if you start to think about just the operating leverage in our model, that's what starts to push through straight down to cash. And we've talked about this before, but you know, exceeding box office level over $250 million in each quarter essentially, every dollar beyond that flows right through down to EBITDA and to cash.

At about an 85% conversion rate. And so that's what'll continue to generate the cash flow. Even as we start to think about it, we have we already know Q3 will be a strong cash flow because China's cash flows come in a little later on their film content. It's say, just generally have a cycle where films have to close and then you get paid your cash. And so imagine the new job too, that still puts us there and the cash will come in Q3. So even with our strong first-half cash flow, we already know Q3 is gonna be strong with the Najee Receipt coming in then.

Operator: Thank you. And we have time for one last question and it comes from David Joyce with Seaport Research Partners.

David Joyce: Thank you. It's great to see the operating leverage really showing through, but I had a question on trying to understand the puts and takes of the take rates. You know, film or mastering distribution was up year over year, but system rentals take great compress by 40 basis points. What yeah. What would explain that, please?

Richard Gelfond: There's always different puts and takes, David. It sometimes you can have upgrades of theaters, and so you when you're upgrading a theater, you'll have to write off the old asset and put in the new theater, but you know that the increments will come within a within a the very early stages of the ten-year term on that location.

As you upgrade to new technology. So it's a very good investment It all comes down to the mix in relation to whether we're putting in sales deals or JV deals as well. And so that kind of ebbs and flows your margin take rate. But overall, the operating leverage as you can see from the content solutions we've done really well in that $1.2 billion guide that we're working towards this year is flowing through. You can see the content solutions 66% margin. With a very strong return and our overall gross margin of over 58%. Going right through to the EBITDA margin of 43%.

It's been a great quarter and a great first half of the year, and we expect good things from the rest of the year as well.

David Joyce: Well, great. Thank you.

Operator: And this concludes the question and answer session. I would now like to turn it back to Richard Gelfond for closing remarks.

Richard Gelfond: Thanks everyone for joining us. I want to leave the call with a few final thoughts. IMAX has reached a new inflection point in our business, and is poised to achieve new levels of success. Filmmakers and studios want a release, their best films in IMAX, Consumers overwhelmingly prefer to see those films in IMAX. And as a result, theater operators wanna be in the IMAX business. All of this is creating a virtuous cycle that leads to growing revenue driven by higher box office more systems signed, and more installations. This means more value generated for consumers our partners, and for you, our shareholders. This simply has never been a better time to be in the IMAX business.

Thank you all. Thank you for your participation in today's conference.

Operator: This does conclude the program. You may now disconnect.

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DATE

Thursday, July 24, 2025 at 9 a.m. ET

CALL PARTICIPANTS

Chairman & Chief Executive Officer — Stephen A. Schwarzman

President & Chief Operating Officer — Jonathan D. Gray

Chief Financial Officer — Michael S. Chae

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

GAAP Net Income: $1.6 billion for the quarter, as directly reported.

Distributable Earnings: $1.6 billion in distributable earnings, or $1.21 per common share, up 25% year over year.

Dividend: Declared a $1.03 per share dividend, payable to shareholders of record as of August 4.

Fee-Related Earnings: Increased 31% year over year to $1.5 billion, or $1.19 per share.

Fee-Related Revenues: Fee revenues reached $2.5 billion in Q2, up 27% year over year and 14% sequentially from Q1.

Assets Under Management (AUM): Rose 13% year over year to a record $1.2 trillion in assets under management, supported by $212 billion in inflows over the last twelve months.

Fee-Earning AUM: Increased 10% year over year to $887 billion.

Base Management Fees: Grew 14% to $1.9 billion, marking the third consecutive quarter of double-digit growth.

Transaction & Advisory Fees: Transaction and advisory fees increased 25% year over year, with a record contribution from the capital markets business.

Fee-Related Performance Revenues: Fee-related performance revenues reached $472 million, up over 2.5-fold from the prior year's quarter, driven by eight different perpetual strategies.

Fundraising: Inflows were $52 billion.

Dry Powder: Ended the period with $181 billion available for deployment.

Private Credit AUM: $484 billion, up threefold in the past five years, while insurance client AUM rose 20% year over year to $250 billion.

Private Investment-Grade Credit Platform: AUM up 38% year over year to $115 billion; credited with generating approximately 190 basis points of excess spread over comparable liquid credits since the start of last year.

Private Wealth AUM: Approached $280 billion, with sales in the channel up 30% year over year to $10 billion.

Key Flagship Product Returns: BCRED delivered 10% annual net returns since inception (as of Q2 2025), BXP's NAV grew to $12.5 billion, with 17% annualized net returns for its largest share class in Q2 2025; BREIT posted 9% annual net returns since inception and achieved 3% year-to-date for its largest share class.

Infrastructure AUM: Rose 32% year over year to $64 billion in assets under management, supported by 17% annual net returns in the VIP commingled strategy since inception.

DXMA (Multi-Asset Business) AUM: Up 13% year over year to $90 billion, with the largest strategy achieving 21 consecutive quarters of positive composite returns.

Private Equity Asia Flagship: Raised a cumulative $8 billion to date, 25% above its predecessor, with expectations to surpass the $10 billion target.

Secondaries Business AUM: $91 billion, doubled over five years; fundraising for the new flagship PE Secondaries fund has begun, targeting at least $22 billion for its first close in Q4 2025.

Corporate Private Equity Fund Performance: Appreciated 5.1%, up 17% for the last twelve months.

Taxable Opportunities Funds: The taxable opportunities funds appreciated 4.1% over the last twelve months.

SP Secondaries Funds: Appreciated 6.6% and 11% over the last twelve months.

Infrastructure Platform Returns: Delivered 2.9%, and 19% over the last twelve months, with data centers noted as a key performance driver.

Real Estate Platform: Values were largely stable, with appreciation in opportunistic funds and BREITs; BPP funds declined modestly, attributed to life sciences office portfolio headwinds.

Portfolio Composition: Data centers, logistics, and rental housing made up about 75% of global real estate equity and nearly 90% of BREIT's equity exposure.

Private Credit Strategies: Non-investment grade private credit strategies reported a 3% gross return and over 13% for the last twelve months, with no new defaults in the quarter.

BXMA (Multi-Asset Absolute Return): Gross return of 2.8%, 12% for the last twelve months, with 27 consecutive months of positive composite returns.

Life Sciences Performance: Dedicated life sciences business appreciated 6.7%, 27% over the last twelve months; prior flagship fund earned 20% annualized net returns since inception.

Dividend Yield: $4.26 per share on a trailing twelve-month basis, representing a 2.4% yield on the current share price—twice that of the S&P 500.

Performance Revenue Eligible AUM: Record $604 billion at quarter end, up 14% year over year.

Net Accrued Performance Revenue: Sequentially increased to $6.6 billion, or $5.30 per share.

BREIT Fundraising: Noted best quarter for regular-way fundraising in two and a half years at $1.1 billion, while repurchases declined further.

New Strategic Insurance Partnership: A collaboration with Legal & General in the UK aims for up to $20 billion over five years, focusing on investment-grade private credit and public-private credit products for pensions and annuities.

Outlook on Management Fees: Management expects the year-over-year growth rate in the second half to resemble the first half, while transaction fees may be lower in baseline terms, with upside tied to market activity. This outlook applies to the fiscal year.

Real Estate Performance Fees: Approximately 60% of $200 billion eligible AUM in real estate sits above hurdle rates, including 100% of BREIT and a majority of opportunistic funds.

SUMMARY

Blackstone Inc. (NYSE:BX) delivered double-digit year-over-year growth across key earnings, fee, and asset metrics, citing broad-based platform expansion and strong investor inflows. Management reported inflows of $212 billion over the last twelve months, supporting record assets under management, and highlighted $181 billion in dry powder, providing flexibility for future capital deployment. Firm leadership outlined differentiated momentum in private credit, private wealth, and insurance channels, with notable acceleration in infrastructure and secondaries, while positive shifts in capital markets and policy were cited as paving the way for stronger realizations and future deal activity.

President Gray stated, "the environment we see emerging of lower short-term interest rates less uncertainty, and continued economic growth. Combined with a pent-up desire to transact, is the right recipe to reignite M&A and IPO activity." marking heightened confidence in transaction pipelines.

Firm noted that "Performance revenue eligible AUM in the ground reached a record $604 billion, up 14% year over year." signaling increased realization potential as market conditions normalize.

Chief Financial Officer Chae provided that the firm’s "Fee-related performance revenues reached $472 million" with granular guidance on scheduled crystallizations suggesting lumpy, but directionally rising, future fee streams.

The company affirmed that approximately 60% of real estate eligible AUM is above hurdles, with the majority of accrued performance revenue concentrated in opportunistic strategies and BREIT.

Management emphasized continued product innovation, referencing the BMAX launch and partnerships with Wellington, Vanguard, and Legal & General as positioning advantages for further expansion in private wealth and insurance segments.

INDUSTRY GLOSSARY

Distributable Earnings: Cash earnings available for distribution to shareholders, a key non-GAAP measure for alternative asset managers.

Fee-Related Earnings (FRE): Earnings generated from recurring management and advisory fees, excluding performance/incentive fees and investment income.

BREIT: Blackstone Real Estate Income Trust, a flagship perpetual real estate investment vehicle focused on generating income and appreciation.

BXP: Blackstone Private Equity perpetual vehicle designed for private wealth clients, offering diversified global private equity exposure.

BCRED: Blackstone Private Credit Fund, a non-traded business development company focused on making direct loans to private companies.

BMAX: Blackstone’s newly launched multi-asset interval fund offering retail investors expanded access to private credit.

VIP: Infrastructure flagship commingled fund ("Vintage Infrastructure Partners") generating performance fees.

DXMA / BXMA: Blackstone multi-asset investing platform focusing on liquid and absolute return strategies across asset classes.

BPP: Blackstone Property Partners, Blackstone’s core+ real estate funds.

Drawdown Funds: Private investment funds where investor capital commitments are called as investments are identified, instead of being fully funded upfront.

GP Stakes: Investments in the management companies of alternative asset managers, providing exposure to management fee and incentive income streams.

Performance Revenue Eligible AUM: Assets under management eligible to generate performance-based fees once return hurdles are met.

Full Conference Call Transcript

On results, we reported GAAP net income for the quarter of $1.6 billion. Distributable earnings were also $1.6 billion or $1.21 per common share. And we declared a dividend of $1.03 per share which will be paid to holders of record as of August 4. With that, I'll turn the call over to Stephen Schwarzman.

Stephen Schwarzman: Good morning, and thank you for joining our call. Blackstone Inc. reported outstanding results for the second quarter. Distributable earnings increased 25% year over year to $1.6 billion, as Weston mentioned. Fee-related earnings grew a remarkable 31% year over year and represented one of the best quarters in our history. The strength of these results, notwithstanding a muted backdrop for realizations, reflects the significant expansion of the firm's earnings power that has been underway as we continue to innovate and scale key growth initiatives. These include our platforms in private wealth, credit and insurance, and infrastructure.

Jonathan Gray: Along with the launch of multiple new funds in our drawdown area. The firm's expansion is also powering our fundraising, with inflows reaching $52 billion in the second quarter and $212 billion for the last twelve months, lifting assets under management 13% year over year to a record $1.2 trillion. In addition, there were reports that the US administration may soon issue an executive order that could help open another vast new market for the firm to deliver superior returns and diversifications for investors. The $12 trillion US defined contribution channel, the foundation of Blackstone Inc.'s exceptional long-term growth, of course, is investment performance.

We continue to deliver for our limited partners, and the second quarter represented the highest amount of overall fund appreciation in nearly four years. The firm achieved these results in a turbulent quarter for markets, which began with the S&P 500 falling 14% amid collapsing investor sentiment due to tariffs, policy uncertainty, and geopolitical instability. At the time, we advised patience to allow for trade negotiations to take place and to give tariff diplomacy a chance to work its way through the system.

Despite the significant external uncertainty, we were encouraged by the fundamental strength of the economy, the accelerating pace of technological innovation as a major growth catalyst, and what we were seeing on the ground in terms of declining inflation. We consistently shared our view that inflation was below the Fed's target when adjusting for lagging shelter costs based on the proprietary data from our large-scale portfolio and our unique position in real estate. As always, the firm's insights informed our views on investing, and we continue to lean into areas where we have high conviction.

We invested $33 billion in the second quarter and $145 billion in the last twelve months, one of the most active twelve-month periods in our history, setting the foundation for future value creation, and what we believe is a favorable time. Our deployment has emphasized areas benefiting from long-term secular megatrends, such as digital and energy infrastructure, digital commerce, private credit, life sciences, and India. These areas have also been among the largest drivers of appreciation in our funds. In particular, the enormous need for debt and equity capital to build the infrastructure powering the artificial intelligence revolution has created extremely positive dynamics for our business.

In real estate specifically, we called the bottom of the cycle eighteen months ago, and since then, we've been actively investing across our real estate equity and debt strategies. We also said it wouldn't be a V-shaped recovery. That is what's happened. Private real estate markets have appreciated gradually over this period. We are now seeing promising signs with new supply falling sharply, the cost of debt capital coming down, and transaction activity picking up.

Stephen Schwarzman: Overall, despite ongoing uncertainties in the environment, there are multiple supportive tailwinds for our business. In terms of the economy, the backdrop remains favorable with resilient growth. We see inflation remaining muted, but the likelihood for an increase in goods inflation but decelerating wage, energy, and shelter inflation. These factors should give the Fed room to lower interest rates over time, which is positive for asset values. In terms of policy, we continue to believe the focus of policy actions ultimately is to support growth. Tax cuts have now been passed into law, and a number of trade agreements have been reached, with many more under active negotiation.

It remains to be seen how individual negotiations will play out, but the direction of travel is toward more resolutions. As the policy environment settles, we expect transaction activity to benefit, including realizations. Greater clarity will lead to greater confidence for companies, financial sponsors, and market participants. We're seeing this dynamic start to take effect with the US stock market at record levels, M&A, particularly sponsor M&A, accelerating, and the IPO market reopening. Two weeks ago, we successfully executed a sizable IPO in Europe, the first from our private equity or real estate portfolios outside of India in several years. And we are preparing a number of other companies for public offerings over the coming quarters.

More conducive capital markets, if sustained, should lead to the acceleration of realizations for Blackstone Inc. over time.

Jonathan Gray: In closing, we are tremendously well-positioned to navigate today's dynamic backdrop on behalf of our investors. Our portfolio is in excellent shape, concentrated in compelling sectors, and we have $181 billion of dry powder to take advantage of opportunities. Since our founding four decades ago, Blackstone Inc. has continued to innovate and advance the frontier of alternative assets. We are never standing still, and I believe the best is ahead for the firm and for our investors. And with that, I'll turn it over to Jonathan Gray. Thank you, Stephen, and good morning, everyone. This was a terrific quarter for Blackstone Inc.

The firm's distinctive competitive advantages continue to drive us forward in multiple areas, leading to expanding earnings power, as Stephen noted. I will highlight three of these areas this morning. First, our robust growth in private credit. Second, our market-leading position in private wealth. And third, our strong momentum in the institutional channel. Overall, a cyclical recovery in transaction activity alongside multiple secular growth engines is a powerful combination for our firm. Starting with private credit.

Stephen Schwarzman: Blackstone Inc. has built the largest third-party focused credit business in the world.

Jonathan Gray: With $484 billion across corporate and real estate credit, up threefold in the past five years. Over the same period, revenue from this platform has increased more than fourfold. Today, we offer clients and borrowers a one-stop solution across the risk spectrum, with leading businesses in direct lending, leveraged loans, real estate lending, asset-based finance, and numerous forms of investment-grade private credit. The scale and breadth of our platform, distinctive origination capabilities, connectivity with borrowers across the market, and our open architecture multi-client model in the insurance channel are significant advantages. In insurance specifically, our decision to be an asset manager for insurance companies rather than becoming one positions us well to address the $40 trillion global insurance market.

Today, we manage over $250 billion on behalf of insurers across private credit, liquid credit, and other strategies, up 20% year over year. Our platform now includes 30 strategic and SMA relationships, and we continue to add more. Two weeks ago, we announced a partnership with leading UK-based insurer and the country's largest asset manager, Legal & General, in which we'll provide investment-grade private credit solutions to support their rapidly growing pension risk transfer and annuities businesses. We will also work together to develop public-private credit products for the UK wealth and retirement markets. We're targeting up to $20 billion for this partnership in the next five years.

Our expansion in the insurance channel is powering tremendous growth for our private investment-grade platform specifically, with AUM up 38% year over year to $115 billion in the quarter. As always, the key is investment performance. Since the start of last year, we placed or originated $68 billion of credits for our private investment-grade focused clients rated A-minus on average, which generated approximately 190 basis points of excess spread over comparably rated liquid credits. Stepping back, Blackstone Inc.'s innovation in private credit is allowing many borrowers to access this market for the first time, while dramatically widening our aperture to invest.

For example, we previously discussed a very substantial opportunity emerging with investment-grade rated corporates, illustrated by the bespoke solutions we designed for Rogers Communications and EQT Corporation. We closed a $5 billion Rogers investment last month alongside Canada's preeminent pension plan as co-investors. We believe few other investment firms could have executed this transaction given its size, complexity, and the depth of relationships needed. Blackstone Inc. has become a trusted, mission-critical solutions provider to many of the world's leading corporations, and we expect more of these types of partnerships over time. Turning to private wealth, where we continue to advance our market-leading position.

In this vast channel, a $140 trillion, including mass affluence and high net worth individuals, a new generation of investors is gaining access to the benefits of alternatives, which is a development led by Blackstone Inc. We started raising private wealth capital twenty-three years ago and established a dedicated organization nearly fifteen years ago, growing AUM to almost $280 billion today, by far the largest private wealth alternative platform in the world.

Stephen Schwarzman: Each of our flagship US perpetual vehicles is the largest

Jonathan Gray: or amongst the few largest of its kind. Revenue from these vehicles exceeded $700 million in the second quarter alone.

Stephen Schwarzman: Compared to approximately

Jonathan Gray: $50 million in the same quarter five years ago. As with credit, our scale is a major advantage in the wealth channel, alongside our extensive network of relationships with advisers and distributors. Our broad menu of high-performing products and the power of our brand, which is built on that performance. In the second quarter, our sales in the wealth channel increased 30% year over year, $10 billion. BCRED led the way, raising $3.7 billion underpinned by performance. 10% net returns annually since inception. BXP raised $1.7 billion in the second quarter, bringing its NAV to $12.5 billion in only six quarters, with an annualized platform net return of 17% for its largest share class.

BREIT had its best quarter of regular way fundraising in two and a half years in the second quarter at $1.1 billion while repurchases continued on their downward trajectory. BREIT's highly differentiated portfolio positioning has led to 9% net returns annually since inception eight and a half years ago, approximately double the public REIT index on a cumulative basis, including over 3% year to date for its largest share class. This has resulted in BREIT's second consecutive quarter of generating fee-related performance revenues for the firm. Finally, BXInfo saw healthy sales of roughly $600 million in the quarter, despite still only being on a small number of distributors.

We launched BMAX, our multi-asset credit product in May, which provides individual investors greatly expanded access to the private credit universe. And we'll be ramping up distribution over the coming quarters. Along with other products in development, and our previously announced alliance with Wellington and Vanguard, we are quite excited about our continued prospects in the private wealth channel. Moving to our institutional business, where we are seeing strong momentum across key open-ended and drawdown strategies. In this channel, again, the advantages of our brand, scale, breadth of products, and, of course, our long-term investment performance. Position us extremely well in an environment where limited partners are consolidating their manager relationships favoring the largest and strongest firm.

In infrastructure, our dedicated platform continues on its powerful growth trajectory. AUM rose 32% year over year to $64 billion supported by remarkable investment performance. 17% net returns annually a commingled VIP strategy since inception. Our multi-asset investing business, DXMA, reported its fastest growth in nearly seven years, with AUM up 13% year over year to a record $90 billion again, led by performance. Q2 marked the twenty-first consecutive quarter of positive composite returns with BXMA's largest strategy. In our drawdown fund area, we raised significant capital in the second quarter.

Stephen Schwarzman: We closed an additional $3.5 billion for our new private equity Asia flagship

Jonathan Gray: bringing the total raise to date to $8 billion already 25% larger than its predecessor. And we expect to exceed our original $10 billion target. In our $91 billion secondaries business, which has doubled in the last five years, we raised additional capital for our fourth infrastructure vehicle, bringing it to over $5 billion nearly 40% larger than the prior vintage. And we launched fundraising for our new PE Secondaries flagship targeting at least the size of the prior $22 billion fund with a first close expected in the fourth quarter. Other strategies we are raising include life sciences, opportunistic credit, GP stakes, and tactical opportunities. Overall, LPs continue to recognize the substantial benefits of investing in private assets.

Despite the cyclically slow realization backdrop. Looking forward, importantly, we believe the deal-making pause is behind us. As Stephen noted, the environment we are seeing is emerging from oh, I'm sorry. As noted, the environment we see emerging of lower short-term interest rates less uncertainty, and continued economic growth. Combined with a pent-up desire to transact, is the right recipe to reignite M&A and IPO activity. For Blackstone Inc., we have the largest forward IPO pipeline since 2021. These trends should be very favorable for dispositions exiting this year and into next year. In closing, we are highly optimistic about the road ahead

Stephen Schwarzman: supported by multiple powerful engines of growth Blackstone Inc.'s value proposition for both our limited partners

Jonathan Gray: and our shareholders. Is stronger than ever. With that, I'll turn things over to Michael Chae. Thanks, Jonathan, and good morning, everyone. We've previously outlined the building blocks for the favorable step-up in

Michael Chae: the firm's earnings power that has been underway. These included the onset of management fees, for multiple drawdown funds exiting fee holidays, the seasoning of perpetual capital strategies and their expanding financial contribution. Both in terms of NAV-based management fees and recurring fee-related performance revenues. Robust growth of our credit insurance business, and our healthy margin position. Firm's second quarter results perfectly illustrate these building blocks coming to fruition at the same time more significant embedded potential for net realizations. Continues to build. I'll first review financial results followed by investment performance and the forward outlook. Starting with results.

Stephen and Jonathan highlighted the continued scaling of the firm's platforms in key growth channels, and the powerful effect that is having on assets under management inflows and FRE. Total AUM increased 13% year over year to $1.2 trillion underpinned by inflows of $212 billion over the last twelve months. While fee-earning AUM rose 10% year over year to $887 billion. Base management fees increased 14%, to a record $1.9 billion in Q2, representing the third consecutive quarter of double-digit growth. Transaction and advisory fees rose 25% year over year, with a record contribution from our capital markets business. Related to the firm's significant investment activity in the quarter including in private credit and infrastructure.

Fee-related performance revenues reached $472 million due to up over 2.5 fold from last year's second quarter, generated by eight different perpetual strategies including BCREDID and BXSL in credit, BXPE in private equity, DIP in infrastructure, BREIT and real estate, along with smaller contributions from other strategies. These drivers, taken together, lifted total fee revenues to $2.5 billion in the second quarter. A remarkable 27% year over year. And up 14% sequentially from Q1. Coupled with the firm's strong margin position. Fee-related earnings rose 31% year over year to $1.5 billion second quarter. Or $1.19 per share. Distributable earnings increased 25% year over year to $1.6 billion in the second quarter or $1.21 per share.

For the LTM period, 26% to $6.4 billion or $5 per share. Despite net realizations remaining at unit levels. Leading to 26% growth in the dividend to $4.26 per share. This equates to an attractive 2.4% yield on the current share price. Double the yield of the S&P 500. And the forward outlook is favorable, as I'll discuss further in a moment. Moving to investment performance. Our funds generated strong overall appreciation in the second quarter. The highest amount in nearly four years, as Stephen noted. Despite the volatile environment. The corporate private equity funds appreciated 5.1% in the quarter, and 17% in the last twelve months. Brent was broad-based.

Despite the macro uncertainties at the outset of the quarter, our operating companies generated high single-digit year over year revenue growth, along with resilient margins. In addition to corporate private equity, our other PE strategies delivered strong returns in the quarter. The taxable opportunities funds appreciated 4.114% over the LTM period. The SP secondaries funds appreciated 6.6% in the second quarter. In the context of the well-positioned portfolio that benefited sizable recent investments executed in prices. The SP funds appreciated 11% for the LTM year. Our dedicated infrastructure platform appreciated 2.9% in the second quarter. And 19% for the last twelve months. Notwithstanding a decline in the public portfolio in Q2 of market.

With appreciation underpinned by continued significant momentum in data centers, along with other digital infrastructure, power, and transportation-related holdings. In real estate, values were largely stable overall in the second quarter. With appreciation in the opportunistic funds in BREITs, led by strength in data centers. Within the CORE plus platform, the BPP funds declined modestly driven by our life sciences office portfolio, which has been impacted by new supply coming online, and increased tenant caution. Overall, our real estate platform remains well-positioned. With data centers, logistics, and rental housing comprising approximately 75% of the global equity portfolio nearly 90% of BREIT's.

In credit, our non-investment grade private credit strategies reported a gross return of 3% in the second quarter, over 13% for the LTM period. Default rate across our 2,000 plus non-investment grade credits remains in the area of 50 basis points over the last twelve months. With no new defaults in private credit in the second quarter. BXMA reported a 2.8% gross return for the absolute return composite in Q2. And 12% for the last twelve months. Notably, the XMA has delivered positive composite returns in each of the past twenty-seven months. A remarkable achievement in liquid markets in any case, and particularly so given historic volatility as characterized this period. One final note on returns.

Our dedicated life sciences business reported outstanding performance again in the second quarter, appreciating 6.7%. And 27% over the LTM period. The quarter benefited from positive developments in our number of investments in the portfolio. Our life sciences platform provides investors with exposure to innovation and exciting growth area in a way that we believe is largely uncorrelated to broader public markets. Our prior $5 billion flagship has achieved annualized returns of 20% since inception. Net of fees. Overall, the strength in the firm's investment performance continues to power our growth. Turning to the outlook. Where as you heard this morning, there is a very positive multiyear picture of the front.

First, in terms of FRE, set up for this high-quality earnings stream is favorable. With a few drivers of note that will affect the second half of this year. We expect base management fees to continue on a strong positive trajectory with the rate of year over year growth in the second half resembling that of the first half. On transaction fees, following a very strong first half, we would anticipate a lower baseline in the second half, with potential upside from rising transaction and market activity. Looking forward to 2026 and beyond, there's robust structural momentum in FRE, driven by the firm's multiple pensions growth.

In terms of net realizations, in the 6% stake in Resolution Life, in connection with the sale of the company to Epot Life. With respect to fund dispositions, we believe we're entering a more constructive environment, as Stephen and Jonathan discussed, and that we're well-positioned to see an acceleration in net realizations. Exiting this year and moving into 2026. Performance revenue eligible AUM in the ground a record $6.00 $4 billion at quarter end. Up 14% year over year. Meanwhile, net accrued performance revenue on the balance earned store value grew sequentially to $6.6 billion or $5.3 per share. These are positive indicators of future realization potential.

In closing, the firm continues on its path of extraordinary long-term growth powered by our brand, investment performance, and culture of innovation against the backdrop of significant secular tailwinds. As always, we remain totally focused on delivering for our investors. With that, we thank you for joining the call, and we'd like to open it up now for questions.

Operator: Thank you. We'll go first to Alexander Blostein with Goldman Sachs.

Alexander Blostein: Thank you. Good morning. Appreciate the question. Wanted to start with a question around credit. Obviously, incredibly powerful driver for you guys and the industry broadly. It's been fueling growth for a couple of years now. At the same time, we're clearly seeing compression in credit spreads. And I'm curious how that's playing into your client conversations where the premium to liquid market is still there. But perhaps might start narrowing if there's more capital coming in there. So any conversations around demand for private credit, whether it's from retail channels or institutional channels, and any implications on fee rates longer term as we think about this product continuing to grow? Thanks. Great question, Alexander.

I would say on the credit fund, front, the demand remains extraordinarily robust. And we're seeing it broadly

Jonathan Gray: noninvestment grade,

Alexander Blostein: investment grade credit, which, as you know, is early days, We're seeing it in The United States, and we're seeing it around the world. And I would say clients are recognizing that base rates have come down. Short rates are likely to come down more. Spreads have tightened gradually.

