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Operator: Greetings. Welcome to Xiaomi's 2025 Annual Results Announcement Investor Conference Call and Audio Webcast. Today's conference will be recorded. If you have any questions or objections you may disconnect at this time. [Operator Instructions] Now we will have Mr. Xu Ran, General Manager of Group Investor Relations and Capital Markets Department to start. Ran Xu: Welcome, everyone. Welcome to the investor conference call and audio webcast for the company's 2025 annual results. Before we start the call, we would like to remind you that this call may include forward-looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions comes from a variety of sources outside of Xiaomi. This presentation also contains some unaudited non-IFRS financial measures, which should be considered in addition to, but not as a substitute for the company's financials prepared in accordance with IFRS. We have William Lu, Partner and President of Xiaomi Corporation; and Mr. Alain Lam, Vice President and CFO of the Corporation to talk to us. Mr. Lu will share recent strategic and business update. Thereafter, Mr. Lam will review the company's financial performance of 2025. And then after that, we will have the Q&A. Mr. Lu, please. Weibing Lu: Good evening. Thank you very much for coming to the 2025 full year call. Now this evening, I'll be talking about 3 points. First of all, review our main achievements in 2025. Second, share of breakthroughs in hard-core tech, in particular, in AI and embodied intelligence. And thirdly, we'll look ahead for the strategic direction focus in 2026. First of all, in 2025, some of our outstanding achievements. Well, in the year, our Xiaomi Group maintained high growth with both annual revenue and net profit reaching all-time highs. Total group revenue reached RMB 457.3 billion, surpassing the RMB 400 billion mark for the first time, up 25% year-on-year. Adjusted net profit reached RMB 39.2 billion, up 44% year-on-year. By segment, first of all, Smartphones. According to Omdia, in 2025, our global smartphone shipments ranked top 3. Market share was 13.3%, remaining global top 3 for 22 consecutive quarters. In Latin America and Southeast Asia, shipment ranking rose to second. In Europe and Africa, third. According to third-party data in Mainland China, our smartphone sales ranking rose to second. On premium models. In 2025, premium models in Mainland China accounted for 27.1% of total smartphone sales, up 3.8 percentage points. In RMB 6,000 to RMB 10,000 price bracket, our market share rose by 2.3 percentage year-on-year. We solidified our high-end base domestically and are making continuous breakthroughs in the RMB 6,000 to RMB 8,000 ultra-high-end market. By end of February 2026, we launched our first Leitzphone for global markets, priced at EUR 1,999, a new milestone in our overseas premium strategy. We'll continue achieving top-tier pricing in mature international markets and elevate our premium overseas sales to new heights. For IoT business in 2025, revenue surpassed RMB 120 billion for the first time, reaching RMB 123.2 billion and 18.3% year-on-year growth, hitting all-time high both domestically and internationally. For the home appliances revenue, it reached 23% plus growth with record shipments. Wearables ranked first globally, TWS earphones ranked second. Tablet shipments grew 25.2% year-on-year, ranked fifth. Our AI glasses released in June '25 ranked third globally and first in China. We continue to drive full category premiumization at home and abroad with overseas high-end products, achieving stellar performance. On premium strategy, in '25, our tech home appliances entered the European market already covering Spain, France, Germany, Italy and more. For autos, Xiaomi Auto delivered 410,000 units in 2025, far exceeding the 300,000 units target set at the year's start. February 13, '26, cumulative deliveries surpassed 600,000, and we are fully committed to delivering 550,000 units. In March 19, we officially launched a new generation SU7. It features major upgrades inside and out, including across the electric powertrain chassis, electronics architecture, et cetera. Within 34 minutes of launch, locked orders for SU7 exceeded 15,000, surpassing 30,000 orders after 3 days. For this year's MWC, we also showcased our Vision GT concept car, not just a concept car, this is Xiaomi Auto's latest exploration of design innovation built on hardcore technology. We are the first Chinese brand invited to participate, and it represents recognition by the world's top simulation driving platforms. For China's auto industry, it shows that in terms of design and innovation, Chinese automakers can already compete on par with the world's best. For hardcore tech, in '25, our R&D investment exceeded RMB 33 billion. For '26 we plan to invest over RMB 40 billion with more than RMB 16 billion for AI, embodied intelligence and other innovation fields. These investments build our solid product capability defenses. And for AI in 2025, we achieved breakthrough progress. For AI, it is an era of truly useful AI, undergoing historical leap from usable to truly useful, a paradigm shift from single tasks to complex tasks processing, from passive to active planning, from tool attributes to ecosystem attributes, and for us with rich terminal products and use cases across smartphones, cars, home appliances, IoT, real data value of AI far surpass the single category companies. Two, our foundation large models enter the leading global open-source tier. In March of the year, we released 3 models, Xiaomi MiMo-V2-Pro, MiMo-V2-Omni and MiMo-V2-TTS, completing our technical foundation for the Agent Era. MiMo-V2-Pro surpasses 1 trillion parameters, supporting 1 million token context windows and ranking 8th globally in Artificial Analysis Large Model Intelligence Index, fifth by global brand. During closed beta and public launch, these models rank first in weekly calls and held first place for many days on OpenRouter, single days as much as double in second place. And we will keep upgrading our foundation models as we move towards general intelligence. Three, we are poised to lead AI in the physical world, deep integration of AI in the physical world as the next frontier. We control over 1 billion hardware access points for its ecosystem. In March '26, our phone AI Agent, Xiaomi miclaw entered limited testing. We're the first OEM to attempt deploying [ launch ] Lobster on phone terminals, exploring the delivery of true AI phone and ecosystem to users. For auto, the new SU7 is equipped with our XLA Cognitive Large Model, achieving mall parking, navigation, complex scene understanding and voice control, improving both driving and experience. For SU7 Ultra, it's equipped with super shell AI, a smart cockpit and advanced AI. For the home in November '25, we launched our Miloco smart home solution, giving smart homes eyes and brains and hands and feet for the first time, a pioneering real world application of Xiaomi MiMo, laying a new vision for next-generation smart homes. Fourthly, for our AI is now Xiaomi core innovation engine in '25 with our tech-forward, about 2/3 of the winning projects used AI, reimagining work across fundamental materials, chipsets and OS, intelligent driving, tech home appliances and more, backed by China's strong AI industry. The coming decade belongs to China. And also Xiaomi is well positioned in person, car, home ecosystem. We'll invest RMB 60 billion in AI over the next 3 years. And in this era, we are confident that we'll place a new trade for Chinese AI. For embodied robotics, it is the ultimate integration platform for AI chips, OS and manufacturing capabilities, a high barrier field. In 2026, we launched a haptic-driven precision grasping, fine-tuning model, core tech for robotic dexterous hands. Shortly after, we open-source a Xiaomi Robotics VLA large model, Xiaomi-Robotics-0, achieving several new SOTA results. In March, Xiaomi embodied robot began internship in our car factory, achieving 90.2% deal size site simultaneous installation success for self-tapping nut workstations, meeting production line cycle times as quick as 76 seconds with 3 hours of auto operation. These are just starts. Over the next 5 years, we believe large numbers of embodied robots will work in Xiaomi's factories. And robots will break brown boundary between virtual and physical worlds. But there are challenges such as cost increase, et cetera. In the short term, there may be some pressure on our business. But on the other side, we will be steadfast in our strategy so that we will continue to have breakthroughs in AI, chips, OS and embodied intelligence. We are committed to scaling our global business model and advancing Chinese tech worldwide. This person, vehicle, home ecosystem is not just a product combination, but the platform for understanding users' full scenario data. We'll firmly seize the opportunities of AI era, and we are filled with endless possibilities and imagination. Alain Lam: Well, thank you, President Lu. As shared by Mr. Lu, in 2025, we have achieved historical leap. Our total revenue reached a record high of RMB 457.3 billion, setting a company best. This year, we achieved a year-on-year increase of 25%. Revenue in the fourth quarter is a new single quarter record. Overall, gross profit margin was 22.3%, up 1.3% year-on-year, historical high also. The second half of 2025 was more challenging for the first. For the full year, our smartphone times AIoT segment revenue was RMB 351.2 billion, up 5.4% year-on-year, which is also a new annual high. The smartphone times AIoT segment gross profit margin also reached a record 21.7%, up 0.5% year-on-year. For smartphones, for the year, revenue was -- sorry, RMB 186.4 billion, accounting for 40.8% of total revenue. In '25, our global shipments reached 165 million units. Our high-end strategy had significant results of continued product strength enhancement. Third-party data shows that in 2025, our high-end smartphone sales in the Mainland of China accounted for 27.1% of our total smartphone sales, up 3.8% year-on-year. In that, RMB 4,000 to RMB 6,000 price segment, our market share reached 17.3%, up 0.5% year-on-year. For RMB 6,000 to RMB 10,000 segment, our market share was 4.5%, nearly doubling year-on-year. According to third party in 2025, our global smartphone shipment volume ranked top 3 with market share 13.3%, maintaining a top 3 position globally for 5 consecutive years. In 58 countries and regions, our smartphone shipments ranked top 3. And in 70 countries and regions, we ranked top 5. Despite rising memory prices in 2025, our smartphone gross margin remained relatively healthy at 10.9% for the year. For IoT, for this year, our revenue and gross margin both performed remarkably. 2025 revenue from IoT grew rapidly by 18.3% year-on-year to RMB 123.2 billion, a new record. And both for domestic and international sales, it was at all-time highs, thanks to product structure optimization and improved product strength. For gross profit margin of IoT, it was a record high of 23.1%, up 2.8% year-on-year. By category, large smart home appliances performed exceptionally well with revenue up 23.1% year-on-year, a record high. Our wearable devices maintained rapid growth and an industry-leading position. Our wearable band ranked first in global shipments and TWS earphones ranked second. Tablet products continue to grow fast, ranking fifth globally with shipments up 25.2% year-on-year. Internet services. We continue to expand our user base. In December '25, our global MAU reached 750 million, up 7.4% year-on-year. Of these, Mainland China MAU reached 190 million, up 10.1% year-on-year. In 2025, our Internet service revenue hit a record RMB 37.4 billion, up 9.7% year-on-year. And of this, just in the fourth quarter 2025 alone, Internet service revenue reached RMB 9.9 billion. Throughout 2025, our Internet gross margin remained relatively stable at 76.5%. Advertising continued to drive Internet business growth with annual revenue of RMB 28.5 billion, a record high. Overseas Internet service revenue grew by 15.2% to a record RMB 12.6 billion, accounting for 33.8% of total Internet service revenue. Next, on EVs. Our EV and AI and innovation business segment, annual revenue for the segment reached RMB 106.1 billion, surpassing RMB 100 billion in less than 2 years, up over 200% year-on-year, accounting for 23.2% of the group's total revenue. Of this, Smart EV sales revenue was RMB 103.3 billion, with other related revenue at RMB 2.8 billion. For the year, gross profit margin for Smart EV and AI, innovation business segment was 24.3%, up 5.8% year-on-year. In 2025, the segment achieved positive annual operating profit for the first time, recording an operating profit of RMB 0.9 billion. We delivered a total of 411,082 new vehicles in 2025. In the fourth quarter alone, 145,115 new vehicles were delivered, a single quarter record high. The average post-tax unit price for the year was RMB 251,171, up 7% year-on-year. Next, over the past 5 years, our cumulative R&D expenditure was RMB 105.5 billion, up 37.8%. '25 alone, R&D expenditure was RMB 33.1 billion, up year-on-year, and we estimate starting from 2026, our cumulative R&D expenditure over the next 5 years will exceed $200 billion. For net profit in '25, the group's adjusted net profit was RMB 39.2 billion, a record high and up 43.8% year-on-year. For CapEx for '25, our CapEx reached RMB 18.2 billion, up 73% year-on-year. And of this, Smart EV and AI innovation accounted for 66% and over. We continue to enhance our shareholder value and we actively repurchased shares on the open market. In '25, our share repurchase was approximately HKD 6.3 billion. Since early '26, our share repurchase totaled about HKD 4.7 billion. In January '26, we announced an automatic share repurchase plan for a cap, with a cap of HKD 2.5 billion, demonstrating our confidence in our company's long-term future. We actively practice sustainable development. In low carbon initiatives in 2025, our group purchased more than 40 million-kilowatt hours of green electricity, over 10x of last year. In '25, our [ PV ] electricity usage in our auto plant exceeded 13 million-kilowatt hours, reducing carbon emissions by nearly 10,000 tonnes annually. On ESG ratings in '25 for CDP Climate Change and Water Security Survey, Xiaomi received a management level B score. Also, in March '26, we achieved our best-ever score of 81 in EcoVadis gold medal, marking another recognition of our ESG efforts. We will continue to follow a robust and enterprising operating strategy and look forward to an even greater achievement for 2026. Thank you so much. This ends my report for this evening. Next, we can have the Q&A session. Operator: [Operator Instructions] Morgan Stanley. Andy Meng: Greetings both. First of all, congratulations for 2025, revenue and profits have reached new record highs. I have two questions, one on memory. We see that memory prices have been rising significantly. Investors, what's most concerned about this for the segment of smartphones. And we noticed that there are already some smartphone selling price hikes in order to offset this memory prices hike. But your smartphone sets are still the same in terms of pricing. So perhaps in supply chain management and in inventory, you are better than your competitors so that in this challenging situation, you exceed your competitors in performance. Perhaps Mr. Lu can explain to us for your new thoughts concerning smartphones and what are your responses to this year's challenges? Weibing Lu: Right. For memory, yes, for each quarter, you have always been caring and concerning about this. And in different occasions, I have also talked about my views on this. In the past, I have said that this is a period that we are going through, and we have to look at 2027. And there may be high price hikes and we have done our work in this regard. But on the other hand, my own feeling is that the cycle of hikes may be longer than I had expected. First of all, there is the AI-led demand. And also for memory, the cost hikes magnitude, I think, is going to be higher and much higher than I had expected. My expectation in the industry was already forward, but I think it's going to be even higher in terms of price hikes for this. So it is longer cycles and the price hikes is going to be higher than I had expected. So for all the consumer items, it is going to impact greatly, not only for smartphones, which we are more concerned about. But for some categories, for some smaller capacity, categories with smaller memories, units, there is a situation where there is a cut in supply even. So this is an actual situation that's facing us in reality. The impact of that, we have a calculation which is very simple, and that is we look at the memory and it's part of the product. The more it is as a part of this product category, the more it will be impacted but less -- of course, it will be less impacted. And in our categories, smartphones, tablets, notebooks, they are more in terms of proportion. But on the other hand, there are some, for example, high-end smartphones. Relatively speaking, it is less for memory part. So for a company, if the products will have more memory as a part of their product then, of course, the impact will be higher, less will be less impact. So this is a very simplistic way of calculation I'm looking at it. In the past 2 weeks, looking at the memory price hikes, we already see some competitors raising their mid-priced smartphone prices. And I fully understand that. I think for annual smartphone manufacturer, if they do not unload to the consumer, it is very difficult to sustain this kind of price hikes. But I think it is inevitable for this. And for Xiaomi, our pressure is very, very large indeed. But as I say, we will try our very best to digest this to protect the consumer. And when we can do this no more, we will have to hike our smartphones prices, and we hope that our consumers and our customers will understand this. Yes, we are slower in price hikes, but it doesn't mean that we are immune from it. There are some competitive advantages for Xiaomi, which I can tell you. So for example, in home appliances, the category, for this category, it will be less impact. For smart cars, EVs, it would be higher because the memory part of that is higher. But on the other hand, compared to the proportion in smartphones, it will be lower. So with our variety of product segments, this is how I see it. And through this, I hope we will be able to better resolve this problem. For smartphones, tablets and notebooks, we are a company -- we are globally leading and also in EVs as well in the past few years. And for the memory suppliers around the world, we have built a very good relationship, mutual trust, and we have long-term supply contracts. So at this point, I do not feel that we have any risk of nonsupply or stopping of supply. So this is our competitive advantage compared to our competitors. The third point is that in my previous expectation, I was more pessimistic about memory price hikes. And therefore, I have been making more aggressive preparations. So in that case, our inventory sufficiency was higher. But overall speaking, for our terminal products cost, it is highly impactful. So this short-term pressure is definitely in existence, it is there. Andy Meng: Mr. Lu, this is very clear. My second question is about our vehicles. For the new generation of Xiaomi vehicles, there had been a successful announcement. And in the investor interaction, I noticed that some investors feel that we -- that Xiaomi doesn't -- no longer talk about or announce the data, but only for the unit data, well, and this is more negative. But for Xiaomi, what is the sale? I think it's going to be stable and it will be positive, and this is how I see it. Can you talk about these 2 investors' point of view? Unknown Executive: Andy, let me just answer that question. Well, for the announcement of sales from the users side, we see some phenomena. The first phenomenon is that for the first 3 days of sales, we already have achieved significant sales, 34 minutes, 150 locked-in sales. And after 3 days, it was over 30,000 units sales, and we have lived up to our commitment. And that is for the delivery starting from the fourth day of launch, we have already started delivery because we have already made preparations for the manufacturing of cars. And also, with some of the problems of the previous batch, they had to wait for a long time and before we could deliver to our users, those who have locked in their purchases. So we have absorbed our experience, and we had a new iteration. Well, as you have mentioned, why do we only disclose our locked-in contracts. We think that this is more fair. So it is not about preordering or big ordering. It is locked orders. Locked orders are solid, and that is the buyers are going to take delivery of these vehicles. And this governs our manufacturing cycle as well. So we think that's locked contracts or purchase is a fairer way of looking at it, and that is why we made the change. And in the industry, I'm sure people have their different practices, but this is what we maintain is the right way. So this is the first point. And also using this particular opportunity for our -- concerning the locked in contracts, let me share some information. So for the first point, it is that a lot of investors have asked about the locked orders. Buyers, are they from our previous buyers or new buyers or most of them we know are new buyers. For the locked orders, they come from new buyers. So it is not the original owners who are changing to -- changing from -- [ 2 Euro ] cars. For iPhone, about 50%, it is first generation. And for 60% of the new buyers, they are iPhone users. So for our locked contracts, the progress is faster than our first-generation users. So compared to the previous numbers, these locked orders are bigger. And also, you are very complementary of our allocation. About 60% of them are using the paid choice, the paid options. So compared to the previous generation, we think that the penetration is better. For example, female buyers, iPhone users penetration and also choosing different options of colors, for example, all these have been performing better in penetration than the last generation, the previous generation. Thank you for your question. Operator: Timothy Zhao from Goldman next. Timothy Zhao: I have 2 questions concerning AI. First of all, concerning in the past 2 years, there are some models and including the foundation models. So for AI capabilities in the ecosystem, what is our capability? And also for miclaw and also for the IoT, how is miclaw positioning? And how do we see it done with IoT? And how is miclaw going to be significant? And also, I would like to know how we consider AI in its users and also developers and internal to Xiaomi and its commercialization? In LLM, what are some KPI considerations for your team? You once said that in the next 3 years, there's going to be a RMB 60 billion expenditure? And how is this on OpEx and CapEx, the allocation, please? Unknown Executive: For 2023, we have used a lot of energy to consider our AI strategy going forward. So we have faced it. First of all, the infrastructure for AI, algorithm, et cetera. And out of the infrastructure, we had an exponential growth in terms of its application. And last year, we had already said that '26 was an explosive use of AI era. So from virtual, AI has moved into the physical world. And this is true to my earlier prediction. And with this prediction coming true, we will be developing our AI/LLM. We started investing in '24 and in 2025 in [ MiMo ] LLM or large language models, we have made a lot of progress. And we have been very clear last year in saying that this year, '26 will be the year of explosive use of AI. And last year, we were more considering about agents, AI agents. So in individual terminal, how can AI have a bigger usage so that people are able to do things that they were not able to use before. With OpenClaw, it's allowed us to very quickly roll out miclaw in testing. So at present, from the responses of our testing, it is very, very positive. And going forward, there is a huge market, and that is AI going to the physical world. So it will be in driving, in robots, in humanoids, et cetera. So in this area, Xiaomi has already made the deployment. And at the end, I think it will have to serve our entire ecosystem of Xiaomi. So this is a direction. This is a large direction, and we will continue to strategically follow that. And also, you mentioned miclaw. And for miclaw, this AI agent of Xiaomi, this is our own developed and it is an agent and it is going to test our modeling capability and also our limitation, and also, it's going to test how we are able to deeply integrate and also our data capability. And at Xiaomi, we will do our own integration with our own data from our users. So we will also be using cloud-based data. And also there will have to be certain integration into the system and also safety, we will be good in protecting safety. So for Xiaomi miclaw, it is going to be the prototype for the future AI agent. Now this is still early on. We do not have some specific commercialization model. And I don't have any KPI for the team yet because only when it is mature will the team has a certain KPIs. So as for the RMB 60 billion that you talked about, yes, my colleague will answer that question. Unknown Executive: That's right. For the [ RMB 16 billion ] and 3 years -- RMB 60 billion, it is -- it includes R&D and also CapEx. But of course, in R&D, it also includes the distribution from previous year's R&D. So it is our present period R&D and also our previous R&D and also CapEx. So there will be 3 parts. If you look at the 2026 [ RMB 16 billion ], most of it is R&D expenses, the present period. So it's a 70% present period R&D. So if it is CapEx plus the previous years, it would be the rest. So the next 3 years, every year, our CapEx will have some previous CapEx, which had been detained into this year. So it may be lower than the 70%. So it is for this period as well as a portion from the previous year's CapEx or amortization from previous year's CapEx. Operator: China Capital, Wen Hanjing next. Hanjing Wen: I have 2 questions. First question concerning our IoT business. We see 2025 IoT performance have been very, very good from revenue and also in progress and advancement. So for this year, there are 2 concern points. They are positive. And for home appliances, new highs reached. But some investors are concerned that with the domestic situation, what do you say the economy ramping down a bit? How do you see this? And also, what about IoT going overseas? What is the planning? And secondly, for vehicles in 2025, overall, for EVs, it is already profitable. And also for future planning for the entire year, how do you see profits for the entire year for vehicles? Weibing Lu: I'll be talking about IoT, and then Alain will answer the other question. For IoT for this business, because we have a number of different categories. I'll be talking about China market and overseas markets. For China market, I think there is an opportunity, and that is premiumization of IoT. For IoT business for us, even though it is very large scale, but our ASP is low. Last year, we had major progress made, but it is still far from our goal. Our watches, our, for example, our hairdryer, et cetera, I think still the average price is relatively low. So in R&D, with our investment in that, I think this year, we are going high end. I think there will be a lot, a lot of positive progress. So I think this is a huge opportunity. So for major home appliances, for our washing machines, our fridge, and it is 4 points. And for aircons, it is 10 points. So for ESG, I think there is still room for pricing. And for our IoT business, overall, last year, it is already at a very high level of AIoT as we will continue to do so. As for overseas business, I think there is a huge space for development because our market has always been the -- in China. If going to the North American market, it's going to be 3x of our original market size. And it's -- so that is to see it's going to be 6x if we reach our potential. It's going to be 6x or at least a few times our domestic China market. So there is a lot of empty room for us to fill in terms of overseas markets. We will send people. We will send our products. And with our IoT development, there had been a lot of overseas and information and testing, and there is huge room for overseas growth and development. So for our high ASP products, this is a high area of growth potential. So this is our overseas plan. Last year, it was 4.5 shops and it's going to grow to 10 or 10,000 shops. And I was in London in Xiaomi Home, I was able to observe that most of the products were high-end product selling. So you think that actually, our categories are very full in range, and these overseas markets, for example, in the U.K., they are selling at high end. So I think there is huge room for development in the overseas market. For the vehicle question, last year in 2025, we have delivered over 410,000 units, far exceeding the 300,000 unit target we set at the year start. So at the year start for this will be 550,000 units for this year's delivery target for 2026. So '26 compared to '25, there is growth. But for the overall situation in '26, there is pressure. So for our expectations, et cetera, we are still very confident that we'll be able to reach our target. As for our target profit. You would know for this category, it is AI and new business segment. So that would include our AI investment and also new development areas. So you cannot just look at the segment as just an auto segment. It includes other new businesses in this segment. But at present, the new businesses are still in the investment stage. As I've mentioned, in AI, for example, this year, we will continue to increase our investment in AI, including in robots. Robotics, we'll increase our investment there as well. So you have to look at 2 areas. One, auto in this segment. And secondly, AI plus new business investment. So for this particular segment, last year, it performed very well. For this year, as auto growth and also in other areas, the kind of fruit that we're going to pick from them, the results, this is going to be an encouraging segment. Operator: Kyna Wong, Citibank. Hiu King Wong: Can you hear me fine? Unknown Executive: Yes. We can. Hiu King Wong: I have 2 questions. First of all, I would like to know for the Middle Eastern situation recently, I don't know whether for the overseas business, including