Michael Chae: But what I think the clients are, enthused about is we are as well

Alexander Blostein: is that enduring premium between the liquid markets and private credit. And that's what they're focused on. And so long as that continues to exist, I think this makes this a very attractive space. In the second quarter for our insurance clients,

Jonathan Gray: we delivered that a rated premium of eight a 185 basis points, a 190 over the last eighteen months,

Stephen Schwarzman: So that's really what the clients are focused on. And to me, that's the key to this. That's why I think it will continue to grow. Also, I think there are some areas here where private credit has a unique capability Some of these corporate solutions we've done with Rogers and EQT Corporation which really work much better in a private format. And then tied to this, enormous investment spend around data centers and energy infrastructure. Again, that's harder to bring to the public market. And it lends itself to private credit. So I would say today, we continue to see very strong demand. The business, you can see it in the numbers in terms of the rate of growth.

20% insurance, 16% overall between credit and insurance, corporate, and real estate debt. It feels to us like this will continue. And the key is, yes, absolute returns may come down a bit, but the relative premium for private credit and what private credit can do and how it can solve solutions for borrowers that continues. So I'd say our optimism looking forward in this space and doing it the way we do it, which is purely as an investment manager with no capital risk and that open architecture which allows us to serve a broader universe We like all of that, and we have a lot of confidence looking forward. Thank you.

Operator: Thank you. We'll take our next question from Glenn Schorr with Evercore ISI. Hi, thanks.

Glenn Schorr: That's a good lead into this question because I feel like everything is going pretty darn good at Blackstone Inc. with the exception of the real estate

Jonathan Gray: in general in this environment. So the question is, maybe you could give us the mark to market of the expected recovery in terms of what's gonna drive it, meaning pricing, financing, deal flow, client flows to the asset class, are we are we all in on waiting on lower rates? What is the incremental over the next, say, year or two that's gonna drive demand for your real estate products? Thanks, Jonathan.

Glenn Schorr: Thanks, Glenn. I would say the good news now is it's all about a question of when not if. Because the building blocks for this recovery are clearly coming into place. The first and most important one is new supply coming down. And that takes time to work through the system because you start a project two, three years ago, then it comes online. It's it's excess capacity. Now because of the two-thirds to decline in building in The US, from the peaks in terms of logistics, and apartment construction, you're gonna begin as we get towards the end of this year and into next year have a much more favorable supply demand dynamic.

The other area is cost of capital. Some of its base rates, which you highlighted, and obviously, the Fed cutting rates will be helpful. But some of it spreads. And those have come back now back to pre Liberation Day levels. They're down significantly from the wides in 2023. And you're beginning to see those early green shoots in terms of a faster recovery. Transaction activity for smaller assets, has definitely gotten better. You see that for both apartments and logistics The US. There's a little more liquidity in Europe now as well. And that, to me, is an important sign. And then on the customer side, which you referenced, there's definitely now more openness to allocating to the space.

We're we're having more conversations there. We raised some capital for a dedicated core plus real estate industrial strategy of a couple billion dollars. We had, as we've seen, we announced the best quarter of fundraising regular way in BREIT that we'd had in two and a half, three years. So it's the early signs of this recovery. If rates come down faster, obviously, the recovery's quicker. If they don't, then new supply will continue to be muted. And then the recovery will take a little more time But, ultimately, we know the path of travel. It's not as if we're gonna disintermediate apartments or last mile warehouses.

So I'd say our confidence on the ultimate outcome high and we're getting closer and closer to that tipping point where real estate will start to move. We haven't quite gotten to that escape velocity yet. But it's feeling better and better given some of these key things The cost of capital and the decline in new supply are very supportive as you start to look forward.

Operator: Thanks, Jonathan. Thank you. We'll go next to Craig Siegenthaler with Bank of America.

Craig Siegenthaler: Hey. Good morning, Stephen, Jonathan. Hope everyone's doing well. We had a question on strategic partners. So in your secondary fund, returns accelerate in February. And there's a one or two quarter delay there too. So maybe they should get even better with endowments and a few Asian institutions selling their PEEF stakes and discounts wider. So wanna see if you could update this on the investment return and fundraising outlook for second half.

Michael Chae: Hey, Craig. It's Michael. On the return portion, as I mentioned in my remarks, it was a combination of factors that really drove pretty robust returns. It does reflect the purchase the gains from a very significant large new purchase, one of our biggest secondary deals. In history. And that had beneficial effect. And then in terms of the underlying funds, we had good appreciation, which contributed to that return as well. And then there was a minor portion of actually currency as well. So it's a combination of those factors, but I think what really kinda outsized returns in the quarter is the benefit of that very large exciting deal that we did that closed in the quarter.

And I would say on the broader

Jonathan Gray: segment, it's really in a sweet spot today. Obviously, there are investors who want liquidity Deal volume, investment volume, I think, for us is up something like is it 40%? I wanna say roughly in the first half of the year over last year. And the pipeline looks pretty good on the deployment front. The returns have been very strong over time in this area. And that's making it attractive to investors. We announced the progress we've made on the secondary's infrastructure fund We've just started on the flagship secondaries private equity fund. We expect we'll get a really good response given the performance over time.

So this is an area the firm has doubled over the last I guess, five years. I expect that it will continue to grow quite a bit. And it's it's another reason why Blackstone Inc. has this exceptional platform. Other firms have strength in one area or another. There are just so many areas. And so when we travel around, I personally travel around a ton, talk with CIOs around the world. The ability to talk about a range of solutions, a range of investing areas, They may be today more cautious on real estate or regular way buyouts, but they're excited about Asian private equity They love what we're doing in secondary. That's really the power of Blackstone Inc.

It's true in the institutional channel. It's true in the retail channel. Secondaries is a powerful example.

Craig Siegenthaler: Jonathan, Michael, thank you.

Operator: Thank you. We'll take our next question from Michael Cyprys with Morgan Stanley.

Michael Cyprys: Hey, good morning. Thanks for taking the question. I just wanted to ask about four zero one k and the retirement opportunity set. I was hoping you could maybe elaborate a bit on how you see the path unfolding

Jonathan Gray: for all accessing the four zero one k retirement title? It seems that target date is perhaps maybe the most likely vehicle. Just curious to get your views on that. How meaningful of an allocation could this be within the target date vehicle, not just for alts, but also considering fixed income replacement and other types. Of strategies that you have or may have in the future. And just more broadly, how you see this playing out and talk about some of the steps that you guys are taking? Thank you.

Operator: Thanks. Well,

Jonathan Gray: it starts with we'll wait and see if there is an executive order, and then ultimately, we'll make decisions. So I think we all need to be patient here. But as we've talked about in the past, we think this is compelling for individual investors today in the defined contributions world. The access to alternatives, both the returns and diversification benefits, So we would expect this is going to happen at some point over time. But, again, we have to wait and see. In terms of where it'll happen, the size, I've gotta wait. I do think it's logical that it happens more in the target date funds.

You know, it's obviously more appropriate for somebody earlier in their, sort of lifespan as opposed to somebody just on the cusp of retirement. And so I think the target date funds where we'll see this initially take hold. Obviously, it's a very large market. And for us specifically, the fact that we have created scale perpetual products that have track records that can absorb large amounts of capital that is a real competitive advantage. I do not believe drawdown funds will be the structure given the complexity of those. For defined contributions. And so I think it's going to be about large scale perpetuals. It's gonna be about firms with brand names.

And the right legal, approaches and track record that capital can get allocated to. So obviously, the dollars in the space are large. Our positioning in the space I think, will be fairly unique. And the range of offerings we have across asset classes, again, pretty unique to be a partner with distributors in this space. But we've gotta wait and see. Is there an executive order? How it rolls out? It will take time. But I do think there is a potentially significant opportunity here. Great. Thank you.

Operator: Thank you. We'll take our next question from William Katz with TD Cowen.

William Katz: Thank you very much for taking the question. So just coming back to some of your forward-looking guidance can you unpack a little bit how you sort of see the interplay for the FRE margin

Jonathan Gray: very strong quarter this quarter? And then relatedly, as we think through the realization up cycle, how do we think about

William Katz: the payout rate on that? That's been pretty steady in the mid-40s. Should we assume that's still the same kind of payout going forward? Trying to think through the overall earnings gearing here. Thank you.

Michael Chae: Hey, William. It's Michael. Thank you for the question. Look, on the margin, outlook and dynamics, we're obviously pleased with the performance year to date. It's the result of, you know, healthy double-digit management fee growth. And strong underlying margin position. We also benefited from higher fee-related performance revenues and transaction fees, which carry attractive incremental margins. I think in the second half, you know, a few variables to consider. There's you know, there is a level of sensitivity to fee-like performance revenues as we've as we've commented in the past.

There's, as we also said, seasonally higher OpEx in the second half of the year, but I think in that area, we previously pointed to low double-digit growth in 2025 overall, and we'd reiterate that view. But, like, overall for the fiscal year, we're tracking favorably against the initial view we gave in January of sort of stability as a guidepost. But as I mentioned, there's always a few variables that can ultimately impact us. But long term, we feel obviously very good about our positioning and the ability to generate operating leverage. On realizations and the sort of performance fee margins and comp ratios, Yeah.

I think broadly speaking, you should expect stability in that varies with the mix of you know, funds and strategies, that are the source of funds revenues in given in a given quarter. We have had the ability to you know, manage the mix of compensation between fee compensation and performance. Revenues. We'll still be able to do that, which will be beneficial to FRE margins directionally. And might trade off performance revenue margins somewhat as a result. But I think that's more directional and have the margin. But we feel very good about our sort of our leverage to drive margins in across the across the p mail.

Jonathan Gray: Thanks, William.

William Katz: Thanks.

Operator: Thank you. We'll go next to Dan Fannon with Jefferies. Jonathan, I wanted to follow-up on your comments around the deal-making pauses

Michael Chae: behind us. Just want to get a little bit more color on confidence around this. We've obviously been here before and waiting for activity to pick up, but you obviously

Jonathan Gray: sounded much more confident here this morning. So just would love a little more color.

Stephen Schwarzman: Well, it's a fair question. Because I think we expressed some confidence similarly at the outset of the year, and then we had the tariff issues and that slowed things down. You know, you can feel things sort of the tumblers falling into place. It's the combination of equity markets recovering to record levels. Its debt spreads now back to the pre Liberation Day types. It's general business confidence, particularly for businesses away from retailing? Who are in the teeth of some of the issues around goods and the cost of those goods. And so there's overall a more constructive environment. There's also a more favorable environment than there's been in a few years, of course, for M&A.

And when you just look at the levels of M&A and IPO volume over the last three plus years, it's running about two-thirds below historic levels. As a percentage of market cap of the stock market. So there's just a lot of pent-up demand in the system. And then when we look at our proprietary data, we've got the busiest pipeline we've had. Since 2021 of potential IPOs. We talked about getting one done in Europe a couple weeks ago. And then deal screenings, you know, on the BXCI, the credit side, up 50% new deals sort of coming in the door that we're looking at versus the end of the year. So lots of things are coming together. Yes.

You need a level of terra firma But if this holds, I do expect we'll see a step function increase in transaction activity. That, of course, on the realization side, as Michael noted, takes a little bit of time. It's like moving the plane out to the runway before it ultimately takes off. But those signs of getting companies public, public companies becoming more active, debt markets, there's been ton of refinancing activity as cost of capital comes down in the last few weeks. All the things are coming into place, and that's what's giving us this confidence you hear.

Operator: Thank you.

Stephen Schwarzman: We'll take our next question from Brian McKenna with Citizens. Okay, great. Good morning, everyone. So real estate performance eligible AUM totals around $200 billion today. Net accrued performance fees stand at less than a billion dollars today. So I'm curious, how much of the $200 billion is currently generating performance revenue And then is there a way to think about how much of this AUM, call it, is 10% away from the hurdle? I'm just trying to get a sense of the trajectory of accrued performance fees in real estate. From here as performance and underlying trends begin to normalize.

Michael Chae: Thanks for the question. Yeah. As you mentioned, the balance of eligible dollars in real estate is about it's over two $100 billion I would just frame it that about 60% of that is above their respective hurdles. In terms of the components in breadth and opportunistic importantly, as it relates to Carrie's, you know, the vast majority, you know, 80% plus of the AUM is above hurdle. And then as I said, that really represents the bulk of our accrued carry in real estate. A 100% of BREIT is also above that hurdle. So that's sort of the structure of it.

And so I think we're you know, as Jonathan just referenced, you know, with time, we expect the realization cycle to accelerate probably more in private before real estate than ultimately in real estate. And in those breadth funds as it relates to net realizations. That's the positioning, relative to hurdles, which is a

Brian McKenna: Great. Thanks, Michael.

Operator: Thank you. We'll take our next question from Steven Chubak with Wolfe Research.

Steven Chubak: Hi, Steven. Good morning. Katie, it sounds like Steven, we lost him. Do mean oh, sorry about that.

Michael Chae: Weston. I'm here. If you can hear me. Sorry. I was muted.

Stephen Schwarzman: Yeah. Good morning, Steven.

Michael Chae: My apologies. Good morning, everyone. Regarding the BMAX launch, I was hoping you could speak to your confidence level as to whether this could scale at a similar pace

Jonathan Gray: to some of your other retail vehicles? Just trying to gauge the early reception Any additional color you can offer on some of the retail products in the pipeline that were referenced in some of the earlier prepared remarks?

Stephen Schwarzman: Sure. I think on VMAX, it will take some time. We've launched this in a little bit of a different way in the RIA channel to start. You know, we've we've gotten a good reception, but this I think we'll we you know, because we have a number of interesting things in the marketplace today, I think this is obviously a little different as an interval fund. And what we're finding with new platforms in the marketplace, people wanna see the track record start to grow and build. Because this is easier to access, on the interval fund basis, I think the ultimate potential is quite significant. But I would expect a ramp up to take a bit of time.

You know, if you look at our track record, of course, in the flagship products, we've had great success. Obviously, BREED and BCRED. BXP in just eighteen months is remarkable where it's gone to be a essentially the market leader in the space in a short period of time. Our platform we talked about is on a small number of distributors. We have a European credit platform that's picking up some momentum. So you know, the conversations with our wealth partners is incredibly positive. And sort of the Blackstone Inc. positioning in that space because of the track record we have, the breadth of products the fact we've been at it so long is really special.

I think you'll continue to see us introduce new products. And I think we'll continue to get a good reception, and it'll be increasingly on a global basis. Each product will have its own sort of pace to how it picks up. And part of it is where we decide to launch these based on a whole variety of considerations. But the overall path is pretty darn good.

Jonathan Gray: Great. Thanks for taking my question.

Operator: Thank you. We'll take our next question from Benjamin Budish with Barclays.

Benjamin Budish: Hi, good morning and thank you for taking the question. I wanted to ask kind of specific on your fee-related performance revenues. It looked like the performance in quarter or at least the outperformance

Michael Chae: versus a lot of expectations was driven by private equity, which I would assume is more BIP than people were expecting. I know that's one that can be a bit lumpy based on the timing fundraising and deployment with the big sort of three-year crystallizations. But any color you could share in terms of what FRPR can or might look like over the at least the next couple of quarters would be helpful just for modeling purposes. Thank you. Yeah.

I think just as it relates to VIP, which was one of your question, And I think we at the end of last year or in the last couple of quarters, gave a sense of the shape of the year after that very large crystallization in the fourth quarter. You know, generally, as you know, infrastructure is subject to will be subject to more frequent crystallizations related to the layering in of new investors and the open-end fundraising over time In the second quarter, we did have nearly $100 million of revenues just to actually give you some specifics around that. In the quarter.

We'd expect about half that in the next quarter from a scheduled crystallization from the institutional fund. And then nothing in the fourth quarter from the institutional funds. We do expect a modest amount from VXN for a the private wealth infrastructure products from its first crystallization in the fourth quarter which will then be quarterly thereafter, which was the VXP structure when it started as well. So there's some fairly granular sense of infrastructure, and fee-like for the balance of the year.

Stephen Schwarzman: I would just say, generally, the layering of these various products will be powerful to earnings power over time.

Michael Chae: Okay. Thank you for that.

Operator: Thank you. We'll take our question from Kenneth Worthington with JPMorgan.

Kenneth Worthington: Hi, good morning. Thanks for taking the question. With regard to legal in general, so thanks for the highlights. You mentioned $20 billion over the five years. Is this based on new products expected to be developed and distributed

Jonathan Gray: Or is there an IMA or a more immediate asset management element of the partnership? As well? And then last quarter, you mentioned Wellington and Vanguard.

Michael Chae: Can you give us an update on product development, how that's progressing?

Stephen Schwarzman: And when we might see those products start to hit the market? Sure. With LNG, it's a partnership focused around

Jonathan Gray: credit and insurance. I'd say a couple things. $20 billion is ultimately our aspiration here with them. I'd say it's a combination of things. The main element of it will be managing investment-grade private credit for their pension risk transfer and annuities business. Something obviously we do for large clients here and SMA clients. So that's a relationship to make them even more competitive in that marketplace in The UK. And then we also said we're gonna try to do some things together in wealth, creating some products together for The UK market. And then potentially in retirement there and defined contributions. Again with our credit products. So it's broad range.

They are the leading insurer and asset manager in that market. We were very excited to be able to partner with a company of that quality and scale. And there's a real entrepreneurial energy now with the CEO, Antonio, there. And we're excited about what we can do with them together. On Vanguard Wellington, there's a limit to what I can say, I think, legally. At this point, we can say that Wellington has filed for our first product together. Obviously, that process of SEC approval will take some time.

But we're excited, as we talked about on the previous call, just the idea of bringing our best-in-class private capabilities with Vanguard and Wellington best-in-class and active and passive debt and equity. And we think for a portion of the wealth market, this could be particularly attractive just sort of one-stop shopping. But I can't really speak to specifics other than this one filing that's been made.

Kenneth Worthington: Great. Thank you.

Operator: We'll take our next question from Patrick Davitt with Autonomous Research.

Patrick Davitt: You mentioned the life sciences performance and the divergence real estate and have obviously built a great business there. Seems to be a fairly significant cut to government research and science funding coming through the pipe. Do you have any early thoughts on how much exposure your portfolios could have to that? And does that cut in funding change your view on the life sciences investment opportunity from here? Thank you.

Jonathan Gray: So it has certainly added to the uncertainty in the space. Michael talked a little bit about this on the tenant demand side in our life science office area. I think the key thing, though, is there is just enormous innovation happening in life sciences. That the AI is likely to accelerate that there are huge capital needs both from the pharmaceutical companies who wanna find partners to accelerate, their phase three process for products. As well as for smaller life science companies who don't wanna issue equity. And it is definitely a marketplace where we think we have a pretty unique offering and capability.

It is possible that we could see some changes in terms of reimbursements and MFNs outside The United States. But overall, the market is quite substantial. The need for these products is substantial. And the number of groups with expertise at scale to do these partnerships is limited. So we still see a very big investment opportunity here.

Michael Chae: The other final thing I'd add on life science offices. As Jonathan mentioned, the supply coming down in real estate apply personal estate applies to this sector as well. Starts are down something like 80% plus since sort of their peak a few years ago. So that is ultimately gonna be a real benefit for the sector. As well.

Operator: Thank you. We'll take our final question from Arnaud Giblat with BNP Paribas.

Arnaud Giblat: Hey, good morning.

Jonathan Gray: One quick question on BXP, please. So there's clearly been a lot of

Stephen Schwarzman: appetite for this product. I'm just wondering how you're thinking about sizing of the product in relation to capacity to deploy in retail, in particular as you might be thinking about vintage diversification. How we be thinking about the potential divergence in construction between the Swell's product and your flagship? Thank you.

Jonathan Gray: Well, I would say at Blackstone Inc., our greatest strength has always been a capacity to deploy and do it in a way that delivers strong returns. We designed BXP with the idea that this is a product that takes in capital on a regular basis. As we experienced with BREIT and BREIT. And, therefore, we wanted the widest aperture possible. So the product can invest in The US, Europe, and Asia It can do it in controlled private equity minority. Hybrid equity, secondaries, life sciences, growth. Opportunistic credit. We actually sacrificed a bit in terms of the market potential by making it only eligible to qualified purchasers.

So that we had the flexibility to deploy capital across these variety of areas To date, the performance has been exceptional. And I just think at Blackstone Inc., we're able to find lots of opportunities serve our institutional clients, which you were asking about, obviously is critically important. Both in terms of the main funds and also their co-investment desires but also create a whole new range of additional investment opportunities across firm. So I feel very good about our ability to deploy capital We've certainly been able to show across credit. We did it in real estate. We have the capabilities to scale up. And this is obviously beneficial in the wealth

Stephen Schwarzman: channel.

Jonathan Gray: As it grows. It's one of the things that really differentiates Blackstone Inc. as a firm.

Operator: Thank you. That will conclude our question and answer session. At this time, I'd like to turn the call back over to Weston Tucker for any additional or closing remarks.

Weston Tucker: Great. Well, thank you, everyone, for joining us today, and look forward to following up after the call.

Operator: That will conclude today's call. We appreciate your participation.

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DATE

Thursday, July 24, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chairman, President, and Chief Executive Officer — Kieran M. O'Sullivan

Vice President and Chief Financial Officer — Ashish Agrawal

Need a quote from one of our analysts? Email [email protected]

RISKS

Management expects transportation production volumes to decrease in 2025 due to tariffs and rare earth supply issues for OEMs and Tier 1 suppliers.

Softness in commercial vehicle-related revenue is anticipated for the remainder of the year, as stated by CEO O'Sullivan.

Total company bookings declined 10% year-over-year in Q2 2025, primarily due to reduced diagnostic bookings in the medical end market.

CEO O'Sullivan said, "it just feels a little tenuous for the next few quarters." regarding transportation market demand, citing ongoing tariff and regional uncertainty.

TAKEAWAYS

Total Sales: $135 million (GAAP), up 4% year-over-year and 8% sequentially from Q1 2025.

Diversified End Market Sales: 55% of revenue in Q2 2025, growing 13% year-over-year, driven by organic growth and the SideQuest acquisition.

Transportation Sales: Down 6% year-over-year in Q2 2025, impacted by softness in commercial vehicle products and the China market.

Aerospace and Defense Sales: Up 34% year-over-year in Q2 2025; up 6% excluding SideQuest.

SideQuest Acquisition Revenue: $4.5 million added in Q2 2025, with management expecting a stronger contribution in the second half of 2025.

Industrial Market Sales: Up 5% sequentially from Q1 fiscal year 2025 and up 6% year-over-year in Q2 fiscal year 2025; industrial bookings grew 22% year-over-year in Q2 fiscal year 2025.

Adjusted Gross Margin: Adjusted gross margin was 38.7% in Q2 2025, a 296-basis-point increase year-over-year and a 174-basis-point sequential gain.

Adjusted EBITDA Margin: Adjusted EBITDA was 23% in Q2 fiscal year 2025, up 250 basis points sequentially and 130 basis points year-over-year.

Adjusted Diluted EPS: $0.57, an increase of 30% from Q1 fiscal year 2025 and up 7% year-over-year.

GAAP Diluted EPS: $0.62 per diluted share for the second quarter.

Operating Cash Flow: $28 million in operating cash flow in the second quarter of fiscal year 2025, up from $20 million in the second quarter of fiscal year 2024; Year-to-date operating cash flow totaled $44 million in fiscal year 2025.

Shareholder Returns: 412,000 shares were repurchased for approximately $17 million in Q2 2025; $26 million returned through dividends and buybacks year-to-date 2025; $38 million remained under the repurchase program as of Q2 2025.

Book-to-Bill Ratio: 1.0 in the second quarter of fiscal year 2025, flat compared to the second quarter of fiscal year 2024.

Sales Guidance: Maintained at $520 million to $550 million for the full fiscal year 2025, with adjusted diluted EPS of $2.20 to $2.35.

Cash and Debt: $99 million in cash and $88 million in long-term debt as of Q2 2025.

New Business and Awards: Won a new customer for millimeter wave small cell applications and secured a business award for EV charging station temperature sensing in Europe.

SUMMARY

Management reaffirmed its focus on diversification, highlighting that over half of revenue now comes from non-transportation end markets. The SideQuest acquisition is expected to bring increased seasonality but a stronger revenue contribution in the second half, tied partially to government funding approvals. The company launched next-generation product platforms, including a smart actuator for commercial vehicles and advanced COBRA technology for precision motor position sensing. Guidance was held steady despite macro uncertainty, with recent cash generation supporting continued shareholder returns and acquisition capacity. Strategic pipeline strength in transportation and diversified end markets underpins confidence for medium- and long-term growth, tempered by near-term caution in transportation visibility due to tariffs and regional production pressure.

Defense bookings and backlog remain healthy, although new order rates were flat year-over-year in Q2 2025.

Industrial market momentum is evident, with bookings up 22% year-over-year and sales up 5% sequentially in the second quarter, supported by multiple customer wins in EMC, switches, and EV applications.

CEO O'Sullivan stated, "diversification remains a strategic priority." supported by the new Evolution 2030 initiative targeting operational rigor and expanded sales growth.

Management emphasized that "impact was very, very minimal in the quarter." though ongoing volatility is under close review.

The company signaled its intent to pursue further acquisitions within the next twelve months, focusing on diversified end markets as part of a stated 5% organic and 5% acquisition growth strategy.

INDUSTRY GLOSSARY

Book-to-Bill Ratio: A measure comparing the value of new orders ("bookings") received to sales shipped ("billings") during a specific period, indicating demand trends.

COBRA Technology: CTS's proprietary high-resolution position sensing technology for motor position applications.

Full Conference Call Transcript

Kieran M. O'Sullivan: Good morning, and thank you for joining us today for our second quarter 2025 results. We delivered another quarter of double-digit growth in our diversified end markets. Diversified sales for the quarter were 55% of overall company revenue. In the quarter, our adjusted EBITDA expanded 250 basis points sequentially and 130 basis points compared to the second quarter of last year. Cash flow generation was also strong in the quarter. Our teams continue to execute on our diversification strategy to increase growth in diversified medical, industrial, aerospace, and defense markets. In transportation, we launched the next generation smart actuator for the commercial vehicle market. Ashish will take us through the Safe Harbor statement. Ashish?

Ashish Agrawal: I would like to remind our listeners that this conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in the press release issued today, and more information can be found in the company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available with today's earnings press release and supplemental slide presentation, which can be found in the Investors section of the CTS Corporation website.

I will now turn the discussion back over to our CEO, Kieran M. O'Sullivan.

Kieran M. O'Sullivan: Thank you, Ashish. We finished the second quarter with sales of $135 million, up 4% from $130 million in the second quarter of 2024. Diversified end market sales were 55% of overall company revenue in the quarter.

Ashish Agrawal: For the quarter, diversified end market sales, including sales to medical, aerospace and defense, and industrial end markets, were up 13% driven by a mix of organic growth and the CyQuest acquisition. Transportation sales were down 6% from the same period last year. Our book-to-bill ratio for the second quarter was one, essentially flat in comparison to the second quarter of 2024. Defense bookings were flat, while industrial bookings were up 22%. Second quarter adjusted diluted earnings were $0.57 per share, and up approximately 30% from the first quarter and up 7% from the prior year period.

We are excited about the prospects for growth in minimally invasive applications where our products help deliver enhanced ultrasound images, making it easier for medical professionals to detect artery restrictions and deliver treatment medications. Our teams are engaged on next-generation development engineering to further enhance diagnostic capability with our customers. Bookings in the quarter were down 10% compared to the prior year period, due to softness in diagnostic bookings. Over time, we expect the volume increases in portable ultrasound diagnostics and therapeutics will continue to enhance our growth profile. Aerospace and defense sales for the second quarter were up 34% from the second quarter of 2024. Excluding sales from the SideQuest acquisition, sales were up 6%.

SideQuest revenues in the second quarter were $4.5 million, and we expect stronger sales in the second half of this year. Bookings in the second quarter were flat from the prior year period as we maintain a healthy backlog. The integration of the SideQuest business is progressing, and the business continued to drive a strong pipeline of opportunities. In the industrial market, we continue to see a gradual recovery with OEMs as well as with distribution customers. Sales in the second quarter were up 5% sequentially and up 6% compared to the prior year period. Bookings in the quarter were up 22% from the same period last year.

We were successful with multiple wins in the quarter for EMC, switches, industrial printing, and temperature sensing applications where we won a new business award for EV charging stations in Europe. We added a new customer in the quarter for a millimeter wave small cell frequency application.

Kieran M. O'Sullivan: Demand across the industrial market is expected to continue improving in the second half of 2025. The megatrends of automation, connectivity, and efficiency enhance our longer-term growth prospects. Additionally, we received the Chassis Ride Height Sensing Award from a North American OEM. More recently, on the innovation front, we advanced our COBRA technology, which enables precise position sensing with high resolution for motor position sensing. The near-term growth rates for ICE versus EVs and hybrids are less of a concern for us given our light vehicle products are mostly agnostic to the drivetrain technology. Total book business was approximately $1 billion at the end of the quarter.

Interest in our eBrake product offering weight and cost advantages continues across OEMs at a slower pace. Our team is proceeding with samples and design. We remain confident in the longer-term growth prospects for this product line given the cost and weight benefits for our customers as well as the sentiment in the market from OEMs and Tier 1 chassis system suppliers. We expect our eBrake and other future products, existing and new sensor applications, will increase our ability to grow content. For our diversified end markets, in line with our strategy, we aim to expand the customer base and range of applications.

Subject to evolving trade tariffs, associated economic uncertainty, demand in the medical end market is expected to be mixed with strength in therapeutics and some softness in diagnostic ultrasound. In aerospace and defense, revenue is expected to grow given our backlog of orders and momentum from the SideQuest acquisition. Across transportation markets, production volumes are expected to decrease in 2025 given the tariff impact and the supply of rare earth for OEMs and Tier 1 suppliers. The North American light vehicle market is expected to be in the 15 million unit range. European production is forecasted in the 16 million unit range, and showing some increased softness due to pressure from Chinese OEMs.

We anticipate softness in commercial vehicle-related revenue for the remainder of the year. As I mentioned in previous calls, revenue from the SideQuest acquisition will introduce some seasonality where the timing of revenue may be influenced by the approval of funding by the US government. With the recent budget approval, we expect revenues for SideQuest will improve in the second half of 2025. The impact of tariffs and the geopolitical environment are creating uncertainty.

Ashish Agrawal: We continue to closely monitor and evaluate the situation while focusing on agility and adapting to cost and price adjustments in close collaboration with our customers and suppliers. Assuming the continuation of current market conditions, we are maintaining our guidance of sales in the range of $520 million to $550 million and adjusted diluted EPS to be in the range of $2.20 to $2.35. Industrial and distribution sales are expected to improve. Longer-term, we expect our material formulations, supported by three leading technologies, and their derivatives to continue to drive our growth in key high-quality end markets in line with our diversification strategy.

Kieran M. O'Sullivan: Thanks, Ashish. Now I will turn it over to you for a deeper dive into our financial results.

Ashish Agrawal: Thank you, Kieran. Sales in the second quarter were $135 million, up 8% sequentially and up 4% from last year. Sales to diversified end markets increased 13% year over year. SideQuest added $4.5 million in revenue during the quarter. As Kieran has highlighted, we are seeing seasonality in sales from SideQuest due to government funding patterns and expect a stronger second half. Sales to transportation customers were down 6% from the second quarter of last year due to softness in sales related to commercial vehicle products and reduced volumes due to China market dynamics.

Our adjusted gross margin was 38.7% in the second quarter, up 296 basis points compared to the second quarter of 2024, and up 174 basis points sequentially compared to the first quarter of 2025. As we continue to work on diversification as a strategic priority, we are seeing a favorable mix impact on our profitability. In addition, our global teams continue to focus on operational execution to deliver margin improvements. We are working closely with customers and suppliers on tariffs, and had a minimal impact on profitability in the second quarter. Exchange rate changes had a favorable impact of $1 million on gross margin.

We achieved adjusted EBITDA of 23% in the quarter, an improvement of 250 basis points sequentially and 130 basis points compared to the second quarter of 2024. Earnings were $0.62 per diluted share for the second quarter. Adjusted earnings were $0.57 per diluted share compared to $0.44 in the first quarter of 2025 and $0.54 in the second quarter of 2024. Moving to cash generation and the balance sheet. We generated $28 million in operating cash flow in the second quarter, compared to $20 million in the second quarter of 2024. Year to date, we have generated $44 million in operating cash flow.

Our balance sheet remains strong with a cash balance of $99 million at the end of the quarter. Our long-term debt balance was $88 million, leaving us good liquidity to support strategic acquisitions. During the quarter, we repurchased 412,000 shares of CTS Corporation stock for approximately $17 million. In total, we returned $26 million to shareholders through dividends and share buybacks so far in 2025. We have $38 million remaining under our current share repurchase program. Our focus remains on strong cash and we continue to support organic growth, strategic acquisitions, and returning cash to shareholders. This concludes our prepared comments. We would like to open the line for questions at this time.

Operator: And our first question today comes from John Edward Franzreb from Sidoti. John, please go ahead. Your line is open.

John Edward Franzreb: Good morning, everyone, and thanks for taking the questions. I'd like to start with the medical market. Seems like there's maybe two product lines going in some directions. Therapeutics, which you said was up 60%, I believe. And also, I think you issued a little bit of a warning about diagnostics. Can you talk a little bit about what's going on in the marketplace there for you?

Kieran M. O'Sullivan: Yeah, John. On the therapeutic side, on the last earnings call, we talked about a larger order and that's obviously playing out here in the second quarter and for the balance of the year as well. We've seen some softness in diagnostics, on the ultrasound side of it. Mostly coming from capital spend in Asia and maybe tariff related as well. If so, we will see some softness there, but overall on medical for the year, we will see growth.

John Edward Franzreb: Oh, good. That's good to hear. And you just touched on the tariff situation. What was the impact, if any, of tariffs on you in the quarter?

Ashish Agrawal: Well, it's pretty nominal. John, as we mentioned in the prepared remarks, we are working closely with customers as well as suppliers. Overall, the impact was very, very minimal in the quarter.

John Edward Franzreb: You expect it to stay that way?

Ashish Agrawal: Generally, under the current conditions, I would say yes, but there's a lot of changes happening as you know. So we are continuing to monitor the situation. As we have talked about in the past, our bigger impact happens with any potential changes in the USMCA.

John Edward Franzreb: Okay. Got it. And when you think about the transportation market, Kieran, you're also signaling continued weakness. Any thoughts about when that market might bottom out for you?

Kieran M. O'Sullivan: John, obviously, yes, weakness this year. It's mixed across the regions. We've talked about softness in China being a factor for us in the commercial vehicle. We think it's bottomed out in China, but we're being a little bit just cautious on that, so we see the trend over a few quarters. On the light vehicle side, we did improve sequentially this quarter. And I would tell you we've got a pipeline book business that is really strong across multiple products that we're working. So it's a little bit mixed, John. I would just say the tariff situation is the one we're watching there. There was some pre-buy in Q2 in April and May.

And it just feels a little tenuous for the next few quarters.

John Edward Franzreb: Makes sense. Makes sense. And just on the cost side of the equation, how's the integration of SideQuest going? Is that fully complete? And are there any other cost measures you're currently active on?

Kieran M. O'Sullivan: John, the SideQuest acquisition is moving along well. A lot of the integration work's been done. And there's still a little bit more to do. We're still running on different ERP systems. But the pipeline of opportunities is really strong. What I would tell you is the timing with the government and getting the budget approval has been something we've been watching carefully and glad to see that approved because we think that's going to be a momentum builder going forward.

John Edward Franzreb: Okay. And any other internal cost-saving actions that you're currently executing?

Ashish Agrawal: So on SideQuest, John, we are really not looking to drive cost-saving type of actions. The business is working on a strong pipeline and we are shoring up capabilities from a production standpoint to make sure that we can drive that growth and do the revenue growth part of it strongly in that part of the business.

John Edward Franzreb: I understood, Ashish. I was actually referencing legacy CTS Corporation.

Ashish Agrawal: Got it. Got it. So in terms of, you know, we are continuing to look at operational efficiency on an ongoing basis like we always do, John. That was contributing to our gross margin expansion in the quarter that we talked about. But in terms of big things that we have in the works, there's not much that we've talked about publicly. You know, as we continue working on things, if there are bigger changes we are making, I'm sure we'll highlight those.

John Edward Franzreb: Great. Okay. Yeah. I'll get back with you. Thanks for taking my questions.

Kieran M. O'Sullivan: Thanks, John.

Operator: The next question comes from Hendi Susanto from Gabelli Funds. Hendi, your line is open. Please go ahead.

Hendi Susanto: Good morning, Kieran and Ashish.

Kieran M. O'Sullivan: Morning, Hendi.

Hendi Susanto: Kieran, Ashish, I would like to ask similar questions, but hopefully deeper. The mix dynamic in the medical marketplace, in diagnostic, and then in therapeutic. Any guidepost on, let's say, how much the large order would sustain or generate a nice revenue upside in the next coming quarters? And then on the other hand, the softness in diagnostic. How much further should we expect?

Kieran M. O'Sullivan: Hendi, the softness in diagnostics may be for a quarter or two. We still feel very confident in the growth of that business in the mid to long term. On the therapeutic side, confident in the growth throughout the balance of this year, and then we would expect new purchase orders as we go ahead. So overall, as I mentioned earlier, we'll see growth in medical this year, and we're expecting growth as we go into the years ahead too.

Hendi Susanto: Okay. Got it. And then, Ashish, may I ask how much revenue SideQuest generated in the same quarter a year ago so that we know on a year-over-year comparison what the numbers look like?

Ashish Agrawal: Yeah. And we closed on the acquisition towards the end of July last year. So the second quarter of 2025 was purely additive.

Hendi Susanto: Yes. But can we know prior to acquisitions, like, how much the quarterly revenue in the second quarter of 2024?

Ashish Agrawal: We haven't talked about that, Hendi, in terms of pre-acquisition revenues. So, you know, that's something that we haven't talked about publicly.

Hendi Susanto: And then I think I asked a similar question in the past. Within transportation, how much is China?

Ashish Agrawal: China transportation as a percent of our overall revenue will be similar to what we have for the overall transportation as a percent of total CTS Corporation. That'll get you close enough in terms of how much revenue we have in China. If you look at overall China, our last year's data that was published as part of the 10-K, we had revenues of about $80 plus million in total.

Hendi Susanto: Okay. Got it. And then, Kieran, you talk about a strong pipeline of opportunities. Sorry. I think you said that in transportation. There are some solid positive pipelines across products that you are working on. Would you be able to mention which products?

Kieran M. O'Sullivan: Yep. Yeah. Hendi, we would be working with customers on accelerator modules, passive safety sensors, new combination sensors, motor position sensing, just to give you a few examples in transportation. And we also have a strong pipeline in the diversified end markets as well.

Hendi Susanto: And then within that transportation, those pipelines, are they more skewed toward North America and Europe?

Kieran M. O'Sullivan: Hendi, I would certainly say we've been winning business in all regions. I would say the larger pipeline is in the North America region, for sure, but some of these OEMs are operating globally too.

Hendi Susanto: Okay. Got it.

Kieran M. O'Sullivan: Yeah.

Hendi Susanto: Okay. Thank you. Let me get back to the queue.

Kieran M. O'Sullivan: Yeah. Thank you, Hendi.

Operator: As a reminder, that's star one on the telephone keypad. You return to the line from John Edward Franzreb from Sidoti. John, please go ahead.

John Edward Franzreb: Yep. Just a follow-up question. Can you talk a little bit about the acquisition market? What you're seeing out there and maybe the size of the opportunities that you're most focused on?

Kieran M. O'Sullivan: John, we're most focused on advancing our diversified end markets, that being aerospace and defense, industrial, and medical. We're always working on a pipeline of opportunities. There's nothing to report at this point in time. But we certainly see some uptick in activity out there.

John Edward Franzreb: That's great. Something maybe within the next twelve months, or am I thinking too far ahead?

Kieran M. O'Sullivan: Well, John, if you look at how we talk about our growth, 5% organic, 5% acquisitions, we would definitely like to do something in the next twelve months.

John Edward Franzreb: Okay. Good to hear. Thanks for taking my follow-up.

Operator: Thank you, John. Thank you. Nothing further in the queue or presence. Just a final reminder that star followed by one on your telephone keypad. We have no further questions, so I'll hand the call back to Kieran for some closing comments.

Kieran M. O'Sullivan: Thanks, Adam, and thank you all for your time today. Despite the challenges of tariffs, geopolitical and economic pressures, diversification remains a strategic priority. We launched our Evolution 2030 strategic initiative to enhance our emphasis on sales growth, operational rigor, and employee engagement while also giving back to the communities where we operate. We look forward to updating you on our third quarter 2025 performance in October. This concludes our call. Thank you.

Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

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DATE

Thursday, July 17, 2025 at 4:45 p.m. ET

CALL PARTICIPANTS

Co-CEO — Ted Sarandos

Co-CEO — Greg Peters

Chief Financial Officer — Spencer Neumann

Vice President, Finance, Investor Relations, and Corporate Development — Spencer Wang

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Full-Year Revenue Guidance: Raised full-year revenue guidance to $44.8 billion–$45.2 billion, representing a midpoint increase of approximately $1 billion over the prior forecast, primarily due to foreign exchange effects and stronger-than-expected member growth.

Operating Margin: Full-year reported operating margin target increased to 30%, up from 29% previously; FX-neutral margin is now guided to 29.5% for the year, reflecting improved underlying membership growth and advertising performance.

Advertising Revenue: On track to roughly double for the year; Ad sales momentum is "a bit ahead of beginning-of-year expectations," with a global ad tech stack now fully rolled out.

Ad Tech Deployment: Greg Peters said, "We have completed the rollout of our own ad tech stack and the Netflix, Inc. ad suite to all of our ad markets now." enabling faster feature releases and improved ad targeting and measurement.

Consumer Metrics: Retention remains "stable and industry-leading," with no significant changes in plan mix, take rate, or engagement; recent price changes performed in line with expectations.

Content Spend: Content amortization is projected to exceed $16 billion this year. It has grown more than 50% from under $11 billion in 2020 to over $16 billion this year, supporting a broader and deeper content slate.

Engagement: Total view hours grew modestly in the first half of 2025, as reported by Greg Peters; per-owner-household engagement has been "relatively steady over the past two and a half years" despite competitive pressure.

Product Innovations: New user interface has been deployed to the first large wave of TV devices and is showing "performance that is better than what we saw in our prelaunch testing," improving content discovery and session metrics.

TF1 Partnership: Announced a partnership with France's TF1 to expand local content offerings, leveraging existing investments in live, advertising, and the new user interface to enhance local market relevance.

Gaming Initiatives: Further investment in games, highlighted by positive early impact from Grand Theft Auto and other licensed titles in 2025; emphasis remains on scaling value to members and retention rather than short-term monetization.

AI Adoption: Successful integration of generative AI in production enabled completion of VFX sequences "10 times faster" and at lower cost, as seen in an Argentine original series; this marked the first GenAI final footage to appear on screen in a Netflix original series or film.

Shareholder Returns and Capital Deployment: Continued preference for organic growth and returning excess capital via share repurchase, with management reaffirming a selective, disciplined approach to potential M&A opportunities.

SUMMARY

Netflix, Inc. (NASDAQ:NFLX) management emphasized an upgraded full-year 2025 revenue outlook of $44.8 to $45.2 billion and improved reported operating margin guidance from 29% to 30%, driven by favorable FX trends and accelerating member and ads business growth. The company completed the global rollout of its proprietary ad tech stack, enabling rapid feature innovation and positioning ad revenue to roughly double this year. Stable retention and engagement trends, combined with significant investment in original content and technology, were highlighted as key to future growth. Management announced the TF1 partnership to further enhance local content breadth in France and maintained a disciplined investment approach across new categories such as games and generative AI initiatives.

Ted Sarandos described new content releases and renewals, including international roles for successful franchises, as central to driving engagement, stating, "it is not about the single hit. So what it is is about a steady drumbeat of shows and films and soon enough games that our members really love"

Greg Peters disclosed, "We have seen an increased programmatic buying." from advertisers following the full ad suite rollout, with upcoming integration of additional demand sources like Yahoo to further expand the business.

Management provided the first confirmation that generative AI-powered final footage debuted in a Netflix original this year, demonstrating operational efficiencies in production scalability and speed.

Ted Sarandos confirmed live events and sports remain a "relatively small part of the total content spend" but acknowledged their outsized positive impact on acquisition metrics and a likely impact on retention.

Spencer Neumann reiterated, "we have historically been more builders than buyers," reaffirming organic growth and cash return as the principal capital allocation priorities despite anticipated media sector consolidation.

INDUSTRY GLOSSARY

Ad Tech Stack: The platform and infrastructure enabling programmatic delivery, targeting, and measurement of advertising inventory across Netflix's services.

TF1: A leading French television broadcaster with whom Netflix announced a localized content partnership.

Generative AI (GenAI): Artificial intelligence technologies used to automate or enhance creative tasks such as visual effects, content personalization, or recommendation systems.

Programmatic Buying: Automated, data-driven purchasing of digital advertising inventory.

Owner Household: A measurement unit excluding shared/borrowed accounts, used by Netflix to assess engagement per paying household.

Amortization (Content Amort): The systematic expense recognition of content production costs over time as titles are distributed and consumed.

iLine: Netflix's internal production innovation group, focused on visual effects and technical advances in entertainment content creation.

Full Conference Call Transcript

Spencer Wang: Good afternoon, and welcome to the Netflix, Inc. Q2 2025 earnings interview. I am Spencer Wang, VP of Finance, IR, and Corporate Development. Joining me today are Co-CEOs, Ted Sarandos and Greg Peters, and CFO, Spencer Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. We will take questions submitted by the analyst community, and we will begin with our results and our forecast. The first question comes from Steve Cahall of Wells Fargo. The question is, since the revenue increase in your forecast is primarily FX driven, we are curious about the components of the constant currency increase.

Is this due to a better underlying revenue growth, or are there specific expenses that are coming in better, like content amortization? I will take that one. Thanks, Steve. So I

Spencer Neumann: As you saw on the letter, we increased our full-year revenue guidance to $44.8 to $45.2 billion. That is up from the prior guide of $43.5 to $44.5 billion. So up about a billion at the midpoint of the range and a tighter range. As you noted, primarily reflects the FX impact from the weakening dollar relative to most other currencies. But the good news is we are also seeing strength in our underlying business. We have got healthy member growth, and that even picked up nicely at the '2 a bit more than we expected. We think that will carry through with our strong back half slate. So we are reflecting that in our latest forecast.

We are also seeing nice momentum in ad sales, still off a pretty small base, but good growth and it is on pace to roughly double our revenue in the year. And it is a bit ahead of beginning of year expectations. So when we carry all that through to operating margin, our operating expenses are essentially unchanged, which is part of your question. So they are basically unchanged forecast to forecast. So we are largely flowing through the expected higher revenues to profit margins.

So that is why our updated target full-year reported margin is up a point from 29% to 30% and that 50 basis point increase in FX neutral margin is really just that revenue lift from stronger membership growth and ads relative to prior forecast flowing through the margin.

Spencer Wang: Thank you, Spence. We will take our next question from Barton Crockett of Rosenblatt Securities. Why is operating margin guidance for the full year only 30% after the upside in February and a forecast 31.5% for the third quarter? Is there a timing issue, FX issue, or is there a new level of spending that will continue beyond the fourth quarter of 2025?

Spencer Neumann: Well, this is really mostly timing. So thanks, Barton. We primarily, as a reminder, manage to full-year margins. And we expect our content expenses will ramp in Q3 and Q4. We have got many of our biggest new and returning titles and live events in the back half of the year. We have also, you know, Q4 is typically a and generally almost always is a heavier film slate. Sure. We will talk about our expect we will talk about more of this on the call. Also be marketing to support that heavier slate, and we are continuing to aggressively build out our ad sales infrastructure and capabilities through the year. So all of that is to be expected.

We can manage to it. We manage to those margins. And even with that back half ramp in expenses, we expect operating margins to be up year over year in each quarter, including Q4, and as just noted, we do expect to deliver strong full-year margins as we just took up our guide to, you know, 29.5% FX neutral, 30% reported.

Spencer Wang: Great. Thanks, Spence. The next question comes from Tom Champion of Piper Sandler. How has your view of the consumer and the macro economy changed over the last ninety days?

Spencer Neumann: Similar to last quarter, we are carefully watching consumer sentiment in the broader

Greg Peters: economy. But at this point, really nothing significant to note in the metrics and the indicators that we get directly through the business. Those are retention that remains stable and industry-leading. There have been no significant shifts in plan mix or plan take rate. And the price changes we have done since the last quarter have been in line with expectations. Engagement also remains healthy. So things all look stable from those indicators and big picture entertainment in general and Netflix, Inc. specific have been historically pretty resilient in tougher economic times.

We also think that we are an incredible entertainment value not only compared to traditional entertainment, but if you think about streaming competitors, when we start at $7.99 in The United States, you think about all the entertainment you get we have a belief and expectation that demand for not only entertainment but for us specifically will remain strong.

Spencer Wang: Thanks, Greg. I think a nice follow-up to this question will be on advertising. So from Ben Swinburne of Morgan Stanley, can you share any data points around your upfront negotiations?

Greg Peters: Yep. As we noted in the letter, our US upfront is nearly complete. We have closed a large majority of deals with the major agencies. Those results have generally been in line or slightly better than our targets and consistent with our goal to roughly double the ads business this year. And what are advertisers excited about? Growing scale is something we definitely hear. Also, a highly engaged audience. So bigger audience, but also an audience that is more engaged relative to our peers. The rollout of our own ad tech stack, which helps deliver a bunch of features, and then our slate, which is generally amazing and includes a growing number of live events that advertisers are excited about.

Spencer Wang: Great. Follow-up question on advertising from Vikram of Baird. How have advertisers in The US responded to the Netflix, Inc. ads suite rollout since the April launch? What features and capabilities are attracting the most interest, and how is the initial feedback in other regions outside of The US?

Greg Peters: We have completed the rollout of our own ad tech stack and the Netflix, Inc. ad suite to all of our ad markets now. So we are fully on our own stack around the world at this point. That rollout was generally smooth across all countries. We see good performance metrics across all countries, and the early results are in line with our expectations. Now we are in this phase of learning and improving quickly based on the fact that being live everywhere means that you get a bunch of feedback about what we can do better, which is great.

As we mentioned before, the most immediate benefit from this rollout is just making it easier for advertisers to buy on Netflix, Inc. We hear that benefit, that ease, from direct feedback talking to advertisers. They tell us that it is easier. See it in our overall sales performance. We have seen an increased programmatic buying. So all of these are consistent, you know, with what we were expecting both qualitatively and from a metrics perspective. We are also, I guess, worth noting that we are going to roll out additional demand sources like Yahoo that will further open up the market for us.

Long term, being on our own stack, that improves the speed of our execution to deliver this, you know, pretty significant roadmap of features that we have in front of us. It is things like improved targeting and measurement. There is also leveraging advertiser and third-party data which we definitely hear demand for as well. And it will ultimately allow us to improve the ad experience for our members. Which is critically important. So that means better ads personalization. So the ads that I see are increasingly different from the ads that, let us say, Ted would see.

And they are more relevant for each of us, which is good for us as users, and it is good for the brands. Also going to be introducing interactivity in the second half of the year, so that is exciting. So that is all to say this is, you know, a pretty significant milestone for us, one we are super excited to get behind us because now we can shift into this steady release cycle where we are dropping new features all the time, both for advertisers and for members. And that is the development and release that we have in other parts of the business. So it is fun to be able to get to that point.

Spencer Wang: Thanks, Greg. I will move this along now to a set of questions around content as engagement. This one comes from Ben Swinburne of Morgan Stanley. 1% engagement growth year over year suggests engagement is down year over year on an average per member basis. How do we reconcile that with engagement growing on a per member household basis if that is still accurate?

Greg Peters: So total view hours did grow a bit in the first half of 2025, and that is despite a particularly back half-weighted slate. But to your point on engagement on a per member basis, we have mostly been focused for the last few years on measuring engagement on what we call an owner household basis. So this takes out the borrower effect, and we obviously think this is the best way to assess our engagement per member because it removes the tricky comparison impacts from paid sharing.

So that metric per owner household engagement has been relatively steady over the past two and a half years throughout the rollout of paid sharing, and amidst increasing competition for TV time as more viewing moves to streaming and gets this on-demand benefit. So we are glad to have held that normalized engagement level, but we clearly also want to increase it. And to that end, we are optimistic and expect that our engagement growth in the second half of this year will be better than in the first half given our strong second half slate.

Spencer Wang: Thanks, Greg. Great segue to Doug Inmuth's question from JPMorgan. The content in the back half of the year looks strong with Squid Game 3 already the third most popular non-English series ever, and Wednesday and Stranger Things releasing in the coming months. You often say that no single title drives more than 1% of total viewing. So how do you think about the business currently as being quote, hit boosted or hit driven, and are you confident that both original and licensed content momentum can continue in 2026?

Ted Sarandos: Yeah. I will take that. And thank you, Doug. On the first part of your question, we are definitely riding this long-term trend of linear to streaming. And that has a natural adoption curve. But we can accelerate our growth with big hits. But as you said, each one of them, even in success, is going to drive about 1% of total viewing. So you need a lot more than just a big hit every once in a while. So to your point, it is not about the single hit. So what it is about a steady drumbeat of shows and films and soon enough games that our members really love and continue to expect from us.

So, like, by way of example, we had 44 individual shows nominated for Emmys this year. So that is what quality at scale looks like. We ended the quarter with a huge return to Squid Game. Thanks for acknowledging. I will go into the second half with the return of Wednesday and Stranger Things. And a really strong slate of supporting titles and favorites, like and new shows. Like next week or this week, we have Eric Bonnett's Untamed. Next week, we have Leanne Morgan's new comedy show Leanne. Both look really great. And that is just to name a few.

And the back half of the year also has perhaps the most anticipated slate of new movies that we have ever had. That starts on the 25th with Happy Gilmore 2, followed by we have a new Knives Out film. We have new films from Noah Baumbach, from Guillermo del Toro, from Catherine Bigelow. And it does not stop there. It does roll right into 2026, and that is the second part of your question. And we are looking forward to movies like the rip from Ben Affleck and Matt Damon. Shirley starred on a new movie called Apex, which is a phenomenal action movie. Millie Bobby Brown is back in Enola Holmes 3.

Recall that in 2023, Enola Holmes 2 was our biggest movie. So we are looking forward to that new sequel.

Spencer Wang: And Greta Gerwig's Narnia is going to be phenomenal.

Ted Sarandos: And then on top of that, we talk about Return of Bridgerton, One Piece, Avatar: The Last Airbender, all three huge successes around the world. The Gentleman, Four Seasons, Point Break, I am sorry, Running Points. Sorry. Beef, which as you recall in 2023, won just about every award imaginable and was a gigantic success for us. It is back for a new season in '26. Three Body Problem, Love is Blind, Outer Banks, and not just from The US, from France, we have LuPan. From Spain, we have Berlin. We have a new season of a hundred years of from Colombia. So big hit returning shows and new series. From each of our regions around the world.

And the new stuff we have got coming up like man on fire, reimagining of little house on the prairie, The Duffer brothers from Stranger Things have a brand new show. The Burrows. We have got the Human Vapor from Japan. Operation Safred Cigar from India, can this love be translated from Korea? So again, popular programming, new and returning from all over the world in 2026. Unscripted shows like the reboot of Star Search, we have got into the doll universe. With Wonka's golden ticket, which we are really excited about.

In our live, we have got a few surprises for you next year, but of course, we have our NFL Christmas Day doubleheader that we are really thrilled about too. So we are really incredibly excited about the back half of this year and confident that it keeps rolling in 26.

Spencer Wang: Thank you, Ted. We will take the next question from Rich Greenfield of LightShed Partners. Who asks, are you concerned by the stagnation in your viewing share domestically?

Spencer Neumann: Think Rich is probably referring to the Nielsen gauge data. Do you need to spend more on programming or spend differently to materially move your viewing share higher?

Ted Sarandos: Yeah. Thanks, Rich. Look, our goal continues to be to continue to grow our share over the long term. And over the past few years, you are right, we have been able to maintain our share even as we work through a growing number of TV-based streaming services, some free, some paid. And the impact of paid sharing that Greg mentioned earlier as well as this, you know, 2025 slate that was more back half-weighted than we typically have in previous years. But over the long term, we tend to keep growing as the other 50% of TV viewing migrates from linear to streaming. And we will do that by doing what we have always done, continuously improve the service.