IoT, handsets, has it impacted you? Are there certain logistics and also cost of raw materials had presented issues to you? And also another question concerning your gross profit margin. For this year, for handsets or smartphones, is there a principle, let's say, under what kind of profit level will you be keeping it or making certain choices for adjusting the price. So for smartphone handsets to protect your profit margin, gross profit margin? And also for vehicles, there may be some pressure, as you have mentioned before. And how do you think this will be making your performance better than your competitors? Are there certain safeguards for profits and also AI, IoT because premiumization is a strategy of yours, you did say that for this kind of premiumization. What is your plan for AIoT, please? Unknown Executive: First of all, for Middle Eastern conflict, it's nothing that we want to see, certainly. I hope that there will be a solution for it because it's going to impact industries and economy around the world, it's going to impact big way. As for Xiaomi business, the Middle Eastern overall situation, for revenue from that part, it is not so much -- it is only in the single digits as a contribution to our profit. So in terms of the market from the Middle East, it's a small proportion of our overall at Xiaomi. So it is controllable from that regard. But at the same time, we also see that the oil situation from the Middle East, we already see some pellets, plastic pellets, and the raw materials is influenced or impacted. But overall speaking, it is still controllable. So that's for your first question. Second question, concerning cars, IoT and also smartphone handsets, the gross margin and what is our pricing strategy, well, for this, I would say, first of all, for memory, for memory components, we are to quantify that. I would say in the past, for a quarter, for example, we expect it to be at a certain high price, but actually, it's going to be at an even higher price, rising even higher. So we are very -- it's very hard for us to quantify that even for a small increase, it may because it is such a big part of the product, it will be impacting the cost of the product a lot. So it is very difficult to foretell early on, like what we had been able to do before. But for smartphones for this category, I think given our size and also our market share, it is very important for us. So if you say whether there's a principle, it would be that we hope. We try our best to make some balances. So my consideration is that we want to maintain our market position. That is very important to us because for smartphones, there are very few listed companies in this category. So I'm not being able to get a lot of accurate data from the industry competitors. But from my years of experience, I know the following. For example, in vehicles, the absolute number as a part of the overall car price, it is less in terms of its impact, but not as big as a smartphone part. For IoT, it is even -- it is also even lower in terms of memory, internal memory price impact. So different categories will have different impact. What is big impact would be smartphone, notebook and also tablets, less so for smart cars, less so for vehicles that is, and even less so for IoT. Operator: Next question, Citic, Xinchi. Xinchi Yin: I have 2 questions. First of all, on AI business. Miclaw has been introduced. And I was fortunate to have joined the launch. That was excellent. Can you give us more guidance? And that is at what point of maturity would you in big model or miclaw to commercialize them? And how would that be like in revenue? That's the first question. As for the second question for this year for chip, for example, do you think that you can have some progress to update us? Unknown Executive: For miclaw, I have already talked a lot about it, and I'm sure as a user, you will have felt this product, and you were there at the launch, and it's given us a lot of nice surprises, but it's a new product. And we still have a lot of -- there's a lot of room for improvement. And I, myself, also have gotten a lot of responses, so we have to improve on it. But I think the iterations will be very fast, and it will be a new version in a few days. So it's going to be -- it's going to have high speed iterations. For Xiaomi overall speaking, for AI, it's still going to be contributed to our users. For the commercialization of AI, I would say, at this point, it is still too early. Even though our large model, efficiency is high, our token commercialization, for instance. But from absolute numbers, it may be a little bit high. So at this point today, I would say commercialization is too early to talk about for us. And also, we already see our XLA model, XLA model. This is the XLA model, which is a cognitive large model. And SU7 is equipped with it from -- at present internally from our testing, it is very, very good in performance. So for these 2 models of cars, I am a user. And I personally would use -- if I use them, and if I have any questions in terms of use, I will put these cases to the team. And I personally experience these auto driving functions. It will be going forward step by step. And also our auto driving, whether the models or chips, we already have some deployments. So integration terminal to terminal, and when we have this ready, it's going to give a lot of new experience to our users. I don't know whether you've been driving our cars. Yes, watch out for its progress as we integrate more and more of our models into them for automotive. Operator: Because of time, this will be the last question from Zoe Xu of UBS. Zoe Xu: A lot of questions have already been asked by others. I have 2 questions to ask concerning new business investment and also IoT. For new business, with the models iterations faster, and you said that there will be more investment into AI. So for expenditure on new business, is chips side will be adjusted? Or do we see that there will be new chips introduced? Second question on IoT. Just now it's been mentioned for tablet and notebooks, there will be some cost impact. So will there be something like smartphones pricing strategy and that is to emphasize the experience for users, please? Unknown Executive: Well, for this year, we have increased a lot of R&D expenses. But for chip, it is a long-term strategic capability of ours. I have already said that this is a platform capability chip because it's going to provide capability for a lot of profit -- product types and product categories. So even though in AI, we have increased our investment, but we have not slackened our investment in chips. Actually, some of the chips, many of the chips. They are part of our big AI strategy. So we will definitely be steadfast with it. As for PC and tablets, we will follow more or less the same strategy as for smartphones. But please also notice that for the notebook that we have just launched, the Xiaomi NoteBook, after 4 years of development, it is selling very well. And it is the demand is even higher than we had expected. When we launched this NoteBook, we already knew that the memory part will be increasing in price. But on the other hand, the response has been so encouraging because of the product strength is good, even though it is more expensive, the users will be able to adopt it and they'll accept it. So I think product innovation, technological capability, these are important, even though memory is hiking in prices. But still, we will have ways to make our products attractive. In 2022, through our efforts, I think our company and our management team will still be able to deliver good performance for everyone. Operator: Thank you. We end the meeting here. Thank you very much for your participation. Thank you for your support for the company, Xiaomi. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good day, ladies and gentlemen, and welcome to Kingfisher plc Full Year 2025-'26 Results Presentation. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Thierry Garnier to start the presentation. Thierry Dominique Garnier: Good morning, and thank you for joining us today for Kingfisher's Full Year Results Presentation. Bhavesh and I will take you through our full year results, our outlook for the coming year and provide an update on our key strategic initiatives. Following this presentation will be the usual Q&A. So let's start with the key messages. 2025 was a strong year for Kingfisher as we continue to execute our strategy at pace and delivered on all our financial priorities. And there are three points I want to highlight. First, our strategic growth initiatives are driving market share gains, a key indicator of our progress. We grew market share across each of our banners in the U.K., France and Spain, and maintained share in Poland. Our sales growth was high quality, led by growth in volume and transaction. We delivered double-digit growth in both trade and e-commerce sales during the year, while our 1P commerce sales were strong. I am particularly pleased with our progress in our marketplaces now reaching GBP 518 million on a GMV basis and up 58% year-on-year. Second, we maintained strong financial discipline amidst significant cost pressure. We grew gross margin by 80 basis points in the year, leveraging Kingfisher scales and sourcing power and benefited from marketplace and retail media, both of which are gross margin accretive. We delivered strong growth in adjusted profit before tax and in EPS. When excluding the business rates refund at B&Q in the prior year, profit is up 13%. And our profit growth, combined with a sharp focus on working capital management enabled us to deliver strong free cash flow. Third, we delivered attractive returns to shareholders. We completed our GBP 300 million share buyback program in March. And today, we announced our fifth GBP 300 million share buyback program, reflecting the momentum in the business. We also announced today a dividend of 12.4p per share, in line with last year. And let me now hand over to Bhavesh for the financial review and outlook. Bhavesh Mistry: Thank you, Thierry, and good morning, everyone. Let me start with an overview of our performance for the year. Total sales for the group were GBP 12.9 billion, with like-for-like sales up plus 1.4%, excluding a negative calendar impact of minus 0.3%. Our sales growth was led by strong performance from our U.K. banners. Adjusted profit before tax was GBP 560 million, up 6%. Adjusted EPS was 23.8p, up 15%, underpinned by our strong earnings growth in the year and supported by a 6% uplift from our share buyback program. Free cash flow generation was GBP 512 million. We delivered this while also increasing CapEx by GBP 71 million as we stepped up our investment in our stores, technology and property. Net leverage now stands at 1.4x, and we maintain a very healthy balance sheet. Turning now to our markets. B&Q reinforced its market-leading position with total sales growth of plus 3.9% or plus 5.9% when we include marketplace GMV sales. Like-for-like growth is plus 3.3%, significantly outperforming a flat market with our market share at record levels. From a product category perspective, core remained resilient with 12 consecutive quarters of underlying like-for-like growth. Big-ticket delivered strong growth of plus 6% in the year and seasonal was plus 30% in Q1, benefiting from favorable weather, which we will lap this quarter. We successfully captured the transference of customers from Homebase to B&Q and acquired 8 of their stores, which our team rapidly opened in time for peak trading. TradePoint sales grew by plus 5.2%, fueled by our enhanced loyalty program and an increased investment in trade sales partners. E-commerce sales grew by plus 21.5%, supported by marketplace growth. B&Q's marketplace is gross margin accretive and generated GBP 15 million of profit in the year. Looking to the year ahead, we will further enhance our trade offering with investment in our people, our offer and our stores, and scale marketplace as we onboard cross-border vendors. You'll hear more on this from Thierry later on. Screwfix delivered consistently strong performance throughout the year with total sales growth of plus 4.5% and like-for-like growth of plus 3.2%, significantly outperforming the market. Our Screwfix team have executed at a high level, enhancing the customer proposition through targeted marketing and promotional campaigns, competitive pricing, range improvements and deeper engagement with trade customers via app-driven reward initiatives. Screwfix opened 27 stores on a net basis during the year, further growing our footprint and convenience for customers. Looking forward, our focus is on growing our share of the trade wallet. We also see further range and space opportunities. Our U.K. banners generated GBP 575 million in retail operating profit, representing 78% of our group total retail profit. Profit grew by plus 2.9% in the year or plus 9.4%, excluding the impact of last year's B&Q business rates refund. We delivered this profit growth despite the significant increases in wages, higher national insurance contributions and the impact from EPR packaging fees. In France, against a subdued consumer backdrop and a home improvement market decline of around minus 3%, we are encouraged to see both of our banners outperforming the market. Castorama like-for-like sales were minus 2.2% in a year of significant change, particularly from the restructuring of several stores. I'll speak more on the progress of our Castorama plan shortly. From a strategic perspective, Castorama delivered a rapid rollout of its trade proposition across the estate, introduced CastoPro zones in 50 stores and implemented a trade loyalty program. Trade penetration reached 9% by the end of the year, up from below 1% a year ago. Good progress was also made on marketplace with 1.6 million SKUs now available to customers. Brico Dépôt delivered total sales of minus 1.8% and like-for-like sales of minus 2.3%. Brico improved its price positioning by 2 points over the year and delivered strong progress in its trade proposition with trade sales up 26% and trade penetration increasing to 17% at the end of the year. This performance was driven by an expanded trade-focused range, investment in dedicated trade colleagues and enhancements to its loyalty program. Brico also successfully opened 1 store transferred from Castorama, doubling sales densities. We feel good about Brico Dépôt, a capital-light model with a clear customer offering of discounted prices and high product availability. Our French banners delivered GBP 97 million of retail operating profit with a margin of 2.5%, up 10 basis points year-on-year. This was a strong performance as both banners offset sales deleverage from a declining market and higher social charges through gross margin expansion and structural cost reductions. Turning now to an update on our restructuring plan for Castorama. Since the plan was announced in March 2024, the new management team has moved at pace to improve competitiveness and efficiency, delivering good progress despite a weaker market, which declined by over 7% in 2024 and a further 3% in 2025. We've already talked about our progress in trade and digital. In addition, the team undertook a significant number of range reviews, which benefited several core categories, including surfaces & décor, tools and tiling. We took cost price and supplier management actions, streamlining the head office organization and rationalized the distribution network space by 15%. The reduction since 2019 was over 35%. Our store restructuring and modernization program is delivering tangible results. Right-sized stores are seeing much higher sales densities, while revamped stores are outperforming the Casto average. The two franchise stores have returned to profitability. This progress has been delivered against a backdrop of significant people change, including a 50% refresh of store managers and regional directors and a 40% change in category directors. We will continue to drive this agenda at pace in 2026, positioning the business to fully benefit when market conditions improve. For France, overall, we remain confident in delivering our medium-term margin target of circa 5% to 7%, with the timing and trajectory of reaching this target dependent upon the pace of the market recovery. In Poland, we remain optimistic about the medium-term growth opportunities. Castorama is a market leader with potential to increase space whilst building on both trade and e-commerce. Poland experienced a slow start to the year with unfavorable weather and political uncertainty weighing on home improvement spending. Like-for-like was minus 1.1% for the full year, though conditions improved in Q4 with a return to growth in both the market and our business. We continue to make good progress with our strategic initiatives, about GBP 1 in GBP 3 comes from trade customers, supported by the rapid rollout of CastoPro zones in more than half of the estate, the recruitment of specialized sales partners and a new trade loyalty program. And e-commerce sales increased 30% year-on-year, benefiting from the launch of marketplace in January 2025. Poland generated GBP 87 million in retail operating profit, representing around 12% of group retail profit. During the year, we accelerated technology investment, resulting in a one-off circa GBP 5 million impairment of legacy systems. Excluding this charge, Poland retail profit was up and profit margin was broadly flat year-on-year. Iberia had an excellent year with plus 8.8% like-for-like growth, outperforming a growing market, driven by competitive price positioning and strong progress in trade. Moving now to our profit performance in the year. Adjusted profit before tax rose by 6% or plus 13% when excluding last year's GBP 33 million business rates refund at B&Q. A key driver of profit growth was gross margin expansion, which increased by 80 basis points, driven primarily by group buying and sourcing benefits, progress in marketplace and retail media with FX also providing a tailwind. We also delivered significant operating cost reductions. Some specific examples include a reduction in our supply and logistics network space of around 10% in France and nearly 30% in Poland, efficiencies in our stores from the rollout of self-service checkouts and the implementation of new store operating models and property cost reductions through store rightsizing and regears. For the year, we delivered 30 basis points of retail operating margin expansion to 5.7% and adjusted profit before tax of GBP 560 million. Turning now to our group cash flow. Starting on the left of this chart. We generated adjusted EBITDA of GBP 1.3 billion. Working capital delivered a net inflow of GBP 74 million, driven by higher payables and our focus on inventory management. Tax, interest and other items amounted to GBP 13 million, including a GBP 60 million benefit from tax prepayment true-ups, which we will lap in H1 2026-'27. CapEx spend totaled GBP 388 million, an increase of GBP 71 million as we continue to invest in technology and our stores. Together, these drove free cash flow of GBP 512 million. We returned GBP 474 million to shareholders through dividends and share buybacks, and total net cash inflow for the year was GBP 107 million. Our dividend payments and share buybacks in 2025-'26 build on our track record of attractive returns to shareholders. Over the past 5 years, we have returned GBP 2.4 billion, equivalent to around 40% of our market capitalization. Looking ahead, we'll continue to build on this track record with a proposed dividend of 12.4p per share to be paid in July and the launch of our fifth share buyback program of GBP 300 million commencing shortly. Looking ahead, we see further opportunities across gross margin, costs and working capital. On gross margin, we expect continued benefit from group buying and sourcing, marketplace, retail media and logistics efficiencies. On the other hand, we expect mix effects from our growing trade penetration and from maintaining competitive prices. We see further opportunities through cost action. At store level, we will deliver savings through operating model enhancements and technology. We also see additional opportunities from improving head office efficiency and to further leverage our shared services center. Inventory also continues to be a priority. Our supply visibility tool is enabling us to reduce lead times and minimum order quantities with our OEB vendors. Coming out of a strong year, we are confident in our ability to capitalize on the attractive growth opportunities in our markets and are well positioned to continue growing sales ahead of our markets, profit ahead of sales and to generate strong free cash flow. For the financial year '26-'27, with a mixed consumer environment, we expect adjusted profit before tax in the range of GBP 565 million to GBP 625 million, and are targeting GBP 450 million to GBP 510 million of free cash flow. We remain mindful of the heightened macroeconomic and geopolitical uncertainty in recent weeks. Where we stand today, we estimate that the in-year direct impact on energy and freight cost is limited. As you know, the situation remains fluid. In similar situations, our markets have behaved rationally on pricing and margin. We have a strong track record of maintaining competitive prices, managing gross margin effectively and flexing our cost base. You can expect us to maintain our disciplined approach. Let me now hand back to Thierry. Thierry Dominique Garnier: Thank you, Bhavesh, and I want to start by outlining the strategic growth drivers, which underpin our current performance and position us for future growth. You can see these priorities on this page. And let me start with trade. We continue to grow our exposure to trade customers, a segment that shops more frequently, spends more and exhibits more predictable purchasing patterns. Our trade strategy leverages our existing store footprint and supports both market share growth and higher store sales densities with little to no incremental CapEx. As a result, trade is both revenue and margin accretive at retail operating profit level. Screwfix treat penetration already stands at 75% across the rest of the group, trade sales grew by 23% and trade customers now account for GBP 1 in every GBP 3 of group sales. With this rapid progress, we are updating our medium-term ambition and now target GBP 5 billion of group sales from trade customers. So looking at some of our initiatives in a little more detail and starting with our stores. We are expanding dedicated trade space within our stores and now have trade zones live across all our banners. We made particularly strong progress in Castorama France during the year as we rolled out our trade proposition across the entire estate and opened 50 new CastoPro zones. We're also excited to announce our first stand-alone TradePoint store opening in London this week. We also continue to invest heavily in our people, 279 dedicated trade sales partners are enrolled across our banners, circa 3x more than last year. We are empowering our trade sales partners and see this as a key lever to unlock additional share of wallet. At Screwfix, our new rewards program provides an industry-leading proposition for our trade customers and is driving strong engagement via the Screwfix app. Customers who sign up to the program receive exclusive and personalized offers, but also surprise perks and gamified engagement. We now have 2.2 million active rewards customers showing higher frequency of visits and higher average order values. Screwfix is also a great example on how we have succeeded with an app-first approach with 41% of e-commerce sales now coming from the app. Another example of where our trade focus comes to life is Brico Dépôt France, a capital-light model with a strong discounter DNA. Trade customers like the efficient shopping experience, competitive pricing and high product availability. We trialed new Pro zones during the year and signed up over 210,000 trade customers to a Pro loyalty program. We also improved price competitiveness by 2 points and introduced bulk-buy discount. These actions enabled Brico Dépôt to grow trade sales by 26% and reached a trade penetration of 17% at the end of last year. We will further build on our trade proposition this year with more Pro zones and enhance our trade value offering through additional volume discounts. Moving now to the digital ecosystem we are building and it starts with a strong 1P e-commerce proposition with our stores at the center. In 2020, we made the strategic decision to leverage our store network to fulfill online orders. This enables us to offer market-leading fulfillment speed for click & collect and home delivery, while also driving incremental traffic to our stores. We continue to improve our core platform by transitioning of our e-commerce legacy systems towards modular and agile technology. This enables rapid feature innovation, faster site load times and market-specific feature deployment. We have developed a digital app store model to ensure excellent product availability for online orders, 94% of 1P orders are picked in-store and we offer rapid fulfillment options from store through our click & collect and home delivery propositions. All this, in turn, drives increased traffic, which supports the growth of our 3P marketplace. Our marketplace offers a broad choice with several million SKUs, which in turn generates more traffic to our websites and fuels additional 1P sales. Our stores also play a critical role for our marketplace. All stores accept marketplace returns and B&Q now offers in-store click & collect for marketplace items, driving additional footfall. Our loyalty programs provide us with rich customer data, enabling personalized offers and targeted promotions. The market is increasingly shifting towards mobile-first and app-based engagement, which provides us with access to data that allows us to improve and personalize customer interaction, and this leads us to monetization. With scale, traffic and comprehensive data, we can sell and grow retail media. As you know, there is lots of current news flow when it comes to agentic commerce. Our platforms are ready to connect to agentic commerce apps, and I will come back to this topic shortly. So to summarize, our digital ecosystem drives a virtuous cycle of value, leveraging our store assets, our web traffic and is powered by Kingfisher technology. So moving to Slide 22, which highlights our group e-commerce performance this year. Screwfix already generates 60% of sales from e-commerce. In the other banners, we grew e-commerce by 20%, and you can see progress in every one of our banners. At the group level, GBP 1 out of GBP 5 now come from e-commerce. Our target in the medium term is to reach e-commerce sales penetration of 30%, out of which 1/3 from marketplaces. So moving to our marketplaces, and I'm going to focus here on B&Q, which is most advanced and provides a clear blueprint for scaling across our other banners. We launched our B&Q marketplace in 2022 and have already achieved a cumulative GBP 1 billion of GMV sales since launch. We have scaled our platform significantly over the past 4 years, adding 2,800 vendors and 3.7 million SKUs while also improving convenience for our customers with the introduction of click & collect, a first for our marketplace in the U.K. B&Q's marketplace has generated GBP 50 million retail profit contribution last year and the marketplaces in France and Iberia have now reached breakeven early in their journey. So looking forward, we have ambitious growth plans, including the onboarding of more international cross-border vendors. And for context, cross-border accounts for broadly 50% of sales at mature pure-play marketplaces and only a few percent for us. An emerging income stream for us is the monetization of our customer data and our traffic. Our insight platform, Core IQ, underpinned by Kingfisher's first-party data enables us to monetize our data with our corporate vendors, having successfully built this capability in Castorama France, we plan to roll it out across all banners in 2026. So moving to retail media. We have brought capabilities in-house, build a group Center of Excellence, and each banner now has a dedicated retail media team. We have also started piloting advertising on digital screens in stores. While at an early stage, we are very excited about this new income stream as adoption of retail media is strong. We target 3% of our e-commerce sales as additional revenues with a significant drop-through to profit. Kingfisher is also a rapid adopter of AI. We see AI as a tailwind for our business and ourselves as leaders in this space. Our in-house AI agent, Hello Casto, was the first agentic agent in the global home improvement industry when we launched it in 2023, followed by Hello B&Q in 2025. Those early investments are paying off. We have seen an increase of over 60% of customers visiting Hello Casto online with conversion increasing by 95%. Last week, we announced a new strategic partnership with Google Cloud. Through this, we'll introduce AI-powered search across all our banner websites and apps, helping customers find products more intuitively. We have also done extensive work to enable AI agents to discover our products and to transact autonomously when this functionality becomes available in the U.K. and in Europe. This partnership will expand our capabilities further, allowing customers to complete purchases via Gemini and other AI agents. Underlying our business are strong own exclusive brands where we provide innovative solutions at affordable prices and which are accretive to our margin. In 2025, within our power tool categories, we launched our next-generation Erbauer range with best-in-class performance in power, in control and durability. Since launched, it has achieved plus 43% sales growth compared with the previous range, and Erbauer is now our #1 tool brand sold across the group. Our new Ashmead kitchen range delivers standout style at entry-level pricing. While our Pragma lowest-priced kitchen range, retails for less than EUR 200 and is 15% cheaper than branded alternatives. Our new kitchens have been a key driver of our strong big-ticket performance in the year. And alongside product innovation, we are developing a growing portfolio of complementary services that support customers with their project such as kitchen and bathroom design to rental, installation service and project finance. Our banners hold leading positions in their markets, each with a distinct model and clear customer proposition where attractive space opportunities exist that meet our investment criteria, we continue to complement our existing store estate. Our mid- to long-term ambition for store space remains at 1.5% to 2.5% sales contribution per annum, and 27 new store openings are planned for the coming year. We believe compact stores will play a more important role in the future across our markets, allowing us to meet customer needs in high-density urban areas and offering convenience and fast fulfillment through click & collect and home delivery. Let me now turn to Screwfix France, which is delivering plus 49% like-for-like store sales growth, in line with our expectation. Momentum continues across all KPIs with a 52% increase in unique customers year-on-year and growing national brand awareness. We continue to see good growth in our older cohorts after 3 years and particularly strong momentum in the north of France where we observe a network effect. So this performance gives us confidence in the future of Screwfix in France. The strategic growth drivers I have outlined underpin Kingfisher's attractive investment story. We have leading positions in our markets, and those markets have attractive structural growth drivers. We operate a diverse portfolio of banners, each with distinct formats and propositions that address a wide range of customer needs. Our strategic growth drivers are allowing us to grow our market share and give us confidence in our continued delivery against our financial priorities, growing our sales ahead of our markets, increasing our profit ahead of sales and generating strong free cash flow. So to summarize, '25-'26 was a strong year. We have clear and attractive growth drivers, and we are confident in our continued delivery in '26-'27 and beyond. With that, let's move to Q&A. Thank you, everyone. Operator: [Operator Instructions] I would like to remind all participants that this call is being recorded. We will take our first question from Richard Chamberlain with RBC. Richard Chamberlain: A couple of questions from me please to start. Can you hear me okay? Bhavesh Mistry: Yes, very good. Richard Chamberlain: Yes. Excellent, excellent. Yes. So first is on the space target you're setting out for the longer term. I think you're talking about 1.5% to 2.5% per year net. I wondered if you can just talk through what the key drivers of that space ambition will be? And also what would the gross space growth be in that scenario? That's the first question. Thierry Dominique Garnier: Thank you, Richard. So I think, first of all, indeed, that's our medium-term target. We believe that Screwfix first is our -- this area where we have a lot of potential. In the U.K., with a format like Screwfix City, but moreover in France. We know that today, we are happy with the store maturity, we will go for a large number of stores in France. In Poland, we have said that we'll probably cover about 50% of the city where we want to be. We have more store to open, not only big boxes as well as medium boxes, around 4,000 square meters of format, we really believe in and as well as smaller format, we call it Castorama Smart, about 2,000 square meters, a lot of potential in Poland. But in France, Brico Dépôt 1,000 is the format we are having high expectations upon that we have a few stores. We're still looking at the results, but it could be an attractive format as well as Iberia. So obviously, Richard, the expansion is not linear. Sometimes you have opportunities, sometimes you have up and down, but clearly, that's our medium-term target. Richard Chamberlain: Great. Very helpful color. And my second question is on the marketplace. Obviously, growth very strong last year. Can you give us a sense of how much that's being driven by newer vendors and how much by a sort of broader range of SKUs from existing vendors on the platform? Thierry Dominique Garnier: I think it's both. We are -- now B&Q, it's the third year in '25, will be the fourth year this year. So we keep increasing the number of SKU, if you compare year-on-year, the number of vendors. In the other countries, you have really a very strong scale up in France, in Poland, in Iberia, we really continue to grow the vendors. I think the big new things that started in '25 and that will be a bigger thing in '26 is what we call cross-border of vendors. In fact, today, when you look at the B&Q marketplace, we just have a few percent of our vendors that are not legally located in the U.K. And we know countries like Germany, for example, or other European countries, you have a very strong base of industrial vendors. It took us a while to find the tech solution to onboard and there is VAT and payment challenges. And now we are able to do that. So you will see a lot more cross-border vendors in the future. And for large marketplaces, I will not give you names, but you can guess the names, in Europe and in the U.S., it's broadly 50% of their vendors are not local vendors. So we feel that's a big opportunity for us looking forward. Bhavesh Mistry: Maybe a couple of things to add, Richard, why we like marketplace, it extends our ranges, lets us play in categories, we wouldn't align with our proposition, but it wouldn't make sense for us to stock directly. So things like white goods, bulky things that take a lot of space in stores, maybe lower margin cap products. But the other thing is marketplace that gets us to reach new customers, right? We have half of the customers that come to B&Q marketplaces are new to diy.com. And then they go on to buy 1P product as well. So we're attracting more customers onto our website to be able to sell them more 1P. Operator: Our next question comes from Tim Ramskill with Bank of America. Timothy Ramskill: I've got a few, so I'll maybe go one at a time. The first couple are kind of cash flow related. So I guess, you obviously highlighted the benefits delivered on inventory. But at the same time, looking at the balance sheet, that's sort of not immediately obvious numbers wise. So maybe you can just help me out. I think there may have been some Chinese New Year effects at play there. So maybe you can just sort of help us sort of square the kind of improvement of 5 days of inventory, please? Thierry Dominique Garnier: Maybe let me start and then we'll give you a few detailed color. I think we are very happy with our inventory program. You have seen it's not the first year we are decreasing our inventories days. I think number of days is really the way we are looking at it. And we had multiple programs from reducing the space of our DCs. And if you look at the past 5 years, we have been consistently reducing the number of DCs and the number of square meters, using better software to have real-time visibility on inventory across the group, from factories in China, ship DCs, providing real-time data to our vendors that allow us to negotiate lead time, minimum order quality. And now we are starting to really work on forecasting with AI and more software. So I would say, you have seen that in the past few years, and we are still very confident looking forward to work hard on our inventories and being able to reduce inventories. Bhavesh Mistry: Yes, not much to add. It's a key focus area for us. As Thierry said, we took out 5 days this year, 7 days last year. We expect continued steady progress. It's a key driver of our working capital improvement. And as Thierry mentioned, we try to focus on structural things, not tactical. So for example, we've got the supply chain visibility tool that we know where our stock sits. And so that means when we work with our factories in China, we can give them better data to better plan their production, and that means that we order less, we have shorter lead times. We order fewer sort of our minimum order quantity sizes are lower. So we're getting the product we need when we need it. That really helps. Just one example, but just gives you a bit of color on some of the structural initiatives that we're taking. Timothy Ramskill: Okay. Excellent. That's very helpful. The next sort of cash flow question was just a little bit around CapEx. Obviously, the guidance for GBP 400 million. What, if anything, is driving a little bit of a step-up? Is that just linked to the sort of store opening plans? And then maybe just some thoughts on how that sort of trends over the next few years, please? Bhavesh Mistry: Yes. So we spent GBP 388 million in CapEx this year, about 3% of sales, which is in line with our guidance. I guess the way we thought about it this year is as we navigated through, we had a good first half. And we're in constant dialogue with our businesses around where could we look for opportunity to deploy and invest more in our business first. That's the first pillar of our capital allocation strategy. That's what we focused on stores. So B&Q, for example, bought a freehold store that was opportunistic that came up, wasn't in our plan, but we felt the right thing to do. We also felt continued investment in maintenance of our stores. That's important. So customer-facing things like LED lighting, entrances, et cetera. So we sort of navigated through the year. And as we saw, we're having a good first half, we chose to take some of that performance and reinvest it, obviously, in the right project parts of the business that drive good returns and help our customer experience. Timothy Ramskill: Great. And then last one for me, if that's okay. Just in terms of marketplace, just help us think about how -- clearly, you've laid out ambition for where that gets to from a revenue contribution perspective. But what would be -- well, how do you expect to grow the costs to deliver that? So when should we start to see perhaps a sort of more dramatic drop-through to profitability? Just some parameters around that would be great. Thierry Dominique Garnier: Yes. Thank you, Tim. I think, first of all, I remind you that the market -- the B&Q marketplace delivered GBP 15 million of retail profit this year. So that starts to be meaningful. When I start from top line, the take rates, the commercial margin we are taking is around industry average for home improvement between 10% and 15%, and we are happy to see this margin across all our different countries. Then you have a bit of tech, but broadly, the investment has been done. We are working with Mirakl. So that's relatively -- it's a SaaS model. So we are -- it's really a small amount. They are small teams. If you take B&Q, we speak about 20 people for over GBP 400 million GMV. So the main variable is the marketing cost. And so when you start the marketplace, you want to be probably around 8% to 10% marketing investments. And then gradually, over time, you will decrease this marketing spend. And after a few years, you are at, let's say, a stable and standard level of marketing investment. So we are gradually decreasing our market investment. And overall, when you do the math, we are seeing very strong flows through to profit. To give you even more color, we will probably be able in the future to increase the take rates because we'll be able to sell more services to our vendors, retail media, fulfillment option, advisers. So a lot of things on the table as well on the take rates in the medium term. Operator: Our next question comes from Adam Cochrane with Deutsche Bank. Adam Cochrane: A couple of questions. First of all, you talked about the compact stores as being an area of growth. Can you just give us an idea of the dynamics on the compact stores. Are they -- despite a lower sales base, are they actually more profitable on a contribution margin than the larger stores? So where I'm going is, are they margin accretive across each of the different banners compared to where you currently are? Thierry Dominique Garnier: Maybe I'll start, and I think Bhavesh will give other views. I think firstly, you remember, we have started this journey a few years ago where we believe compact store format in DIY is an important trend. It's not an obvious format, there are countries that exist. When you look at France, we have in the market companies like Mr. Bricolage or Weldom that are, in fact, small format. In the U.K., you have less small format. So in the U.K., we have B&Q locals, and that's really a high street format. And we will start to open more B&Q locals this year, and we have a target in the medium term about 30 stores. We have a format that is called B&Q retail park, around 2,000 square meters. We have Screwfix City, very successful, and we believe we can open 100. We have Brico Dépôt 1,000 in France. I mentioned that it's a very important format for the future. In Poland, we have a great medium box, around 4,000 square meter, and we are working hard on the 2,000 square meter box that is not fully ready yet. And we are still working on our small format for Poland. And obviously, B&Q, we are as well very pleased with the medium box format. So I would say, on average, our medium box and smaller formats are in line or better than the average of their markets. There are a few exceptions. For example, if you tell me in Poland, smaller format, we are not up yet, so Brico Dépôt 1,000, there's still some improvement to do. But overall, what you see is sales density and profit in line or slightly better than the average. Bhavesh Mistry: And not much to add there, Adam. I think on B&Q Locals, we've got 11, 8 of them are working pretty well. The other 3 are not. Of the 8 that are working well, we look at what are the right ranges, what's the right delivery into a city center location, logistics, how are consumers engaging with us. So we're constantly learning as we build and adopt these. Adam Cochrane: And the second question I've got is, if we look at the B&Q performance as the year progressed, there may have been some drivers from Homebase customer transference. Did that make a material difference as each quarter went on? Can you just remind us of maybe when that annualizes? And the second part of that question is, if we assume that some of the B&Q like-for-like was from Homebase, and a decent proportion is coming through from the growth in trade, is there a question mark over the core U.K. DIY customer, which appears to be in reasonably low to mid-single-digit decline if you take into account the Homebase and your trade customer growth? And are you focusing so much on the trade customer that the DIY customer is getting less of a service than they were historically? Bhavesh Mistry: Let me -- thanks, Adam. Let me start with Homebase, and then I'll get Thierry answer the second one. So we haven't disclosed specifics on Homebase, but a couple of data points. Firstly, Homebase went to admin in November 2024, and then stores closed in January and February of 2025. And the way we sort of modeled and looked at it was one of the stores that are with -- B&Q stores that are within 20 minutes of a Homebase, and how are they performing versus the rest of the portfolio. And there -- that's where we did see an uplift. Obviously, the teams executed well. The 8 stores that we acquired, we made sure we're open for peak. We made sure we have the right product availability. As you know, we had a super strong seasonal last quarter 1. But Homebase was one of a number of drivers of B&Q's performance, right? We had good performance in big-ticket, continued growth in our core categories. We've got profitable growth in trade and e-commerce. And then obviously, the strong seasonal that you saw in H1. So yes, it benefited us, but one of many levers. Thierry Dominique Garnier: Yes, Adam, a few more comments. I think, first of all, we have to look at B&Q, including marketplaces. So we have indeed the store, we have trade, we have marketplaces. So when we add marketplaces, what we call the GMV, the B&Q sales growth is plus 5.9% in 2025-'26 versus the flat market. So yes, trade is growing. But you can't say that the rest of the perimeter is having difficulties. And it's all based on the same assets. So we are leveraging our assets to grow e-commerce and to grow trade. Another data I can give you is services installation. We're on 22% at B&Q. So clearly, we see a lot of good news on interaction with the customer. So you really have to keep looking at B&Q altogether, including marketplace. Bhavesh Mistry: And just to add, we performed above the market in the U.K. Well, that gives you a data point. Adam Cochrane: Okay. And final question is, you talked about growing sales ahead of the markets and profit ahead of sales. Your midpoint of the guidance implies a 6% increase in profits. Given that one number that today surprised me slightly was the OpEx growth, particularly in the U.K. is the implication to get to your midpoint that there's a low single-digit like-for-like in order to leverage that up to get to your 6% at the midpoint profit growth? Thierry Dominique Garnier: I think maybe to start, Adam, I think in the mixed consumer environment, we feel good with a 6% increase in the midpoint. We feel it's a good plan. It's predicated on continued progress in our strategy on trade and e-commerce and as well a lot of discipline on gross margin and costs. So in the current environment, we rather feel good around this midpoint guidance. Operator: Our next question comes from Grace Gilberg with Jefferies. Grace Gilberg: Can you hear me? Thierry Dominique Garnier: Yes. Grace Gilberg: Perfect, perfect. First one is around gross margin actually. I mean, obviously, it was a pretty good year in terms of your gross margin expansion and continuing in the second half after what was a pretty good first half, and that was quite impressive. You've mentioned that these have to do with primarily better sourcing as well as just getting better deals with your suppliers. How structural is -- or how structural are these gains? And what is -- what are the things that your suppliers are seeing that are having you to be able to have these better deals, for example? That's the first question. The second one is actually around France. It was a little bit weaker than the other two regions. Obviously, the market has been down, and it's very difficult to see, that hasn't been very helpful. But it seems from your perspective that the model is working particularly at Brico Dépôt. What are the benefits that we maybe haven't seen yet just because of the market? And what are you expecting to see going forward? I'll start with those two, and then I have one or two others. Bhavesh Mistry: Grace, so on gross margin, yes, look, we're really pleased with the performance in the year, right? We grew by 80 bps as we flagged. And as we look into the year ahead, we have different puts and takes. So on one hand, you're going to continue to see further expansion of marketplace, as Thierry mentioned earlier, that's margin accretive. We continue to look at the store as the heart of our digital ecosystem. So a lot of preparation and picking is done in the store. That means we need less logistics space. And so you'll see continued focus on logistics efficiencies. And then buying and sourcing was quite successful in this year that helped drive our margin, and we expect to continue to see that in the year ahead, particularly the insight that we get from our private label business. We look at something called should-costs. We understand the components of all of our products, and that gives us real data to negotiate with our branded suppliers. And that will continue. And then we expect further FX tailwinds based on our hedging. We hedge 100% of our committed orders into next year. So we have a pretty good read on FX. On the other hand, we have growing trade. We're really pleased with what we're doing with trade for all the reasons you heard us talk about. But at a gross margin level, it is dilutive. We always focus on maintaining competitive prices. And then freight is starting to turn into a headwind. So those are some of the pluses and minuses that we think about as we look at the year ahead on gross margin. Thierry Dominique Garnier: Now, I think to France, I think overall, I think we feel good about the progress in '25. Just to tell you what I have in mind. First, market was around minus 3%, so pretty difficult market. We did around minus 2%. So we overperformed the market. In a year where Castorama had significant disruption from store work, a lot of range reviews. We had a big head office restructuring. We were changing a lot of the team in the store. You heard in Bhavesh's comment that we changed about 50% of the store manager, 40% of the category manager. And as well in France, we have to remember that it's a lot of new tax and high wages in '25, like in the U.K. So in this environment, being able to gain market share in all banners, to have a profit up, to see the strategic progress on trade, on e-commerce, to deliver on the Casto plan, but as well on the Brico plan, to answer your question on Brico, probably the two biggest progress we made was continue to have an even lower price index because it's a discount -- discounter banner. And we did a lot, a lot of progress on the Pro sales. You saw that. And at the end, the team are in a good place. We see team engagement in France growing really in a strong position. So overall, I think it's a very strong year in a very difficult market. So indeed, we need the market to recover. But for me, the market recovery, the French market recovery is a question of time. Grace Gilberg: Okay. All clear. And then I suppose my last question is around the full year guidance for FY '27. Obviously, you do have some tough comparatives heading into Q1 given how strong B&Q was last year. And then many of your competitors have as well or just peers within the home market have cited that it's been pretty wet weather and hasn't been helpful for trading into the beginning of the year. What makes you confident in reaching your full year PBT numbers, given that you're facing some of these headwinds potentially? Bhavesh Mistry: Well, as you know, Grace, we don't provide current trading. So we don't guide for the current quarter. But factually, you're right, we had a very strong seasonal, so B&Q's Q1 seasonal last year was 30%. So it's a pretty tough comp to lap. But as we look ahead to sort of our guidance for the full year, we look at sort of what are of the drivers from a top line perspective. We've got a mixed consumer backdrop. But in the U.K., we expect continued momentum from our two banners, notwithstanding the tough comp in Q1 on Homebase transfers as we talked about earlier. Top line in France, it's still a weak market. It's improving, but very slowly. Savings rates are still elevated, 400 to 500 bps above the long-term average. So very much in France is focused on what we can control, differentiated proposition, discount proposition of Brico, all the heavy lifting we're doing at Casto. You heard us talk about in our prepared remarks. And then Poland was flat last year. Q4 was good, but I'd say we need to see more quarters of good sustained consistency in Poland. So that's sort of how we think about the top line when we set our guidance. And then we talked about in your earlier question, what things that we will continue to manage effectively got some puts and takes. And those will be the same things next year as we saw this year. And then continued focus on cost. We've got a track record of managing our costs pretty well. As and when trading environments change, we have the agility to flex our cost base. So those are some of the component parts that sort of set our full year guidance on profit and cash. Hopefully that adds. Thierry Dominique Garnier: Just to add a few words around general, how we feel, obviously, looking at the Middle East crisis. I think, obviously, we are very mindful. But we look at our top line first with resilient business. We have about 2/3 of our business is repair and maintenance, so less discretionary. We now have reached 30% of the group sales is delivered through trade. So as well more resilient. We really see the benefit of our strategy on e-commerce and trade. Looking again at B&Q in 2025, real growth, plus 5.9% in the flat market. So you start to see the benefit of the strategy. And as Bhavesh said, we have had a strong track record of discipline, margin management, cost management in all the past years. Operator: Our next question comes from Yashraj Rajani. Yashraj Rajani: I've got three, please. I'll ask them one by one. So the first one is on the cross-border vendor e-commerce, which you have fully highlighted. So is that just an element of introducing a different price point? Or do you think that you're missing something in the range architecture there, which is now being complemented with this cross-border vendor e-commerce? And how do you think about the right balance so that it doesn't cannibalize your own 1P sales? Thierry Dominique Garnier: So I think we -- thank you for the question, Yash, first of all. I think it's -- we really see that more as a range topic, as choice. In fact, we are already selling on our marketplaces, I think you should take the U.K., U.K.-based vendors. So you have a lot of very strong countries in the world with very strong industrial base. Germany, but even and as well China, we'll open gradually our marketplace to Chinese vendors. We see the potential here. But it's not around price competition. To give you another color, we are working hard on what we call buy box. And I will not enter into the tech detail, but we could do that off-line, if you want. That will allow us as well to have more price competition between the same SKUs from 2026. So cross-border is really around choice. Bhavesh Mistry: And what I said earlier, right? Yes, there's probably a little bit of cannibalization, but look at our 1P sales, it's stronger than our store sales. And 3P traffic brings new people to diy.com that we wouldn't otherwise get, and a lot of them go on to buy 1P product. So that's a benefit of having the choice that Thierry talks about. Yashraj Rajani: Sure, that's super helpful. And then the second question is, again, on France. So I appreciate you commented that the market is difficult, but there's obviously all the self-help initiatives that you highlighted. So even if you assume that the market stays where it is, what is the absolute margin improvement you can see from all the things that you control even if like-for-likes are negative? Thierry Dominique Garnier: Yes. I think, Yash, we are still confident in our 5% to 7% profit margin for France in the medium term. We always said part of it is really our self-help action, and we are progressing on this. To remind you as well that some of the self-help action, you have very short-term impact, when you do a head office restructuring, you have short-term impact. Some other, like range reviews or the store network restructuring, you need a bit of time to realize, to crystallize all the benefits. So one, self-help actions. Second part is the market improvement. Personally, I'm convinced that we'll see market improvement. It's a question of time, and we need both to achieve those 5% to 7%. Yashraj Rajani: Got it. Got it. Super helpful. And the last one from my end, maybe quite a topical one is the Middle East. So can you just sort of quantify any sort of freight headwinds or more broadly disruption that you're seeing, which would probably create some availability issues, if any? Or just anything else you'd like to highlight on the Middle East? Thierry Dominique Garnier: So maybe I'll start with supply chain, and then Bhavesh will come on the cost side. First, it's obvious that we have no operation in the region. We have nearly two suppliers in the region. So you see it's really a very, very limited direct impact. And before Bhavesh will comment on gross margin and costs, again, remind you that 2/3 of our business is repair and maintenance and 30% is trade. We are high expectation to deliver on our strategy on trade and e-commerce in 2026 and beyond. So we expect this to give us resilience looking forward. Bhavesh Mistry: Yes. I mean you heard me mention it in my prepared remarks, but the direct impacts, based on what we know today, and as you know, things are changing every day, but the impact for us is fairly limited energy. On energy, our quantum energy costs are less than 1% of our sales, and the majority of that is hedged. And then on freight, again, a small proportion of our COGS, about 20% of our COGS are sourced from Asia, and we typically lock in annual contracts with carriers. So those contracts have what we call like a fuel index, so there may be a little bit of a headwind, but we've locked in those contracts for the year. We looked at previous situations, the markets have behaved pretty rationally on pricing and margin. And we continue to stay focused on managing our margin and being super disciplined on cost. And so that's our focus, right, to continue to do that as we navigate our way through. Operator: Our next question comes from Mia Strauss with BNP Paribas. Mia Strauss: I just want to check a few. I think last year, you talked maybe about doing consumer surveys for your trade sales partners. And what sort of pipeline they're seeing over the next few weeks. Maybe if you can just give us a comment on that for the current year? Thierry Dominique Garnier: Yes, absolutely, Mia. And by the way, you will see that in the appendix of our document we released, Page 34. Indeed, we do a monthly survey for Screwfix. What you see on the Page 34 is that 93% of our trades people are working. So it's 2 points year-on-year. So slightly higher than last year. But we have a second category that is working and have more work to come, 79% of the survey and is 6 points up year-on-year. So we do this survey every month for the past few years. So it's pretty reliable. So we feel those results will remain strong. Mia Strauss: And then maybe just on your share of the trade wallet. What share do you currently have? And essentially, what is the realistic opportunity of what share you could get in the future? Thierry Dominique Garnier: I think Screwfix, our estimate is around 15%, 1-5. So for our trade business, you could say it's still relatively low, and that's why we believe we have a lot of opportunity ahead on Screwfix share of wallet on the range, the size of the range, B2B. We have a plan that will address more of this share of wallet growth in the future. And you have seen as well in the presentation, the rewards program. For all the big boxes, our estimate that is a few percent. Our share wallet in B&Q in France, in Poland is just a few percent of a very large market. Very often, the trade people, they already come to our stores, but mainly for urgencies. And that's why all this plan is finally leveraging your assets to sell more to people that are already in your stores through your loyalty program, traders