So in mind, since 2020, our content amort has grown more than 50%. You know, from under $11 billion to more than $16 billion. That we expect to do this year. And over that same time period, we definitely had we saw a big increased spending, but also increased engagement. Increased revenue, increased profit, and increased profit margin. So that is our model in action.

It is our objective to sustain healthy revenue growth, reinvest in the business to improve on all aspects of the service, and that includes growing content spend, strengthening expanding the entertainment offering, and to drive that positive flywheel of growth by adding value to our members and all the while growing engagement revenue and profit around the world.

Spencer Wang: Great. Thank you, Ted. I will move to Alan Gould from Loop Capital next. Can you provide more information on the TF1 partnership? Why did you choose to add TF1 in France as opposed to other broadcasters as your first partner, why is now the right time to create such a partner? Should we anticipate similar partnerships in other countries?

Greg Peters: Yeah. Perhaps to start with the rationale for the partnership. You would think with that long list of amazing titles that Ted just rattled off, we would have enough to satisfy every person on the planet. But it turns out we actually consistently hear from our members that they want more. They want more variety, more breadth of content. So the fundamental purpose for this TF1 partnership is all about that goal. Of expanding our entertainment offering. How do we enhance the value we deliver to members? Want to provide more content, more variety, more quality. So just as you have seen us do with licensing and production, this is just another mechanism to expand that offering.

And in this case, it is specifically about highly relevant local for local content in a country that has strong demand for that local content. This is an accelerated way to satisfy that need. Why now? Why was this time the right time? Well, we have invested a lot in a bunch of enabling capabilities that are either required or highly leveraged by this deal. You can think live, ads, the new UI, among other things. And then why TF1 versus some other partner? Well, we know each other really well. We wanted our first partner to be in a big territory. We wanted to pick the leading local programmer.

We wanted to be highly aligned in terms of the deal and the shape of the partnership and the values that we thought we could generate mutually by working together for our customers. And we both look at this as an opportunity to learn, to figure out how do we scale the local content that TF1 is producing to more customers in France. So we are looking forward to seeing what consumers think. You never really know until you get out there and get the real reactions. And then, obviously, we will factor that into our plans going forward.

Ted Sarandos: Thanks, Greg.

Spencer Wang: From Robert Fishman of MoffettNathanson, with reports suggesting Apple is now in the driver's seat for F1 rights. Uh-huh. Unintended, I guess. Plus UFC and MLB still looking for new deals and the NFL may be looking to come to market a year earlier. Can you share updated thoughts on how you are approaching sports rights for Netflix, Inc. and where you draw the line on something that can move the needle?

Ted Sarandos: Wow. Thanks for that, Robert. Remember, sports are a subcomponent of our live strategy. But our live strategy goes beyond sports alone. Our live strategy and our sports strategy are unchanged. You know, we remain focused on ownable big breakthrough events that because our audiences really love them. Anything we chase in the event space or in the sports space has got to make economic sense as well. You know, we bring a lot to the table, the deals that we make have to reflect that. So live is a relatively small part of the total content spend. And we have got about 200 billion view hours.

So it is a pretty small part of view hours as well right now. That being said, not all view hours are equal. And what we have seen with live is it has outsized positive impacts around conversation, around acquisition, and we suspect around retention. And but so right now, we are very excited where we sit. Very excited with the existing strategy. We are excited about the Canela Crawford fight and September and the SAG Awards and our weekly WWE matches. And the NFL, of course, which is a great property, and we are happy to have Christmas Day doubleheader, which includes Dallas versus Washington. And Detroit versus Minnesota.

So today, our live events have all primarily been in The US, keep in mind. So over time, we are going to continue to invest and grow our live capabilities for events around the world in the years ahead. So we are excited, but the strategy is unchanged.

Spencer Wang: Thanks, Ted. Good follow-up question on that one from Steve Cahall of Wells Fargo. What investments have you made to increase your capabilities in producing live events? What have you been able to do in-house in 2025 that you could not do last year? And how long will it take before you have the capability to produce large-scale events like NFL games?

Ted Sarandos: Yeah. Thanks, Steve. I would say remember, when we started original scripted programming, we had zero production capability. House of Cards was in fact thinking about our first three years of original programming, all of those shows were produced by others. Have to go three years later, we have produced Stranger Things in-house. Today, we still have shows that are produced by others. Universal, Twentieth Television, which is Disney, Paramount, Lionsgate, Warner Television, there is lots of available infrastructure to produce TV. And that is true of live events and sports as well. If we when we do more and more, we may choose to bring some of that in-house.

We have already produced a few, and we are just as likely to continue to use partners with existing production infrastructure and work to make sure that those productions are bespoke and they feel like they could only be on Netflix, Inc. So you should not think about the mix of partnerships and self-producing as a we think about it as a scaling tool. Not backfilling some, like, lack of ability in some area of the company. So and I should note by example, CBS is a phenomenal partner producing NFL games with us, and we are thrilled to work with them again this year on Christmas Day.

Greg Peters: Maybe take this opportunity just to some commentary on the general capability we have been building with live. Know, when we start something new, we pretty much expect that we are not going to be brilliant at it at the beginning. What? But we yeah. That is true. And we do not have any real reason to believe that. But we do not let that stop us from kicking off initiatives that we believe have a strong strategic rationale even though we know we need to develop that capability. Of course, our job is to get out there and learn by doing and get world-class as quickly as we possibly can.

And if you look at our current capabilities around live, we are in just a completely different place today compared to when we first started. As a good example that just happened last Friday, we had our first concurrent pair of live events. We had Taylor versus Serrano globally delivered alongside WWE SmackDown, was delivered ex-US. Both events at scale and delivered with extremely high quality. So it is great progress we have seen, and we have got a great roadmap ahead of us to continue to enhance those experiences. For folks.

Spencer Wang: Thank you both. Last question on the content side or the topic of content comes from Ben Swinburne of Morgan Stanley. What are the learnings from the success of K-Pop Demon Hunters? More animated musicals with fictional bands, question mark. That is a question from a man who probably has that movie playing on repeat in their home if I am guessing correctly. K-Pop Demon Hunters is a phenomenal success out of the gate. One of the things that I am really proud of the team over

Ted Sarandos: is original animation, not sequel, not live-action remake. Original animation feature is very tough and has been struggling for years. And I think the fact that our biggest hits now, Leo, Seabeast, and now K-Pop Demon Hunters, are original animation. So we are super thrilled about that. The mix of music and pop culture, getting it right matters. Good storytelling matters. The innovation in animation itself matters. And the fact that people are in love with this film and in love with the music from this film that will keep it going for a long time. So we are really thrilled. And now the next beat is where does it go from here?

So know, we put in the letter how just how successful the music has been. And continues to be, and we think that will drive fandom for this fictional K-Pop band that we have. But more importantly, for the song Golden and for the song Soda Pop, these are enormous hits, and they all came from a film that is available only on Netflix, Inc. So we are really excited that we can pierce the culture with original animated features considering that folks have been poking us on it.

Spencer Neumann: Let us do it again later in the year within your dreams. Right, Ted? Absolutely. In your dreams, another very

Ted Sarandos: funny one and also completely original. So Yeah.

Spencer Wang: Great. I will move us on now to a few questions on plans as well as product. So from Michael Morris of Guggenheim, he asks, Netflix, Inc. continues to broaden content genres notably with live sports and the recently announced TF1 partnership. Is there a path to additional tiers of service based on types of content available, or will Netflix, Inc. always make all content available at the ad-free/ad-supported price points?

Greg Peters: I have learned to never say never, so I would say we remain open to evolving our consumer-facing model. Think we have got a few principles, important principles that we are carrying with us that I do not see changing significantly. One is we want to provide members choice. Right? So how do we have a different set of plans, a different price points, different features that allows folks to opt in to what is the right Netflix, Inc. for them. Also, how do we provide good accessibility to new members around the world? We want to grow, and that means making that we have got accessible price points.

And then finally, the plans we offer, they have to know, ensure that we are having reasonable returns to the business based on the entertainment value that we deliver, and we are hoping to grow those and so those returns would grow as well. Now obviously, the reason to do that is we can continue to reinvest in adding more entertainment and building a better experience. And maybe one other thought too is there is a component of complex in ChoiceDax that we have to consider in how we think about our offering. It is structured. So having said all that, though, I think we believe that the bundle is a great value for members.

It allows members around the world to access a wide range of entertainment in a very easy way at a very reasonable price. So I would expect that will remain an important feature of our offering for the foreseeable future.

Ted Sarandos: A lot of value and simplicity.

Spencer Neumann: Yeah.

Spencer Wang: Great. From Rich Greenfield of LightShed Partners, help us understand why your new UI/UX is so important as you expand live content. Beyond live, can you provide some color on what metrics have improved since the launch of the new UI, such as speed of users finding a title and change in failed sessions.

Greg Peters: As we said previously, it is really hard for a new UI to immediately compete, be better than the UI that we have had for the past ten years that has been iteratively evolved and improved. But now that we have actually rolled out this new UI to the first large wave of TV devices, we are actually seeing performance that is better than what we saw in our prelaunch testing. To some degree, that is expected because we made some improvements based on the results of that testing phase. So it is exciting to see that those delivered actual better results.

But the rate of that change actually gives us increased confidence that this new experience will drive better performance, by the variety of metrics we look at some of which include the ones that Rich is mentioning in relatively short order. And then maybe just a point on why are why do we build this and launch this new experience the first place? Why was this so important? Bluntly, the previous experience was designed for the Netflix, Inc. of ten years ago, and the business has involved considerably since then. We got a wider breadth of entertainment options. We got TV and film, more of those, of course, from around the world, but now also games and live events.

If you think about the discovery experience that is best suited for these new content types, it is inherently different. Helping our members understand that there is a really good reason for them to launch Netflix, Inc. and tune in at 7PM on a Friday night versus just showing up whenever they were free and wanted to be entertained. That is a totally different job, and we really need a different user interface to do that job well. Add to that, we saw the opportunity to leverage newer technologies, like real-time recommendations that respond dynamically to what you need from us in that specific moment.

So the Netflix, Inc. you get on a Tuesday night is different from the Netflix, Inc. you get on a Sunday afternoon. But all of those rationales together and what we are seeing in terms of the performance so far, we are very confident that we have got a much better platform in this new user experience to build from to continue to improve, and that will help us meet the needs of the business over the years to come.

Spencer Wang: Thanks, Greg. The next question comes from Steve Cahall of Wells Fargo. YouTube is the only streamer that exceeds Netflix, Inc. in terms of US share of TV time. Do you see an opportunity to bring notable YouTube creators and their content exclusively to Netflix, Inc.? How big could this opportunity be?

Ted Sarandos: Thanks, Steve. Look. We want to be in business with the best creatives on the planet. Regardless of where they come from. Some of them are here in Hollywood. Others are Korea, some are in India. And some are creators that distribute only on social media platforms, and most of them have not yet been discovered. So, for those creators doing great work, we have phenomenal distribution. Desirable monetization, brilliant discovery in our UI, and a hungry audience waiting to be entertained. So Steve, you recently I think I listened to you on a podcast where you talked about our business model and on this I believe on this very topic.

And we largely agree with you and believe that working with a wide set of content creators makes a lot of sense for us. And as you said, if I am remembering it right, not everything on YouTube will fit on Netflix, Inc. We could not agree with that more. But there are some creators on YouTube like Miss Rachel that are a great fit. If you could saw on the engagement report, she said 53 million views in 2025 on Netflix, Inc. So she clearly works on Netflix, Inc. And we are really excited about the Sidemen and pop the balloon and a wide variety of and video podcasters that might be a good fit for us.

And particularly if they are doing great work and looking for different ways to connect with audiences.

Greg Peters: And maybe broadening this out for a second, and taking that question to look at sort of all of the competitors. That we face for our share of TV time. We have always said that the market for entertainment is very large. And we face competition from all kinds of directions. So whether it is linear, or streamers or video games or social media, it is also a very dynamic, competitive market as we and all of our competitors seek to provide better and better options for consumers.

And one of those changes, one of those vectors of dynamicism has been that sort of steady inevitable shift to streaming and on-demand as more services move deliver their content in a way that we all know consumers want. That creates increasing competitive pressure for us that we have got to respond to. We also see free services as a form of strong competition. Free is very powerful from a consumer perspective. So it is not surprising that some free services are growing in engagement. But I think Ted said it well earlier in the call, not all hours are created equal. And we have a different profit model from other services, a strong profit model.

So we are going to compete to win more moments of truth for sure. But especially compete to win those most profitable moments. And back to your specific question, it is worth remembering there is about 80% of total TV view share that neither Netflix, Inc. or YouTube are winning right now. We think that represents a huge opportunity for which we are competing aggressively and we aim to grow our share.

Ted Sarandos: The vast majority of our money and attention is focused on that 80%.

Spencer Wang: Thank you. Next question from Justin Patterson of KeyBanc. Could you please talk about your generative AI initiatives? Where do you think GenAI will be most impactful over time, revenue or expense efficiency?

Spencer Neumann: Well, I may take start with the with GenAI.

Ted Sarandos: We remain convinced that AI represents an incredible opportunity to help creators make films and series better, not just cheaper. There are AI-powered creator tools. So this is real people doing real work with better tools. Our creators are already seeing the benefits in production through previsualization and shot planning work and certainly visual effects. It used to be that only big-budget projects would have access to advanced visual effects like de-aging. Remember last quarter, we talked about Pedro Paramo. Well, that is just no longer the case. And, you know, this year, we had El Atonata. It is a very big hit show for us. From Argentina.

In that production, we leveraged virtual production and AI-powered VFX there was a shot in the show that the creators wanted to show a building collapsing in Buenos Aires. So our iLIGHT team iLIGHT team partnered with their creative team using AI-powered tools they were able to achieve an amazing result with remarkable speed. And in fact, that VFX sequence was completed 10 times faster than it could have been completed with visual, traditional VFX tools and workflows. And, also, the cost of it would just not have been feasible for a show in that budget. So that sequence actually is the very first GenAI final footage to appear on screen in a Netflix, Inc. original series or film.

So the creators were thrilled with the result. We were thrilled with the result. And more importantly, the audience was thrilled with the result. So I think these tools are helping creators expand the possibilities of storytelling on screen, and that is endlessly exciting.

Greg Peters: And maybe to cover a few of the other areas. You know, the member experience is a place where we feel like there is tons of opportunity to leverage these new generative technologies to improve the experience. You know, we have been in the personalization and recommendation business for, you know, two decades. But yet we see a tremendous room and opportunity to make it even better by leveraging some of the more newer generative techniques.

We are also rolling out have piloted right now a conversational experience that uses allows our members to basically have a sort of natural language discussion with our user interface saying, you know, I want to watch a film from the eighties that is, you know, a dark psychological thriller, get some results back, maybe iterate through those in a way that you just could not have done in our previous experiences. So that is super exciting and, you know, we see that all of the work that we do there essentially is a force multiplier to that large content investment we are making.

If we do a better job there, that means every dollar that we spend means more value back to our members by connecting them with the titles that they are truly going to love. Advertising is another really great area. You know, we have seen it is a high hurdle to create a brand forward spot in a creative universe of one of the titles that we are currently carrying. But it is very compelling for both watch and for those brands, and we think these generative techniques can decrease that hurdle iteratively over time and enable us to do that in more and more spots.

So there is a bunch of places where we think we have got an advantage in terms of data and scale where we can leverage these new generative techniques to deliver just more benefits for our members and for our creative community.

Spencer Neumann: Yeah.

Ted Sarandos: If you do not mind me coming back for one second, I just rolled off iLine as if everyone knows what iLine is. I probably should clarify that iLine is our production innovation group inside of our VFX house at Scanline, and they are doing a lot of this work with our creators. So I just realized that I just threw that out there as everyone knew.

Spencer Wang: Thanks for clarifying, Ted. Let us see. Our next question comes from Brian Pitts of BMO Capital Markets. With your evolving gaming ambitions, including partnerships with Grand Theft Auto and the recently announced Roblox agreement, can you talk to near-term monetization opportunities within gaming?

Greg Peters: Sure. We look at the near-term monetization opportunity with games very similar to how we have looked at other new content categories can think unscripted or film or on and on. And that is essentially if we deliver more value in our offering, we get increased user acquisition, we get increased retention, we get increased willingness to pay. So it drives all of the sort of core fundamentals of our business. We have seen those positive effects, albeit in a small way relative to the size of our overall business. When it comes to members playing games on the service. We already have those positive proof points.

And we are going to ramp our investment in this area, which is currently quite small compared to our overall content investment. As we ramp the size of those positive effects. So we want to remain disciplined not investing too far ahead of demonstrating that we know how to translate that investment into value for our members. We have seen good progress, as you note, with licensed games like GTA. We have seen good progress with games we developed like Squid Game Unleashed, so you will see more from us in both of those categories. As well as a whole new set of interactive experiences that we think that we are either in a unique or differential position to deliver.

So we are super excited to roll those out over the next year. And then we remain open to the core question. We remain open to evolving our monetization model, but we have got to get to a lot more scale before that becomes a really materially relevant question. So we are going to do that work first. It is probably worth restating, the TAM for this market is very, very large. We remain convicted about our strategic opportunity and excited to make more progress.

Spencer Wang: Thanks, Greg. We will take our last question. From Jessica Reif Ehrlich of Bank of America Securities. Given your healthy balance sheet and what appears to be a coming wave of M&A and media globally, are there certain types of assets that would strengthen your moat i.e., what is your view of owning successful IP or studio assets as they come to market?

Spencer Neumann: I will take that one, Spencer. Thanks, Jessica. Well, we agree. Continued consolidation of studio and network assets is likely. But at least with respect to consolidation, within legacy media, we do not think it materially changes the competitive landscape. As you also know, we have historically been more builders than buyers, and we continue to see big runway for growth without fundamentally changing that playbook. You heard a lot of that today. So we look at a lot of things. We apply a framework or lens to those opportunities when we look at, you know, is it a big opportunity? Does it strengthen our entertainment offering? Does it strengthen our capabilities? Does it accelerate our strategy?

And we look at all of that relative to the opportunity cost of distraction or other alternatives. We have been pretty clear in the past that we also have no interest in owning legacy media networks so that also kind of reduces the funnel for us. But you know, in general, we believe we can and will be choosy. We have got a great business. We are predominantly focused on growing that organically, investing aggressively in responsibly into that growth. And returning excess cash to shareholders through share repurchase and you will see us continue on that path.

Spencer Wang: Great. Thanks, Spence. And that will wrap up our Q2 earnings call. So we thank you all for taking the time to join us, and we look forward to seeing you all next quarter. Thank you.

Ted Sarandos: Conditioning. Yeah. And much like France and France, they have three hot

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DATE

Thursday, July 17, 2025 at 4:45 p.m. ET

CALL PARTICIPANTS

Co‑Chief Executive Officer — Ted Sarandos

Co‑Chief Executive Officer — Greg Peters

Chief Financial Officer — Spencer Neumann

Vice President, Finance, IR, and Corporate Development — Spencer Wang

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Full-Year Revenue Guidance: raised guidance from the prior range of $43.5 billion to $44.5 billion, primarily due to foreign exchange tailwinds and stronger member growth.

Operating Margin: Reported margin target increased to 30%, up from 29%. FX-neutral margin up 50 basis points on membership and ads revenue lift, with operating expenses unchanged from the prior forecast.

Advertising Revenue: Ad-supported business is expected to approximately double revenue, tracking slightly ahead of beginning-of-year expectations and supported by the global ad tech stack rollout and strong upfront results.

Member Metrics: Retention rates remain stable and industry-leading; no major changes observed in plan mix or plan take rate; engagement remains healthy according to management metrics.

Engagement Growth: Per-owner-household engagement has remained stable for two and a half years through the rollout of paid sharing and increased competition.

Content Investment: Content amortization is projected at more than $16 billion for 2025. Content amortization has grown more than 50% since 2020, designed to support both new and returning global titles.

Regional Partnerships: TF1 partnership in France initiated to accelerate highly localized content offerings, leveraging new capabilities including live and advertising integration.

Live Content Milestone: Successfully delivered concurrent global live events using internally developed infrastructure, with plans to expand live offering and maintain partnership-based production model.

Generative AI Adoption: Achieved a tenfold speed improvement in VFX delivery for “El Atonata” using GenAI-powered production tools in 2025, marking first GenAI final footage in original content.

Gaming Strategy: Monetization approach remains focused on driving acquisition, retention, and willingness to pay; management describes game-related investment as disciplined and incremental relative to overall content spend.

User Interface Overhaul: The newly launched UI is delivering better performance than prelaunch testing across the initial rollout to the first large wave of TV devices, with improvements observed in a variety of metrics tracked by management.

M&A Discipline: Management reaffirmed focus on organic growth and disciplined evaluation of potential acquisitions, reiterating no interest in owning legacy linear TV networks.

SUMMARY

Management upgraded full-year revenue and reported margin guidance for 2025, as increasing FX benefits and stronger member growth flowed directly to profitability while operating expenses remained flat in forecasts. The global rollout of Netflix, Inc.'s ad tech stack fueled rapid expansion in advertising sales and simplified inventory access for marketers worldwide. Recent product launches—such as the enhanced user interface and generative AI-powered production—have delivered demonstrable performance gains. Management outlined a disciplined strategy for live and sports content, emphasizing scalable infrastructure, partner models, and a global roadmap to expand the live offering within economic constraints.

CFO Neumann explained, "we expect operating margins to be up year over year in each quarter, including Q4, and as just noted, we expect to deliver strong full-year margins, as we just raised our guidance to 29.5% FX-neutral and 30% reported for full-year 2025."

The company completed the global implementation of its proprietary ad technology, enabling programmatic sales and the introduction of additional demand sources, including Yahoo, to broaden advertiser reach.

Co-CEO Peters said, "we are in this phase of learning and improving quickly based on the fact that being live everywhere means that you get a bunch of feedback about what we can do better, which is great."

With the new TF1 partnership, Netflix, Inc. is testing a model for scaling local content through collaborations with leading linear broadcasters; consumer response will guide potential expansion of this approach.

Co-CEO Sarandos noted ongoing commitment to reinvestment: "It is our objective to sustain healthy revenue growth, reinvest in the business to improve on all aspects of the service, and that includes growing content spend, strengthening and expanding the entertainment offering, and to drive that positive flywheel of growth by adding value to our members"

INDUSTRY GLOSSARY

TF1: France’s leading broadcast television network and Netflix, Inc.'s inaugural traditional broadcaster partner for localized content expansion.

Paid Sharing: A Netflix, Inc. policy restricting account use to a single household, aiming to convert password-sharing users into paying subscribers.

Ad Tech Stack: Proprietary technology platform enabling programmatic advertising, advanced targeting, and self-serve tools for Netflix, Inc.'s ad-supported streaming plans.

GenAI: Generative artificial intelligence technologies used to accelerate content production, personalization, and advertising at Netflix, Inc.

iLine: Netflix, Inc.’s in-house production innovation group within its Scanline VFX division, specializing in advanced visual effects using AI-powered tools.

Full Conference Call Transcript

Spencer Wang: Good afternoon, and welcome to the Netflix, Inc. Q2 2025 earnings interview. I am Spencer Wang, VP of Finance, IR, and Corporate Development. Joining me today are Co-CEOs, Ted Sarandos and Greg Peters, and CFO, Spencer Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. We will take questions submitted by the analyst community, and we will begin with our results and our forecast. The first question comes from Steve Cahall of Wells Fargo. The question is, since the revenue increase in your forecast is primarily FX driven, we are curious about the components of the constant currency increase.

Is this due to a better underlying revenue growth, or are there specific expenses that are coming in better, like content amortization? I will take that one. Thanks, Steve. So I

Spencer Neumann: As you saw on the letter, we increased our full-year revenue guidance to $44.8 to $45.2 billion. That is up from the prior guide of $43.5 to $44.5 billion. So up about a billion at the midpoint of the range and a tighter range. As you noted, primarily reflects the FX impact from the weakening dollar relative to most other currencies. But the good news is we are also seeing strength in our underlying business. We have got healthy member growth, and that even picked up nicely at the '2 a bit more than we expected. We think that will carry through with our strong back half slate. So we are reflecting that in our latest forecast.

We are also seeing nice momentum in ad sales, still off a pretty small base, but good growth and it is on pace to roughly double our revenue in the year. And it is a bit ahead of beginning of year expectations. So when we carry all that through to operating margin, our operating expenses are essentially unchanged, which is part of your question. So they are basically unchanged forecast to forecast. So we are largely flowing through the expected higher revenues to profit margins.

So that is why our updated target full-year reported margin is up a point from 29% to 30% and that 50 basis point increase in FX neutral margin is really just that revenue lift from stronger membership growth and ads relative to prior forecast flowing through the margin.

Spencer Wang: Thank you, Spence. We will take our next question from Barton Crockett of Rosenblatt Securities. Why is operating margin guidance for the full year only 30% after the upside in February and a forecast 31.5% for the third quarter? Is there a timing issue, FX issue, or is there a new level of spending that will continue beyond the fourth quarter of 2025?

Spencer Neumann: Well, this is really mostly timing. So thanks, Barton. We primarily, as a reminder, manage to full-year margins. And we expect our content expenses will ramp in Q3 and Q4. We have got many of our biggest new and returning titles and live events in the back half of the year. We have also, you know, Q4 is typically a and generally almost always is a heavier film slate. Sure. We will talk about our expect we will talk about more of this on the call. Also be marketing to support that heavier slate, and we are continuing to aggressively build out our ad sales infrastructure and capabilities through the year. So all of that is to be expected.

We can manage to it. We manage to those margins. And even with that back half ramp in expenses, we expect operating margins to be up year over year in each quarter, including Q4, and as just noted, we do expect to deliver strong full-year margins as we just took up our guide to, you know, 29.5% FX neutral, 30% reported.

Spencer Wang: Great. Thanks, Spence. The next question comes from Tom Champion of Piper Sandler. How has your view of the consumer and the macro economy changed over the last ninety days?

Greg Peters: Similar to last quarter, we are carefully watching consumer sentiment in the broader economy. But at this point, really nothing significant to note in the metrics and the indicators that we get directly through the business. Those are retention that remains stable and industry-leading. There have been no significant shifts in plan mix or plan take rate. And the price changes we have done since the last quarter have been in line with expectations. Engagement also remains healthy. So things all look stable from those indicators and big picture entertainment in general and Netflix, Inc. specific have been historically pretty resilient in tougher economic times.

We also think that we are an incredible entertainment value not only compared to traditional entertainment, but if you think about streaming competitors, when we start at $7.99 in The United States, you think about all the entertainment you get we have a belief and expectation that demand for not only entertainment but for us specifically will remain strong.

Spencer Wang: Thanks, Greg. I think a nice follow-up to this question will be on advertising. So from Ben Swinburne of Morgan Stanley, can you share any data points around your upfront negotiations?

Greg Peters: Yep. As we noted in the letter, our US upfront is nearly complete. We have closed a large majority of deals with the major agencies. Those results have generally been in line or slightly better than our targets and consistent with our goal to roughly double the ads business this year. And what are advertisers excited about? Growing scale is something we definitely hear. Also, a highly engaged audience. So bigger audience, but also an audience that is more engaged relative to our peers. The rollout of our own ad tech stack, which helps deliver a bunch of features, and then our slate, which is generally amazing and includes a growing number of live events that advertisers are excited about.

Spencer Wang: Great. Follow-up question on advertising from Vikram of Baird. How have advertisers in The US responded to the Netflix, Inc. ads suite rollout since the April launch? What features and capabilities are attracting the most interest, and how is the initial feedback in other regions outside of The US?

Greg Peters: We have completed the rollout of our own ad tech stack and the Netflix, Inc. ad suite to all of our ad markets now. So we are fully on our own stack around the world at this point. That rollout was generally smooth across all countries. We see good performance metrics across all countries, and the early results are in line with our expectations. Now we are in this phase of learning and improving quickly based on the fact that being live everywhere means that you get a bunch of feedback about what we can do better, which is great.

As we mentioned before, the most immediate benefit from this rollout is just making it easier for advertisers to buy on Netflix, Inc. We hear that benefit, that ease, from direct feedback talking to advertisers. They tell us that it is easier. See it in our overall sales performance. We have seen an increased programmatic buying. So all of these are consistent, you know, with what we were expecting both qualitatively and from a metrics perspective. We are also, I guess, worth noting that we are going to roll out additional demand sources like Yahoo that will further open up the market for us.