sales partners. So we really feel starting from this very low base of share of wallet in our other big boxes, there is significant opportunities. Bhavesh Mistry: And look, in the U.K., it's a big market, right, it's GBP 30 billion, total trade market. TradePoint sales are close to GBP 1 billion. So a lot for us to still go after. Mia Strauss: That's helpful. And then maybe just for you, Bhavesh, on the free cash flow. So the guidance is a little bit lower year-on-year. And I think it's -- last year, you also talked about achieving over GBP 500 million over the full current year. I guess, last year, you saw about a GBP 91 million increase in payables. What was that from? And I guess, going forward, why is it a little bit lower? Bhavesh Mistry: So look, yes, pleased with our free cash guidance. We've delivered more than GBP 500 million over the last 3 years. And our focus this year will be continued on the profit drivers we talked about and working capital, and particularly inventory. So again, some of the stuff we mentioned earlier, some of the structural initiatives. We set a range of GBP 450 million to GBP 510 million, midpoint GBP 480 million. That's about GBP 30 million higher than the midpoint we set last year. And so confident that we'll continue to deliver cash flow well. We also still have spent more on CapEx this year. The question somebody asked earlier, as we saw and navigated through the year that we are trading well and had a good cash performance, we chose to redeploy some of that both in buying freehold, but also at our maintenance and tech. So we kind of navigate through the year. And then you always get fluctuations, right, in year-on-year. So sometimes one-offs. But over the medium term, we're still guiding to around GBP 500 million per annum free cash and have done that in the last 3 years. Mia Strauss: Great. Maybe just on the -- if we look back to '25, what was the reason for that significant increase in payables maybe? Bhavesh Mistry: I think timing, largely. We look -- as you'd expect any retailer, we kind of look at payment terms as well as something we navigate, but also, our sales was higher, right? So that sort of drives our payables. Operator: [Operator Instructions] Our next question comes from Georgina Johanan with JPMorgan. Georgina Johanan: Everyone, can you hear me okay? Thierry Dominique Garnier: Yes, Georgina. Bhavesh Mistry: Yes. Go ahead. Georgina Johanan: I've got three quick ones, please, really just following up some questions that have already been asked. The first one is very much appreciate that you prefer not to give current trading trends. But just in the context of maybe the consumer more broadly, particularly in the U.K., I think one of the early surveys that's been done since the start of the crisis and headlines around higher energy prices and so on, actually, we saw an 8-point fall in consumer confidence. So just wondering if you can kind of comment on how you're seeing consumer behavior rather than trading trends necessarily. The second one was, I appreciate you don't provide a like-for-like guidance, and of course, there are changes that will be made depending on trading performance. But if you were to see perhaps only a flat like-for-like this year, can you just confirm that you'd be able to hold profits in that scenario, please? And then finally, you very helpfully at the half year, I think, quantified some of the gross margin benefits from buying and sourcing initiatives. If I remember correctly, around 60 basis points. Is it reasonable to assume that you can actually achieve a similar level again in fiscal '27? And indeed, where did that land for fiscal '26 overall, please? Thierry Dominique Garnier: Thank you, Georgina. Let me start with the first one, and then Bhavesh will cover the two and three. So to be direct, indeed, we don't want to comment on the current trading. But I think it's an important topic, we have not seen up to now real impact on the customer. We have not seen a change of trend following the start of the Middle East crisis. Bhavesh Mistry: On your second question, we have different levers that we pull as we navigate through the year, margin, cost, investment in the business. We set our guidance range or profit range is the same as we said previously, GBP 60 million, around that midpoint, and we'll navigate and push and pull levers as trading evolves as you saw us do this year. On gross margin, I'm not going to quantify it, but I'd refer you to my previous response on the various puts and takes. We've got lots of things that are tailwinds, but we also have some things that are headwinds on gross margins. Operator: At this time, there are no further questions. I will now hand back to Thierry for closing remarks. Thierry Dominique Garnier: Just to thank you for joining us this morning, for your questions. Again, we are confident in our delivery of this year and our strategic progress. Confident in the fact we stay very disciplined on the thing we can control well as we did in the past. So again, thank you, and we are always available with the team if you have any questions. And for some of you, I think we'll meet in the coming days. Thank you very much. See you soon. Operator: Thank you for joining today's call. We are no longer live. Have a nice day.
Operator: Good morning, and welcome to the Dollarama Fourth Quarter and Fiscal Year 2026 Results Conference Call. On today's call is Neil Rossy, President and CEO; and Patrick Bui, CFO. They will begin with brief remarks followed by a Q&A with financial analysts. Before we begin, please note that today's remarks may contain forward-looking statements about Dollarama's current and future plans, expectations, intentions, results or any other future events or developments. Forward-looking statements are based on information currently available to management and on reasonable estimates and assumptions made by management. Many factors could cause actual results, future events or developments to differ materially from those expressed or implied. You are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements represent management's expectations as of March 24, 2026. Except as may be required by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are invited to consult the cautionary statement on forward-looking statements and Dollarama's management's discussion and analysis dated March 24, 2026. All forward-looking statements on today's call are expressly qualified by this cautionary statement. In addition, Dollarama may refer to certain non-GAAP and other financial measures during the call. Please consult the non-GAAP and other financial measures section of Dollarama's with MD&A dated March 24, 2026, for definitions, reconciliations with the appropriate GAAP measures and other information. The disclosure documents related to this call are available in the Investor Relations section of dollarama.com and on SEDAR+. I will now turn the call over to Neil Rossy. Neil Rossy: Thank you, operator, and good morning, everyone. For fiscal 2026, we are pleased to have met or exceeded our financial guidance on all metrics, while we also advanced our growth ambitions. We generated same-store sales of 4.2% in Canada for the year and delivered strong earnings growth with EPS increasing nearly 14% year-over-year. Fiscal 2026 also marked a significant milestone in our international expansion with Dollarcity entry into Mexico and our acquisition of a national discount chain in Australia. In Canada, our compelling value continued to resonate in a economic environment that is weighed on consumer sentiment and discretionary spending. As Canadians face pressures on their household budgets, they turn to Dollarama for a year-round value and everyday convenience. Throughout the year, our full assortment contributed to solidifying Dollarama as a destination for affordable goods across our product categories. We experienced solid demand for general merchandise and seasonal items which speaks to the strength of our buying team and direct sourcing platform. We also saw continued sustained demand for consumable products, which speaks to our ability to offer strong value for sought after every day essentially. Unfortunately, the weather did hamper our fourth quarter performance, which was off to a good start. Unfavorable weather conditions across Canada directly impacted both store traffic and peak sale periods through to the end of January. However, we nonetheless generated 1.5% same-store sales growth in the quarter with basket growth driven by a positive seasonal performance. In Canada, we successfully opened an exceptional 75 net new stores in fiscal 2026. This brought our network across the country to 1,691 stores by the end of January. For fiscal 2027, we are returning to our historical cadence of annual net new store openings in the range of 60 to 70. This past February, we had another real estate milestone with the opening 1,700 store in Canada. We are making steady progress towards our long-term target of 2,200 stores by 2034. Reaching this threshold of stores requires us to grow our distribution and warehousing capacity in tandem. The development of our logistics hub in Western Canada is moving along well, having made significant progress building the structure. With everything moving along on time and on budget, we are on track to have our Calgary hub operational by the end of 2027. Having a 2-node logistics model support our long-term growth in Canada and bring added resilience to our logistics through redundancy. By applying our proven business model Dollarcity continues to generate strong top line momentum, margin expansion and footprint growth across our core markets in Latin America. This is translating into impressive year-over-year network and earnings growth. Consistent with the prior year, Dollarcity opened 100 net new stores in 2025 bringing into total store count to just over the 700 store threshold at year-end. This includes 11 stores in Mexico since entry last summer, where we are now building a new growth platform. Dollarcity is well on its way to achieving its store target of 1,050 stores by 2034. As a reminder, this excludes Mexico for which we have not yet set a long-term target. In fiscal 2027, Dollarcity will continue to grow in its first 4 countries of operation in LatAm with a focus on growth in Colombia and Peru. At the same time, we will be carefully scaling our presence and operations in Mexico. While it is still early days, we continue to be pleased with the team's execution and initial customer reception. Over the last few months, we have been firming up our plans in fiscal 2027 priorities for our multiyear transformation of our retail platform in Australia. We have several initiatives underway across 3 main pillars: merchandising, store experience and network growth and operational excellence. Deploying aspects of our model is impacting just about every facet of the business. In the near term and through fiscal 2027, this work will be both gradual and disruptive but it is a prerequisite to setting up our Australian operations for future success. Changing the merchandising strategy is the most important pillar of the transformation and the most complex to implement. We expect our first Dollarama in port SKUs to start hitting shelves during the second quarter of fiscal 2027, with imports primarily comprised of general merchandise and seasonal items. The target is to have about half of the Dollarama import SKUs sourced by the end of fiscal 2027. On the domestic side, which is primarily consumables, we are also looking at products SKU by SKU to deliver increased value to our customers. Under store experience and network growth, our goal is to renovate the layout and change fixtures in 60 to 80 stores this year, having done 4 last year. We also aim to open 15 to 25 net new stores, all with the dollar MLA out in fixtures, having opened 7 in fiscal 2026. On operational excellence, we are strengthening the IT infrastructure and optimizing various processes. Notably, we are working on migrating Australia's ERP system to ours to get all our business processes integrated to the same platform. On the logistics front, we are finalizing our plan to optimize operations and support long-term growth. We are also adding team members as we built the bench strength of the local team. Once a store feels like a Dollarama shop and reflects our value proposition through both the offering and open experience, we will convert that store to the Dollarama banner. By fiscal year-end, we will be in a better position to evaluate our progress on this front and initial customer reception. The objective is to build our brand equity in the market by introducing our strong and differentiated value and convenience position as we have done over time in all of our other markets. As you can see, the year ahead is shaping up to be both busy and exciting for Dollarama. Today, we have strong teams across 3 continents working to execute on their respective growth plans with each market bringing its own unique set of characteristics, priorities and opportunities. While the path may differ from one market to the next, the long-term vision guiding our efforts remains the same: to deliver unbeatable value to consumers in every market where we operate and to create long-term value for our shareholders. As we enter fiscal 2027, the macroeconomic and geopolitical backdrop is evolving rapidly and remains uncertain. Considering the current economic environment in Canada, we expect that consumers will continue to be cautious and deliberate in their spending. In this context, the importance of value is only increasing. And we believe that the value, convenience and affordability we offer will continue resonating with consumers. Looking at the broader geopolitical environment, the conflict in the Middle East is beginning to have ripple effects on transportation and production costs. Our business model is resilient and provides us with a number of levers to help mitigate these impacts in the near term. The key variable will be the duration of the conflict which will determine how persistent these cost pressures will be. As always, we remain highly disciplined as price followers. We will only pass on price increases were absolutely necessary and while staying true to our year-round value proposition. Across the business, our focus is on the disciplined execution of our plans maintaining our strong value proposition and leveraging the strength of our business model to deliver for our customers and our shareholders. With that, I'll pass it over to Patrick. Patrick Bui: Thank you, Neil, and good morning, everyone. Let's start with a brief overview of our consolidated results before turning to segment performance. Q4 sales, which included 1 less week compared to last year, increased by 11.7% to $2.1 billion. For fiscal 2026, sales increased by 13.1% to $7.3 billion positively impacted by contributions from Australia as well as greater number of stores and SSS growth in Canada. Diluted EPS increased by 2.1% in Q4 to $1.43. This included a positive $0.03 impact from Australia. For the full fiscal year, EPS rose by 13.7% year-on-year to $4.73. Our Canadian segment met or exceeded all financial guidance targets. SSS came in at 1.5% for Q4 over and above SSS of 4.9% in Q4 last year. The increase was primarily driven by demand for seasonal products, offset by 2 important factors. The first is a calendar shift caused by a 52-week fiscal year following a 53-week fiscal year. In the quarter, this resulted in one less historically strong pre-holiday sales week and an additional historically low sales week at the end of January. It also included 4 less pre-Halloween shopping days compared to Q4 last year, which we recorded in Q3. Excluding the calendar shift, SSS would have been 3.5%. The second factor was the weather. As mentioned by Neil, a high volume of weather events, including cold temperatures and precipitation impacted store traffic and resulted in lost sales. This is reflected in the 1.6% decrease in the number of transactions. Despite this, Basket growth was healthy, growing 3.1%, and we met our annual SSS guidance for the year coming in at 4.2%. While the weather resulted in softer-than-anticipated SSS as weather conditions improved, so did traffic patterns. Store traffic continued to recover nicely as we entered fiscal 2027. Looking ahead to fiscal 2027, we anticipate generating SSS growth in Canada of between 3% and 4%. Consistent with our outlook last year, we continue to expect sustained demand for the compelling value we offer, which remains particularly relevant in the current environment. At the same time, we also remain mindful of the macro environment and the uncertainty it creates. Gross margin for the Canadian segment came in at 46.6% of sales in Q4 compared to 46.8% last year. The variance is primarily due to the 53rd week in fiscal 2025, with the 14th week in fiscal 2025, providing additional scaling benefits. Full year gross margin was 45.6% of sales, slightly exceeding the top end of our guidance. For fiscal 2027, our guidance range for gross margin in Canada is in line with last year at between 45% to 45.5% of sales based on our ability to actively manage product margins. Looking at early fiscal 2027 and given the current macro context, we are closely monitoring pressures in the global supply chain which may negatively impact gross margin during the year. SG&A for the Canadian segment in Q4 was 14.5% of sales compared to 14.7% last year. The improvement reflects the positive impact of scaling. Full year SG&A came in within guidance at 14.4%. For fiscal 2027, we expect scaling to help offset the impact of higher store labor and operating costs. As a result, our annual guidance range for SG&A in Canada is slightly better than in the prior year at between 14.1% and 14.6% of sales. Finally, CapEx for fiscal 2027 in Canada is between $420 million to $470 million. The year-over-year increase primarily reflects capital spend for our logistics hub project, a portion of which shifted over from last year. Turning to Dollarcity. Our share of their net earnings in Q4 increased by 22% to $70.5 million. For the year, our share reached $191.5 million, an over 47% increase. This was driven by SSS and store network growth, offset by the ramp-up of operations in Mexico. On a 100% basis, the Mexico business realized a net loss of USD 5.4 million and USD 11.7 million for Q4 and the full year, respectively. As the business is still in ramp-up mode, we expect a loss in fiscal 2027, consistent with the range provided last year of between USD 10 million to $20 million for 100% of the business. On February 5, Dollarcity declared a dividend of USD 125 million, with our share coming in at USD 75.1 million. The doubling of the dividend compared to the previous one declared speaks to Dollarcity's strong free cash flow generation with its profitable growth trajectory continuing to mirror Dollaramas. In early fiscal 2027, we made a capital contribution of USD 38 million towards Mexico expansion plans. This follows 2 USD 18 million contributions made last year. As with previous capital contributions, we allocated a portion of our share of the latest Dollarcity dividend. Looking now at Australia. For the approximately 6-month period since our acquisition in late July, the business had a neutral impact on consolidated net earnings for fiscal 2026. For perspective, looking at the full year and on a pro forma basis, Australia generated approximately $916 million in sales and a net loss of $10.6 million, all in Australian currency. Turning to fiscal 2027. It is expected to be an investment year as we ramp up the integration process. Neil spoke to our priorities across our strategic pillars. As a result, the Australian segment is expected to generate a net loss in fiscal 2027. These impacts are presented in our financial documents and in our investor presentation, which is available on the Event page, but I'd like to call out the main ones. First and most significant is the anticipated negative impact from the merchandise changeover and transition to lower-priced items. As you can appreciate, it is also the hardest to quantify at this stage of the transformation as it will depend on several factors. These include the timing of the product transition. The speed at which sales of incumbent higher-priced SKUs will be compensated by sales of the lower-priced Dollarama SKUs and impact on store traffic. That said, we anticipate a negative impact on sales for the year. The second is related to capital expenditures for store renovation and net new store openings. These are estimated at between AUD 400,000 and AUD 600,000 per renovated store and between AUD 800,000 and AUD 1 million per net new store. There is also a direct impact on sales during renovation related store closures. Third is P&L related. We expect to incur about $35 million to $45 million in incremental costs related to integration, IT transformation, additional head count and labor costs. These transformational changes are essential to set the business on a path for profitable growth. There's a lot of work to be done, but we are excited and motivated by the upside potential once we work through some of these major changes to the business. Our vision is to build a leading value retailer with a strong and favorable margin profile compared to global peers. The work we are undertaking in fiscal 2027 will represent a critical first step in our multiyear path to deliver attractive return on investments. Back to Dollarama, in terms of returning capital to shareholders, we repurchased over 4.4 million shares for cancellation during fiscal 2026 for a total cash consideration of $834.2 million. We also announced today that the Board has approved a 13.4% increase to the quarterly cash dividend, bringing it to $0.12 per share. Looking ahead, our priorities are clear. We will continue to allocate capital in a balanced manner as we pursue our profitable growth in Canada and LatAm and as we embark on the transformation of our Australian platform. Consistent with past practice, we also intend to allocate the majority of excess cash towards share buybacks and a dividend subject to quarterly approval. While the broader economic environment remains uncertain, the underlying fundamentals of our business are strong and our value proposition as relevant as ever. As we enter the next fiscal year, we are focused on disciplined execution to advance our growth initiatives across multiple geographies and support long-term value creation for our shareholders. With that, I'll now turn the call back to the operator for the Q&A. Operator: [Operator Instructions] Our first question is from Irene Nattell with RBC Capital Markets. Irene Nattel: I was wondering if we could spend a minute just unpacking that same-store sales number. You called out weather, you called out strong seasonal. Can you give us an idea of what the cadence was through the quarter, what the exit rate was, where we are quarter-to-date and what the demand is like across the store, please. Patrick Bui: Sure. Thanks for your question, Irene. Look, starting at a high level, we believe the overall consumer environment remains exactly the same, right? Canadians are faced with pressure on their household budgets and they turn to Dollarama for year-round value and everyday convenience. So if you look at it sequentially, we had strong momentum as we exited the third quarter. We had strong momentum as we started the fourth quarter in November. And then traffic then dropped off when we encountered unfavorable weather conditions in December and in January. But once those conditions were behind us, traffic resumed nicely in February and as we kicked off fiscal 2027. So it seems to suggest that the consumer environment that we've seen in the past few quarters, the past many few quarters is exactly the same that we're seeing as we start the new fiscal year. Operator: Our next question comes from the line of Brian Morrison with TD Cowen. Brian Morrison: The second focus, I think, this morning is Dollarcity leverage with your sales up 28% and equity income up 22%. But when you look at the disclosure, the Mexico loss, I think you even called that on the call, would the LatAm growth have been 30% to 35% illustrating leverage, Patrick. Is that correct? And I know there was a pricing structure in Colombia. It was a positive driver last year that will be lapped but looking forward, how should we think about leverage drivers at LatAm and what your breakeven store target is for Mexico? Patrick Bui: Sure. So it is true when you look at those numbers of top line of 28% and bottom line of 22%. That does include Mexico. And so if you were to exclude Mexico, I think you're correct in saying that bottom line growth is over 30%. You need also to consider that when you look at the top line growth, it includes sales from Mexico this year. and we didn't have those sales obviously last year. So you would conclude that the Dollarcity business, excluding Mexico is still benefiting from leverage and scale as we move in time. So to conclude that the business is still growing at a good pace, and there is still scaling benefits to come in the future. I believe before I forget, there was a second part of your question about Mexico, we've provided in our financial statements the loss for 100% of Mexico this year. We've also commented that Mexico, while we're very happy with the progress is still in ramp-up mode. So we do expect a loss similar -- a range similar to last year, so about USD 10 million to USD 20 million. After that, hopefully, EBITDA losses will shrink, but a little too early, Brian to be -- to have a clear view on when that business will break even. Operator: Our next question comes from the line of Chris Li with Desjardins. Christopher Li: Maybe just a 2-part question on Australia. First is, I know it's still super early, but for the stores that have been renovated so far, what's been the sales lift? And is it trending in line or better than your expectation? Patrick Bui: Yes. And just to take a step back. So what we're doing when we're converting stores, right? So we talked about renovating the layout of the stores, having the appropriate racking, lighting, flow of shopping as well. But it also provides us a higher density of products in the stores, which is an important condition when you're selling low price items and high-volume sales. And so one would expect a positive uplift. And even if all the products are currently all TRS products, if I could say, we did see a pickup in unit sales. That being said, the real power of the conversion is really when you combine the conversions with a good density of Dollarama SKUs, and we're not there yet. As Neil commented, we're going to start introducing some SKUs in the first part of -- the first part of the second half of the year. Operator: Our next question comes from the line of Mark Petrie with CIBC. Mark Petrie: Neil, you touched on this in your prepared remarks, but obviously, the macro picture has gotten significantly murkier in the last month or so. Can you just add some color to what you said already with regards to the impacts that you've seen on your supply chain, costing and consumer demand. And obviously, as you said, the longer this goes on, the higher the risk is to affecting costs more materially. But what's the sort of over under on when you would expect this to affect your outlook and guidance. Neil Rossy: So it's still early days. And unfortunately, higher energy costs will permeate throughout the supply chain for all retailers and for consumers over the next few months to a year. The duration of the conflict will decide the scale of the effect. But certainly, inbound costs, outbound costs production costs, raw material costs are all being affected by the increased cost of oil. And that will eventually make its way down the supply chain. Our job as low-cost retailers and value retailers is to ensure that we're price following and to ensure that we are offering the best value -- relative value in the market that we can. But I don't believe that any retailer will be -- will escape the reality of global economics. And we just -- we all hope for the consumer and for the world, I would go so far as saying that the conflict ends as quickly as possible. Operator: Our next question comes from the line of John Zamparo with Scotiabank. John Zamparo: Perhaps a follow-up or 2 on that same topic. I wonder if you can elaborate on the ripple effects you've seen. It would be helpful to get a sense of some magnitude on how impactful you expect this to be? In other words, what the gross margin guide would have been prior to the start of the war? And just to clarify, have you seen any deceleration in same-store sales subsequent to the start of the war? Patrick Bui: Yes. Look, I mean, as Neil alluded to, this is early days, right? So we are seeing some increased costs in transportation. We're seeing some cost increase and even product costs. But if we're under the context of this is short term, all of this is -- some of it is included in our guide, right? So if you look at our guide, we're saying 45%, 45.5% million same as last year, recognizing that there might be some incremental costs that we're seeing right now. But very important is to Neil's point, if this is prolonged and/or deepens, well, there will be potentially over time, consequences on gross margins that we may or may not be able to pass on. But generally speaking, we have a resilient business model and we're in a good position to offset some of those costs. So I would say we've included some of what we're seeing in the guide. But obviously, if this gets prolonged and gets worse, well then there might be negative consequence on our gross margins and frankly, ripple effects throughout the whole industry and the whole economy. Operator: Our next question comes from the line of Etienne Ricard with BMO Capital Markets. Etienne Ricard: Patrick, to circle back on Mexico. If you look at your experience in other markets for Dollarcity, at what level of scale from a store count perspective, do you typically reach breakeven levels in a given country? Patrick Bui: Every -- I would start out by saying we're following a recipe in all countries we open. So this is arguably the fifth time, but there are some nuances, right? Like certainly, in this case, Mexico is a bigger country, so does might take bigger investments to start off with. And so it's hard to compare with other countries. But just to give you some elements, think of the pace at which we're ramping up Mexico to be pretty much in line with the experience that we've had in a country like Colombia or Peru. So it gives us -- we'll give you a sense of what we're thinking in terms of ramp-up and related to that and a little bit to an earlier question, we're not breakeven. We weren't breakeven last year. We don't expect to be EBITDA positive next year. So maybe in the following year, we might be starting to curb EBITDA losses, but this is not bottom line, right? So you would need incremental time to derive a breakeven on the net income. But like I said, a little too early to say, have a look at the other countries, we'll give you a sense of direction but every country is slightly different. That's all we could say on that. Operator: Our next question comes from the line of Ed Kelly with Wells Fargo. Edward Kelly: I wanted to dig in on Australia. I've heard you say a couple of things this morning around -- it sounds like a little bit of a comp headwind. You're going to be doing remodels. There's some transition costs. I'm not sure about the gross margin opportunity. But when you put all this together for a business that, I don't know, maybe it was a small loss in fiscal '26. Does the loss in this business grow to a range of sort of $30 million to $40 million in EBIT? I'm just kind of curious if you could help us frame that because it does look like maybe could matter from an earnings perspective. Patrick Bui: Sure. So let's take it piece by piece. As we think about the potential impact to fiscal year '27. So first point is the business on a stand-alone basis, so without transformation from Dollarama, you look at last year on a full year basis, what had a loss of AUD 10.6 million. So you need to start from that base to which when you look at the 3 pillars that we've laid out in our investor presentation, there are incremental integration costs. So we talk about $35 million to $45 million that you would need to factor in. Then you move to -- and I'm moving from third bucket and coming to the first, but the second bucket is a lot about CapEx. So we provide some color in terms of store renovations and new stores. There is a small P&L impact for the period during which we're going to close a source for the renovation. So we would need to factor that potentially a little bit of DNA. And then the first bucket is really the most uncertain. So this is about transitioning the products, and we talked about all the factors. But this one, as you might appreciate, we barely have a Dollarama product in the country. And so to start guessing the impact of the transition is a little dangerous at this point. But certainly, once we get greater clarity there, we'll be happy to share with you. But that's how I would think about framing the net income loss for this year. Operator: Our next question comes from the line of Mark Carden with UBS. Mark Carden: I wanted to touch quickly on the competitive backdrop. Are you guys seeing any shifts in intensity, particularly from some of the mass merchants? And then population growth has also pulled in meaningfully any shifts in how you approach unit growth placement going forward in same-store sales, just given the change in dynamics there? Neil Rossy: No. I think the market in Canada is quite stable. Competition remained stable. There's no real new entrants to talk about. Overall, I would say it's business as usual in Canada. Operator: Our next question comes from the line of Martin Landry with Stifel. Martin Landry: I would like to touch on your same-store sales guidance for fiscal '27. I would like to know a little bit what assumptions you've used in terms of traffic and basket size? And also if you can talk a little bit about price increases quantify maybe what you've done in terms of price increases in '26? And what's implied in your guidance for '27? Patrick Bui: Yes. Taking from a high level, the 3% to 4%, if you recall, it's the same guidance as we provided last year. And so to an earlier comment, when we think about the economic and demand side, it's a very similar setup than what we have seen last year. The slight nuance perhaps compared to last year is towards the end of fiscal '26. We started seeing some price increases from the domestic side, which will trickle into fiscal '27. So there's a little bit of an uplift when we think about the beginning of fiscal '27 but other than that, we expect a context that is very similar to this year. So the last year, sorry. I mean certainly, as we start the year, there's a lot happening out there and a lot of unknowns. And so we think it's prudent to start with the same guide as we've had last year at 3% to 4%. Operator: Our next question comes from the line of Zhihan Ma with Bernstein. Zhihan Ma: I wanted to circle back on the Australia side. I think initially, you were kind of saying that it probably takes 3 to 4 years in that range to turn profitable in Australia. I'm wondering if that's still the right time line to think about it? And I'm assuming that probably means you'll have enough time to convert all the merchandising in stores, but probably not remodel the stores. How should we think about what does it take to turn profitable on the ground? Neil Rossy: Yes. Thanks for the question. So consistent with what we said in the past, this is a multiyear transformation, i.e., 4 years. And what the 4 years takes into account is think of the conversions being an important part of this transformation. So 400 stores, going at an average clip of 100 per year, that takes 4 years. So for us to say the transformation is complete. We need to make sure that we're well advanced, if not completed on the conversion side. And one is, hopefully, what we'll see in 4 years is that we'll have our stores converted and a strong assortment of Dollarama SKUs in the stores. And so yes, we remain consistent with that 4-year time line. Operator: Our next question comes from the line of Luke Hannan with Canaccord Genuity. Luke Hannan: Patrick, you touched on the first bucket as it relates to the Australian business transformation as being the most important and talked about refreshing the assortment through the balance of this year. Just curious to know how did you target that initial cohort of SKUs that you're looking to swap out and put in your own? Are they concentrated within any particular price points or category as we think about your assortment? Neil Rossy: So the initial study was on, of course, Dollarama's strongest SKUs, taking into account, of course, the SKUs that are transferable to Australia since they have different compliance rules different standards and different products, different voltages in their electricity grids, different sizing in their note pads that they follow a U.K. standard on things in the stationary lines. So barring the exceptions that are different between Canada and Australia. The balance of the items we started with a focus on compliance first and foremost, the items that we were able to do compliance quickly on because the Australian compliance centers are entirely different from Canada. So an entire compliance study has to be done on every single SKU that goes into the country. But the goal is to get all dollar and the SKUs into Australia within the next 2 years or so. The priority started with our best SKUs and the most transferable SKUs. Operator: Our next question comes from the line of Corey Tarlowe with Jefferies. Corey Tarlowe: Great. Patrick, you made a comment that around a $10 million loss from Australia and then, I think, building to like $35 million to $45 million as an investment or starting point I think that's like $0.15 to $0.25. Can you just clarify kind of the glide path on that and on the investments, I just wanted to double click on that. Patrick Bui: Yes. Sorry. Part of your question I cut off. But yes, you're starting from that $10 million base just as the business operating as normal. And then you would add on top of that $35 million to $45 million of incremental integration cost. And then I also talked about the 2 other buckets, the impact of the store opening. So there is some incremental P&L impact there, but that's mostly CapEx. And then you would need to factor in something. We're guiding that it will lead to a net loss in sales. So that would have an impact on your bottom line but you would need to add all those pieces. And so all of that transformation, especially when you think about integration costs, have started as we kicked off the new year, and the team is working very hard to transform the business, but also as a necessary condition are also incurring incremental costs. Neil Rossy: And I just wanted to add that clearly, the Dollarama team feels strongly that in the long term, this is a very exciting project and that bringing value to the Australian consumer has merit, both for the consumer and for our shareholders. So while this is a 4-year project, once you've established a low-cost retail platform in Australia with -- by that point, over 500, 600 stores, we feel very confident that being the 800-pound gorilla in the market will play very well for our shareholders. Operator: Thank you. And I'm showing no further questions at this time. This does conclude today's call. Thank you all for your participation. You may now disconnect.
Operator: Good day, and welcome to the Smithfield Foods Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Julie MacMedan, Vice President of Investor Relations. Please go ahead. Julie MacMedan: Thank you, operator, and good morning, everyone. Welcome to Smithfield's Fourth Quarter and Full Year 2025 Earnings Call. Earlier this morning, we announced our results. A copy of the release as well as today's presentation are available on our IR website, investors.smithfieldfoods.com. Today's presentation contains projections and other forward-looking statements that are being provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release, in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Please refer to our legal disclaimer on Slide 2 of the presentation for more information. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating profit and margin, adjusted net income, adjusted earnings per share and adjusted EBITDA. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our slide presentation on our website. Finally, all references to retail volume and market share are based on Circana, MULO+ data. With me this morning are Shane Smith, President and CEO; Mark Hall, CFO; Steve France, President of Packaged Meats; and Donovan Owens, President of North America Pork. I will now turn the discussion over to Shane. Shane? Shane Smith: Thank you, Julie. Good morning, everyone. 2025 was an outstanding year. Solid execution on our strategies drove record profits, expanded margins and increased cash flow. We set the foundation for multiyear growth while maintaining a very strong financial position, investing in our business and returning value to our shareholders. Last January, we returned to the U.S. equity markets through an IPO that reintroduced us as the new Smithfield. While our history spans 90 years, the transformation underway over the past decade has fundamentally reshaped Smithfield into a leaner, more profitable and strategically focused company. We streamlined our Packaged Meats portfolio, exited non-core and high-cost operations, accelerated automation and built an accountable culture focused on profitable growth. This hard work prepared us for the IPO. In 2025, our first year as a public company, we delivered on our commitments, record operating profit, record net income, strengthened margins and disciplined execution across all segments. Importantly, these results were broad-based, reflecting the power of our diversified product portfolio, our vertically integrated model and our relentless focus on operational excellence. The advantages of our model were clear in 2025, and we see further opportunities for coordination across the value chain. I'm pleased to announce that we have named Donovan Owens, President of North America Pork. Under Donovan's leadership, the Fresh Pork segment adjusted operating profit increased to $209 million in 2025 from $30 million in 2022. This performance demonstrates our improved agility, channel mix and disciplined operating focus. Under the new structure, Fresh Pork, Hog Production and Commodity Risk Management will report to Donovan. Donovan will also oversee our Mexico operations, which are an integral part of our North America growth strategy. We are excited about the opportunity to unlock additional synergies across our upstream businesses in this new structure. Now, I'd like to review our fiscal 2025 accomplishments in more detail. On a consolidated basis, adjusted operating profit increased 30% to $1.3 billion, with profit margin expanding to 8.6%, up from 7.2% in 2024. Each segment executed effectively. Packaged Meats delivered its fourth consecutive year of operating profit above $1 billion and its second highest profit year despite higher raw material costs and a cautious consumer spending environment. Fresh Pork demonstrated strong execution amid a compressed industry market spread and trade disruptions due to tariffs. And Hog Production achieved its highest profit year since 2014, reflecting improved operations and market conditions. Across the company, continuous improvement and productivity initiatives delivered meaningful cost savings. Our rock-solid balance sheet with net debt to adjusted EBITDA of just 0.3x at the end of the year provides us with the financial flexibility to support our growth strategies and return value to our shareholders. In 2025, we returned value to shareholders through dividend payments of $1 per share. Today, we announced a quarterly dividend of $0.3125 per share, and we anticipate paying annual dividends of $1.25 per share in 2026. In January, we entered into a definitive agreement to acquire Nathan's Famous for $102 per share. Successfully closing this acquisition will be immediately accretive and will secure a core national brand and create meaningful growth and synergy opportunities. In February, we announced that we have initiated the approval process to invest up to an estimated $1.3 billion over the next 3 years to build a new state-of-the-art packaged meats and fresh pork processing facility in Sioux Falls, South Dakota. Building this innovative new plant from the ground up will represent one of the largest investments in American agriculture and will modernize our manufacturing footprint and unlock long-term cost and efficiency benefits. Now, let's turn to our growth outlook for fiscal 2026. Protein demand is strong and growing across consumer demographics, value for its nutrition and health benefits. Pork, which is not our only protein, but is our primary offering, is well positioned within the protein complex. Pork presents a strong relative value to beef and its nutritional profile with lean cuts like pork tenderloin offers a superior nutritional alternative to chicken breast. Pork is also central to Asian and Latin cuisines, which are popular with U.S. consumers, particularly among Gen Z and Millennials. We believe all these factors serve as a long-term tailwind for pork, and we expect 2026 to be another year of increased profitability, driven by margin expansion, disciplined cost management and continued execution of our core strategies. Our 5 strategic priorities remain unchanged, increase Packaged Meats profit through mix, volume growth and innovation, grow Fresh Pork profit by maximizing the net realizable value across channels in a best-in-class cost structure, achieve a best-in-class Hog Production cost structure, drive operating efficiencies in manufacturing, supply chain, distribution, procurement and SG&A and evaluate synergistic M&A opportunities. First, in Packaged Meats, which is our largest and most profitable segment, we are meeting the demand for protein with convenience, flavor and value through our strong brand portfolio as well as our private label offerings. Our strategy to grow Packaged Meats operating profit centers on 3 levels: mix improvement, volume growth and innovation. So first, product mix. We remain focused on accelerating the shift toward higher-margin, value-added product categories and expanding unit velocity while reducing volume of lower-margin commodity type product categories. Coming out of 2025, we saw strong momentum in these value-added categories. In the fourth quarter, we grew units and market share in our core higher-margin focus areas of lunch meat and cooked dinner sausage, among others, and we expect these higher-margin categories to again achieve strong volume growth in 2026. Second, volume growth. We participate in 25 key Packaged Meat subcategories at retail, 10 of which are valued at over $1 billion. In 2025, we grew branded volume share in 6 of these $1 billion-plus categories. This volume growth reflected strong increases in our points of distribution led by our national brands. Looking ahead, we see continued white space opportunities to grow volume and increase market share in each of these categories. We are driving volume in today's economy by delivering quality protein at a good value. Our portfolio of quality branded products spans multiple categories and price points and is an important competitive advantage for Smithfield. A great example is lunchmeat. We are attracting and retaining consumers within our branded portfolio even as they trade up and down the value spectrum. If they choose private label, we benefit as well. Over the past several years, we have improved private label profitability, which represents just under 40% of our retail channel sales. We are also supporting our brands by investing in direct-to-consumer advertising and effective trade promotion. In 2025, we increased foodservice sales by 10%, driving higher sales volumes with both new and existing customers. Our success in foodservice reflects our position as a scaled, trusted provider of high-quality products as well as our ability to deliver value-added solutions that save our foodservice customers time and money. We are also very agile in helping foodservice customers launch limited time offers, which help drive traffic. In 2025, we introduced 57 new limited time offers, which gave consumers reasons to keep coming back. Despite food away-from-home inflation nearly double that of food at home, we successfully grew foodservice volume 2% in 2025. In 2026, we expect to increase Packaged Meats volume across the retail and foodservice channels, driven by product innovation, strong marketing, advertising and trade investment. Next, product innovation. Innovation is an important pillar of our Packaged Meats growth strategy. We focus on introducing new flavors, convenient and easily prepared offerings and premium offerings. We have numerous innovative product offerings planned for 2026 in the retail channel for our 3 national brands: Smithfield, Eckrich and Nathan's. So in summary, we expect to grow Packaged Meats profitability by focusing on 3 levers: mix improvement, volume and innovation. Now, let's talk about our second core growth strategy, increasing Fresh Pork profitability. We are focused on maximizing net realizable value across channels and continuing to improve operating efficiencies. 2025 was a dynamic year for Fresh Pork due to both compressed market spreads and trade disruptions. Historically, compressed market spreads, the price between hogs and meat significantly reduced profitability. However, our Fresh Pork team demonstrated agility and delivered strong profitability even in tighter markets due to our improved cost structure and diversified channel strategy. In 2025, Fresh Pork profitability was strengthened by sales and volume growth in the U.S. retail channel, with profit enhanced by value-added case-ready items. We also grew volume and profitability in our pet food and pharmaceutical channels, executing well on our next best sales strategy. In addition, we continue to deliver operating efficiencies and cost savings, which helped mitigate the impact of the compressed market spread on segment profitability. In 2026, our priorities include growing volume in the U.S. retail channel, emphasizing higher-margin, value-added, case-ready and marinated offerings, expanding adjacent channel opportunities such as pet food and pharmaceuticals, increasing automation, plant efficiency, yield optimization and supply chain savings and optimizing harvest levels across our network. By focusing on these priorities, we will continue to outperform the market. Now, to our strategy to optimize Hog Production. We continue to progress toward a best-in-class cost structure in Hog Production. In 2025, we outperformed the Iowa State benchmark for hog grower profitability, reflecting improved genetics, feed management and herd health. In 2026, we will continue to focus on improving our operations, including herd health and feed conversion. We're also excited about unlocking more opportunities across our Hog Production and Fresh Pork segments under Donovan's leadership. With respect to the number of hogs internally produced, in 2025, we produced 11.1 million hogs, which is down from 17.6 million at the high point in 2019 and from 14.6 million in 2024. This reduction reflects the transfer of 3.8 million hogs to our external joint ventures, which was consistent with our rightsizing strategy. Over the medium term, we continue to target producing approximately 30% of Fresh Pork's needs internally. We believe this will provide an optimal balance of assured supply and cost risk management. Next, our strategy to optimize operations and deliver operating efficiencies in manufacturing, supply chain, distribution, procurement and SG&A was a meaningful contributor to our improved profitability in 2025. In 2026, we are looking to accelerate the use of innovative technologies across all aspects of our business. We are increasingly leveraging advanced technology to become a more efficient business and to further strengthen our competitive position. We deploy this technology to drive innovation, productivity and optimize performance on our farms in our processing facilities and across our corporate functions. For example, we recently formed a co-sourcing partnership with a third-party technology provider that will provide the benefits of artificial intelligence and robotic process automation for administrative and transactional work in our finance operations. This partnership gives us immediate access to the latest technology and provides flexibility as technology change continues to accelerate. Finally, we continue to evaluate opportunistic M&A to support our growth strategies. In January, we entered into an agreement to acquire one of our top national packaged meats brands, Nathan's Famous. Successfully closing the acquisition will secure our rights to this iconic brand into perpetuity and enable us to maximize Nathan's Famous brand growth across the retail and foodservice channels. With this acquisition, we will own all our major Packaged Meats brands. We will remain disciplined in evaluating additional complementary and synergistic M&A opportunities. In summary, we have returned to the U.S. equity market well positioned to deliver reliable, repeatable earnings and cash flow growth. Our business model has never been stronger. Our high-performing vertically integrated model led by Packaged Meats provides a competitive advantage and supports sustainable margin expansion over the long term. We are investing capital in a disciplined manner to support our growth strategies, to generate attractive returns and to build sustainable long-term value for our shareholders. With that, I will turn it over to Mark to review our financials in more detail. Mark Hall: Thanks, Shane, and good morning to everyone joining the call. Our strong 2025 results reflect the consistent execution and resilience of our teams. We closed the year with an outstanding fourth quarter. Total company sales increased 7% for the fourth quarter and 10% for the year with growth across all segments, reflecting higher market prices across the pork value chain and Packaged Meats ability to maintain pricing discipline through innovation and brand power. Record fourth quarter adjusted operating profit of $402 million fueled our record full year 2025 adjusted operating profit of $1.3 billion. Full year adjusted operating profit margin increased an impressive 140 basis points to 8.6%. Fourth quarter adjusted net income from continuing operations attributable to Smithfield was $329 million, which was our second highest on record. This helped us deliver a record $1 billion for the full year. Adjusted diluted EPS for the fourth quarter was $0.83 per share, up from $0.52 per share in 2024 and for the full year was $2.55 per share, representing a 36% increase from 2024. Now, on to our fiscal year 2025 segment results. Packaged Meats delivered fiscal year 2025 adjusted operating profit of $1.1 billion, which was the second highest profit on record and an adjusted operating profit margin of 12.4%. This strong profitability in the face of raw material input cost increases of $525 million and a challenging consumer spending environment demonstrates the success of our Packaged Meats segment strategy. Packaged Meats fiscal 2025 sales of $8.8 billion increased by 5.3% compared to fiscal 2024. This was driven by a 5.6% increase in average selling price with roughly flat sales volume. Industry-wide, volume growth has been challenged due to inflation and consumers' tight budgets. As Shane mentioned, we were able to maintain volume through the power of our strong branded portfolio, complemented with private label options and our diversified product portfolio offering convenience, flavor and value. The higher average selling price was driven primarily by higher market prices across the pork value chain with key raw materials such as bellies, up 19%; trim, up 19% to 35%; and ham, up 9% year-over-year. Next, Fresh Pork. For 2025, we delivered $209 million in adjusted operating profit despite $135 million year-over-year decline in the industry market spread, truly an outstanding job by the Fresh pork team. As Shane mentioned, Fresh Pork executed well on maximizing the net realizable value of each hog and continue to deliver operating efficiencies and cost savings, which largely mitigated the impact of the compressed market spread and export market disruption on segment profitability. Fresh Pork sales of $8.3 billion increased 6% year-over-year, primarily driven by a 5.8% increase in the average selling price and roughly flat volume. The higher average selling price was driven primarily by higher market prices across the pork value chain. Turning now to Hog Production. Hog Production generated $176 million in adjusted operating profit, the highest since 2014. The strong results were driven by improved commodity markets as well as actions we've taken to optimize our operations. 