Long term, being on our own stack, that improves the speed of our execution to deliver this, you know, pretty significant roadmap of features that we have in front of us. It is things like improved targeting and measurement. There is also leveraging advertiser and third-party data which we definitely hear demand for as well. And it will ultimately allow us to improve the ad experience for our members. Which is critically important. So that means better ads personalization. So the ads that I see are increasingly different from the ads that, let us say, Ted would see.

And they are more relevant for each of us, which is good for us as users, and it is good for the brands. Also going to be introducing interactivity in the second half of the year, so that is exciting. So that is all to say this is, you know, a pretty significant milestone for us, one we are super excited to get behind us because now we can shift into this steady release cycle where we are dropping new features all the time, both for advertisers and for members. And that is the development and release that we have in other parts of the business. So it is fun to be able to get to that point.

Spencer Wang: Thanks, Greg. I will move this along now to a set of questions around content as engagement. This one comes from Ben Swinburne of Morgan Stanley. 1% engagement growth year over year suggests engagement is down year over year on an average per member basis. How do we reconcile that with engagement growing on a per member household basis if that is still accurate?

Greg Peters: So total view hours did grow a bit in the first half of 2025, and that is despite a particularly back half-weighted slate. But to your point on engagement on a per member basis, we have mostly been focused for the last few years on measuring engagement on what we call an owner household basis. So this takes out the borrower effect, and we obviously think this is the best way to assess our engagement per member because it removes the tricky comparison impacts from paid sharing.

So that metric per owner household engagement has been relatively steady over the past two and a half years throughout the rollout of paid sharing, and amidst increasing competition for TV time as more viewing moves to streaming and gets this on-demand benefit. So we are glad to have held that normalized engagement level, but we clearly also want to increase it. And to that end, we are optimistic and expect that our engagement growth in the second half of this year will be better than in the first half given our strong second half slate.

Spencer Wang: Thanks, Greg. Great segue to Doug Inmuth's question from JPMorgan. The content in the back half of the year looks strong with Squid Game 3 already the third most popular non-English series ever, and Wednesday and Stranger Things releasing in the coming months. You often say that no single title drives more than 1% of total viewing. So how do you think about the business currently as being quote, hit boosted or hit driven, and are you confident that both original and licensed content momentum can continue in 2026?

Ted Sarandos: Yeah. I will take that. And thank you, Doug. On the first part of your question, we are definitely riding this long-term trend of linear to streaming. And that has a natural adoption curve. But we can accelerate our growth with big hits. But as you said, each one of them, even in success, is going to drive about 1% of total viewing. So you need a lot more than just a big hit every once in a while. So to your point, it is not about the single hit. So what it is about a steady drumbeat of shows and films and soon enough games that our members really love and continue to expect from us.

So, like, by way of example, we had 44 individual shows nominated for Emmys this year. So that is what quality at scale looks like. We ended the quarter with a huge return to Squid Game. Thanks for acknowledging. I will go into the second half with the return of Wednesday and Stranger Things. And a really strong slate of supporting titles and favorites, like and new shows. Like next week or this week, we have Eric Bonnett's Untamed. Next week, we have Leanne Morgan's new comedy show Leanne. Both look really great. And that is just to name a few.

And the back half of the year also has this perhaps the most anticipated slate of new movies that we have ever had. That starts on the 25th with Happy Gilmore 2, followed by we have a new Knives Out film. We have new films from Noah Baumbach, from Guillermo del Toro, from Catherine Bigelow. And it does not stop there. It does roll right into 2026, and that is the second part of your question. And we are looking forward to movies like the rip from Ben Affleck and Matt Damon. Shirley starred on a new movie called Apex, which is a phenomenal action movie. Millie Bobby Brown is back in Enola Holmes 3.

Recall that in 2023, Enola Holmes was our biggest two was our biggest movie. So we are looking forward to that new sequel.

Spencer Wang: And Greta Gerwig's Narnia is going to be phenomenal.

Ted Sarandos: And then on top of that, we talk about Return of Bridgerton, One Piece, Avatar: The Last Airbender, all three huge successes around the world. The Gentleman, Four Seasons, Point Break I am sorry, Running Points. Sorry. Beef, which as you recall in 2023, won just about every award imaginable and was a gigantic success for us. It is back for a new season in '26. Three Body Problem, Love is Blind, Outer Banks, and not just from The US, from France, we have LuPan. From Spain, we have Berlin. We have a new season of a hundred years of from Colombia. So big hit returning shows and new series. From each of our regions around the world.

And the new stuff we have got coming up like man on fire, reimagining of little house on the prairie, The Duffer brothers from Stranger Things have a brand new show. The Burrows. We have got the Human Vapor from Japan. Operation Safred Cigar from India, can this love be translated from Korea? So again, popular programming, new and returning from all over the world in 2026. Unscripted shows like the reboot of star of Star Search, we have got into the doll universe. With Wonka's golden ticket, which we are really excited about.

In our live, we have got a few surprises for you next year, but of course, we have our NFL Christmas Day doubleheader that we are really thrilled about too. So we are really incredibly excited about the back half of this year and confident that it keeps rolling in 26.

Spencer Wang: Thank you, Ted. We will take the next question from Rich Greenfield of LightShed Partners. Who asks, are you concerned by the stagnation in your viewing share domestically?

Spencer Neumann: Think Rich is probably referring to the Nielsen gauge data. Do you need to spend more on programming or spend differently to materially move your viewing share higher?

Ted Sarandos: Yeah. Thanks, Rich. Look, our goal continues to be to continue to grow our share over the long term. And over the past few years, you are right, we have been able to maintain our share even as we work through a growing number of TV-based streaming services, some free, some paid. And the impact of paid sharing that Greg mentioned earlier as well as this, you know, 2025 slate that was more back half-weighted than we typically have in previous years. But over the long term, we tend to keep growing as the other 50% of TV viewing migrates from linear to streaming. And we will do that by doing what we have always done, continuously improve the service.

So in mind, since 2020, our content amort has grown more than 50%. You know, from under $11 billion to more than $16 billion. That we expect to do this year. And over that same time period, we definitely had we saw a big increased spending, but also increased engagement. In increased revenue, increased profit, and increased profit margin. So that is our model in action.

It is our objective to sustain healthy revenue growth, reinvest in the business to improve on all aspects of the service, and that includes growing content spend, strengthening expanding the entertainment offering, and to drive that positive flywheel of growth by adding value to our members and all the while growing engagement revenue and profit around the world.

Spencer Wang: Great. Thank you, Ted. I will move to Alan Gould from Loop Capital next. Can you provide more information on the TF1 partnership? Why did you choose to add TF1 in France as opposed to other broadcasters as your first partner, why is now the right time to create such a partner? Should we anticipate similar partnerships in other countries?

Greg Peters: Yeah. Perhaps to start with the rationale for the partnership. You would think with that long list of amazing titles that Ted just rattled off, we would have enough to satisfy every person on the planet. But it turns out we actually consistently hear from our members that they want more. They want more variety, more breadth of content. So the fundamental purpose for this TF1 partnership is all about that goal. Of expanding our entertainment offering. How do we enhance the value we deliver to members? Want to provide more content, more variety, more quality. So just as you have seen us do with licensing and production, this is just another mechanism to expand that offering.

And in this case, it is specifically about highly relevant local for local content in a country that has strong demand for that local content. This is an accelerated way to satisfy that need. Why now? Why was this time the right time? Well, we have invested a lot in a bunch of enabling capabilities that are either required or highly leveraged by this deal. You can think live, ads, the new UI, among other things. And then why TF1 versus some other partner? Well, we know each other really well. We wanted our first partner to be in a big territory. We wanted to pick the leading local programmer.

We wanted to be highly aligned in terms of the deal and the shape of the partnership and the values that we thought we could generate mutually by working together for our customers. And we both look at this as an opportunity to learn, to figure out how do we scale the local content that TF1 is producing to more customers in France. So we are looking forward to seeing what consumers think. You never really know until you get out there and get the real reactions. And then, obviously, we will factor that into our plans going forward.

Ted Sarandos: Thanks, Greg.

Spencer Wang: From Robert Fishman of MoffettNathanson, with reports suggesting Apple is now in the driver's seat for F1 rights. Uh-huh. Unintended, I guess. Plus UFC and MLB still looking for new deals and the NFL may be looking to come to market a year earlier. Can you share updated thoughts on how you are approaching sports rights for Netflix, Inc. and where you draw the line on something that can move the needle?

Ted Sarandos: Wow. Thanks for that, Robert. Remember, sports are a subcomponent of our live strategy. But our live strategy goes beyond sports alone. Our live strategy and our sports strategy are unchanged. You know, we remain focused on ownable big breakthrough events that because our audiences really love them. Anything we chase in the event space or in the sports space has got to make economic sense as well. You know, we bring a lot to the table, the deals that we make have to reflect that. So live is a relatively small part of the total content spend. And we have got about 200 billion view hours.

So it is a pretty small part of view hours as well right now. That being said, not all view hours are equal. And what we have seen with live is it has outsized positive impacts around conversation, around acquisition, and we suspect around retention. And but so right now, we are very excited where we sit. Very excited with the existing strategy. We are excited about the Canela Crawford fight and September and the SAG Awards and our weekly WWE matches. And the NFL, of course, which is a great property, and we are happy to have Christmas Day doubleheader, which includes Dallas versus Washington. And Detroit versus Minnesota.

So today, our live events have all primarily been in The US, keep in mind. So over time, we are going to continue to invest and grow our live capabilities for events around the world in the years ahead. So we are excited, but the strategy is unchanged.

Spencer Wang: Thanks, Ted. Good follow-up question on that one from Steve Cahall of Wells Fargo. What investments have you made to increase your capabilities in producing live events? What have you been able to do in house in 2025 that you could not do last year? And how long will it take before you have the capability to produce large-scale events like NFL games?

Ted Sarandos: Yeah. Thanks, Steve. I would say remember, when we started original scripted programming, we had zero production capability. House of Cards was in fact thinking about our first three years of original programming, all of those shows were produced by others. Have to go three years later, we have produced Stranger Things in house. Today, we still have shows that are produced by others. Universal, Twentieth Television, which is Disney, Paramount, Lionsgate, Warner Television, there is lots of available infrastructure to produce TV. And that is true of live events and sports as well. If we when we do more and more, we may choose to bring some of that in house.

We have already produced a few, and we are just as likely to continue to use partners with existing production infrastructure and work to make sure that those productions are bespoke and they feel like they could only be on Netflix, Inc. So you should not think about the mix of partnerships and self-producing as a we think about it as a scaling tool. Not backfilling some, like, lack of ability in some area of the company. So and I should note by example, CBS is a phenomenal partner producing NFL games with us, and we are thrilled to work with them again this year on Christmas Day.

Greg Peters: Maybe take this opportunity just to some commentary on the general capability we have been building with live. Know, when we start something new, we pretty much expect that we are not going to be brilliant at it at the beginning. What? But we yeah. That is true. And we do not have any real reason to believe that. But we do not let that stop us from kicking off initiatives that we believe have a strong strategic rationale even though we know we need to develop that capability. Of course, our job is to get out there and learn by doing and get world-class as quickly as we possibly can.

And if you look at our current capabilities around live, we are in just a completely different place today compared to when we first started. As a good example that just happened last Friday, we had our first concurrent pair of live events. We had Taylor versus Serrano globally delivered alongside WWE SmackDown, was delivered ex US. Both events at scale and delivered with extremely high quality. So it is great progress we have seen, and we have got a great roadmap ahead of us to continue to enhance those experiences. For folks.

Spencer Wang: Thank you both. Last question on the content side or the topic of content comes from Ben Swinburne of Morgan Stanley. What are the learnings from the success of K-Pop Demon Hunters? More animated musicals with fictional bands, question mark. That is a question from a man who probably has that movie playing on repeat in their home if I am guessing correctly. K-Pop Demon Hunters is a phenomenal success out of the gate. One of the things that I am really proud of the team over

Ted Sarandos: is original animation, not sequel, not live-action remake. Original animation feature is very tough and has been struggling for years. And I think the fact that our biggest hits now, Leo, Seabeast, and now K-Pop Demon Hunters, are original animation. So we are super thrilled about that. The mix of music and pop culture, getting it right matters. Good storytelling matters. The innovation in animation itself matters. And the fact that people are in love with this film and in love with the music from this film that will keep it going for a long time. So we are really thrilled. And now the next beat is where does it go from here?

So know, we put in the letter how just how successful the music has been. And continues to be, and we think that will drive fandom for this fictional K-Pop band that we have. But more importantly, for the song Golden and for the song Soda Pop, these are enormous hits, and they all came from a film that is available only on Netflix, Inc. So we are really excited that we can pierce the culture with original animated features considering that folks have been poking us on it.

Spencer Neumann: Let us do it again later in the year within your dreams. Right, Ted? Absolutely. In your dreams, another very

Ted Sarandos: funny one and also completely original. So Yeah.

Spencer Wang: Great. I will move us on now to a few questions on plans as well as product. So from Michael Morris of Guggenheim, he asks, Netflix, Inc. continues to broaden content genres notably with live sports and the recently announced TF1 partnership. Is there a path to additional tiers of service based on types of content available, or will Netflix, Inc. always make all content available at the ad-free/ad-supported price points?

Greg Peters: I have learned to never say never, so I would say we remain open to evolving our consumer-facing model. Think we have got a few principles, important principles that we are carrying with us that I do not see changing significantly. One is we want to provide members choice. Right? So how do we have a different set of plans, a different price points, different features that allows folks to opt in to what their is the right Netflix, Inc. for them. Also, how do we provide good accessibility to new members around the world? We want to grow, and that means making that we have got accessible price points.

And then finally, the plans we offer, they have to know, ensure that we are having reasonable returns to the business based on the entertainment value that we deliver, and we are hoping to grow those and so those returns would grow as well. Now obviously, the reason to do that is we can continue to reinvest in adding more entertainment and building a better experience. And maybe one other thought too is there is a component of complex in ChoiceDax that we have to consider in how we think about our offering. It is structured. So having said all that, though, I think we believe that the bundle is a great value for members.

It allows members around the world to access a wide range of entertainment in a very easy way at a very reasonable price. So I would expect that will remain an important feature of our offering for the foreseeable future.

Ted Sarandos: A lot of value and simplicity.

Spencer Neumann: Yeah.

Spencer Wang: Great. From Rich Greenfield of LightShed Partners, help us understand why your new UI/UX is so important as you expand live content. Beyond live, can you provide some color on what metrics have improved since the launch of the new UI, such as speed of users finding a title and change in failed sessions.

Greg Peters: As we said previously, it is really hard for a new UI to immediately compete, be better than the UI that we have had for the past ten years that has been iteratively evolved and improved. But now that we have actually rolled out this new UI to the first large wave of TV devices, we are actually seeing performance that is better than what we saw in our prelaunch testing. To some degree, that is expected because we made some improvements based on the results of that testing phase. So it is exciting to see that those delivered actual better results.

But the rate of that change actually gives us increased confidence that this new experience will drive better performance, by the variety of metrics we look at some of which include the ones that Rich is mentioning in relatively short order. And then maybe just a point on why are why do we build this and launch this new experience the first place? Why was this so important? Bluntly, the previous experience was designed for the Netflix, Inc. of ten years ago, and the business has involved considerably since then. We got a wider breadth of entertainment options. We got TV and film, more of those, of course, from around the world, but now also games and live events.

If you think about the discovery experience that is best suited for these new content types, it is inherently different. Helping our members understand that there is a really good reason for them to launch Netflix, Inc. and tune in at 7PM on a Friday night versus just showing up whenever they were free and wanted to be entertained. That is a totally different job, and we really need a different user interface to do that job well. Add to that, we saw the opportunity to leverage newer technologies, like real-time recommendations that respond dynamically to what you need from us in that specific moment.

So the Netflix, Inc. you get on a Tuesday night is different from the Netflix, Inc. you get on a Sunday afternoon. But all of those rationales together and what we are seeing in terms of the performance so far, we are very confident that we have got a much better platform in this new user experience to build from to continue to improve, and that will help us meet the needs of the business over the years to come.

Spencer Wang: Thanks, Greg. The next question comes from Steve Cahall of Wells Fargo. YouTube is the only streamer that exceeds Netflix, Inc. in terms of US share of TV time. Do you see an opportunity to bring notable YouTube creators and their content exclusively to Netflix, Inc.? How big could this opportunity be?

Ted Sarandos: Thanks, Steve. Look. We want to be in business with the best creatives on the planet. Regardless of where they come from. Some of them are here in Hollywood. Others are Korea, some are in India. And some are creators that distribute only on social media platforms, and most of them have not yet been discovered. So, for those creators doing great work, we have phenomenal distribution. Desirable monetization, brilliant discovery in our UI, and a hungry audience waiting to be entertained. So Steve, you recently I think I listened to you on a podcast where you talked about our business model and on this I believe on this very topic.

And we largely agree with you and believe that working with a wide set of content creators makes a lot of sense for us. And as you said, if I am remembering it right, not everything on YouTube will fit on Netflix, Inc. We could not agree with that more. But there are some creators on YouTube like Miss Rachel that are a great fit. If you could saw on the engagement report, she said 53 million views in 2025 on Netflix, Inc. So she clearly works on Netflix, Inc. And we are really excited about the Sidemen and pop the balloon and a wide variety of and video podcasters that might be a good fit for us.

And particularly if they are doing great work and looking for different ways to connect with audiences.

Greg Peters: And maybe broadening this out for a second, and taking that question to look at sort of all of the competitors. That we face for our share of TV time. We have always said that the market for entertainment is very large. And we face competition from all kinds of directions. So whether it is linear, or streamers or video games or social media, it is also a very dynamic, competitive market as we and all of our competitors seek to provide better and better options for consumers.

And one of those changes, one of those vectors of dynamicism has been that sort of steady inevitable shift to streaming and on-demand as more services move deliver their content in a way that we all know consumers want. That creates increasing competitive pressure for us that we have got to respond to. We also see free services as a form of strong competition. Free is very powerful from a consumer perspective. So it is not surprising that some free services are growing in engagement. But I think Ted said it well earlier in the call, not all hours are created equal. And we have a different profit model from other services, a strong profit model.

So we are going to compete to win more moments of truth for sure. But especially compete to win those most profitable moments. And back to your specific question, it is worth remembering there is about 80% of total TV view share that neither Netflix, Inc. or YouTube are winning right now. We think that represents a huge opportunity for which we are competing aggressively and we aim to grow our share.

Ted Sarandos: The vast majority of our money and attention is focused on that 80%.

Spencer Wang: Thank you. Next question from Justin Patterson of KeyBanc. Could you please talk about your generative AI initiatives? Where do you think GenAI will be most impactful over time, revenue or expense efficiency?

Spencer Neumann: Well, I may take start with the with GenAI.

Ted Sarandos: We remain convinced that AI represents an incredible opportunity to help creators make films and series better, not just cheaper. There are AI-powered creator tools. So this is real people doing real work with better tools. Our creators are already seeing the benefits in production through previsualization and shot planning work and certainly visual effects. It used to be that only big-budget projects would have access to advanced visual effects like de-aging. Remember last quarter, we talked about Pedro Paramo. Well, that is just no longer the case. And, you know, this year, we had El Atonata. It is a very big hit show for us. From Argentina.

In that production, we leveraged virtual production and AI-powered VFX there was a shot in the show that the creators wanted to show a building collapsing in Buenos Aires. So our iLIGHT team iLIGHT team partnered with their creative team using AI-powered tools they were able to achieve an amazing result with remarkable speed. And in fact, that VFX sequence was completed 10 times faster than it could have been completed with visual, traditional VFX tools and workflows. And, also, the cost of it would just not have been feasible for a show in that budget. So that sequence actually is the very first GenAI final footage to appear on screen in a Netflix, Inc. original series or film.

So the creators were thrilled with the result. We were thrilled with the And more importantly, the audience was thrilled with the result. So I think these tools are helping creators expand the possibilities of storytelling on screen, and that is endlessly exciting.

Greg Peters: And maybe to cover a few of the other areas. You know, the member experience is a place where we feel like there is tons of opportunity to leverage these new generative technologies to improve the experience. You know, we have been in the personalization and recommendation business for, you know, two decades. But yet we see a tremendous room and opportunity to make it even better by leveraging some of the more newer generative techniques.

We are also rolling out have piloted right now a conversational experience that uses allows our members to basically have a natural language discussion with our user interface saying, you know, I want to watch a film from the eighties that is, you know, a dark psychological thriller, get some results back, maybe iterate through those in a way that you just could not have done in our previous experiences. So that is super exciting and, you know, we see that all of the work that we do there essentially is a force multiplier to that large content investment we are making.

If we do a better job there, that means every dollar that we spend means more value back to our members by connecting them with the titles that they are truly going to love. Advertising is another really great area. You know, we have seen it is a high hurdle to create a brand forward spot in a creative universe of one of the titles that we are currently carrying. But it is very compelling for both watch and for those brands, and we think these generative techniques can decrease that hurdle iteratively over time and enable us to do that in more and more spots.

So there is a bunch of places where we think we have got an advantage in terms of data and scale where we can leverage these new generative techniques to deliver just more benefits for our members and for our creative community.

Spencer Neumann: Yeah.

Ted Sarandos: If you do not mind me coming back for one second, I just rolled off iLine as if everyone knows what iLine is. I probably should clarify that iLine is our production innovation group inside of our VFX house at Scanline, and they are doing a lot of this work with our creators. So I just realized that I just threw that out there as everyone knew.

Spencer Wang: Thanks for clarifying, Ted. Let us see. Our next question comes from Brian Pitts of BMO Capital Markets. With your evolving gaming ambitions, including partnerships with Grand Theft Auto and the recently announced Roblox agreement, can you talk to near-term monetization opportunities within gaming?

Greg Peters: Sure. We look at the near-term monetization opportunity with games very similar to how we have looked at other new content categories can think unscripted or film or on and on. And that is essentially if we deliver more value in our offering, we get increased user acquisition, we get increased retention, we get increased willingness to pay. So it drives all of the sort of core fundamentals of our business. We have seen those positive effects, albeit in a small way relative to the size of our overall business. When it comes to members playing games on the service. We already have those positive proof points.

And we are going to ramp our investment in this area, which is currently quite small compared to our overall content investment. As we ramp the size of those positive effects. So we want to remain disciplined not investing too far ahead of demonstrating that we know how to translate that investment into value for our members. We have seen good progress, as you note, with licensed games like GTA. We have seen good progress with games we developed like Squid Game Unleashed, so you will see more from us in both of those categories. As well as a whole new set of interactive experiences that we think that we are either in a unique or differential position to deliver.

So we are super excited to roll those out over the next year. And then we remain open to the core question. We remain open to evolving our monetization model, but we have got to get to a lot more scale before that becomes a really materially relevant question. So we are going to do that work first. It is probably worth restating, the TAM for this market is very, very large. We remain convicted about our strategic opportunity and excited to make more progress.

Spencer Wang: Thanks, Greg. We will take our last question. From Jessica Reif Ehrlich of Bank of America Securities. Given your healthy balance sheet and what appears to be a coming wave of M&A and media globally, are there certain types of assets that would strengthen your moat i.e., what is your view of owning successful IP or studio assets as they come to market?

Spencer Neumann: I will take that one, Spencer. Thanks, Jessica. Well, we agree. Continued consolidation of studio and network assets is likely. But at least with respect to consolidation, within legacy media, we do not think it materially changes the competitive landscape. As you also know, we have historically been more builders than buyers, and we continue to see big runway for growth without fundamentally changing that playbook. You heard a lot of that today. So we look at a lot of things. We apply a framework or lens to those opportunities when we look at, you know, is it a big opportunity? Does it strengthen our entertainment offering? Does it strengthen our capabilities? Does it accelerate our strategy?

And we look at all of that relative to the opportunity cost of distraction or other alternatives. We have been pretty clear in the past that we also have no interest in owning legacy media networks so that also kind of reduces the funnel for us. But you know, in general, we believe we can and will be choosy. We have got a great business. We are predominantly focused on growing that organically, investing aggressively in responsibly into that growth. And returning excess cash to shareholders through share repurchase and you will see us continue on that path.

Spencer Wang: Great. Thanks, Spence. And that will wrap up our Q2 earnings call. So we thank you all for taking the time to join us, and we look forward to seeing you all next quarter. Thank you.

Ted Sarandos: Conditioning. Yeah. And much like France and France, they have three hot

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DATE

Thursday, July 17, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chairman — Thomas Peterffy

Chief Executive Officer — Milan Galik

Chief Financial Officer — Paul Brody

Director of Investor Relations — Nancy Stuebe

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Commission Revenue: $516 million for the second quarter, up 27% year-over-year; would have been $15 million higher absent the SEC fee cut, representing an additional 3% increase for the quarter.

Overnight Trading Volumes: Grew over 170% compared to the second quarter of 2024, reflecting continued global demand for after-hours trading.

Net New Accounts: Added 250,000 net new accounts in Q2 2025, pushing year-to-date additions to over 528,000 as of Q2 2025, more than were added in all of 2023.

Client Credit Balances: Rose 34% year-over-year to $144 billion, despite higher client trading activity.

Client Equity: Increased 34% year-over-year to $604 billion; up 16% for the quarter, compared to an 11% rise in the S&P 500.

Pretax Income: Pretax income surpassed $1 billion for the third consecutive quarter, driven by record commissions, net interest, and total net revenue.

Pretax Profit Margin: Reached a record 75% pretax profit margin, with well-controlled expenses.

Net Interest Income: Reported at $860 million, a quarterly record and 9% higher year-over-year (GAAP); excluding a one-time $26 million tax recovery, $834 million.

Total Customer DARTs (Daily Average Revenue Trades): Increased 49% year-over-year to 3.6 million trades per day.

Headcount: Reached 3,087 as of June 30, 2025, up 5% over the prior year.

Stock Split and Dividend: Completed a four-for-one stock split on June 17 and raised the annual dividend from $1.00 to $1.28 per share (32¢ on a split-adjusted basis).

Interest Rate Sensitivity: A 25 basis point reduction in the benchmark Fed funds rate is estimated to reduce annual net interest income by $73 million, based on balances as of June 30, 2025; a 1% drop across all benchmarks would reduce it by $335 million.

Product and Platform Enhancements: Launched "Forecast X" for retail clients in Europe, US, Canada, and Hong Kong; added investment themes to facilitate idea generation; rolled out thousands of global software releases and product changes in the quarter.

Cryptocurrency Initiatives: Progressed new partnerships and added cryptocurrencies, stablecoin funding, asset transfer capability, and plans for staking and expanded European crypto access.

Introducing Broker Pipeline: Integrations and pipeline activity increased over the prior quarter, bolstered by returning competitor clients and product expansion.

SUMMARY

Interactive Brokers Group, Inc.(NASDAQ:IBKR) management emphasized rapid global customer expansion and a record pace of core financial metrics during a quarter marked by turbulent markets and strong investor engagement. The completion of a stock split and dividend increase signals capital return priorities, while enhancements to overnight trading, product offerings, and crypto functionality were positioned as key to driving future growth.

Paul Brody stated, "Net interest income also received a benefit from lower interest expense on customer cash balances, as rates have declined worldwide over the past year."

Milan Galik explained, "The pipeline remains very strong." referencing new and returning introducing broker relationships, with conversions rising sequentially.

Chairman Peterffy said, "I expect this environment to be very, very favorable to brokerage firms in general. And investment banks in general and specifically for Interactive Brokers."

During Q&A, it was noted that zero DTE options activity stayed steady versus the previous quarter, with particular strength in S&P 500 contracts and new engagement in "Forecast X" index products.

The company disclosed continued disappointment with the pace of crypto market share gains despite low costs, but outlined forthcoming features to potentially address barriers to asset transfers.

INDUSTRY GLOSSARY

DARTs (Daily Average Revenue Trades): A standard industry measure indicating the average number of revenue-generating trades per day executed for customers.

Zero DTE Options: Options contracts that expire on the same day they are traded, popular for intraday index and, potentially, single stock strategies.

ATS (Alternative Trading System): Electronic trading venues outside traditional exchanges, facilitating alternative execution and liquidity, especially in overnight trading.