2025 Hog Production sales of $3.4 billion increased by 13% year-over-year. This was despite a 23% or approximately 3.4 million head reduction in the number of hogs produced as part of our planned rationalization strategy. The sales increase was primarily due to higher external sales to our new joint venture partners, both from ongoing sales of grain, feed and other services as well as from the initial transfer of commercial hog inventories. Our average market hog sales price was up 8.9% year-over-year, inclusive of the effects of hedging. Adjusted operating profit for our Other segment, which includes our Mexico and Bioscience operations, of $45 million increased $10 million compared to 2024. We see the Mexico market as a big opportunity for future growth. Our corporate expenses came in $26 million below the prior year, reflecting our disciplined cost management strategies. In summary, we delivered a record 2025 operating profit and net income due to solid consistent execution across our operations. Next, let's review our strong financial position and cash flow generation. At the end of 2025, our net debt to adjusted EBITDA ratio was 0.3x, well below our policy of no less than 2x. Our liquidity at the end of the year was $3.8 billion, including $1.5 billion in cash and cash equivalents. This is well above our liquidity policy threshold of $1 billion. During 2025, we generated cash flows from operations of over $1 billion, and it would have been a record of nearly $1.3 billion when adjusted for the repayment of an accounts receivable monetization facility. Capital expenditures for 2025 were $341 million compared to $350 million for 2024. Approximately 50% of our planned capital investments each year are to fund projects that will drive both top and bottom line growth. This consists primarily of various plant automation and improvement projects, as we continue to lower our manufacturing cost structure and better utilize labor. Reinforcing our commitment to return value to shareholders, we paid $1 per share in annual dividends in 2025. And as Shane mentioned today, we announced that our Board declared a quarterly dividend of $0.3125 per share and that we anticipate paying annual dividends of $1.25 in 2026. Our ample liquidity, including sizable cash balance and robust cash flow supports our investment in business growth and shareholder return while maintaining a strong financial position. Now, on to our outlook for fiscal 2026. First, I'd like to share our thoughts on potential market tailwinds and headwinds that could impact our 2026 results. First, tailwinds. We expect protein to remain in high demand in 2026 and for pork to be well positioned as a healthy, affordable option for consumers. We also see raw material costs as a tailwind. While we expect input costs to remain elevated by historical standards, they should be slightly lower than in 2025. Our raw material assumptions are supported by the USDA outlook for pork production to be up 2.5% in 2026. That said, we're monitoring herd health as a key variable impacting the outlook for U.S. pork production and raw material costs. Potential headwinds that we're monitoring include a continued cautious consumer spending environment and a dynamic geopolitical environment. It's still too early to predict the full impact from the conflict in Iran, but there are 3 main components of our business that this could impact. First, the direct impact of fuel costs such as diesel; second, corn prices, which are tightly correlated to the oil markets; third, the petroleum-derived supplies that we use such as resin-based packaging. Based on what we know today, we believe our outlook incorporates identified risks, but it will depend on the duration of the conflict. With these assumptions as a backdrop, our outlook for fiscal 2026 called for continued margin expansion driven by the strategies Shane just reviewed. This includes continued innovation, improved asset utilization, accelerated automation initiatives and cost savings that will help us achieve another record-setting year. First, we anticipate total company sales to be up low single digits compared to fiscal 2025. Our outlook for segment adjusted operating profit is as follows: for Packaged Meats, we anticipate adjusted operating profit in the range of $1.1 billion to $1.2 billion. For Fresh Pork, we anticipate adjusted operating profit of between $200 million to $260 million. And for Hog Production, our anticipated adjusted operating profit range is $150 million to $200 million. As a result, we anticipate total company adjusted operating profit in the range of $1.325 billion to $1.475 billion, reflecting broad-based performance. Please note that our outlook reflects 53 weeks of operations in 2026 and does not include the impact of the proposed Nathan's Famous acquisition and investment in the new processing facilities in Sioux Falls, South Dakota. Our targeted capital spend for 2026 will be in the range of $350 million to $450 million. In addition, subject to permitting and other approvals, we expect to invest up to $1.3 billion over the next 3 years to construct the new state-of-the-art Packaged Meats and Fresh Pork processing facility in Sioux Falls. We currently anticipate groundbreaking to commence in the first half of 2027 and for operations to commence by the end of 2028. We'll provide more updates as we progress. In summary, 2025 demonstrated that our key strategies are working. We expect 2026 to be another year of increased profitability, as we continue to execute our core strategies. Now, I'll ask the operator to open up the call for Q&A. Operator? Operator: [Operator Instructions] And today's first question comes from Megan Clapp with Morgan Stanley. Megan Christine Alexander: I guess, maybe to pick up, Mark, where you left off there, I wanted to start with the Packaged Meats outlook specifically. You talked about low single-digit top line growth for the total company. I guess... Shane Smith: Megan, did we lose you? Megan Christine Alexander: Sorry, can you still hear me? Shane Smith: Yes, you cut out for a second, though, Megan. Megan Christine Alexander: Okay. Okay. I'll start over. So Packaged Meats outlook, I wanted to ask about that. As we think about the top line guide, you talked about low single-digit growth for the total company. Should we be thinking about Packaged Meats kind of in that range? And then, from a margin perspective, if we just kind of take the midpoint of your profit guidance, I think it does imply some modest margin expansion, but, yes, still kind of well below where you've been historically. And, Mark, you kind of talked about this a little bit in your remarks, but maybe you can just help us understand a little bit more of the puts and takes on margins, as we think about the year ahead in terms of input cost inflation, continued mix benefits, and then, anything you're taking into account on consumer demand given some of the macro factors? Mark Hall: Thanks, Megan, for the question. So just on the top line, it's important to note that the low single-digit revenue growth year-over-year includes $230 million of one-time inventory sales to the joint ventures in 2025 that, that won't repeat. So that's about 150 basis points. And then, consistent with the comments, we're looking for lower markets year-over-year with the USDA call for pork production to be up about 2.5% year-over-year. So that's going to have a ripple effect throughout the segment. And I'll let Steve talk specifically to the top line on Packaged Meats. Steven France: Thank you for the question. So I'd start out by saying that nothing has really changed with respect to our long-term outlook for Packaged Meats margins. In the short term, as Mark had mentioned, consumers are definitely stretched, and I would say that the grocery and foodservice industry are seeing people spend less or trade down to less expensive items or items that deliver more value. And think about the fact that in 2025, our raw material costs were up over $525 million. So although we do expect to see lower raw material costs, as Mark had mentioned, they're still going to be elevated versus historical norms. Now, despite some of these headwinds, we do believe that we are better positioned than most companies due to the family of brands and also the extensive product portfolio that we have. And as you know, we have a very successful private label business, which does provide us the ability to capture those consumers, as they move up and down those different price points. And by doing that, so when you think about the family of brands that we have and also the private label that we have, it actually helps to minimize some of the financial exposure that we have with consumers, as they do move up and down that pricing spectrum. Now, we are focused on building long-term value, but it's also about protecting our near-term profits. So that means we are investing in our brands. We're funding our innovation that aligns with consumer trends. We also continue to shift, as Shane had mentioned during his opening comments, shift our mix from commodity items to higher-margin value-added products. And then, we're also, of course, spending capital to expand on capacity where it supports our long-term growth and profitable growth. So as Shane and Mark had mentioned, for our outlook for 2026, at this point, it really reflects the best view that we have today. And it's really guiding our Packaged Meats profit to that $1.1 billion to $1.2 billion, which we believe represents a healthy level of profitability in the face of really cautious consumer spending, higher-than-normal raw material markets. And, of course, there's a big unknown tied to the Iranian war that's currently going on. So at the end of the day, we are very -- we still -- we are confident in the outlook that we have, and we'll be able to address some of these challenges as they come at us throughout the year. Megan Christine Alexander: Great. That's super helpful. And just a follow-up on Hog Production. So the guide for the year, $150 million to $200 million would suggest similar profitability to '25 at the midpoint. And the futures curve at this point does seem to imply similar producer profit levels as well. At the same time, you've talked extensively, including in the remarks here, about the structural improvements you're seeing in your own business and even talked about perhaps monitoring the herd health as a potential tailwind. So maybe you can just help us understand a little bit more about what's embedded in the guide from an industry perspective? And what you're seeing in terms of supply today and -- versus your own internal cost improvements? Shane Smith: Yes, Megan, when you look at supply, we don't see right now any material level of expansion taking place outside of productivity and improvements in health. And I think that's what the USDA is modeling it as well with their 2.5% increase. And as you know, when you look at last year, the real true impacts of the health across the U.S. industry really didn't become apparent until we were in -- really into the second quarter. So we're monitoring what's going on as a part of overall health and how that will impact meat in the back half of the year. We do think that the guide that we issued this morning encompasses what we see today from the grain markets, from the changes in diesel fuel that we're seeing have an impact on things like freight and animal movements. So we feel comfortable where we are. We think it feels like we're back in somewhat of a normal cycle in that Q1-Q4 versus Q2-Q3 scenario. And of course, as you know, we have different hedging strategies that we take advantage of throughout the year. So we're really comfortable with the guidance that we've issued today in hog production. To your point, we have seen some real structural changes in our business. And the genetics that we've talked about for the last couple of years, that really helped us in 2025. We saw a lean pig cost that was down probably 8% year-over-year, better feed initiatives and livability initiatives. Our overall feed cost was down over 5%. And so we're seeing all of those things manifest in the earnings. And so again, I think we're really comfortable with the guidance with what we see today. Operator: And our next question today comes from Ben Theurer with Barclays. Benjamin Theurer: Shane, Mark and team, 2 quick ones. So first of all, as we look into like the value chain as a whole, and we've kind of like talked a little bit about the Hog Production just now and before that about the Packaged Meat segment. So picking up on what's in the middle in the Fresh Pork segment. Clearly, it was, call it, potentially a somewhat challenging 2025 with all the trade restrictions, et cetera. But as we move into 2026 and as you kind of like pointed to the puts and takes, can you maybe elaborate a little bit more on the Fresh Pork business itself, what to think about, a, seasonality? And b, what are like the more Fresh Pork-specific risks and opportunities for 2026 in contrast to 2025? That would be my first question. Shane Smith: Yes. So, Ben, maybe I'll start and then hand over to Donovan. 2025, I'm really proud of how the Fresh Pork team executed. We saw $135 million degradation in the gross market spread, but yet our profits were only down about $17 million. And so we saw growth in retail and sales volumes. I think that was 4% in sales and 5% in U.S. retail channel volume, really leaning into the case-ready part of the business. But also looking at some of those alternative channels that we've discussed before with our pet food business and our pharmaceutical business. And so I would say the Fresh Pork team in the face of what was a really dynamic and ever-changing 2025 did an excellent job in executing that next best sales strategy. Donovan, do you want to add to that? Donovan Owens: Yes. I think Doug (sic) [ Ben ], and Shane, you said it well in your opening remarks. But yes, 2026 for Fresh was a challenging year. I think it led off with what Doug (sic) [ Ben ] might be referring to as the tariffs. So the tariffs started to have some impact. It had some impact on the year. But as we look at how we rebounded in our net realizable value efforts in 2025, they paid dividends. I mean, we focused on our core strategy of looking at our Fresh Pork, Fresh Pork value-added business, as Shane has mentioned earlier. Growing our Fresh Pork in that arena is going to be pivotal in 2026, as it was in 2025. So we're going to focus on our case-ready value-added pork. We're going to focus on our marinate offerings. We're also going to focus on our branded effort, branded fresh pork to tie into our Packaged Meats portfolio. So we want to connect the dots, Doug (sic) [ Ben ], on all of our business. I think that's been an opportunity for Smithfield for a while and leverage our strength of our Packaged Meats business and start putting our name on our Fresh Pork portfolio of Smithfield, not just a brand that we have to fight with other -- with our competitors in the industry. So look forward to it, Ben, sorry for that. I got your name mixed up. But nonetheless, 2026, I feel very confident that we will continue our strategy on fresh pork and look forward to improved results. Benjamin Theurer: Awesome. And then, real quick on the capacity expansion project, Sioux Falls. I think you said groundbreaking first half 2027. So probably within the CapEx of that $1.3 billion, probably nothing yet to be contemplated for 2026. But how should we think about the CapEx needs for that project splitting that into what would be '27 and '28? And how do you think about just the general timeline? If you could refresh me on that one, that would be much appreciated. Mark Hall: Yes. So, Ben, as you indicated, there is no capital included in our estimate of $350 million to $450 million for the current year. So there may be some incremental spending towards the end of the year, but the most significant portion of the spend will come in '27, '28 and a little bit of spillover into '29. So anticipate groundbreaking, as you said, in early 2027, hopefully, to have the first products running down the line at the end of 2028. And I would say that the capital spending will be paced pretty evenly throughout the construction period. Operator: Our next question today comes from Leah Jordan at Goldman Sachs. Leah Jordan: I wanted to follow up on Megan's question within Packaged Meats. Just seeing if you could provide more color on how we should think about the margin cadence in that segment as we go through the year. And any timing impacts we should keep in mind? I mean, we're going to be lapping some different input costs as we go through the year as well as potential shift in Easter and as well as the 53rd week. Steven France: Sure. Thank you for the question. So first, when you think about margins and also how that would potentially tie to promotions, what we're focused on is really -- it's on the quality merchandising side. So it's really going after the quality of it versus quantity because typically, if you're going after the quantity, you're going to run into some potential challenges from being unprofitable. But what we continue to see is improvement with our promoted volume sold as feature and display. And when we do that, that by far is the most impactful promotional vehicle. So we'll continue with our current promotional strategy, although the reality is we're not just counting on promotions to drive our volume, we're actually very fortunate because our consumers are incredibly loyal and our brands perform because people trust us to deliver that same great quality, flavor, value every time. And that consistency that we built over decades shows up in every product. And our customers and consumers know that they can count on us. So -- the other part of your question was, I guess, consistency. And when -- reality is when you look at the first half and second half of the year, it's -- even though we have some seasonality between different items, between seasonal hams, we also have growing items during the summer, but the reality is when you look at first half and second half, they're basically fairly equal from a profitability standpoint. Shane Smith: Leah, the only thing I would add there, and I think this was part of your question, we will see Easter a little earlier this year. So there will be some Q1 impact of last year we would have saw in Q2. And the 53rd week actually will fall at the end of December, which would be post-Christmas for us. Mark Hall: Right. So to Shane's point, on a segment profit margin perspective, it's a little lighter in the first and fourth quarters because of that seasonal ham influence. Leah Jordan: That's very helpful. And then just for a follow-up, I wanted to ask on the feed side, given lower feed costs were such a tailwind for you in Hog Production last year, and now, we've got maybe some potential headwinds emerging, so how are you planning for feed over the coming year? What have you locked in so far? And just any color around assumptions within the guidance range and your flexibility there? Should we see some movement? Shane Smith: Yes. On the feed side, and Leah, we don't necessarily talk specifically about our hedge positions, but we do use corn and soybean meal contracts to help lock in when we think it's advantageous. So -- but I would tell you, our overall feed strategy is more than just a grain. It's being efficient in what we do. It's about the livability, the animals coming out that we've been putting grain into. What I would tell you, as it relates to feed for 2026, we are seeing some increases, and those spikes coincide with what we see taking place in the Middle East. I think we've been very in front of that, I would say, as far as our hedging strategies and how we think about locking in those grain costs as we go forward. So I think, again, as I mentioned earlier, I think we're in a pretty good position, as we look at 2026 from where we stand on corn. And keep in mind, as we go through the year, the later in the year we get, the feed cost, that fed cost of corn really would show up in the back part of the year and into 2027. So I think from a 2026 standpoint, we're pretty well positioned. And we think, again, that guidance that we issued encompasses that variability that we think we'll see in corn. Operator: And our next question today comes from Heather Jones at Vertical Group (sic) [ Heather Jones Research LLC ]. Heather Jones: I wanted just to ask a quick clarifying question on the extra week. So I think you talked about expecting a low single-digit volume increase in -- on the Packaged Meat side in retail and foodservice. I was wondering, is that adjusted for the extra week? Or is it largely due to the extra week, so we should expect most of that increase in Q4? Mark Hall: That includes the extra week. So the extra week is falling after the Christmas holiday this year. So it's -- seasonally, it's a softer week in the year as all the loading has gone on leading up to the holiday season. So from a volume and profitability standpoint, it punches below the average week's weight. Heather Jones: Okay. So you're expecting growth in the other quarters as well, not just the Q4? Mark Hall: Correct. Heather Jones: Okay. And then, I just wanted to ask about the Hog Production outlook, and just, how you all are thinking about the cadence of that 2.5% growth? Because my understanding is that there was some expectation that there would be like an easy comparison because of the PED and PRRS we had in '25. But PRRS has hit pretty hard again. I think it's in the upper Midwest. And so I was wondering, do you think the 2.5% takes that fully into effect? And how you're thinking about industry volumes year-on-year as the year progresses? Shane Smith: Yes. If I understood your question correctly, we are hearing that same thing that you just mentioned that PRRS is really beginning to show up in the Midwest. But again, I think our guidance, as we've issued this morning, takes that into account, both from what we expect to see on a seasonality basis between Q1 and Q4 and in the middle part of the year as in Q2 and Q3. So we think from a disease standpoint, from a corn standpoint, transportation that we've got those things embedded. And of course, as we move through the year, things will become much clearer, and we'll continue to update that guidance as we move through the year. But as it sits today, we feel really comfortable with that range that we printed this morning. Operator: And our next question today comes from Chris Downing of Bank of America. Christopher Downing: This is Chris on for Pete. You noted that acquiring Nathan's will eliminate licensing fees and allow you to capture the full retail margin with immediate earnings growth expected. Can you quantify for us how much of the anticipated accretion comes from recapturing licensing economics versus incremental operating synergies? And how quickly those benefits should scale post close? Shane Smith: Yes, Chris, I'll begin, and maybe, I'll throw it over to Steve or Mark. As we're -- really kind of limited on what we can say and what we can share. Once we close this transaction, once we successfully close it, we'll be able to share a lot more detail on both our plans and some of the inherent numbers. But as it sits today, we're really limited in what we can share until the deal actually closes. Steve, do you want to add some things on Nathan's? Steven France: Yes, I can just add a couple of things. And first and foremost, we're very excited on the Packaged Meat side of the business about Nathan's and what that represents for the future of Smithfield. So we know the Nathan's brand incredibly well. Obviously, we've been making products for years and selling it into the retail channel. So there's virtually no integration risk, and that's a really big deal from an M&A standpoint. Owning the brand, that would let us scale, scale with utilizing our marketing, innovation and also distribution across retail. And then ultimately, we'd have access to that foodservice channel, which again would be a big plus for the total Smithfield business. I would like to share more about what we have planned. But at this point, since the deal is not finalized, I'm going to have to wait until the transaction closes. But it's a great question. We're very excited about the opportunity to purchase Nathan's. Shane Smith: Yes. And, Chris, the only other thing I would add to that is we do believe that the transaction will be immediately accretive to our earnings. And I think you can look at Nathan's disclosures and really get to the crux of your question about what that licensing fee has been. Operator: And our next question today comes from Max Gumport with BNP. Max Andrew Gumport: I was hoping to turn back to Sioux Falls. Obviously, it's a very big investment for the company. I realize it's early, but any color or quantification you can provide on the benefits that you will receive? It's replacing a very old plant. I think it's over 100 years old, so maybe particularly on the cost side, what this means for efficiencies, automations and cost savings? Shane Smith: Yes, Max. I'm really excited about this investment in Sioux Falls. And to your point, it's a large investment, but it's necessary. Sioux Falls is a key part of not only our Fresh Pork business, but also our Packaged Meats strategy in general. And so that facility is over 100 years old. And as you can imagine, there's a lot of upkeep on that facility. But not only that, the footprint of that facility makes it very difficult to implement some of the automation and technology that we as a company are really rolling out across our footprint. When this facility is done, it will be the largest fresh combined, Fresh Pork and Packaged Meats facility in our system. We are anticipating a best-in-class facility that will just deliver significant efficiency gains to both Fresh Pork and Packaged Meats. So I'm really excited about the investment. We're anticipating it's going to have a really strong intern investment, and we expect to see those benefits in year 1, as we move to that optimal production level. But the interesting thing about Sioux Falls for us is it's a key part of the country. There's a tremendous culture of Hog Production in that part of the country. And from a vertical integration standpoint, that plant is less than 1% vertically integrated. So this investment is not only good for us, it's good for South Dakota agriculture, the surrounding regions and American agriculture in general. And like I said in my opening comments, this investment really represents one of the largest single investments in American agriculture that I'm aware of. And so we, as a company, are extremely excited about the opportunity to do this. I think it's going to be transformative for us as a company. And I think it's going to lead the way in the industry, as it relates to cost structures, to competitiveness. And so I'm really looking forward to getting this project done. Max Andrew Gumport: Great. And then, on the first quarter, I realize we're essentially through the first quarter at this point already. So I was hoping maybe for a bit more color on any initial thoughts on the sales and profit realized, maybe you don't typically guide by quarter, but just given that there's essentially only a week left or so, maybe a bit of color on how the first quarter is looking. Mark Hall: Yes. It's really about continuing execution of our strategies, continue to improve that mix within the Packaged Meat side of the business, appealing to the consumer across that price spectrum, whether it's in our branded portfolio or in private label. And again, continuing optimization of our net realizable value within Fresh Pork. So we're seeing continued execution of our strategies, and we look forward to a solid first quarter. We'll be back in front of you in, what, about 5 weeks, I think, to report on the first quarter, but things are shaping up. Operator: We have time for one more question today. And our final question comes from Saumya Jain with UBS. Saumya Jain: Congrats on the quarter. A quick one. With more CapEx spend, as you noted in '27 and onwards, would you see more upgrades or bolt-ons on current facilities or acquisitions of new ones? And what would drive one versus the other? Mark Hall: Yes. So in terms of CapEx, again, the uptick in '27 and '28 is related to the Sioux Falls build-out. Our guide for this year is really in that $350 million to $450 million range. And what you've seen is over the recent past, we've really worked significantly to optimize our network and improve our cost structure. So most recently, we announced the closure of 2 lease facilities in Elizabeth, New Jersey and in Springfield, Massachusetts, and we're folding those into existing operations. So that along with the transfer of the $3.8 million head that Shane mentioned in Hog Production to our joint venture partners, it really brings reduced requirements for maintenance CapEx across the network. So we're going to continue to invest about half of that CapEx figure on growth capital and about the other half on infrastructure, so maintenance types of projects. But we have plenty of opportunities to invest in growth capital, drive capacity expansions and cost savings projects through automation. So again, the $350 million to $450 million is all encompassing on the base business with incremental spend related to Sioux Falls in '27, '28 and '29. Saumya Jain: Great. And then real quick, I noticed that the market share in the hot dogs Packaged Meat subcategory changed from third to fourth. So I guess just wanted to understand what was driving that last quarter. And how do you view your acquisitions of Nathan's then changing the competitive dynamic in the space? Steven France: No, it's a good question. So, as far as the total hot dog category, so this is for the total industry, obviously, we're seeing some historic beef markets, which is resulting in consumers seeking value or gravitating down to private label or value tiers. Now, keep in mind, when I say that, that even when they gravitate down into private label, we have the ability to capture that consumer with some of the private label products that we do produce or some of the regional brands that fit that value tier. Now, if you look at the total category, so not just where we were, but for the total hot dog category for the U.S., in Q4, the sales were down 5.2%. And for total 2025, sales were down 4.8%. Now, with all that said, despite some of the category declines and some of the consumer shifting, we're still able to grow our Nathan's volume share, unit share and dollar share in Q4. So we also increased our points of distribution by over 19% in 2025, and that's on the Nathan's brand. So that really highlights the strength of the brand and also consumer loyalty. So despite some of the category declines that we saw within the hot dog space, we're very comfortable with where we are from a Nathan's performance and also what we expect to see in 2026. Operator: That concludes our question-and-answer session. I'd like to turn the conference back over to President and CEO, Shane Smith, for closing remarks. Shane Smith: Thank you, and thanks to everyone who joined our call today. I want to thank all of our Smithfield Foods employees for their exceptional execution in 2025. It truly was an outstanding year, and we're proud that our strategies drove record results, but we're not stopping here. Instead, we're constantly challenging ourselves to grow our business and continuously improve our operations. I'm looking forward to speaking to you again when we report our first quarter results. Thank you. Operator: Thank you. The conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2026 First Quarter Earnings Conference Call. [Operator Instructions] The conference call is being recorded, and a replay will be accessible on the KB Home website until April 24, 2026. And I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin. Jill Peters: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the first quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Rob Dillard, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin as well as other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And finally, please note all figures are based on our quarter ended February 28, and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here's Jeff Mezger. Jeffrey Mezger: Thank you, Jill. Good afternoon, everyone. We are pleased that our first quarter financial results were within our guidance ranges. Operationally, our divisions continue to execute well, and we achieved our highest community count in many years, contributing to year-over-year growth in net orders. Perhaps most importantly, we have returned to a mix of sales that are predominantly built-to-order, which we believe will enable us to achieve 70% built-to-order deliveries in the second half of this year. We have a renewed focus on this core strategy as a central component in strengthening our company going forward. With the lag between sale and delivery for built-to-order homes, we expect to continue growing our backlog. A larger backlog will provide many benefits, including greater predictability in our deliveries and higher gross margins than we achieved on inventory sales, typically in the range of 300 to 500 basis points. As to the details of our first quarter results, we produced total revenues of about $1.1 billion and diluted earnings per share of $0.52. We continue to have significant financial flexibility and remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders. We repurchased 843,000 shares of our common stock at an average price below our current book value per share, which we believe is an excellent use of our cash, accretive to both our earnings and book value per share and a factor in improving our return on equity over time. Inclusive of dividends, we returned almost $70 million in capital to our shareholders in the first quarter. In addition, we continued to expand our book value per share compared to the year ago period to over $61. Consumers have been faced with a variety of challenges over the past 2 years, and the conflict in the Middle East that began at the end of February has added another layer of uncertainty. Against this backdrop and taking into consideration that our net orders in the first quarter were below the level we needed to hold our prior year -- our prior full year delivery guidance, we are lowering our range for the year. Rob McGibney will provide more color on this in a moment. Before turning the call over to