Full Conference Call Transcript

What we experienced in the second quarter felt like a roller coaster in reverse. Instead of the market moving upward, getting to a high level, then dropping precipitously to a series of volatile ups and downs, we got the precipitous drop first, with the S&P reaching a low on April 8, then a spike of volatility followed by the market grinding upwards towards quarter end. The uncertainty and volatility during the quarter led to an accompanying spike in trade volumes. Also over the quarter, we saw the shrinking life of market dips. Investors, whether looking for securities with momentum behind them, or simply worried about missing out on a rally, bought the dip.

In equities, we saw customers actively using our platform tools to find companies to invest in that met their particular parameters. This included an expansion of the magnificent seven to include companies that may be beneficiaries of the world embrace of artificial intelligence. As AI is incorporated into more environments, by quarter end, the market had recovered to surpass its February peak, closing up over 10%. And since quarter end, it has continued upwards from there. Volatility and uncertainty often spark increased market activity. Combined with our strong net new account growth, this led to our client trading volumes expanding for stocks, options, and futures. Our commission revenue increased by 27% compared to last year.

Though this figure may slightly understate the actual growth. The SEC fee rate, which is included within our commission revenue, was reduced to zero halfway through the quarter. Without this fee, we would have generated an additional $15 million in commission revenue, which would have represented a 3% increase on our total of $516 million. We continue to see increasing activity in our overnight trading hours. We offer the most comprehensive overnight product set, with over 10,000 US stocks and ETFs, plus US equity index futures and options, and on the fixed income side, global corporate bonds, US treasuries, and European and UK government bonds.

Given our global client base, for some customers, overnight hours here are their daytime trading hours that they want to operate in, and, therefore, are particularly sought after.

Operator: Our overnight volumes grew over 170% from second quarter 2024 to second quarter 2025.

Nancy Stuebe: Given our rapid growth, continuous additions and enhancements to our platforms, and periodic volume surges, having a platform that is scalable is critical. We enhanced our ATS this quarter by improving its performance and ability to handle large spikes in volume by up to 20x on high volume days, ensuring we are better equipped for market surges and capable of delivering top-tier execution for our clients. We also made enhancements to our smart order router, which is designed to provide best execution, which includes price improvement and the possibility of receiving rebates. It is this price execution advantage we offer that keeps our sophisticated customer base engaged on our platform.

Operator: And that encourages new clients.

Nancy Stuebe: We saw strong account growth as we added more investors to our platform. This quarter, we added 250,000 net new accounts, bringing our year-to-date total to over 528,000, more than we added in all of 2023. Our application processing is highly automated and continually becoming even more so, allowing us to handle surges in new accounts efficiently without adding significantly to our headcount or cost base. New accounts meant more cash in those accounts, raising our client credit balances 34% to a record $144 billion, despite strength in trading volumes indicating our customers are using the cash they deposit to participate in the markets.

Our client equity rose 34% to $604 billion, up 16% for the quarter versus 11% for the S&P. More accounts and higher volumes translated into strong financial results. Quarterly commissions, net interest, total net revenue, and pretax income were all records, with our pretax income reaching over a billion dollars for the third consecutive quarter. Our expenses remained well controlled, and our pretax profit margin was an industry-leading 75%, a record for us. Finally, on the platform side, automating substantial parts of the brokerage business and using all tools and the judicious inclusion of artificial intelligence is the heart of what we do.

In the second quarter alone, we rolled out thousands of software releases and product configuration changes around the globe. This is a scale of automation and effort that we handle routinely, within highly regulated environments around the globe, to give our clients the global access and edge they demand. In terms of how the business looked on the client front, we continue to see growing numbers of investors worldwide wanting access to international, and particularly US markets. Regarding introducing brokers, our pipeline of potential continues to onboard iBrokers to the platform and add prospective ones to it at a steady pace with steady demand around the world. In terms of new efforts and product introductions, we had a busy quarter.

Forecast X is now live for retail clients across most of Europe, as it is for the US, Canada, and Hong Kong. We also expanded into forecast contracts on financial markets, including indices like the 500, as well as Forex and crypto. These have seen strong interest. Yesterday, we introduced investment themes, a powerful new discovery tool designed to help investors quickly turn market trends into actionable trading ideas. With investment themes, clients can begin with broad topics like generative AI or nuclear energy and instantly uncover companies tied to those themes. No ticker symbols or prior research needed.

Alternatively, they can start with the ticker symbol and view detailed company profiles, including insights into competitors, related industries, and global revenue sources, helping them assess regional risks and growth opportunities. We believe investment themes will streamline our clients' investment process, helping them uncover opportunities and make informed decisions faster than ever before. With respect to our stock, we completed our four-for-one stock split on June 17 and increased the dividend as announced in the previous quarter. As for capital allocation, while we have not stopped looking at potential acquisitions, we realize there are few opportunities at a price that makes sense for us.

We will keep looking, but as we have been noting, returning capital to shareholders via increases in the dividend makes sense for now.

Paul Brody: We will be adding our four millionth customer in the third quarter, just one year after adding our three millionth. While the market may move in any direction in the short run, we are looking to capture the long-term trend towards more global investing across multiple customer types and jurisdictions, giving investors the ability to invest in the companies they like, paying in the currencies they have, around the clock.

Nancy Stuebe: This trend and our ability to serve it with a much lower cost structure and a much broader product and tool set is what sets us apart and will continue to do so in the years ahead. With that, I will turn the call over to Paul Brody. Paul?

Paul Brody: Thank you, Nancy. Thanks, everyone, for joining the call. We'll review the second quarter results, and then, of course, we'll open it up for questions. Starting with our revenue items on Page three of the release, we are again pleased with our financial results this quarter as we again produced record net revenues and pretax income. Commissions rose to a record $516 million, 27% above last year's second quarter. We continue to see higher trading volumes from our growing base of active customers, with options and futures both setting new quarterly volume records.

Net interest income also reached a quarterly record of $860 million, despite lower benchmark rates in some of the major currencies and a risk-off posture adopted by investors responding to tariff-driven market uncertainty at the beginning of the quarter. We recognized a one-time credit of $26 million related to recovery of taxes withheld at source, which is reflected in segregated cash interest. Without this, our net interest income still reached a record $834 million. Higher segregated cash balances and strong securities lending contributed to these results. Net interest income also received a benefit from lower interest expense on customer cash balances, as rates have declined worldwide over the past year.

Other fees and services generated $62 million, down 9% 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 market data and FDIC sweep fees. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Our other income was a $42 million gain, both as and as adjusted. Turning to expenses, execution, clearing, and distribution costs were $116 million in the quarter, up just 1% over the year-ago quarter despite significantly higher volumes in options and futures, which carry higher fees.

Midway through the quarter, the SEC fee rate was cut from $27.80 per million to zero. Had it been in effect the entire quarter, commission revenue and execution and clearing expense would both have been an estimated $15 million higher. The SEC fee is a pass-through to customers, so it does not impact our profitability. As a percent of commission revenues, execution and clearing costs were 18% in the second quarter, for a gross transactional profit margin of 82%. We calculate this by excluding from execution, clearing, and distribution $22 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component.

Compensation and benefits expense was $163 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 11%, unchanged from last year's quarter. IBKR stock incentive plan bonuses vest in the second quarter, which leads to higher taxes paid for FICA and other social insurance than in other quarters. The total of these extra taxes was $5 million over the year-ago 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 June 30 was 3,087. G&A expenses were $61 million, up from the year-ago quarter, mainly on higher advertising expenses.

Our pretax margin was 75% for the quarter, both as reported and as adjusted. Income taxes of $98 million reflect the sum of the public company's $50 million and the operating companies' $48 million. The public company's effective tax rate was 18.1%, within its usual range. Moving to our balance sheet on page five of the release, our total assets ended the quarter 33% higher than in the prior year quarter-end, at $181 billion, with growth driven by higher segregated cash balances and higher margin lending. New account growth helped drive our record customer credit balances. We continue to believe 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% to $18.5 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, also considering overall capital allocation. The consistent strength of our business and our healthy balance sheet supported our raising the dividend in the second quarter from $1 per year to $1.28, or 32¢ on a split-adjusted basis. In our operating data on pages six and seven, our customer trading volumes tracked industry growth over the prior year quarter in our three major product classes.

Options and futures contract volumes rose 24% and 18%, respectively, and stock share volumes rose 31%. On page seven, you can see that total customer DARTs were 3.6 million trades per day, up 49% from the prior year and strong in all product classes. Commission per cleared commissionable order of $2.05 was down from last year, primarily due to the elimination of the SEC fee mid-quarter and the performance of our smart order router leading to the capture of higher exchange rebates, which as pass-throughs, serve to lower both our commission revenues and our execution and clearing costs.

Paul Brody: Page eight shows our net interest margin or NIM numbers. Total GAAP net interest income was $860 million for the quarter, up 9% on the year-ago quarter. And excluding the $26 million recovery of taxes withheld at source, it was $834 million. This quarter's NIM is also adjusted by removing this one-time credit of $26 million from segregated cash interest. The adjusted NIM net interest income was $861 million. We also include, for NIM purposes, certain income that is more appropriately considered interest, but that for GAAP purposes is classified as other fees and services, or as other income.

Net interest income reflects strength in segregated cash interest and securities lending, as well as a decrease in interest expense driven by lower benchmark interest rates on customer cash balances. A few central banks, the UK, Australia, and Europe, reduced rates again this quarter, while others, including the US, Canada, Hong Kong, and Switzerland, held steady. Year on year, the average US Fed funds rate fell 100 basis points or 19%. Despite this decline, our segregated cash interest income was up 2% on higher balances, while margin loan interest decreased 6% on lower rates, but was bolstered by higher lending balances. The average duration of our investment portfolio remained at less than thirty days.

The US dollar yield curve remains inverted from the short to medium term, 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. The strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest was stronger this quarter, after a long period in the industry with few of the hard-to-borrow names that drive revenue, there was an uptick in hard-to-borrows that we were able to capitalize on. What we have mentioned in the past still holds true.

Some of the typical drivers of securities lending, including IPOs and merger and acquisition activity, are somewhat more active than in 2024 but without a substantial impact on the securities lending market. Nevertheless, we have been consistently raising the total notional dollar value of securities we lend. As benchmark interest rates rose from near zero in 2022, more of what we earned from securities lending became 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 securities lending net revenue would have been $251 million for the quarter, versus $194 million in the prior year quarter, a 29% increase.

Interest on customer credit balances, the interest we pay to our customers on the cash in their accounts, declined on lower benchmark rates, even though we built up higher client cash balances from new account growth and from risk-reducing sales resulting in cash balances. As we have noted in the past, the high interest rates we pay on customer cash, currently 3.83% on qualified US dollar balances, is a significant attraction to new customers. Fully rate-sensitive customer balances ended the current quarter at $22.8 billion versus $18.6 billion in the year-ago quarter.

Now for our estimates of the impact of changes in rates, given market expectations of rate cuts sometime in 2025, we estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $73 million reduction in annual net interest income. Note that our starting point for this estimate is June 30 with the Fed funds effective rate at 4.33%, and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 27% of our customer cash balances is not in US dollars, so estimates of the 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 $8 million for 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 $335 million. This takes into account rate-sensitive customer balances and firm equity. In the second quarter of 2024, we estimated that a 1% decrease in all benchmark rates would decrease our annual net interest income by $307 million. In the past year, the US Fed funds benchmark did in fact fall 1%, and other countries' rates for the most part fell about the same.

However, this quarter's net interest income represented an annualized increase of $225 million driven by higher balances. 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.

Paul Brody: With that, we will now open up the line for your questions.

Operator: Thank you. As a reminder, if you would like to ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. And our first question today will be coming from the line of Craig Siegenthaler of Bank of America. Your line is open.

Craig Siegenthaler: Hey. Good evening, everyone. Hope you are all doing well. So, I wanted to follow up with a comment that Thomas made at a conference in May. I actually, I think it was Thomas. The commentary was regarding decelerating account growth. However, account growth in the quarter was still really strong, 32% clip, in line with last quarter. So I was just hoping you could help clarify those comments you made. And should we expect somewhat slower growth in the summer months into 4Q as we have seen in previous years?

Thomas Peterffy: So I would like I always like to overdeliver. That is why I projected lower account growth than I really believed would take place, and I continue to do that for the future.

Craig Siegenthaler: Great. Well, Thomas, we like it when you overdeliver too. Just for my follow-up, the Genius app, I think, just passed in the house several minutes ago, so that is pretty much done. The Clarity Act is making its way through Congress of two digital asset initiatives. Thomas, I am wondering, will broader demand for digital assets could this cause you to rethink your current digital asset model, which relies on a Paxos partnership? But also does not allow your clients to use nonfacility wallets with their IBKR accounts. I know I think you have felt pretty strong in the past about holding crypto on the balance sheet, which is one issue. So I will take this one.

This is Milan. Thanks for the question. You might have seen in the news that Interactive Brokers has an investment in a cryptocurrency exchange called Zero Hash.

Milan Galik: The news was published this week or a week ago, that there is a continued capital raise down by Zero. Actually, we obviously we participated in it in order to keep our percentage ownership steady. We have a good partnership with Zero Hash. We work together on a number of items that we are going to be delivering in the next quarters. We have already added several cryptocurrencies in the past quarter, and there are numerous initiatives that we are working on. We are going to be making it possible for the clients to fund their accounts with stablecoins.

We are working on the asset transfer capability in the crypto space, so we will be able to take in crypto asset transfers. And then later during the year, we will be adding staking. Obviously, at the same time, we are working on expanding our ability to offer cryptocurrency trading geographically. At the moment, we are focusing on Europe, and we are hopeful that we will be able to add the capability to our European customers in the coming quarters.

Craig Siegenthaler: Great, Ed. Sounds exciting. Good to hear, Milan. And, guys, thanks for taking my questions.

Paul Brody: Thank you.

Operator: Thank you. Our next question will be coming from the line of James Yaro of Goldman Sachs. Your line is open.

James Yaro: Thanks a lot for taking the questions. I just wanted to start with any perspectives that you might have on the tokenized equity products that we are seeing across a variety of brokerages and crypto firms for European customers on US stocks. Maybe you could just talk about the advantages and disadvantages of this product in your view. Guess, you know, is it something that you would consider offering? I am not sure exactly why, but if so, that would be helpful. And then, I guess, your perspective on whether this product represents any sort of additional competition in Europe relative to your business.

Milan Galik: So I will focus on two different stock tokens that are currently available. One was made available to the European clients of Robinhood. I think they made it available in July. And I think it probably best if I contrast our offering to the offering that they just launched. So what they put online in the form of tokens on US stocks is a fundamentally worse product than what our European clients had access to for years. Our clients have access to more than 10,000 real US shares and ETFs, twenty-four hours a day, five days a week.

In contrast, the stock tokens that Robinhood made available to the European clients are a derivative on 200 or so symbols, which means that the client does not have ownership interest in the stock. Instead, he or she has an OTC contract against Robinhood. The customer cannot transfer the position to another broker if he wanted to. He would have to sell the position and transfer the cash.

As to the cost, if you look at Robinhood's own key investor information document, which is a document every broker has to offer to their clients about every financial instrument they make available for trading, a hypothetical $10,000 investment cost declined $10 while our client pays a fraction of that, a dollar or so. So that is the Robinhood offering. There is also Kraken XShares that are available. Kraken, as you know, is a significant cryptocurrency exchange. They made 60 or so tokens available, which are similarly secured notes backed by the underlying in a Jersey entity that they have.

The creation and redemption keys for these XShares are half a percent each, and there is a management fee of a quarter of a percent per year. Now, unlike in the case of Robinhood, Kraken lets you withdraw the tokens to your own self-custody wallets and then trade the token on the DeFi network. But that obviously leads to some problems. There was an article a couple of days ago in the Wall Street Journal which talked about the very significant price differences between the tokens and the underlying shares.

And on Sundays, I think specifically on July 5, Amazon was reported to show the price that was four times as large as the stock price from the previous closing price. And the same similarly, an Amazon X, which is the token issued by Kraken, suffered even while the dislocation on Jupiter. There was a lack of liquidity available for the client who submitted an order for $500. And, briefly, the Amazon's token was trading at the price a 100 times larger than the closing price on the previous day. So all in all, stock tokens at this time seem like a great opportunity to do much worse than buying an ordinary share.

James Yaro: Okay. Thank you, Milan. That is really helpful color. Could you just talk a little bit about the execution cost differences that you are seeing on your platform in overnight versus during market hours? I know that is a tough one because you know, I am generalizing across a variety of stocks today. And then maybe you could just talk about your expectations for how execution costs, you know, outside of market hours could evolve over time.

Milan Galik: There is obviously a difference between the stocks and options and futures on the other hand, between the overnight hours and the regular trading hours. So if you look at the exchange-traded products like options and futures, the execution costs are the same whether you trade them overnight or during the day. The execution cost for stocks is very different because the stocks are currently not offered outside of extended trading hours. So every platform that offers them, and Interactive Brokers has a substantial offering in this space, has a different price than what one would pay to an exchange. Interactive Brokers has its own ATS, EOS ATS, where overnight stocks are trading.

And it is also connected to a blue ocean that is another significant ATS in the space. So the combination with these two venues allows us to offer thousands and thousands of stocks and ETFs during the overnight trading with a lot of liquidity at very low cost.

James Yaro: Okay. Thanks a lot.

Milan Galik: Thank you. One moment. Our next question will be coming from the line of Benjamin Budish of Barclays. Your line is open.

Benjamin Budish: Hi. Good evening, and thanks for taking the question. Maybe first, just a high-level question. You have talked a lot about the pickup in international growth quite a bit over the last many years. I am just curious in terms of overnight trading specifically, it sounds like that is growing much faster than international growth more broadly. Curious, is that sort of a behavior change? Is that sort of more stocks and options being made available? It sounds like your offering has been consistent for some time. But just curious if you could unpack what you are seeing there.

I know I think Thomas mentioned also at a conference earlier that you have an expectation that is going to be quite meaningful as a percentage of total volumes over the next ten to twenty years. So curious for your commentary on sort of the recent drivers of that outsized growth.

Milan Galik: Well, for us, especially the overnight US stock offering is important because we have significant clientele in Europe and Asia, and our overnight hours correspond to their day during the day hours. So by us offering the US stock trading overnight, we are satisfying the appetite of the overseas clients in these geographies so that they can trade and access US markets during the day. Given that we have significant clientele overseas, that part of an offering for us is very important. And more and more of our introducing brokers are realizing that and are turning on this offering for their clients.

As far as the importance of the overnight trading in the long general, I think we will see the same progression as we have seen over the past decade or so. You I am sure you remember that the regular trading hours for NYSE stocks or even Nasdaq stocks, those markets open at 09:30 and close at 4 PM. And then the so-called extended hours have been added. Those markets now open at 4 AM and close at 8 PM. And the amount of volume we see during those trading sessions is growing, as well as the volume we show in the overnight session.

So over time, the differences between the trading hours will not disappear, but will diminish for sure. There will still be some special time periods like on open trading, at 09:30 and on closed trading at 4 PM, because a lot of ETFs and mutual funds mark their NAV using those prices. But we will see more and more overnight trading in the future.

Benjamin Budish: Very helpful. Maybe one more sort of in the weeds question perhaps for Paul. Just in terms of your interest rate sensitivity, it looks like this quarter versus last quarter, maybe a slightly higher percentage of cash is not in US dollars, but the sensitivity to a 25 basis point change in rate seems like it is a much lower dollar number. Just curious, is it like a lower absolute starting level of rates? Or the driver of that sort of lower sensitivity?

Paul Brody: Right. That is a good question, Ben. So, primarily, there are some once again, low rate low interest rate currencies. There are several of them out there that are either nearing or just breached the zero line back into negative territory. So that leads to nonlinearity of the up and down scenarios. Because when you cross over the zero point, you know, we are either passing through or we are not passing through the full spread gets compressed, and then it returns. So, yes, that overall number was somewhat lower than in the past because those two rates are coming down.

Benjamin Budish: Okay. Very helpful. Thank you so much.

Operator: Thank you. And the next question will be coming from the line of Dan Fannon of Jefferies. Your line is open.

Dan Fannon: Great. Thank you. I was hoping to expand upon your comments around sec lending clearly improved this quarter. You talked about an increase in some hard-to-borrow securities. Curious about how diverse that was. And as we think about an environment where IPOs are picking up, is it reasonable to assume that should be on an upward trajectory given the kind of current trends?

Paul Brody: Well, if, so in terms of how diverse it was, not especially. There are some several high flyers in there. But so our results are coming from two places. Right? We generally, with more accounts than more equity and more participation, we see a rise in our general level of both customers who are shorting stocks and they are recovering. Or customers with margin stocks that we are able to lend out or fully paid stocks in our fully paid program to lend out and share the benefits with the customer. And then, of course, the specials come in on top of that.

And as I said, you know, a few high flyers can you know, make a substantial difference in the overall p and l. As to what is going to happen in the future, you tell me. It is a general you know, markets for IPOs and m and a activity and so forth leads to you know, more of this the and, you know, and these hot stocks from an interest from a stock loan rate standpoint come from a greater proportion of shorts to available stock to cover those shorts. So the you know, corporate deals and so forth tend to lead to those kind of conditions.

If those pick up, you know, then the likelihood is so will some of the hard-to-borrow stocks.

Dan Fannon: Great. That is helpful. And then I was hoping you could expand upon the introducing broker comments you know, thinking about the size of the partners that are coming on and also the backlog you mentioned also I think was reasonably good. Just curious how you would characterize that versus say maybe a year ago and how those conversations have progressed.

Milan Galik: If we look at the number of integrations that we heard in the second quarter, they increased compared to the Q1 of this year. The pipeline remains very strong. The pipeline includes new entrants to the market, existing firms that broaden their offering in terms of even products or countries or asset classes. One interesting note I would make is that some firms that we spoke to in the past who at the time decided not to go with Interactive Brokers, but chose a competitor or chose to do an in-house build, are coming back around to us and reengaging. They do realize that our offering is superior. Our cost is superior as well, so they come to us.

So I am very happy with what I see in the pipeline both in terms of conversion as well as what is in the backlog.

Dan Fannon: Great. Thank you.

Operator: Thank you. As a reminder, if you would like to ask a question, please press 11 on your telephone. Our next question will be coming from the line of Kyle Voigt of KKBW. Your line is open.

Kyle Voigt: Maybe just a question on client credit balances, which grew, I think, over 6% in the month of June, which is the highest since March. You just speak about the main drivers of what you saw in June specifically? Was it more new cash being deposited into accounts? Was it rebalancing from existing clients? Is there something else driving that significant cash increase that we saw in June?

Paul Brody: I think it was a combination of those things. You know, new cash coming in was as strong as it has been in the last several months. It does have its ups and downs. April was particularly strong, both in taking in new cash and in that risk-off environment of April when a lot of stocks were being sold. That generates cash balances. And, you know, because clients feel comfortable leaving those cash balances with us, they simply go up and reinvest them. I do not think there was anything else specific to June that was notable.

Kyle Voigt: Okay. Just for a follow-up, we have seen a recent reacceleration in zero DTE trading percentages in the broader options market. Was curious to hear about whether you have been seeing that in your own customer base in recent months? And then also curious to hear about your view of rolling out zero DTE on single stocks. What else needs to be done from the brokerage industry standpoint? In terms of functionality to be able to offer this? And how close are we, in terms of being able to see that product hit the market, do you think?

Milan Galik: I did not pay a lot of attention to how the zero DTE percentages are changing. They are roughly the same as they were in the previous quarter. I would point out one interesting thing, and that is the zero DTE options trading is doing very well, and those options are very busy, especially the ones on the S&P 500 index. If you look at the forecast x forecast x just listed a few weeks ago, contracts, yes and no contracts, that are in some sense similar to the zero DTE options. And we listed those on a number of different indexes. And we see significant engagement from our clients. Happy with that.

As far as the stocks are concerned, that is a little bit more complicated issue. As I mentioned, the popular zero DTE options are the index options. They settle in cash. The stock options they settle into physical. So you get a stock delivered if you exercise your long call. Now you can submit your exercise request after the stock market is closed, after the main session closes at 04:00. You have, I think, half an hour or sixty minutes to submit your exercise instructions. So there will be some amount of extra volatility in the stock on the days when they publish their earnings or when there is a significant news issue.

So you may see some unexpected exercise and assignment activity on those days. And that is an issue that the industry recognizes. We ourselves wrote a comment letter about that. So one way to solve that would be to list zero DTE stock options that settle in cash, but that would come with its own set of problems. So we will see what the ultimate decision is going to be, but there are some issues that the cash-settled index options did not have.

Kyle Voigt: Great. Thank you.

Milan Galik: Thank you.

Operator: And our next question will be coming from the line of Patrick Moley of Piper Sandler. Your line is open.

Patrick Moley: Yeah. Good evening. Thanks for taking the question. Thomas, I had one for you. I caught your interview on CNBC before the call here. You sounded very bullish. I think you said that you know, you do not really see much that could derail this rally here. And that you could see, you know, this rally continue for the next two or three years. So with that in mind, I am just hoping you could elaborate on, you know, what that could mean for overall retail trading activity if we do see markets continue to grind higher?

And then in terms of IBKR's platform specifically, what are some of the read-throughs there if that is the environment that we are entering into? Thanks.

Thomas Peterffy: Well, as I have said, I expect this environment to be very, very favorable to brokerage firms in general. And investment banks in general and specifically for Interactive Brokers. This is a great time for us. And it is a great time for your firm too. All of your firms. And maybe just a follow-up on crypto. Milan, I think last quarter, said that you were somewhat surprised at just how much how little market share you had taken since beefing out the crypto offering. Just given how much lower cost the offering was. So just curious if that is still what you have seen. Have you seen any market share gains there?

And then this push to kind of build out the offering even more is that a factor of you just recognizing that you think you need to have a more robust offering in order to attract more retail customers to the platform. Any color there on that strategy? Would be great. Thanks.

Milan Galik: So my disappointment in terms of how much market share we are getting in the crypto space remains. I am still disappointed given how much less expensive we make it for our clients to buy crypto. But I do expect, and I do hope for some asset transfers coming our way, which right now, it is impossible if you already have holdings in cryptocurrencies and you want to switch brokers, you would have to sell those currencies, turn them into cash, and that is what you would have to deposit with us. So supporting asset transfers should open the doors to some new clients to recognize that our prices are lower, they should bring our assets to our platform.

That is my hope. As to why is it that we are paying attention to crypto, we have been paying attention to it for a while. But the environment has changed with the new administration, which is significantly friendlier to the crypto space than the previous one, we obviously have to react to that. Our investors as well as clients, financial advisers, individual clients do expect to have means to enter the space through us. So we need to do we need to add it to our offering.

Patrick Moley: Okay. Great. That is it for me.

Paul Brody: Thank you.

Operator: This does conclude today's Q&A session. I would like to turn the call back over to Nancy for closing remarks. Please go ahead.

Nancy Stuebe: Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website, and we will also be posting a clean version of our transcript on the site tomorrow. Thank you again, and we will talk to you next quarter end.

Operator: This concludes today's program. Thank you all for joining. You may now disconnect.

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DATE

• Thursday, July 17, 2025. at 10 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Thomas Travis
• Chief Credit Officer — Jason Estes
• Chief Financial Officer — Kelly Harris

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TAKEAWAYS

• Net Interest Margin (NIM): Remained at the higher end of the historical range, despite mild anticipated future degradation as stated by Thomas Travis.
• Loan Growth: The deal pipeline "looks solid right now," according to Travis; Q2 originations surpassed Q1 and growth momentum is expected to continue in Q3 2025, pending unpredictable paydowns.
• Core Yield on New Loans: Recent portfolio additions are yielding slightly below the 7.6% core yield reported for Q2 2025, as noted by Jason Estes.
• Expense Outlook: Projected Q3 total expenses of $10 million, split between $1 million in oil and gas and $9 million in other expenses, per Kelly Harris.
• Oil and Gas Asset Recovery: Internal Q3 projection of $2 million in fees, including oil and gas-related fees, expected to remain within the 36%-38% core range, without material disruption from current expense or revenue trends. 75% of cash outlay has been recovered, with full recovery expected by mid-2025.
• M&A Strategy: Company continues to engage in discussions, with a pronounced focus on "MOE" deals; prior signed LOIs did not proceed due to discipline on terms.
• Credit Quality: Continued improvement in "a little cleaner, you know, a little smaller MPA number" has been observed over the last several quarters, with very clean past dues and adherence to underwriting fundamentals as discussed by Jason Estes.
• Portfolio Mix Trends: Shift within energy loans from service deals to production loans, with energy exposure now almost half of the level it was seven or eight years ago; hospitality and C&I portfolios noted for high churn and active customer base management.
• Deposit Costs: Deposits remain relatively stable, though management anticipates slight increases to support growth in Q3 2025, offset by focusing on attracting zero-cost transaction accounts.
• Interest Rate Sensitivity: Management expects loan and deposit betas to move "one for one" on the first few rate cuts, with loan floors helping offset potential margin compression.

SUMMARY

Bank7 (NASDAQ:BSVN) management signaled confidence in sustaining above-average NIM and operational efficiency while preparing for minor margin moderation if deposit costs rise. Full cash recovery from oil and gas assets remains on track, and the lending pipeline signals sustained growth for Q2 2025, barring unpredictable paydowns. The company maintains active M&A dialogue but has held firm on deal discipline, focusing on fit and value creation.

• M&A conversations remain frequent, with market participants' improved Accumulated Other Comprehensive Income (AOCI) expected to loosen deal activity in key dynamic geographies.
• Liquidity and portfolio granularity are supported by churn and asset turnover in the energy, hospitality, and C&I sectors, facilitating customer base renewal and segment growth.
• Jason Estes stated, "our past dues are very clean," reflecting management's continued focus on credit quality and risk controls despite broader economic uncertainties.
• Talent acquisition may occur selectively in North Texas, but management emphasized culture and credit discipline over rapid expansion in response to recent regional M&A trends.

INDUSTRY GLOSSARY

• MOE (Merger of Equals): A business combination in which two companies of similar size consolidate, typically with shared governance and integration of operations.
• AOCI (Accumulated Other Comprehensive Income): A component of equity reflecting unrealized gains and losses not included in net income, affecting tangible capital and M&A dynamics in banking.
• MPA (Mentioned Pass Assets): Bank-specific term used internally to denote credits closely monitored because of risk factors, prior to official regulatory classification as criticized or classified.
• Loan Beta / Deposit Beta: The responsiveness of loan or deposit yields to changes in benchmark interest rates, indicating asset and liability sensitivity in rate cycles.

Full Conference Call Transcript

Thomas Travis: Thank you. Welcome to the call. We obviously had a great quarter as you can see in the results. Before we get to that, a couple of weeks ago, today, there was a really bad flood in my hometown of Kerrville, Texas. And so anyone on the call that has money left in their budgets for relief fund, there's a great organization, their Kerr County Relief Fund. They really need support. So consider that when you're looking at your expenditures in that area. I'm sure that the people down there will put it to good use. Back to the call, it was one of our best quarters ever.

And we always have to recognize that those results happen because of our talented group of bankers. They drove strong loan and deposit growth. And we thank them very, very much. As you can see, we maintained our NIM on the higher end of our historical range, and we also continue to benefit from that low efficiency ratio. When you put those factors together, with the solid loan growth, we experienced nice strong core earnings. We're very comfortable with our asset quality and always give a shout out to Jason Estes and his team. They've done an excellent job of maintaining a high-quality credit book. While at the same time growing that portfolio. So we're very proud of our results.

We're pleased to continue to provide shareholders with excellent top-tier results. And without further ado, I guess we're standing by for any questions. You may have. Thank you.

Operator: 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 are using a speakerphone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause for just a moment to assemble our roster. And your first question today will come from Woody Lay with KBW. Please go ahead.

Woody Lay: Hey, good morning, guys.

Thomas Travis: Morning, Woody.

Woody Lay: Wanted to start on loan growth. Obviously, a really strong quarter on the growth front, and it's been a really successful first half of the year when many others in the industry have kind of lagged in growth. You know, I know your growth can be a little bit lumpy quarter to quarter, but how are you thinking about the growth momentum in the back half of the year?

Thomas Travis: Always depends on the lumpy paydowns. I think our deal pipeline, it looks solid right now. You know, I think we've signaled that the last couple quarters in a row that you know, things in Oklahoma, things in Texas, economically are they're just in a really good spot. We're thankful to do business where we do business. And so you know, going into Q3 again, pipeline looks strong. But you just never know on the chunky pay downs you know, what's really coming. I think it was fourth quarter of last year.

You know, we just had a big wave of companies selling, people selling assets, various things that lead to a little bit of unpredictability there in the payoff side. But from the origination side, Q1 was strong. Q2 was stronger slightly. You know? And I think Q3 is lining up to be similar, but we'll see.

Woody Lay: And then how do you think about the NIM outlook given the growth? Deposit costs are relatively stable in the quarter. Just given the expectation for strong growth, could we see deposit costs start to move up to fund the growth? And how does that impact the NIM?

Thomas Travis: Yeah. I think that's a fair way to state what we see real-time is that to keep up on the deposit side, it does cost a little bit more money. We're always focused on, you know, offsetting some of that higher-priced money with the transaction accounts, you know, the zero-cost accounts. And so bankers have done a really nice job of dragging that business in. And, you know, hopefully, we can continue to do so, but I think we've been talking for a few quarters in a row about, yeah, we expect a slight degradation, but we do expect to remain in our historical ranges. And that holds true today.

Woody Lay: Got it. And then last for me, you know, we've seen deal activity pick up in your backyard. Just any update on the M&A front? For you all?

Thomas Travis: Woody, we've come close a couple of times over the last twelve months. We've actually had a couple of signed LOIs and then you know, we're very disciplined in our approach. And for various reasons, those didn't happen. We continue to meet with various potential partners. We're very focused on we'd love to do an MOE, but we just continue to have a lot of meetings and do a lot of evaluations. And yeah, I think the tendency for people now is they improved their AOCIs somewhat which is gonna loosen up the market we're gonna just continue to evaluate opportunities in what we consider to be dynamic markets and common cultures.

And it's just hard to predict when one of those might break loose.

Woody Lay: Alright. That's all for me. Thanks for taking my questions.

Thomas Travis: Thank you.

Operator: And your next question today will come from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race: Hey, guys. Good morning. Thanks for taking the questions.

Thomas Travis: Hi, Nathan. Good morning.

Nathan Race: Just following up on the margin commentary. Curious maybe, Jason, if you can kind of touch on some of the competitive pricing dynamics you're seeing and just kind of where you're seeing new loans come on the portfolio relative to the 7.6% kinda core yield the second quarter?

Jason Estes: Yeah. I think it would be slightly lower than the 7.6, but you know, still I think, you know, if you go back a year ago, or two years ago, there were fewer banks really aggressively looking for loans, after March 23. And I would consider today's environment very historically normal from a pricing standpoint, you know, within the competitive set, you know, here in Texas and Oklahoma, it just seems pretty benign. You know, and that's nice to see some return to normalcy. So, yeah, there's always pricing pressure, Nate. But right now, feels like people have kinda settled in on the deposit and the loan side. Which is part of what led to the results.

Nathan Race: Got it. That's helpful. Then just kinda thinking about the appetite to maybe add some producer going forward. There's obviously been some M&A announcements within, you know, two of your key MSAs recently. So just curious kinda what the appetite is, maybe add some talent maybe relative to the existing capacity across the teams.

Thomas Travis: Nate, I met with a person in Dallas on Monday, and we you know, we've looked at a few lift-out possibilities and those are delicate things as you can imagine. And you know, I think the dynamic when you look at a lift-out or people coming out of those situations is always the credit comes first, and then the deposits to help fund that growth seems to be a slower dynamic. And so we evaluate those and you may see us do something in the North Texas region but I don't know that it's going to be that anything that's materially dynamic at first. You know, we're very, very careful and culture is very, very important to us.

And so we'll see how that goes in the next couple of months.

Nathan Race: Okay. Great. Maybe, one last one for me for Kelly. You know, I strip out some of the oil and gas impacts within the expenses, I think you run around $8,800,000 coming out of the quarter. So just curious how you're thinking about kind of expense run rate over the back half of this year.

Kelly Harris: Yeah, Nate. I believe Q2 is probably a solid guide. Internally, we are showing a little bit of expense creep. So you could increase that slightly, but it's probably a good start. I think, from a Q3 perspective. Fees $2,000,000 split evenly with oil and gas and core. And then on the expense side, we're using $10,000,000 with a million in oil and gas and $9,000,000 on the expenses.

Thomas Travis: Okay. I don't think it's had a real meaningful impact to our efficiency ratio. Correct. It's you know, we're still in that core 36 or 37, 38% core.

Nathan Race: Right.

Thomas Travis: And so I guess I would argue it's probably splitting hairs at this point, Nate.

Nathan Race: Right. And then can you just remind us what the remaining life is on the oil and gas assets? Should that largely run off by the end of or should the recovery much conclude by the end of next year? Before then?

Thomas Travis: I think I when I read your piece, you said that we had recovered 75% of our cash outlay. Is that what you said in your piece this morning, Nate?

Nathan Race: Correct. Versus, I think, 68% at the end of last quarter.

Thomas Travis: Right. And I think that's pretty accurate. Yeah. We should recover fully cash on cash, middle of next year, I think, is what we're projecting. So three to four more quarters. We've achieved our goal there, Nate. It's working really, really well. And we've achieved our goal on that. And so it's going to just continue to perform that way and become really not material anymore. Then that's a good thing.

Nathan Race: Right. Got it. I appreciate all the color. Congrats on a great quarter, guys.

Thomas Travis: Thank you.

Operator: Thank you. And your next question today will come from Matt Olney with Stephens. Please go ahead.

Matt Olney: Yeah. Thanks for taking the question, guys. Just a few follow-ups here. Kelly, I think I missed your commentary you just made about the fees for the third quarter with and without the oil and gas revenue. Can you just go over that again?

Kelly Harris: Yeah. We're internally projecting $2,000,000 in fees not split evenly between the oil and gas and the core.

Matt Olney: Got it. Okay. Helpful. Thank you, Kelly. And then going back to the loan growth discussion, it looks like a portion of that growth was within energy lending. Just looking for any more color on kind of the opportunities you see on that side. And then just overall growth that you're seeing in 2Q in the pipeline, Just any color on the overall granularity of these loans? I think some of these loans can be smaller singles and doubles, but I think also you've open to some larger chunkier loans. Just any more color on the quick granularity what you're seeing these days?

Thomas Travis: Sure. Matt, it's always a mix with us, you know, and I would say going back to the first of this year, know, I think if you look our production loans, you know, that's really where we're up. You know, $3,035,000,000. In that energy bucket. And what's happened in our energy portfolio really since we went public is, you know, just this shift away from service. The service deals we're in are big fund deals typically. And it shifted a lot more to production. You know, just think it hedged oil and gas production. And so you know, that's kind of a story for this first half of the year as well.

And then, you know, from a C and I standpoint, there's some strength there this year that's getting a little bit clouded by some exits. Within that portfolio. And so we've really had a nice origination year in the C and I portfolio. And then you know, owner-occupied real estate, we've had a good year there. We're up you know, about $19,000,000 net. And then a little bit of growth in our dollars outstanding in the hospitality portfolio. But, again, that's another one like energy and like C and I, those and the hospitality between those three portfolios, there's just a lot of churn.

And so, lots of exits, lots of asset sales, and then you know, we're constantly trying to reload that customer base. And so, you know, we're benefiting from some of these exits on the deposit side, and so we like to stay real active in those three books. Because it's really helped us grow the company here over the last ten years. I would add to Jason's comments that if you look at a long-term horizon, going back to for the last seven or eight years, the energy exposure today is almost half what it was seven or eight years ago.

And because of the growth in the other segments, and the other the hospitality segment is down exposure-wise from a percentage basis. And so we haven't expanded those verticals. And in fact, in the energy, it's come down quite a bit. And I really as Jason said, it doesn't have anything to do with us exiting a segment. It has everything to do with the ability to grow the other parts of the portfolio and specifically in the Dallas-Fort Worth region. So I think it's important to remember the long-term dynamics that are in play there.

Matt Olney: Okay. Well, I appreciate the color on that. And then I guess going back to the margin discussion, I think you kind of hit on some a little bit of pressure in the third quarter we already discussed. Just remind us of your rates and sensitivity and, I guess, the market's currently expecting a September Fed funds cut. And I guess with that on your balance sheet, I'm just now assuming there could be a little bit more incremental margin headwind in the fourth quarter, if that's the case. But just remind me if you were well distributed to rates.

Kelly Harris: Yeah, Matt. This is Kelly. The first few rate cuts we were able to the loan beta and deposit beta one for one. We anticipate more of the same for the next couple of rate cuts. And as floors kick in, we'll definitely help out on the liability side.

Thomas Travis: That's great. You can see I can think you can see some of that dynamic on page 10. We tried to illustrate the floors and what the dynamics are. I would say generally that we always talk about our NIM. And when we talk about NIM, we're looking at the net NIM without loan fee income. And historically, we're very close to the high end of our historical range. And so I think it's a natural thing that we are very well positioned for when rates do come down, and we're not concerned about it because we have so many floaters and floors. And we're funding it on the other side properly.

But I think that it's important that we all remember the long-term averages that we experience in that net NIM and I'm delighted that we've been able to keep it where it is. I mean, I got a little bit of bone to pick with Nate. I saw Nate did say he's I didn't realize Nate last quarter that you had predicted us to be even higher than where we are. I feel like a pole vaulter that just pole vaulted 20 feet, and Nate's like, well, you should have done 21. But I'm half kidding, Nate.

But, seriously, I think when you look at NIM, it's really important to remember the long-term dynamics of the match balance sheet the floors, and that look. If we bleed down into the more typical historical range, that's okay. And it wouldn't surprise us.

Matt Olney: Okay, guys. Thanks for the color. Appreciate it.

Thomas Travis: Thank you.

Operator: Thank you. And your next question today will come from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race: Unrelated question to your last comment, Tom, but just wondering if Jason can maybe just comment on what he's seen in terms of criticized, classified, migration in the quarter and just how you're thinking about, you know, credit quality and charge-offs over the balance of this year and into next?

Jason Estes: Yeah. I'd say, you know, if you go look back over the last several quarters, you know, it's just kind of this continuous path toward a little cleaner, you know, a little smaller MPA number. Really, nothing has changed you know, over the last, I'd say, six to nine months internally. You know, our past dues are very clean. Economic environment here is good. We stick to our underwriting fundamentals. We're not adding new business lines. It's just more of the same.

And you know, there's a little bit of uncertainty, I think, in the economy, you know, if you just look at the headlines and see the tariffs and different things going on with immigration policy and it's pretty remarkable you know, as we talk to our clients and these business owners and how they operate and you know, you'll see someone have to deal with the issue here or there, but all in all, it's just been a really good you know, run of multiple quarters here where we operate. I mean, the economy is strong.

Nathan Race: Okay. Great. That's helpful. And Tom, I'll be sure to set a low core margin bar for you in the future.

Thomas Travis: Appreciate it. You know, we appreciate it, Nate. You know, it's easier to meet low expectations. You know that.

Nathan Race: Indeed. Thanks, guys.

Thomas Travis: Thank you.

Operator: This will conclude our question-and-answer session. I would like to turn the conference back over to Thomas Travis for any closing remarks.

Thomas Travis: Well, we're again, we're delighted with the quarter, with the first half of the year. We're cautiously excited about the rest of the year. Just the great markets that we operate in. And the great team of bankers that we have, and we're just delighted to continue to provide shareholders with absolute top-tier results, and we're gonna keep doing what we've always done. And so thank you. Bye-bye.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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DATE

Thursday, July 17, 2025 at 9 a.m. ET

CALL PARTICIPANTS

Chairman, CEO, and President — John Ciulla

President and Chief Operating Officer — Luis Massiani

Chief Financial Officer — Neal Holland

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TAKEAWAYS

Return on Tangible Common Equity: 18% for the second quarter, illustrating continued profitability.

Revenue Growth: Revenue grew 1.6% compared to the prior quarter.

Loan and Deposit Growth: Loans and deposits each grew over 1% sequentially in Q2 2025.

EPS: $1.52 for Q2 2025, an increase from $1.30 in the first quarter (GAAP EPS for Q1 2025).

Efficiency Ratio: 45.4% efficiency ratio, maintaining operational efficiency while investing in the business.

Tangible Book Value per Share: Tangible book value per common share reached $35.13, up over 3% from the prior quarter.

Common Equity Tier 1 (CET1) Ratio: Increased; management affirmed a short- to medium-term CET1 target of 11% for the remainder of 2025.

Net Charge-Off Ratio: 27 basis points for net charge-off ratio, positioned within Webster's long-term normalized charge-off range of 25-35 basis points.

Provision for Loan Losses: $47 million provision for credit losses, $31 million lower than the previous quarter (Q1 2025), driven by credit performance improvement.

Allowance for Loan Losses: $722 million or 1.35% of loans, reflecting increased balance sheet growth rather than changes in the economic outlook.

Net Interest Income (NII): Projected full-year 2025 NII guidance of $2.47 billion to $2.5 billion; assumes two Fed funds rate cuts starting in September.

Net Interest Margin (NIM): 3.44% net interest margin, down four basis points from the prior quarter, with expectations to end the year between 3.35% and 3.40%.

Deposits: Total deposits increased by $739 million, including a $200 million uptick in noninterest-bearing deposits at period end (but with $200 million lower average balances over the quarter).

Share Repurchases: 1.5 million shares repurchased at an average price of $51.69, with an additional $700 million authorized for future buybacks.

Asset Quality Trends: Nonperforming assets declined 5%, and commercial classified loans declined 4% sequentially.

Loan Portfolio Activity: C&I originations exceeded $2 billion; commercial real estate originations totaled $1.2 billion, while balances in this segment decreased due to payoffs.

HSA Bank Opportunity: The reconciliation bill's new provisions are expected to yield $1 billion to $2.5 billion in incremental HSA deposits over the next five years, and $50 million to $100 million of incremental HSA Bank deposit growth is anticipated as early as next year.

InterSync: The rebranded deposit platform continues to provide granular deposits and liquidity diversification.

Marathon Asset Management Joint Venture: Operational as of next quarter, with $242 million of loans moved to held-for-sale status in preparation for contribution; meaningful fee income expected to build in 2026.

Tax Rate: Effective tax rate was 20% year-to-date, of 2025, expected to move to 21% in the second half.

Rent-Regulated Multifamily Loan Exposure: Portfolio totals $1.36 billion, with only eight loans exceeding $15 million and a current debt service coverage ratio of 1.56 times.

SUMMARY

Management reported broad-based growth in earnings, assets, and deposits compared to the prior quarter, while maintaining efficiency and capital strength. They highlighted a material inflection point in asset quality, with criticized commercial loans and non-accruals both declining. Executives anticipate significant long-term deposit growth from HSA Bank due to legislative changes, with the majority of the expanded opportunity tied to newly eligible bronze ACA plan participants. The company confirmed its Marathon joint venture is set to bolster balance sheet flexibility and future fee income, with fee income expected to begin ramping in 2026, positioning Webster to pursue larger loan deals and grow capital markets revenue streams. Tangible book value per share increased to $35.13 alongside disciplined share repurchase activity, with a consistent deployment framework tied to capital availability and market opportunities. The outlook remains for full-year 2025 NII of $2.47 billion to $2.5 billion, and NIM (Net Interest Margin) is expected to moderate toward a 3.35%-3.40% range as year-end approaches.

Management described continued investments in technology, business development, and risk management as part of preparations for growth toward the $100 billion asset threshold.

Executives do not anticipate material expense changes in HSA Bank operations from expanded direct-to-consumer outreach, with incremental marketing spend expected but no substantial change in expense trajectory.

Deposit cost guidance for the back half of 2025 assumes movement dependent on Fed rate cuts and ongoing market competition; management maintains effective neutrality to interest rate changes in near-term scenarios.

The company expects the sponsor finance pipeline to recover, supported by increased sector activity and new capabilities from the Marathon joint venture, which will also support larger bilateral transactions and broader deal structures.

Brokered deposits are managed within a 3%-5% range of total deposits, with anticipated seasonal fluctuations but stable long-term contribution.

Leadership changes include the appointment of Jason Schugel as Chief Risk Officer and Fred Crawford as a new board member, both cited as bringing valuable large-bank expertise as Webster approaches regulatory asset size thresholds.

Management stated, "We do not see new pockets of credit deterioration developing anywhere across any industry or sector." and reaffirmed that existing classified loan exposure is concentrated in CRE office and healthcare service categories.

INDUSTRY GLOSSARY

HSA Bank: A Webster Financial Corporation segment providing health savings accounts and related health spending solutions distributed via employers and individual channels.

InterSync: Webster's rebranded deposit platform (formerly Interlink) designed to broaden access to granular, low-cost deposits and enhance liquidity diversification.

B2B2C model: Business-to-business-to-consumer; HSA Bank operates by distributing products through organizations to end consumers.

Marathon Asset Management Joint Venture: A partnership between Webster and Marathon to expand Webster's private credit origination capabilities, contribute loans, and generate fee income through asset management.

Classified Loans: Loans designated as carrying elevated credit risk requiring monitoring or remediation, typically including 'substandard,' 'doubtful,' or 'loss' classifications.

Full Conference Call Transcript

John Ciulla: Thanks, Emlen. Good morning, and welcome to Webster Financial Corporation's second quarter 2025 earnings call. We appreciate you joining us this morning. I'm going to start with a recap of our results and the competitive positioning that drives them. Our President and Chief Operating Officer, Luis Massiani, is going to provide an update on exciting developments in our operating segments, and our CFO, Neal Holland, will provide additional detail on financials before my closing remarks and Q&A. Highlights for the second quarter are provided on Slide two of our earnings presentation. Our results were solid with a return on tangible common equity of 18%, ROA of nearly 1.3%, and growth in both loans and deposits of over 1% linked quarter.

Overall revenue grew 1.6% over the prior quarter. Our financial results put our company on a trajectory to meet the outlook we established in January, despite a less certain macroeconomic picture at points in the first half of the year. We achieved this outcome while maintaining our strong operating position and balance sheet flexibility. Our common equity tier one ratio increased, and our loan to deposit ratio remained roughly flat. With our strong capital position and new capital generation, the board authorized an additional $700 million in share repurchases, and we bought back 1.5 million shares in the quarter. Additionally, the inflection point in asset quality that we projected to occur in mid-2025 is materializing.

Both criticized commercial loans and non-accruals were down in the quarter. Our net charge-off ratio was 27 basis points, within our long-term normalized charge-off range of 25 to 35 basis points. We do not see new pockets of credit deterioration developing anywhere across any industry or sector. Similar to our view a quarter ago, we have not yet seen any impact to credit related to various tariff proposals. While remaining vigilant to any potential effects from proposed tariffs, we do not have disproportionate exposure to industries we believe could be most impacted, and our borrowers have had additional time to develop strategies to manage costs, their supply chains, and pricing.

Our strong operating position and distinctive business provide us a lot of flexibility and growth opportunities, an advantage that will serve us well as tailwinds accumulate for the banking industry. We feel we have the most differentiated deposit profile within our peer group, in particular, our healthcare financial services segment comprised of HSA Bank and Amitros, our growing source of low-cost, long-duration, and very sticky deposits. The B2B2C model of these businesses enables efficient operation and distribution. Provisions included within the recently passed reconciliation bill also accelerate growth in HSA deposits. In addition to the healthcare financial services segment, we also have strong deposit franchises in our consumer and commercial bank.

We also operate InterSync, previously known as Interlink, and rebranded this quarter. Interlink provides us access to granular deposits and is another differentiating feature for Webster as a source of liquidity. As a predominantly commercial bank, we have a diversity of loan origination channels with distinct risk-reward characteristics. These provide us the opportunity to add assets in the loan categories that provide the most appealing risk-reward characteristics at a given point in time. We anticipate that the asset management partnership with Marathon we announced last year will be effective as of later today, and we believe that it will enhance sponsored loan growth and drive fee revenue in 2026 and beyond.

The combination of our funding advantage and diversified loan origination engine allows us to grow at an accelerated rate relative to peers over the long term. Ultimately, with our distinctive business composition, we have a lot of liquidity. We run a highly efficient and profitable bank. We generate a lot of capital. This provides us with both a solid defensive position and a great deal of optionality on offense, whether that be organic growth, strategically compelling tuck-in acquisitions, or returning capital to shareholders. I will now turn it over to Luis to discuss emerging strategic opportunities for Webster, including at HSA Bank and within the commercial segment, each of which have recently experienced strategically important developments.

Luis Massiani: Thanks, John. Starting with HSA Bank, we were pleased to see three favorable provisions for HSA accounts incorporated in the reconciliation bill, which was signed into law earlier this month. In our view, these provisions will significantly increase the addressable market for the HSA industry and HSA Bank, mainly driven by bronze ACA plan participants newly gained eligibility to fund an HSA account as part of their healthcare plan. We estimate the potential deposit opportunity for HSA Bank over the next five years ranges from $1 billion to $2.5 billion of additional deposits, starting with incremental growth next year of $50 million to $100 million.

There is likely to be a somewhat lengthy ramp-up period for adoption as newly eligible consumers begin to understand the benefits of an HSA account and how best to use it for their health and financial wellness. We are further encouraged that for the first time, eligibility for HSA accounts has been decoupled from high deductible health plans, and that several provisions that were initially included but did not make the final spending bill have strong support in both the House and Senate. Additional substantive legislation in 2025 is likely, including the possibility of another reconciliation bill.

If all of the provisions that were in the original spending bill passed by the House were to become law, we believe this could double our range of opportunity for incremental deposits. Turning to asset management, we have reached operational realization of the private credit joint venture we had previously announced with Marathon Asset Management. In the second quarter, we moved $242 million of loans in held-for-sale status as these loans will be contributed to the joint venture, which we expect will be up and running in the third quarter.

The economics of our asset management strategy will be determined by the long-term performance of the joint venture, but we anticipate the benefits will be significant as we strengthen our competitive position in the private credit market. Webster will be able to lead larger bilateral deals, participate in larger syndications, accelerate on-balance-sheet loan growth and spread income, and offer clients a broader set of deal structures beyond senior positions without changing our existing on-balance-sheet credit profile. Webster will retain full banking relationships, including opportunities for cash management, capital markets, and deposit business.

The asset management platform will also drive economic value by generating fee income, which we anticipate will be limited for the remainder of 2025 but will then begin to ramp in 2026. We are also continuing to invest across all other areas of our bank, both in our lines of business as well as operations, technology, and risk. Business pipelines are building nicely for the second half of 2025, with a well-diversified mix of commercial and consumer loan and deposit opportunity. We have continued to make targeted investments in technology and business development in areas including metros, HSA, InterSync, and the consumer and commercial banking verticals, which should allow us to further strengthen our deposit channels and funding profile.

I will turn it over to Neal for a detailed review of financial performance.

Neal Holland: Thanks, Luis, and good morning, everyone. I'll start on Slide four with a review of our balance sheet. Total assets were $82 billion at period end, up $1.6 billion from last quarter with growth in loans, cash, and securities. Deposits were up over $700 million. The loan to deposit ratio held flat at 81% as we maintained a favorable liquidity position. Our capital ratios remained well positioned, and we grew our tangible book value per common share to $35.13, up over 3% from last quarter. At the same time, we repurchased 1.5 million shares. Loan trends are highlighted on Slide five. In total, loans were up $616 million or 1.2% linked quarter.

Excluding the one-time transfer of $242 million of loans moved to held for sale, loan growth would have been $858 million or 1.6%. We provide additional detail on deposits on Slide six. We grew total deposits $739 million. Deposit costs were up three basis points over the prior quarter, as we experienced the seasonal mix shift effect of the second quarter in HSA and public deposit accounts. On Slide seven, are income statement trends. Interest income was up $9 million from Q1, and noninterest income was up $2.1 million. Expenses were up $2 million. At an efficiency ratio of 45.4%, we maintain solid efficiency while investing in our franchise.

Overall, net income to common shareholders was up $31 million relative to the prior quarter. EPS was $1.52, versus $1.30 in the first quarter. In addition to a solid PPNR trend, we also saw a significant reduction in the provision this quarter. Our tax rate was 20%. On Slide eight, we highlight net interest income, which increased $9 million driven by balance sheet growth and the higher day count quarter over quarter. The NIM was down four basis points from the prior quarter to 3.44%. There was a discrete benefit from a nonaccrual reversal that added two basis points to the NIM this quarter. Excluding this, the NIM would have been 3.42%.