Rob, I want to congratulate him on his promotion. As part of our long-term succession plan, Rob assumed the role of President and Chief Executive Officer on March 1, and I transitioned to Executive Chairman of the Board. Rob is a proven results-oriented leader with a deep understanding of our business gained over the past 25 years with the company. He began his career at KB Home in our Las Vegas division, historically our largest and most profitable, where he rose to Division President and then continued on in roles of increasing responsibility within the company. Rob has worked side-by-side with me during the past 5 years while running our homebuilding operations and both the Board and I are confident that he is ready to lead KB Home forward. With that, I'll turn the call over to Rob. Rob McGibney: Thank you, Jeff. I am honored to step into the role of CEO and excited about KB Home's future. With our distinguished brand, differentiated product offerings and industry-leading customer service, there are significant opportunities to create value for both our homebuyers and our shareholders. In addition, our strong financial position provides us with flexibility and the ability to support growth of our business over time. One of the traits that defined our operations in fiscal 2025 was consistency in our operational execution that led to meaningfully improving our build times and tightly managing our direct costs. We will continue to focus on these key areas in fiscal 2026 together with our renewed focus on our built-to-order strategy. We are confident the multiple advantages of our BTO model will ultimately result in a stronger company. We remain optimistic about the long-term housing market with favorable demographics supporting higher demand over time, together with the structural undersupply of homes. Near term, buyers continue to demonstrate the desire for homeownership and the ability to qualify, although tepid consumer confidence, elevated mortgage interest rates and affordability pressures have stifled underlying demand. More recently, the conflict in the Middle East has created more uncertainty for an already cautious consumer. In the first quarter, healthy traffic in our communities, a steady conversion of traffic to sales, the lowest cancellation rate we've experienced in the past 4 years and our higher community count drove a 3% year-over-year increase in net orders. While the growth in net orders is clearly a positive at 2,846, our sales were below what we needed to maintain our prior full year delivery guidance, as Jeff noted. The meaningful improvement in cancellations reflects high-quality committed buyers who are ready and able to purchase a home and also supported net orders at an average absorption pace of 3.5 per month per community. Although this pace was slightly lower year-over-year, we remain focused on our long-standing annual average target of 4 net orders per community to optimize our assets. Most importantly, our order mix demonstrates a deliberate and strategic shift in how we are positioning the business for the long term. We are returning to our core built-to-order model, a foundational element of how KB Home operates. This is how our teams are trained, how we manage our communities, and how we create value. While this will result in a temporary trough in deliveries for the first half of the year, as the higher level of BTO homes we are selling now will benefit our third and fourth quarter deliveries and we have intentionally slowed our inventory starts, it is a purposeful reset that positions us to be a stronger, more predictable company in the second half of the year and beyond. We are making considerable progress increasing our built-to-order sales. They represented 44% of our net orders in October, growing each month through the first quarter. We exited February at 68%. And in the early weeks of March, we are now above 70%. Built-to-order homes typically generate between 300 and 500 basis points of incremental gross margins compared to inventory homes and as a result, have a greater percentage of BTO deliveries will drive higher margins -- having a greater percentage of BTO deliveries will drive higher margins. As we increase our mix of built-to-order homes, we are building a solid backlog, a solid sold backlog that has not yet started construction. This backlog provides greater visibility into future deliveries and revenues, improves efficiency in our starts and production processes and gives our trade partners clearer line of sight into their upcoming workloads. In turn, this predictability supports better execution and over time, contributes to more favorable cost structures. We can leverage the pending starts into more favorable bids and keep our trade partners on our job sites, which is more efficient and further improves build times. Internally, our cost structure benefits from managing the even flow production. With the makeup of our net orders in the first quarter, together with our expectations for BTO sales in the second quarter, we anticipate reaching a turning point in the second quarter in growing our backlog relative to the prior year period. As a result, we expect to drive sequential increases in deliveries as we move through the back half of the year. More broadly, we view this as more than just a mix shift. It is a reset back to our core operating model that extends well beyond the current fiscal year results, which will allow us to operate with greater precision, less volatility and stronger alignment among sales, starts and deliveries. It reduces the need for speculative inventory, lowers our exposure to pricing swings and supports more disciplined capital deployment. Over time, we believe this will translate into a more durable and differentiated business, one that is better positioned to generate sustainable margins and returns across cycles. We also expect our deliveries in the second half of this year to reflect a more favorable regional mix with increased contribution from our Northern California businesses. Our communities in these markets have historically had higher ASPs and higher margins. More of these community between now and with deliveries projected in the third and fourth quarters and beyond, we expect to see the benefits in our financial results. Finally, with greater delivery volumes at higher ASPs in the second half of the year, we expect to regain operating leverage on the fixed cost component of our gross margin. Our ability to build homes more efficiently continues to be strong. We had already achieved our company-wide target of 120 days from home start to completion on built-to-order homes in the fourth quarter of fiscal 2025, yet we further improved in this critical area in the first quarter, with a sequential decrease to 108 days. This is an important factor in the value proposition of a BTO home from a customer standpoint relative to the time it takes to purchase a resale or an inventory home. Shorter build times also allow our customers to lock their mortgage rates more easily and cost efficiently. In reducing our build times, we have now meaningfully expanded our selling window within the year. Last year, it took us about 5 months to build a home, which meant early spring was the latest we could sell BTO homes for same-year delivery. Today, with build times closer to 3.5 months, we can continue selling BTO homes for same-year delivery into the summer. The result is simple. More of what we sell this year turns into deliveries and revenues by year-end, which improves both our volume and cash flow. We ended the first quarter with 276 active communities, the highest count we have had in many years, up 8% year-over-year. We achieved 37 grand openings in the first quarter, in line with our target, and project another 30 to 35 community openings in our second quarter. These new communities will contribute to a peak for community count sometime within our second quarter at the height of the spring selling season. With more communities, we are positioned to drive more sales and our new communities typically sell at a stronger initial absorption pace, benefiting from the newness and excitement of grand openings and supported by our disciplined community opening process. As we look beyond the second quarter, depending on the pace of sellouts, we expect the community count to step down somewhat in the second half of the year. Our production is in better balance today with a total of 3,353 homes in process, split between 70% sold and 30% unsold. This balance aligns with our expectation to increase our BTO deliveries to at least 70% of our total in the second half of this year. As to direct costs, we continue to benefit from lower trade labor expense in most markets, but there is some pressure on material costs from lumber. We are managing our lumber locks strategically and drawing on our deep supplier relationships to limit cost increases while also continuing to actively rebid our local and national contracts as well as value engineer our products and simplify our studio offerings to help manage our overall direct cost. Before I wrap up, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home Loans. Our capture rate remained high with 81% of buyers who finance their homes in the first quarter using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 16% was fairly steady as compared to prior quarters, and equated to over $72,000. On average, the household income of customers who use KBHS was about $133,000 and they had a FICO score of 743. Even with 1/2 of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or pay in cash. 11% of our deliveries in the first quarter were to all-cash buyers. In conclusion, we continue to navigate market conditions with a focus on strong operational execution and disciplined adherence to our built-to-order model to drive results. We are confident that our personalized product offerings and transparent pricing approach are compelling for our buyers. Further, with an increasing number of communities in attractive submarkets set to open in our second quarter, and expected higher percentage of BTO deliveries as well as an anticipated regional mix weighted towards higher ASP, higher margin Northern California deliveries later this year, we believe we are well positioned for stronger results in the second half of fiscal 2026. And finally, as we continue to align our overhead to our delivery volume, we have taken steps to reduce our cost, including an unfortunate but necessary 10% year-over-year headcount reduction. While it takes a little time to see the impact of these measures in our financial results and our SG&A ratio is also a function of our revenue level, we do expect this ratio to be lower in the second half of 2026 as well. And with that, I will turn the call back to Jeff. Jeffrey Mezger: Thanks, Rob. We have a favorable lot position owning or controlling over 63,000 lots at the end of our first quarter, 41% of which were controlled. Our growth strategy remains primarily centered on expanding our share within our existing markets with the geographic footprint that we believe is positioned for long-term economic and demographic growth. Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested about $560 million in land acquisition and development in the first quarter with roughly 60% of our investment going toward developing land we already own. In closing, I want to thank our entire KB Home team for their commitment to serving our homebuyers and the discipline with which they've been executing our built-to-order model, which we believe will result in a stronger company going forward. Although market conditions remain challenging, we are focused on the appropriate levers to drive improved results, renewing our focus on built-to-order, reducing our build times, lowering our costs, opening new communities and staying balanced in our capital allocation. We plan to continue our share repurchase program in fiscal 2026 with between $50 million and $100 million of repurchases plan for our second quarter. Following the end of the spring selling season, we expect to have more clarity on our year. As a result, we anticipate providing margin guidance with our 2026 second quarter earnings announcement in June. We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. Now I'll turn the call over to Rob Dillard for the financial review. Robert Dillard: Thanks, Jeff. I'm pleased to report on the first quarter fiscal 2026 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market maintaining a healthy pace and delivering our built-to-order advantage. We expect that this strategy of providing a personalized home that the customer prefers will also benefit our financial performance as we shift the delivery mix towards higher-margin built-to-order homes in 2026 and beyond. In the first quarter of fiscal 2026, we were within our guidance range with total revenues of $1.08 billion and housing revenues of $1.07 billion, a 23% decrease on a year-over-year basis. We delivered 2,370 homes in the quarter. This result was near the midpoint of our guidance range as we continue to experience moderate demand from a cautious consumer. Deliveries benefited from a 22% reduction in build times for built-to-order homes to 108 days, a 9% sequential reduction. Lower build times increase capital efficiency and benefit volume, as Rob discussed. Average selling price declined 10% to $452,000 due to regional and product mix and general market conditions. Average selling price declined 3% sequentially due primarily to regional mix. Housing gross profit margin was 15.3% and adjusted housing gross profit margin, which excludes $2.2 million of inventory-related charges, was 15.5%. Adjusted housing gross profit margin was 480 basis points lower, primarily due to pricing pressure, higher relative land costs, regional mix and lower operating leverage. We continue to manage cost effectively and achieved an 8% reduction in total direct construction costs per unit. SG&A as a percent of housing revenue increased to 12.2% as lower costs were offset by a decrease in operating leverage. SG&A expense decreased 14% due to reduced selling expenses associated with lower unit volume and fixed cost controls. SG&A benefited from a favorable impact of an $8 million insurance recovery. While such recoveries occur from time to time, the absolute size and relative impact of this quarter's recovery was greater than usual. Homebuilding operating income for the first quarter decreased to $33 million or 3.1% of homebuilding revenues. Net income was $33 million or $0.52 per diluted share benefiting from a 13% reduction in our weighted average diluted shares outstanding. Turning now to our guidance. Our guidance for the second quarter and full year 2026 reflects the current uncertainty of the new home market, which we believe has been impacted by affordability concerns and recent geopolitical tensions. We continue to focus on controlling the controllables and have improved our operations with lower build times and lower costs. We believe that this operational improvement, combined with our strategy to shift to a higher mix of built-to-order homes will further benefit our financial results in the second half of 2026 and beyond, as Rob detailed in his comments. In the second quarter of 2026, we expect to generate housing revenues between $1.05 billion and $1.15 billion, based on expected deliveries of between 2,250 and 2,450 homes. Housing gross profit margin, assuming no inventory-related charges, is expected to be between 15% and 15.6% for the second quarter of 2026. Price will continue to be the primary driver for margin pressure as we balance price and pace for the remainder of the year. Margins are expected to be impacted by higher relative land costs, regional mix, and reduced operating leverage as deliveries are expected to remain below prior year levels. We expect to continue to partially offset this margin pressure with lower direct construction costs per unit. We continue to expect margins to improve in the second half of 2026, driven largely by positive operating leverage from typical seasonality and a more favorable regional mix with a shift to higher-priced, higher-margin West Coast communities as well as our strategy to increase the mix of built-to-order homes delivered. The second quarter 2026 SG&A ratio is expected to be between 12.4% and 13% due to expected reduced operating leverage despite cost controls. We had solid results, reducing both fixed cost and direct construction costs in the first quarter, and we expect this to continue in the remainder period of 2026. We expect our SG&A ratio to decline in the second half of the year due to lower fixed costs and increased volume. Our effective tax rate for the second quarter is expected to be approximately 19%. The tax rate is expected to trend higher in the second half of 2026 due to reduced impact of energy credits. For the full year 2026, we expect housing revenues of between $4.8 billion and $5.5 billion based on between 10,000 and 11,500 deliveries. This full year guidance is based on current market conditions. We anticipate refining full year guidance and providing additional details as we gain further clarity on the spring selling season. Turning now to the balance sheet. We continue to manage our capital with discipline. With a dual focus on funding growth and returning excess capital to shareholders with over $5.7 billion in inventories, a 1% sequential increase, we believe that we are well positioned to fund growth in the near and long term. We own our control over 63,000 lots, including approximately 26,000 lots that we have the option to purchase. We continue to invest in growth, as indicated by the $567 million we invested in land and development, while also exercising discipline through our rigorous underwriting standards, that resulted in abandoning contracts to purchase 3,400 lots at a cost of $2.2 million. We believe that this rigorous land process has improved the quality of our land inventory and will benefit future profitability. We're confident that we'll continue to identify and execute land opportunities, matching our consistent cash flow and considerable liquidity. At quarter end, we had total liquidity of $1.2 billion, consisting of $201 million in cash and $1 billion available under our $1.2 billion revolving credit facility. As with last year, the $200 million in utilization of our revolving credit facility is seasonal in nature. We have no debt maturities until June of 2027. We will continue to be thoughtful in managing our capital structure to ensure we capitalize on favorable market conditions to refinance any maturities. We continue to target a debt-to-capital ratio in the neighborhood of 30% to support our strong BB positive credit rating. We are comfortable with our current 32.9% ratio. Our strong balance sheet, combined with the returns from our operations has enabled us to return over $1.9 billion to shareholders in the form of dividends and share repurchases in the past 4.5 years. In this period, we have repurchased 37% of our shares outstanding, which we believe is the highest percentage of shares repurchased during this time among our peer companies. Returning capital remains a core part of our focus on delivering strong total shareholder returns in all market conditions. In the first quarter, we paid $17 million in dividends, representing a 1.8% yield, and we repurchased 843,000 shares for a return of capital of $50 million. We ended the quarter with $850 million available under our current repurchase authorization. We expect to repurchase between $50 million and $100 million of common stock in the second quarter. As we look ahead, our strategy is to enhance our results through increased operating rigor as we shift our delivery mix towards higher-margin built-to-order homes. We believe that this operating strategy when combined with our shareholder-focused capital strategy will maximize shareholder value over the long term. With that, we'll now take your questions. John, would you please open the line. Operator: [Operator Instructions] And the first question comes from the line of Matthew Bouley with Barclays. Matthew Bouley: So first, I guess based on the numbers you gave around inventory homes, it seems like the built-to-order orders really improved kind of beyond what you get just from cutting spec starts. So my question is, obviously, we talk about the sort of gross margin benefit, that's pretty clear. But when you talk about mixing the business back to built-to-order, maybe this will be a preview of your Investor Day a little bit. But what does that kind of more full and visible backlog do for your sales folks, your operators, what changes around your thought process on production and starts? Just any more color on why the business overall runs better relative to spec production. Rob McGibney: Sure. Matthew, thanks for the question. When we look at our built-to-order business, as I mentioned in my prepared remarks, it's really part of our DNA. It's how we set up things. It's how we look at the world, it's how we train our salespeople. So we're not surprised to see the shift to built-to-order. And part of it is just we haven't been starting the specs so we're not competing with ourselves in our own communities with both heavy spec load as well as build-to-order. But the benefits that it provides to the business in predictability. The first place I would go is that we've got this backlog of sold not started homes that we can leverage that gives us a cadence where we can operate on even flow production. That benefits all across the board, whether that's on our fixed cost or just managing to a consistent level of construction in our communities. Plus we can use that cash, if you will, of homes that we have sold not started because it also gives our trade partners visibility. And most of the markets that we're operating in right now, we're seeing starts are down pretty significantly year-over-year, and there are trade partners that are hungry for work. So that's the first place that we point to with this guaranteed sequence of starts that's coming up. You mentioned it, but one of the obvious ones is the big margin, incremental margin that we see within the same community, selling built-to-order versus the inventory. And from a customer's perspective, our view, my view is that we're creating something different. And it's not just treating a home like a commodity or a widget, where people take what's out there and available, but they're getting to create their own personal value by picking their lot, picking their floor plan, picking their elevation, going through the design studio process and really making that home their own and designing it to fit their needs and their lifestyle and fit their budget as well. Matthew Bouley: Okay. Got it. No, that's super helpful. Second one, just kind of jumping into the guide. So mean you talked about, I guess, removing roughly 1,000 deliveries from the full year guide. Q1 orders were up year-over-year. I know you mentioned that it wasn't the level you needed to hold on to the guide. What I'm trying to get at is, I guess, was that Q1 order number, the entire driver of the guidance change? Or is this -- should we also think you're trying to reflect any more recent shifts in the market in March or any other changes on kind of the progression towards built-to-order. Anything else that's kind of changed relative to when you gave this guidance in January? Rob McGibney: Yes. It's really the combo of the things that you mentioned. Part of it is the orders. Our orders while was a positive year-over-year comp, and we're pleased with the transition to more BTO sales, they were below our internal expectations that we had and how we built the plan for the year. As we get into the early part of March, there's a lot of noise out there. And we mentioned in our prepared remarks, this conflict in the Middle East that started right at the end of February. And we saw pretty good sales results in the first week of March. But the last couple of weeks have been a little softer than what we would like to see or what we normally get this time of year. And we just don't have a lot of visibility right now as I don't think anybody does into how long this conflict may go on, and how it's going to impact consumer psyche and confidence. But we feel that right now, it's weighing on the consumer. So those are really the 2 reasons why we adjusted the guide and provided a little wider range than we normally would for full year deliveries and revenue because of the lack of visibility we got into the short-term kind of acute nature of the market right now. Operator: And the next question will come from the line of John Lovallo with UBS. Matthew Johnson: This is actually Matt Johnson on for John. I appreciate the time. I guess, first, if we could just talk about gross margin a little bit. If I recall, I think last quarter, you guys had expected 1Q to be the low point for the year on gross margin. Now it looks like at the midpoint of your outlook, you're expecting 2Q to be down from 1Q. So can you guys just give us some more color on what's driving that kind of -- what's giving you guys confidence that margin will, in fact, ramp from 2Q to 3Q? And then just if you guys could give us some numbers, I think you gave some numbers on the mix of BTO versus spec orders, but if you give some numbers around the mix of BTO for spec deliveries in 1Q versus 2Q, that would be great. Robert Dillard: Yes. As we thought about the sequential mix on where gross profit is going to go, I think that we think it's actually relatively flat as we're guiding to a range, we're putting a range out there that we feel comfortable with. I think that if you think about the drivers individually between quarters sequentially, we don't expect meaningful changes in price, but we do expect to continue to get some delivery cost reductions. So I think there should also be some mix factor in there that's going to be driving it down before we see the ramp. As you think about the second half of the year, it's something that we've been talking about in the past, the shift of ETO should accumulate to an increase in gross profit margin. We do expect some seasonal unit uplift that we would -- that we've kind of -- that's implicit in the guide, that should have some uplift in margins. And then also further cost reduction should have a benefit as well. So it's really those 3 factors that we think are going to benefit the margins as we go through the year. We have pretty confidence in that because we're selling the houses now and marketing the houses now. And that's one of the benefits of the model is that we know the margins of the BTO house before we build it, whereas with the spec, you kind of never know until it's done. Rob McGibney: I'd add to that as we look out towards the back half of the year, I mentioned it in my prepared remarks, that we have a lot of things that are just structurally different that we see that are going to lift margins. And Rob mentioned the shift to BTO, leverage on fixed with greater scale. But a big one that I mentioned is the shift or the transition back to a bigger, better business in Northern California. So as we look to the back half of the year, we're getting deliveries from communities, from stores that are open in Northern California today that have a much higher ASP and have very healthy margins. And as those become deliveries, some of these average selling prices are between $1.2 million to over $2 million. So it has a big impact on the overall company margins, and we see that happening today. If you think about Northern California, we've gone through a little bit of a trough here with communities over the last couple of years. It used to be one of our biggest, most profitable businesses. And in that area of the country, it takes a really long time to bring lots to market. So we've been working on these things for years. They're finally here, we're delivering, and we like what we see, and it's going to provide a real tailwind for margins on the back half of this year. Matthew Johnson: Yes. That all makes a lot of sense. I appreciate all the color there. I guess then if I could just follow up on the direct costs, specifically, I think you guys said they were down 8% year-over-year, which is really strong, obviously, although it sounded like there are some puts and takes within that. So I guess if you guys could just talk a little bit more about the impact from materials versus labor within that? And then just any -- obviously, it's early days here, but any disruption from what's going on in the Middle East, just broader supply chain kind of what you're hearing from your suppliers in terms of potential price or availability impacts there? Rob McGibney: Yes. Overall, you noted the number year-over-year. We've made good progress with the things that we can control and value engineering our products and rebidding and renegotiating, reworking our national contracts. So that's all structural and will stand. Lumber has started to tick up here recently, and we've got various locks in a lumber strategy where we have different lock periods for different divisions. And there's potentially some tailwind or headwind coming from that as we relock some of these depending on what happens with lumber. But we think that our strategy is sound there, and I don't think that it's going to be a significant impact and likely it may just be an offset to further direct cost reductions that we'd otherwise be able to go out and get and achieve. As far as the impact from the situation in the Middle East, it's just really difficult to tell. With oil prices being higher, certainly, that can bleed into land development and vertical construction. And then a lot of the products that go into a home, there's petroleum that's involved in those products at some point. So potential cost increases there, we're hopeful that we can continue to offset that with some of the proactive things that we're doing, but it really is a total unknown at this point. We haven't seen it yet. It hasn't showed up yet in our cost. Operator: And the next question comes from the line of Stephen Kim with Evercore ISI. Stephen Kim: Yes, the move to BTO is very clear. It's obvious that there's some margin benefits there. With it, though, you're probably also going to see, you would think, slower backlog turns and maybe a temporary drag on cash flow. I'm trying to get a sense for what we should be thinking in terms of a going forward backlog turnover ratio in 2017 to 2019, pre-COVID, you were kind of running at like your exit rate of the year, your fourth quarter, which usually was your highest, was like kind of in the low 60s. I'm