Drivers of lower NIM include seasonal deposit mix shift, higher cash balances, and slight organic spread compression. Slide nine illustrates our interest income sensitivity to rates. We remain effectively neutral to interest rates on the short end of the curve, with modest shifts expected in our net income for up and down rate scenarios. On Slide 10 is noninterest income. Noninterest income was $95 million, up $3 million over the prior quarter. The modest increase reflects growth in deposit service fees and a lower impact from the credit valuation adjustment. Slide 11 has noninterest expense. We reported expenses of $346 million, up $2.1 million linked quarter.

The modest increase in expenses was primarily the result of in human capital, partially offset by seasonal benefits expense. We continue to incur expenses that enhance our operating foundation as we prepare to cross $100 billion in assets. One significant investment came to fruition in the second quarter. I'm happy to say that this is the first quarter we are reporting earnings on our new cloud-native general ledger. On Slide 12, detailed components of our allowance for credit losses, which was up $9 million relative to the prior quarter. The increase in the allowance was predominantly tied to balance sheet growth. Our CECL macroeconomic scenario was relatively stable, and we saw good asset quality trends quarter over quarter.

After booking $36 million in net charge-offs, we recorded a $47 million provision. This increased our allowance for loan losses to $722 million or 1.35% of loans. Our provision was down $31 million from the prior quarter. Slide 13 highlights our key asset quality metrics. As you can see on the left side of the page, nonperforming assets were down 5%, and commercial classified loans were down 4%. On Slide 14, our capital ratios remain above well-capitalized levels, and we maintain excess capital to our publicly stated targets. Our tangible book value per share increased to $35.13 from $33.97, with net income partially offset by shareholder capital return.

Our full-year 2025 outlook, which appears on Slide 15, points to improvements in NII and the tax rate for the year. We now expect NII of $2.47 billion to $2.5 billion on a non-FTE basis. This assumes two Fed funds rate cuts beginning in September. We expect the full-year tax rate will be in the range of 20 to 21%. Year to date, we are in a 20% effective tax rate due to discrete benefits, but we expect the rate to return to 21% in the second half of the year. With that, I will turn back to John for closing remarks.

John Ciulla: Thanks, Neil. In summary, it was a good quarter for Webster, generating solid growth and high returns. We are executing on new opportunities to grow our business. Our proactive approach on credit risk management has allowed us to remain in front of potential problems. Tailwinds are building for regional banks. With some additional time to digest and plan for tariffs, our clients are moving forward with business development plans, and it appears that loan growth is set to accelerate. We are starting to observe changes in banking regulations, such that they are appropriately tailored to the complexities and size of individual institutions, and they should help enable US banks to strengthen their competitive position.

As I stated last quarter, Webster is positioned to prosper in a variety of operating environments, including an accelerating investment cycle. We are excited to demonstrate Webster's full potential. We have excess capital to deploy, diverse loan origination channels, a differentiated and competitively advantageous funding profile, and are focused on new business opportunities. I want to take a moment to welcome Jason Schugel to our executive management committee. Jason joined us as Chief Risk Officer this week, as we had previously announced Dan Bligh's intent to retire. Jason has fifteen years of experience at a category four bank, most recently as chief risk officer. Particularly valuable experience as we grow our bank toward $100 billion in assets.

Dan served as our chief risk officer for fifteen years and built an exemplary risk team over a period of substantial change for Webster and the banking industry. We wish him the best in his retirement. We were also happy to announce recently that we added Fred Crawford as a new board member. Fred joins the board with impressive C-suite large financial institution expertise. Finally, I'd like to thank our colleagues for their efforts so far this year. We saw positive financial and strategic outcomes virtually across the board this quarter. This type of result does not materialize without a significant amount of effort and engagement throughout our organization. Thanks again for joining us on the call today.

Operator, we'll now open the line to questions.

Operator: Your first question comes from the line of Chris McGratty with KBW. Please go ahead.

Andrew Leisher: Hey. How's it going? This is Andrew Leisher on for Chris McGratty.

John Ciulla: Hey. How are you?

Andrew Leisher: Just starting on capital. Just given the current environment and outlook for potential deregulation, what is your willingness to reduce CET1? And then just overall thoughts on near-term pace of the buyback? Thanks.

John Ciulla: Sure. I know we stated that our medium-term and short-term goal is 11%. And that over the long term, as markets stabilize, that we could see that target move back towards a 10.5% range. I would still say that for the balance of '25, that 11% target is probably the right amount. And we'll talk further about that going forward. But we do think over time that we can reduce the level comfortably and safely of our CET1 ratio. And the second question, I think, was on capital management and share buybacks. I think we say every quarter, we take a really disciplined approach to it. First prize is continuing to grow our balance sheet with good full relationship loans.

If that's not available to us, we do have, and we continue to look seriously at opportunities to continue to enhance our healthcare services vertical and other areas of the bank where we think we can grow deposits and fees inorganically through tuck-in acquisitions. If neither of those are available, we look to return capital to shareholders through dividends or share buybacks. And so I think if the first two don't materialize, given our capital level, you'll likely see us continue some level of share buyback in the second half.

Operator: Your next question comes from the line of Casey Haire with Autonomous Research. Please go ahead.

Casey Haire: Great. Thanks. Good morning, everyone. Question on the NIM outlook. The cash build, are you guys good with where the cash balances are today? And then also, I think you guys talked about a long-term debt issue coming in the second half of the year. Just wondering how that's going to impact?

Neal Holland: Yeah. On the cash, we're getting right to the levels that we're hoping to get to. In this quarter, building cash had a one basis point impact to NIM. We expect an additional one basis point throughout the rest of this year over the next few quarters. So a little bit of impact there, but not overly material. And we are still expecting a new debt issuance in the back half of the year that will have one basis point impact to NIM.

Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon: Hey, guys. Good morning. Neil, just to follow-up, I was curious on deposit cost for the second half of the year given your expectation for two rate cuts. And also InterSync's sort of strong deposit growth. How are you thinking about deposit costs?

Neal Holland: Yeah. So maybe I'll take a step back and talk about our interest rate sensitivity for a second. So we positioned pretty neutral. So if we don't get the two cuts in the back half of the year, we don't expect any material impact to our overall net interest margin. But going specifically to your deposit question, obviously, if we get additional cuts, we expect to continue to move our deposit costs down. If we don't get two additional cuts, you know, we are seeing some pretty significant competition on the deposit side, so don't see material opportunity to move down deposit cost. But the team is active in that area, and it's something that we're closely monitoring.

Mark Fitzgibbon: Okay. And then just to follow-up, John, unrelated. If the category four threshold gets lifted, how important does bank M&A become for Webster? And if so, you know, what would you be sort of looking for in potential targets? Whether business line or geography or any other any on that would be much appreciated.

John Ciulla: Sure, Mark. I mean, I think our stance right now and, you know, clearly, is some noise around the fact that there may be an indexing of that $100 billion mark or maybe even an elimination of it. We're kind of standing pat to say, that happens when and if it happens. And it impacts kind of the way we stayed and how aggressively we continue to build out certain regulatory requirements. So I think, you know, that we're attuned to it. There's no question about the fact that we've said that, you know, we're not really in the market for whole bank M&A.

Part of the reason was that we do something transformational if we did, and we were not going to do that until we were ready to cross $100 billion. I think the clear thing we want to get across is that's not our primary goal regardless of whether the $100 billion mark moves or not. So I think it's fair to say for you that gives us more optionality if that number either moves up or is eliminated. And if the right circumstances exist, we would be more able to engage in whole bank acquisition.

But I think if you think about what we're talking to our board about and what we're doing as a management team right now, it's really a focus on organic growth, tuck-in acquisitions that continue to build out our deposit profile and strengthen our healthcare services vertical. So I would still say it's unlikely to see us engage in the short to medium term in active bank M&A.

Operator: Thank you. Next question comes from the line of Jared Shaw with Barclays Capital. Please go ahead.

Jared Shaw: Hey. Good morning.

John Ciulla: Morning.

Jared Shaw: I guess maybe on the HSA news, you know, it's great that the total addressable market is expanding. Does that require you to make any investments in new delivery channels or new outreach channels to capture that additional pool or, you know, how should we think about the expense associated with going after that market?

Luis Massiani: Yeah. No. Great question, Jared. No material change in the expense trajectory of HSA. We actually already run a pretty significant direct-to-consumer channel, and this is going to be the opportunity that's presented itself with these changes. It is slightly different from what we typically do through the employers, and it is more of a direct-to-consumer channel. But we actually do have a direct-to-consumer channel today that generates a not insignificant amount of new accounts and, you know, new account openings and pretty sizable business that we run direct-to-consumer today already. So no major change.

There will be, obviously, some elements of different types of marketing and some marketing spend that we'll have to, you know, that we'll have to figure out as we go. And, you know, the reason for being somewhat cautious on just the ramp-up that we're going to see is that, you know, HSA is, you know, just because everybody getting over the new eligible consumers that can have an HSA can now have an HSA doesn't mean that they're going to take it up, you know, immediately. And so do envision that there's going to be some spend on the marketing and education front.

No changes that we need to make from a technology or operational perspective, but this is going to be a long-term investment in, you know, identifying the new consumers, educating them on how they should be using an HSA benefits. Both short-term and long-term. And so there will be some element of investment that we'll make in that education process, but it's not going to materially change the OpEx trajectory of the business.

Jared Shaw: Okay. Alright. Thanks. And then if I could follow-up, on the allowance and provision. You know, with the improving broader credit backdrop, how should we think about the allowance build from here and the provision? Is that being targeted as a percentage of loan originations, or should we be thinking that as a percentage of the average loans?

Neal Holland: Jared, as we say every quarter, the CECL program and process is pretty much tied to risk rating migration, loan growth, weighted average risk ratings in the portfolio, and we generally don't give guidance on it. I think we are comfortable in our total coverage ratio when you triangulate and look at peers and our category four peers and our current peer group, I think we're in a pretty good place right now. You know, I think growth in our coverage would come from balance sheet growth or credit deterioration. I think, you know, we took a great move, I thought, strategically in the first quarter of changing our weighting for a recession scenario.

So we really felt like that was a good move to get us in the right spot. We did not back off our sense of what the future holds. So I think one of the things we're proud of is that our provision came down significantly driven by credit performance underlying, not driven by a change in what we think the outlook is. We still have a pretty good balance and a pretty good assessment of or a pretty good portion of assuming that there could be recession risk in the future.

So I feel like where we are is conservative, appropriate, and, you know, it'll be driven by loan growth and credit performance in the second half of the year.

Operator: The next question comes from the line of Matthew Breese with Stephens Incorporated. Please go ahead.

Matthew Breese: Hey. Good morning. Two things on originations. You know, first, C&I originations picked up quite a bit this quarter. Over $2 billion. How much of that feels sustainable, and how are spreads holding up there? And then two, commercial real estate originations were strong as well at $1.2 billion. Balances were actually down. So maybe you could talk about that dynamic and how payoffs are playing a role in commercial real estate today.

John Ciulla: Yeah. I'll take a shot and then ask Luis and Neil if they want to add anything. I mean, I think another thing we were proud of this quarter is that our originations came really across the entire bank in all categories, commercial and consumer. We had a really nice quarter with respect to commercial middle market, traditional C&I. And as you mentioned, at the end of the day, we actually reduced our CRE concentration. Quite frankly, not intentionally. That pipeline is building. We've said we're really comfortable where we are in that 250-ish range.

And so we do have a building pipeline in CRE with high-quality full loans, and hopefully, you'll see that category contribute to what we believe will be strong back half of the year loan growth across the board. And with respect to your specific question about is it replicable, given the fact that it wasn't in any one category and we're seeing pipeline build, we do think that we can see similar loan growth quarterly over the course of the rest of 2025.

Luis Massiani: Yeah, Matt. The only thing that I'd add there is that there was a little bit of pent-up demand where you saw earlier in the year, you know, first quarter all the noise that we were seeing with tariffs and so forth. I think that a part of this is just back-ended growth in originations and volumes that we saw ramping up over the course of the second quarter. And one of the things that gives us a lot of confidence going into the second half of the year is that the pipeline of activity in both commercial C&I and commercial real estate has gotten better over the course of May and June.

And today, we sit in a place where we have, I think, greater visibility of what we're going to be seeing from a loan growth perspective for the second half of the year. So nothing specific to point to as to why there's $2 billion in originations. It was on the C&I side. It was across the board, and the positive is that we're starting, you know, we're continuing to see type of activity across all the business lines and verticals, so we feel pretty good about the second half of the year for originations.

Matthew Breese: Great. And my second question is just in light of Mamdani's ascendancy here towards the mayorship in New York City. And, of course, this is if he wins. You know, how much of a valuation impact do you think there could be to, you know, the heavier rent-regulated buildings? Could this asset class become more of a problem for you, and do you have at your fingertips what kind of allowance against this asset class you already have?

Luis Massiani: So we don't have the allowance on the rent-regulated itself. You know, let me see if we could track it down while we're here. But, you know, you kind of hit the nail on the head in the question, Matt, which is it's an if. You know, it's not for sure and for certain that Zorin is going to win, you know, maybe he does. You know, we had moved away from the rent-regulated business particularly from a new originations perspective for quite some time. So it's not anything that we feel would derail what we're doing on the origination side. And the portfolio that we have is very seasoned.

It was originated, you know, well, you know, a long time ago with good debt service coverage ratios and LTVs. And so even though we do have, you know, a decent-sized portfolio of rent-regulated, it's not anything that we've originated recently. It's well-seasoned. And the credit stats on the portfolio are very, very good. But, you know, it's not a portfolio that we have historically reserved for significantly because the credit profile has been very good, and we expect that's going to continue to be the case. Particularly with the types of properties that we have there.

I tell you the path forward from a valuation perspective, you know, I'm not going to say that we've seen the exact types of commitments that are being made there now with rent freezes, but this is an asset class that has gone through multiple iterations of this type of risk, and it's continued to, you know, been somewhat resilient over time. And is there going to be a valuation effect? There will. But we don't think that it's anything that would have any material impact on our book of business given how seasoned it is, and, you know, we'll have to manage, you know, deal with whatever, you know, eventualities come up if it does happen that Mondavi wins.

Neal Holland: And, Matt, just again to reiterate, $1.36 billion in total exposure, only eight deals over $15 million, really small average loan size. And, you know, really good LTVs and current debt services. So I think, you know, we don't think of that as we are not overly exposed to that asset class. And I think more than 60%, or somewhere between around 60% of what we underwrote in rent-regulated multifamily was underwritten after the rent-regulated laws came into effect in 2019, meaning we weren't anticipating significant rent increases in order to service the debt. So really granular, very small part of our overall portfolio, and so, again, we don't see a material credit impact even if there's further regulation.

Matthew Breese: Appreciate all that. Thank you.

Operator: Your next question comes from the line of Anthony Elian with JPMorgan. Please go ahead.

Anthony Elian: Hi, everyone. The credit quality metrics inflected as you would expect by this part of the year. But should we expect the metrics you highlight on Slide 13 to improve further in the coming quarters? I understand there will be one-offs, but you know, is this declaring victory on credit quality now, or should we expect these metrics to improve even further? Thank you.

John Ciulla: Yeah. I think you kind of asked and answered the question. You know, we're always low to predict credit performance, and I probably get myself in trouble for not being more aggressively positive. But underlying here is the fact that our risk rating migration has really stabilized, and we're not seeing any new pockets of problems either in any sector, any geography, or any business line, which is really encouraging. And the other thing that I would remind everybody is even the NPLs and classifieds that are outstanding, they're really concentrated in those two portfolios that we continue to talk about for a long time.

So 45% of our on the balance sheet right now are either CRE office or healthcare services, and 25% of our classified loans are in those two categories. Two categories now, which are both well below a billion dollars. We've worked through them significantly. We don't have significant originations in either of those two categories. So that gives us another sense that, yes, directionally, over time, we think we should continue to see trending down in those two asset categories. And, obviously, with the caveat that because we're a commercial bank with larger exposures that in any one quarter, you could see things bump around.

Anthony Elian: That's fair. Thank you.

Operator: Your next question comes from the line of David Smith with Truist Securities. Please go ahead.

David Smith: Good morning. Just on the topic of credit continuing to improve, is there any further benefit to recovery of interest income, you know, in the NII forecast as other nonaccruals work down over time?

Neal Holland: Yeah. Again, that's one where, you know, obviously, if we had line of sight to it and we would be dealing with it, accelerating it. So I would say if you look at every single one of our quarters, ins and outs and nonaccruals tend to have an impact. You either accelerate if you have a resolution, you know, previously deferred income, or you start to get a drag if you've got a new nonperformer. I guess the best thing to say would be, we anticipate nonperformers to trend down. So we hope that the positive impact outweighs the negative impact.

But nothing in our forecast would lead us to believe that we have sort of any material impact on NII either way in the second half of the year.

David Smith: Alright. Thank you.

Operator: Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.

Bernard Von Gizycki: Hey, guys. Good morning. Neil, first question just on noninterest-bearing deposits. There's a nice uptick of about $200 million in the quarter. And I know that previous guidance was expecting the PPAs remain flat on a full-year basis. Just any thoughts on how you're thinking about any potential growth in the second half and how we should think about full year?

Neal Holland: Yeah. Noninterest-bearing was interesting quarter. As you pointed out, we were up $200 million points to point. But if you get into the average balance movement, we were actually down $200 million the quarter. So we did see a little bit of a positive movement towards the end of the quarter. We continue to believe that, you know, if you trend back historically over the last five or six quarters, obviously, as an end of and banking, we've seen decline in DDA accounts. Our belief is we're at the bottom of that decline, and we'll start to see some, you know, mild growth coming in the back half of the year.

We're not counting on outsized growth to hit our guidance, but we do believe we've kind of reached that bottom and should see a return to the trend for Webster Bank and for the banking industry as a whole.

Bernard Von Gizycki: Okay. Great. And just one follow-up for Luis. Just on HSA, like you mentioned on the three provisions included in the final bill, most of the benefit that you mentioned is coming from the bronze HSA plan participants. But the other two, regarding the direct primary care and telehealth, anything how big were those, would you say, of the one to two and a half billion you kind of cited? Was this just kind of like a rounding error? Or just anything you can give just on, like, sizing since the bronze are, like, the bigger component?

Luis Massiani: Yeah. It's slightly more than rounding error, but I think you could still characterize it as a rounding error on the last two. The big driver of this is the fact that you now have, you know, under today's enrollment rates in the bronze package about 7 million consumers that are now going to be eligible to, you know, to pair up their bronze package with an HSA account.

That's largely the driver of this, and that's again why this, you know, for us is a long-term path of identifying the 7 million consumers and then trying to figure out where, you know, how best to educate them on how to use an HSA, which is going to take some time to do. But it is largely that is the driver of the deposit growth for the most part.

Neal Holland: Yeah. That clearly is the big one. The other two are valuable. You know, the telehealth, for example, a risk to the industry. And it's great to see that, passing and that risk removed from the industry. So we're very happy by the other two, but I agree with Luis that it really is majority the one provision that's driving our estimate.

Bernard Von Gizycki: Okay. Great. Thanks for taking my questions.

Operator: Thank you. The next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Hey. Good morning, guys. Thanks for taking my questions. Most of my questions asked and answered at this point. But I guess first, just you've talked about the C&I and CRE broadly, but curious on the sponsor side that been a little bit light lately, if you're seeing any changes in demand there, if you're kind of baking in any pickup in that book in the back half of the year as the other categories start to pick up.

Luis Massiani: Yeah. Short answer is yes. It was very late in the first and, you know, early part of the second quarter of this year, even going back to the third and fourth quarter of last year, there was, you know, we had already started to see a downward trend in, you know, origination activity. That, you know, pipeline of business on the sponsor side has ramped up nicely in the second part of the second quarter. And we do envision that we're going to get back to, you know, a better growth trajectory and growth profile there.

And we do think that the addition of the, you know, just becoming a improving and strengthening our competitive position through the joint venture with Marathon is also going to be helpful to on-balance-sheet origination. So we're going to be able to look at more deals than what we looked at in the past. We're going to be able to target slightly larger deals than what we have been able to in the past.

And so when you factor in return to greater just sector activity for, you know, for PE in general, combined with what we are doing on just improving our competitive position as an originator, all of that should result in a better growth trajectory in the back half of this year.

Daniel Tamayo: Great. Thanks, Luis, for that. And then I guess just quickly on the deposit side. So you had the seasonal factors that impacted your growth or inflows of the brokered CDs in the quarter. Curious if you can kind of how you're thinking about the movement of the portfolio maybe in the third quarter. But overall, just thoughts on where you think that category shakes out for you as you look at the contribution of brokered as a percentage of deposits longer term? Thanks.

Neal Holland: Yes. So brokered, we run brokered fairly low as a percentage of our total deposit mix. In season one and season three, we see nice increases in our public deposit accounts. In quarter two and quarter four, as we see those trend down, we bring in more broker deposits to help offset those. So as you think about Q3, you'll likely see, you know, potentially brokered come down as those public deposits move up. You'll see that trend reverse again in Q4. But we really run our broker deposits kind of in that 3-5% of deposit range, so range we're real comfortable with, and that's how we think about the seasonal movement in the broker deposits.

Operator: Your next question comes from the line of Kumar Braziler with Wells Fargo. Please go ahead.

Kumar Braziler: Good morning.

Neal Holland: Hey, Kumar.

Kumar Braziler: Following up on the Marathon commentary, I'm just wondering to what extent does that loan growth come just from looking at larger deals? And is that a two-way street where things that Marathon might originate will end up on your balance sheet? Or is that just what you're originating will end up on the JV?

John Ciulla: It largely we think that the more swings at the plate will come from the fact that we can participate and compete for larger transactions without increasing the on-balance-sheet hold sizes. I would say that, yes, there is a two-way street there that could benefit us from an origination perspective. Although our origination channel and capabilities will be the majority of the originations related to what we would put in the joint venture. So excited about it. Again, this will be, as Luis mentioned in his comments, there'll be a ramp period before we start to get noninterest income. But we do think that we'll benefit relatively shortly from a more competitive offering and a larger implied balance sheet.

Kumar Braziler: Okay. Great. And then as a follow-up, just looking at margin trajectory, realizing that it benefited a little bit from some interest recoveries here in 2Q, but can you just maybe talk to some of the competitive landscapes around the deposit side, some of the spread tightening on new loan production and is the expectation that we're still kind of tracking towards a 3.40 margin as we go through the back end of the year, or does maybe some of the loan growth commentary mitigate some of those pressures?

Neal Holland: Yeah. So we're still expecting net interest margin of approximately 3.4% this year. And so if you think about that in the first half of the year, we were obviously a little bit above that 3.4% level. So we kind of expect to exit the year somewhere between 3.35 and 3.40. And I've mentioned a couple items. You know, we'll have a little bit more cash on the balance sheet. We've got a debt restructure in the back half of the year. We've got a little bit of pressure on our securities portfolio called a basis point or two as we have some mix shifts there.

Then there'll be some modest spread impact, and that really depends on how fast we grow the balance sheet. And so there's some variables there on where we end on the back half of the year. But as you mentioned, and I mentioned earlier, deposit competition is challenging in the market right now. I think our teams are doing a great job of maintaining clients and winning new relationships, but it's a challenging environment. We're also have put on some, you look at the risk rating of our new loan origination, they're at an even higher quality than our overall loan portfolio. So that's causing a little bit of organic spread compression as we move forward.

So we're reiterating our full-year NIM guidance. But do expect that the back half of the year to be a little bit less of the net interest margin side of the first half. And I always want to add that we don't manage the organization in NIM. You know, we're most focused on NII and NIMs and outcome, but did want to provide that color on some of the factors we're thinking about in the back half of the year.

One thing I would say to tie that to the earlier question, if we do see continued increase M&A activity and what Luis talked about with respect to sponsor pipeline improves, that gives us a chance to outperform as our higher-yielding loans could impact positively the margin.

Kumar Braziler: Great. Thank you.

Operator: Your next question comes from the line of Ben Gerlinger with Citi. Please go ahead.

Ben Gerlinger: Hi. Good morning.

Neal Holland: Morning, Ben.

Ben Gerlinger: Just kind of following up a little bit tangential on the Timur's question. The marathon. With the larger loan size, do you think it's maybe a little bit bigger company? And then with the fee income opportunity and part of you, you guys tease it a little bit that it's going to take a little while to ramp up. And it's more of a 2026 question than 2025. But once we get that flywheel really going, the contribution to fee income, are we talking, like, a couple million incremental per quarter, or are we talking, like, tens of million per quarter once you get the full thing going? So probably more like a run rate late 2026.

Luis Massiani: Yeah. I think that there's two opportunities as we think about the potential for, you know, what the impact of the joint venture is going to be. When we're referring to the, you know, the fee income that, you know, we're talking about asset management income, and, you know, that is, you know, for, you know, the first vehicle that we're going to be running, it's going to be more of the, you know, you said tens of millions is not that big. It's going to be smaller than that, but it's going to be a good recurring source of income that we will be generating, and we'll continue to provide more details.

And you'll see those, you know, you'll see it ramping up in the, you know, through the P&L over time. The just as good of an opportunity, if not better, and you and I think you hit the nail on the head when you said, you know, larger, you know, larger transactions means larger companies will mean larger opportunity to be able to do capital markets business, swaps, indications, as well as, you know, just treasury management and deposit opportunity plays there as well.

You're going to start seeing that fee income being generated, you know, more, you know, more closely tied to the origination activity of the vehicle, which will be up and running in the third quarter, and we should we're going to start originating. You know, we anticipate, you know, loans into the vehicle at that time. So a two-pronged approach. You know, a good impact of the JV is what's going to happen on our own balance sheet with just, you know, greater origination activity and then all of the loan fee activity that happens off of those originations, which we are largely going to retain at Webster Bank.

And then, longer term, you'll have, you know, an income that will be driven off of the, you know, what the eventual performance of the portfolio becomes in the vehicle as well as, you know, how large the vehicle becomes in the perspective of, you know, kind of the number of loans that are held in, you know, on the platform.

John Ciulla: And one important point I want to make on this is and because I think it's this isn't new activity for us. This isn't us having to go out find new sponsors or we're chasing things. This is simply gives us the capacity to continue to deliver full relationships, cash management, deposits, loan fees, originations with existing sponsors who, as the markets change with private credit, have moved more to private credit. We still do tons of business with them. But on the larger deals, they move away from us because of our balance sheet. So it's important point to know that this isn't changing risk profile. This isn't changing activity. We don't need to hire new people.

We have very sophisticated people in that sponsor group. To just giving them more tools to take advantage and deliver for their existing clients.

Ben Gerlinger: Gotcha. That's helpful. I just want to dig a little deeper than that. Do you have the kind of let's call it, back office or banking opportunities for kind of legacy marathon relationships now? Is it really trying to keep separate church and state between Webster, JV, and Marathon? On, like, opportunity in front of you.

John Ciulla: I wouldn't comment on that now. I think over the long term, they're a great firm. And I think there are more things we can do together. One of them would be what you talked about with respect to having a good banking services product for other borrowers. But that's not on the drawing board now, and I wouldn't comment on that.

Ben Gerlinger: Do appreciate it.

Operator: Next question comes from the line of Laurie Hunsicker with Seaport. Please go ahead.

Laurie Hunsicker: Great. Hi. Thanks. Good morning. Two questions. Number one, what was your share buyback price on the 1 million shares in the quarter? And then number two, just going back to the rent-regulated multifamily, that $1.4 billion, do you have an approx debt service coverage and then anything to think about or know about on that $185 million of maturities coming up over the next twelve months?

Neal Holland: Yeah. Our Q2 share repurchases were at $51.69.

Laurie Hunsicker: Thank you.

Neal Holland: And our current debt service coverage ratio on the portfolio is 1.56 times.

Laurie Hunsicker: Perfect. Thank you so much. Oh, and anything on that $185 million of maturities that we should be thinking about?

Neal Holland: No. Normal course.

Laurie Hunsicker: Right. Thanks, guys.

Operator: I will now turn the call back over to John Ciulla for closing remarks. Please go ahead.

John Ciulla: Thank you very much. We appreciate everyone participating this morning. Have a great day.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

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