wondering, is that like kind of a reasonable level that we should be thinking about for the business to kind of return back to that kind of a level? Or do you think you can do better than that? I noticed you said your build time was like 3.5 months, that would imply a backlog turnover ratio of like 86%. So I mean just some guidance here or some color would be really helpful. Rob McGibney: We don't really think about the business that way. But I think somewhere between that 60% number and the 80% number is probably where we'll fall. The backlog turn that we've had has kind of been a false read versus what our typical business is because we're going into a quarter, and we may have 500, 600, 700 sales -- same-quarter sales and closings of inventory turn that weren't in that beginning backlog number. So it's pumping up that ratio. With our build times where we've got them, and we build the plan from the ground up when we do our quarterly and full year plans. And we're banking on the cycle time improvements, the build time improvements that we've gotten so far. But I think 70% -- 60% to 70% is probably a good target. Yes. Jeffrey Mezger: Steve, just to clarify one other thing. Our built-to-order approach is actually better with cash. If you think about carrying a couple of thousand spec homes that you have to sell and close, they're fully loaded and all the cash is out, and we're setting this up where it's real-time deliveries, the home gets completed, the loan is approved and the buyer goes and close. So it's actually better cash management. If you can just roll through the WIP sold at the percentage we're targeting. Stephen Kim: Got you, okay. That's really helpful. Then another side effect of moving to more BTO is that it potentially exposes you to higher cancellation rates. I know cancellation rates are super low this quarter. And it's -- one of the things I've been thinking about is that your customer deposits as a percentage of ASP are about 2%, which is pretty low even relative to other built-to-order builders, and I know you've traditionally run with some lower customer deposits than other builders. And I'm curious if you could sort of talk about why that is, why you adopt that as part of your strategy? And is that something that you might change going forward? Rob McGibney: Steve, I'd say it's something that we always evaluate, and we might change going forward depending on market conditions. When market conditions are really strong, it's easier to command a higher deposit. But today, with the way things stand, we don't want to let that deposit upfront be a major obstacle to somebody purchasing their home. And my view on it is that when somebody comes in and buys the personalized home and they go through that process that I described earlier, and they're creating their own personal value that's unique to them. That's as much of a hook is getting them to stay in the deal as the deposit is. So we don't anticipate that we're going to have real issue of cancellations. The backlog quality that we've got, the buyer profile is very healthy. They're creating their own value in their home. And we feel good about how we're positioned with that. Operator: And the next question comes from the line of Michael Rehaut with JPMorgan. Michael Rehaut: I wanted to first just revisit kind of the first quarter and March to date sales trends, which was obviously behind the guidance reduction? And also just better understand, if possible, how the year-over-year sales pace trended throughout the first quarter in terms of December, January, February? And if there's any incremental color in terms of at least on a year-over-year basis, how that kind of played into March. Rob McGibney: Sure. Our sales cadence or the order cadence progressed generally as we would expect seasonally, really improving each week as the quarter unfolded. And so we mentioned we delivered 3.5 sales per community for the quarter. And December was a slower start for us and put us behind on our year-over-year comp. Then we saw solid momentum through January and February and ultimately finished the quarter up 3% year-over-year. As to March, as I said, the last couple of weeks of March have been a little softer than we would have liked. And this conflict in the Middle East, I think, which kicked off right at the end of February, beginning of March, there's clearly some near-term pressure on the consumer psyche from that. And that's one of the things that's limiting some of the visibility in the short term. But as I mentioned before, we just -- we don't know how long that's going to go, or how long this will weigh on the consumer, but we've reflected that in, I think, appropriately in our guidance by taking a more measured approach with that, including a wider full year revenue and delivery range than we normally provide at this point. Michael Rehaut: Okay. That's helpful. I appreciate that. And I guess, secondly, with regards to the gross margin outlook for the back half. I know you talked about ASPs and the mix benefiting from California, more California in the back half of the year. I think it would be extremely helpful if there's any way to kind of size or give any type of rough degree of magnitude or range, 50 bps, 100 bps, 200 bps, however you want to characterize it, but any way to quantify perhaps the degree of magnitude of improvement that you're expecting in 3Q and 4Q gross margins relative to your 2Q guide. I think it would be very, very helpful for people to try and get their arms around, modeling and trying to anticipate what level of improvement you're thinking of at this point? Robert Dillard: Yes, Michael, there's a couple of key factors that we're thinking about that have been driving that second half margin uplift that are giving us a lot of confidence. The first one that we've talked about in the past is the BTO shift. And if you can just do the rough math around increasing BTO mix from where it is today to around 70% and then the 300 to 500 basis point differential in the margin there that equates to about 50 basis points of margin uplift as you get to that BTO mix and where we're targeting. Further, we've got regional mix in there, which is relatively meaningful. The difference in gross profit and some of those higher-margin communities can be as much as 1,000 basis points, and it's something that will have a meaningful impact just on that with the price. So things that you should consider there is that there will be a shift in the ASP that's just associated with mix, and there will be a shift in the profitability that's just associated with mix as well. Other factors are the reducing cost and then the uplift in units, which could have -- we're not really calling that, and that's the component that we're still thinking about, but that's anywhere historically in the range of 0 to 100 basis points. Operator: And the next question comes from the line of Alan Ratner with Zelman & Associates. Alan Ratner: Thanks for all the details so far. First, just on the pricing side and the strategy. Obviously, with the shift to BTO, I know you've also been focused on more of a base price model as opposed to a heavy incentive model. I'm just curious, as you look at your portfolio, obviously, there's uncertainty in the market and maybe there might need to be adjustments on the pricing side. What have you seen over the last month or 2 in terms of pricing at your communities? Do you feel like you've hit that point of where pricing has stabilized. I know you mentioned orders were a little bit below your expectations for the quarter. So are you still seeing a meaningful percentage of your communities where pricing is still drifting lower? Rob McGibney: Alan, as I always say, it's really a community-by-community story. Overall, pretty stable. About 70% of our communities during Q1 either had no change, or they had some level of small price increases. They were outpacing what our optimal projections are. We did have still about 30% of our communities where we've moved price down further and different degrees, depending on the community as we just work to find the market and optimize that asset. So changes from quarter-to-quarter. But again, that is a community-by-community focus, it changes, not just on a metro level, but a submarket level and then down to within the community, and degree of change, it can be anywhere from -- it might be a $2,000 change, or it might be $10,000 change. But we're making these incremental movements to try to hit the optimal pace to get the best return result out of each community. Alan Ratner: Got it. Okay. That's helpful. And then second, on your backlog, which is obviously growing here. I'm curious how you're thinking about the risk of higher rates now that rates are beginning to creep up again. And I guess what I'm trying to get at is, if you go back a couple of years ago, obviously, when rates surged, people that enter the contract expecting to close at a certain mortgage rate. You either had difficulty qualifying at that higher rate, or simply didn't want to move forward at that higher rate. And I know you're trying to get away from incentives and rate buydowns, but how are you thinking about the folks that might have written contracts over the last month or 2 when rates were 25, 30, 40, even 50 basis points lower than they are today. Is there a risk there? Are you working with those buyers to lock in a rate or a buy down a rate if necessary to get them to qualify. Just curious how you're thinking about that if rates do continue to move higher here? Rob McGibney: Yes, it's a good question. I'd say if you go back to what you were drawing the comparison to before in different markets, one of the things that was challenging for us there is the way that build times had expanded. And when you're getting up to 8 or 9 months from sale to close, you're exposed to a lot of rate volatility in that time period. And now that we're building in 108 days, we've got less time exposure there. Certainly, with rates being as volatile as they have been over the last couple of weeks, there's some exposure to a limited number of the homes that we've got in backlog. But generally, we're trying to get the buyers locked in with a loan before that home starts at least, if not before. So it's limited exposure to a subset of houses that we have in backlog, mostly in our sold not started yet universe. And if we need to and find that we have to, we're not so rigid on the no incentive approach that we're not willing to help out and do something to buy that rate down to keep that buyer basically in the same position. But it's something that we'll evaluate as we go. And rates have been bouncing around wildly from day to day. So when we hit the low spots, we're going to work to lock as many buyers as we can. Operator: And the next question comes from the line of Susan Maklari with Goldman Sachs. Susan Maklari: My first question is on the SG&A. You mentioned that you did some head count reductions. Can you talk about how comfortable you are with where the business is running today, and how we should think about that potential benefit and the flow-through of that coming in over the upcoming quarters? Rob McGibney: Well, Susan, I would say that the adjustments that we made were to adjust to the new reality of what our deliveries and our revenue and our production levels are. So as we look ahead, if the market were to improve and volumes go back up, I think there's some structural change in there that we'll be able to get the benefit of. But the moves that we've really made on headcount and other fixed cost changes are to rebalance and reposition things with where we now think revenues are headed for the year. Susan Maklari: Okay. All right. And then turning to land, can you just talk a bit about what you're seeing there? Has there been any adjustment on the land market? And what you're watching for to potentially start to ramp up some of your spend on that side? Rob McGibney: So we're still in the land market. We're searching every day for the right deals that fit our profile and that fit the return hurdles that we believe that we need to drive profitable growth over time. It's been a little more challenging on the land front to drive a lot of deal flow because the market has been pretty sticky with price. And there's patient land sellers that generally have not adjusted to the new reality of what's happened with sales prices and demand over the last year or so. As we look at our existing portfolio of deals or deals that we have under contract to purchase, we're having success with landowners in renegotiating terms. That's generally been the easiest thing to renegotiate, which is helpful on the financial side of things, too, because often, that means we're doing a structured takedown instead of a bulk purchase, or we're able to kick out the closing to tie back close of escrow on the land much closer to when we can start turning dirt in development of the lots or in some cases, actually going vertical on the houses. But overall, I think there's still some adjustment that's got to happen in the land market, to reduce the gap between the bid and the ask. At the same time, there are still sellers out there that have adjusted. And that's what we're really focused on is building up our portfolio with new deals that fit our return hurdles today based on current conditions and current pricing and costs. Operator: And the next question comes from the line of Mike Dahl with RBC Capital Markets. Stephen Mea: You've actually got Stephen Mea on for Mike Dahl today. I was hoping to dive more into the BTO versus inventory dynamic. The messaging of BTO typically being like 300 to 500 bps above inventory isn't really helpful. But I was hoping you could impact how this dynamic has been rolling through your most recent orders given all the adjustments to the base price you've had to make in all directions given the choppiness of the market but are you trending on like higher end, lower end, or is there any sort of potential expansion or shrinking of this delta like embedded within your outlook? Rob McGibney: Are you referring to the margin difference or the percentage of sales? Stephen Mea: The margin difference. Rob McGibney: I would say that, that stayed pretty consistent. We're able to -- we've got visibility on that on both the closing side as well as the sales side and haven't seen much of a change there. It's been pretty consistent in that we've got that 300 to 500 basis point delta where built-to-order margins are better than inventory. One of the things that I think we're starting to see now is as we have cleared out some of the inventory, and you don't have as much in a community, and there's buyers for that community that may want or need that quick move in because they've got an apartment lease or something that's coming up. So in communities where we've only got a handful of inventory, and we're primarily selling BTO, there's a little bit less of a reduction in the margin on those inventory sales versus where in the past, we've had quite a few to choose from, both in inventory that's completed as well as build to order. So as we're making this transition to the build-to-order, I think we're definitely getting higher margins on the build-to-order sales, and it will probably help somewhat on the inventory that we do have as well. Stephen Mea: Got it. That's so helpful. And then lastly, just a very broad question, just what you're seeing in your markets at a regional level, if you could speak to any notable pockets of strength and potential areas that are lagging just would be helpful to get a heat check considering all of the choppiness that's out there. Rob McGibney: Sure. Every market's got its own story. And there's places in each metro that are still doing just fine and selling very well, and there's places within the metros that are challenged. But from a regional perspective, we're seeing relative strength on the West Coast, including most of California, Seattle and Boise, Las Vegas continues to perform very well. Texas remains more competitive. Houston has held better with Austin and San Antonio, both grappling with higher inventory and just a very competitive market to secure those customers who are ready to transact. Florida is a little more mixed. Orlando and Jacksonville, I'd say are seeing better demand than Tampa right at the moment. But overall, pricing in Florida, I think, still has stabilized. It's just that the level of demand isn't quite producing the volume that we'd like to see. But every market's got its own story, and each metro has got those communities that are performing well and those that aren't. It appears to be maybe a little bit of a flight to quality with the top submarkets performing better than maybe some of the drive to qualify -- drive to qualified type communities, but that's not the bulk of our business anyway. Operator: And our final question comes from the line of Sam Reid with Wells Fargo. Richard Reid: Actually, I just wanted to confirm your start pace in the first quarter. I can back into that based on your homes in production, but maybe just wanting to confirm the number because I believe the math would imply something less than 1,000 units versus, say, the 1,800 that you started in Q4. And then maybe just piggybacking off of that, how start pace versus sales pace should look as we move through Q2, Q3 and Q4. Rob McGibney: Yes. So we've -- as we've mentioned, we've intentionally been pulling back on the spec starts and matching our starts to our built-to-order sales. So our starts were down, but it was right around 1,800. I believe it was 1,805 in the first quarter. So as we look ahead into Q2, we expect to generate more BTO sales and generate our starts from those sales. And right now, we've got a healthy backlog of homes that haven't started yet that are at the sold not started stage. And that's going to feed our starts over the next couple of months. Richard Reid: That's helpful. And then if it was already covered, I apologize. But maybe could you just give me the final expectation for Q2 on spec versus built-to-order. And any context on what spec versus build-to-order look like on orders for the first quarter? Rob McGibney: I walked through the cadence on that earlier. So I don't know, Rob, if you have the overall average. But we exited February at about 68% BTO. And January and December were slightly below that. But kind of looking at that as the rearview mirror. So as we go forward, we know we left -- we exited February 68%. Early March, we're tracking above 70%, and we think we'll maintain that or get at least 75% as we move through Q2. Operator: Ladies and gentlemen, thank you. That does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines.
Operator: Good morning, and welcome to Cadeler's Third Quarter 2025 Earnings Presentation. Presenting today are Mikkel Gleerup, Chief Executive Officer; and Peter Brogaard, Chief Financial Officer. Please be reminded that presenters' remarks today will include forward-looking statements. Actual results may differ materially from those contemplated. The risks and uncertainties that could cause Cadeler's results to differ materially from today's forward-looking statements include those detailed in Cadeler's annual report on Form 20-F on file with the United States Securities and Exchange Commission. Any forward-looking statements made this morning are based on assumptions as of today, and Cadeler undertakes no obligation to update these statements as a result of new information or future events. This morning's presentation includes both IFRS and certain non-IFRS financial measures. A reconciliation of non-IFRS financial measures to the nearest IFRS equivalent is provided in Cadeler's annual report. The annual report and today's earnings presentation are available on Cadeler's website at cadeler.com/investor. We ask that you please hold all questions until the completion of the formal remarks, at which time in you will be given instructions to the question and answer session. As a reminder, this call is being recorded today. If you have any objections, please disconnect at this time. Mikkel Gleerup, you may begin. Mikkel Gleerup: Thank you very much, and thank you to everyone dialing in to listen to our presentation this morning/afternoon. Yes, I will ask everybody to read through the disclaimer in the presentation. So annual report 2025 and first, taking you through the highlights of 2025. Financial performance in Cadeler in 2025 were above our expectations. We ended at the top end of the range that we guided last year, ending the year with a robust contract backlog of EUR 2.8 billion, which really gives us that earnings visibility into the future that we have been discussing with our investors over the course of the last couple of years. We had 4 newbuilds scheduled for delivery in 2025, and they were all delivered on time and on budget. We added Wind Keeper to the fleet to support Nexra and our partners and really this new O&M service platform. We continued exceptional execution with significant progress made towards the delivering on the Hornsea 3 project. Wind Keeper upgrade successfully completed and multiple campaigns supported with vessel swaps. We have had strong utilization with vessels operating across the world in markets as Europe, U.S. and in APAC. Commercial highlights for the financial year '25. Scylla continued to work in the U.S. on Revolution Wind for Ørsted and have since shifted over to Sunrise Wind. The Wind Orca has been mobilizing for the Hornsea 3 project for Ørsted, where she will be executing the secondary steel scope. On Wind Osprey, we have been mobilizing for the EA3 turbine installation, which is a project we do for ScottishPower Renewables. On Wind Mover, we will shortly be commencing the turbine installation on the Baltic Power project, where she is taking over from another vessel that we previously had working on that project. The Wind Maker stays in Asia. And as we have announced over the course of the last couple of weeks, we'll be executing O&M campaigns for clients in Taiwan this year. Wind Pace came back from the U.S. after having supported the Vineyard Wind project and is also now mobilizing for the EA3 turbine installation project for ScottishPower Renewables. Wind Peak will continue to install turbines on the Sofia project for Siemens Gamesa. The Wind Keeper has been delivered to the client on an up to 5.5-year contract and is currently installing on the He Dreiht project for Vestas. Wind Ally is completing the last phase of the mobilization in Europe in Rotterdam and is preparing to go to the U.K. to start putting in monopiles for Ørsted on the Hornsea 3 project. And the Wind Zaratan project, for her 2026 is a transition year. We have decided to do some upgrades to Wind Zaratan, do some O&M work in Asia and then take the vessel back to Europe to start working both on O&M, but also on support jobs for foundation projects. At a glance, we now stand at 362 office-based employees, more than 800 seafarers. We have now installed more than 1,700 wind turbines, more than 900 foundations, a number that will go up significantly during this year due to the Hornsea 3 project and also have been working on more than 275 locations for operations and maintenance. So all in all, very busy and continuing to grow the business in the industry that is also growing with us. We have been discussing a lot with our investors and other stakeholders in the company, the transition to full scope T&I campaigns for the foundation work. And we have prepared a few slides to go through where we are now on the Hornsea 3 project and where we are as a company on the transition to taking on these full scope T&I campaigns. The company came from a charter-based day rate model where we could add services as requested by the client to now having a more integrated project delivery and construction platform, as we say, it's a solution-based offering to the clients. We have -- we used to have a very compact organization and moderate complexity in the organization, but also in the offerings we were offering to the clients. And now we are going into a much more complexity -- complex environment and really also where the organization has to deliver many different scopes from transport on heavy lift vessels to handling equipment in port, offloading, unloading very, very large pieces of equipment, storing them safely, Q&A on these products while we have them in our custody for the clients. We came from a utilization-driven model with a higher relative percentage margin to an execution driven with a higher absolute return and upside model on the T&I scopes. The vessels in the previous model was the primary revenue stream and where we today see vessels as strategic enablers to capture more scope as we take on these bigger projects for our clients. On Hornsea 3, trying to give you an overview of the time line for the first full T&I scope that we have embarked on. The project was signed in early '23, a very busy year for us signing both that project, but also working on the merger with Eneti, preparing for taking delivery of the vessel, a lot of supplier scopes starting to transport monopiles and secondary steel, starting to install monopiles and secondary steel and then also embarking on installing 50% of the turbines on the project and then commissioning and closing the project somewhere in '27. It is a very, very complicated project and something that we go into with a great deal of humility. But I think that I'm pleased to say that we are exactly where we want to be. And the Wind Ally delivered early, we were able to mobilize her in China directly from the newbuild yard and have taken her successfully back to Europe, finalizing mobilization now in Rotterdam before, as I said, starting to put in monopiles in April this year. Hornsea 3 really requires a lot of coordination. And we are also now experiencing being in the middle of the project, the complexity of the project and also the benefit of having built up the team and having worked close with our clients in terms of what was required to execute this because a project like this never goes to plan, I think it's fair to say. And we have also been met with requirements from our clients to change different things as we have worked since '23 and until today. But I'm pleased to say that we have taken on these challenges with our can-do attitude in the company, and we are exactly where we want to be in terms of being ready to install the project from April of this year. And a total capacity of 2.8 gigawatt when it's installed, 197 monopiles, 60 office-based staff working on it, 120 port and construction staff working out there for us in somewhere where there's a yellow dot on this map. We have 10 vessels in total, 3 from Cadeler working on the project. We are transporting more than 400,000 tonnes of material on the project. We have 10 ports involved and 12-plus partners involved in this. So in all fairness, a very complicated project, but also one where we are learning a lot. We've taken some pictures from the project to also demonstrate the scale of this project because I think it's hard to understand the size of these monopiles. All of them are the same size as the Los Angeles class submarine, and we are installing 197 of those in the U.K. from April this year and until 2027 and into 2027. We have also been working with our client to do a mockup trial of the secondary steel. These foundations are TPless, meaning that they don't have a transition piece on top. And that means that all the secondary steel is being installed by a tool that is being carried on board the Wind Orca that carries storage towers for secondary steel and then she's lifting the secondary steel on board on to the foundation in one lift with this tool. And together with our client, we build a mockup for this, a full-scale mockup in the port where we were able to test this tool and the functionality of this tool before going offshore. And it's been a pleasure to work with our client on these mockups and really refining the whole rehearsal of concept before we go into the actual execution offshore. And we have added some pictures on that as well. As we have been discussing, the changes in the project time line has led to increased, but delayed revenue for the foundation T&I. So Cadeler will earn more money on the Hornsea 3 project compared to what was originally envisaged when we signed the project. Not due to things that have happened on the Cadeler side, so to speak, but because our clients have had to change what they originally anticipated in terms of, for example, monopile delivery, whereas the monopiles coming from. Originally, we expected two fabrication yards, today we are working with four fabrication yards. That all means that we are receiving the monopiles in a different pace, but it also means that the project is stretching over a longer time and that we will be involved with some of the suppliers that we have on the project for a longer time. So what it means is that it's an increased revenue and an increased margin to Cadeler, but the project will stretch over a longer period of time. In terms of our commercial pipeline across the globe, I think I have to say that we are still continuing to grow, and we are still involved in a lot of projects and a lot of bidding on projects globally. Obviously, the European market is really the front runner in terms of new projects that we are working on. And as you can see from this slide, we are working on more than 50-plus open commercial opportunities in the market, and we are discussing projects with our clients, both for '27, '28, '29, 2030, but also well into the next decade, which gives us a very great deal of confidence in the market as such, but also a positive outlook for where we are going as an industry. And I'll come back to that a little bit later in the presentation. Asia continues to perform as well. We see new markets opening in Asia as we progress the ongoing market, which is Taiwan, Korea and Japan. We see also development now in the Philippines, but also development in Australia. And all in all, we are active where our clients want us to be active, and we are continuing to bid for projects in the region -- in a region that I would say is developing as expected. The U.S. market, it is what it is, and we have discussed it many times before. We don't see any short-term opportunities in the U.S. market, but we are still executing in the U.S. market. We sent the Wind Pace back to Europe from completion on Vineyard Wind, and we are now installing with the Scylla on the Sunrise Wind project. All in all, we expect to be busy in the U.S. for the years to come. And also, we are happy to engage with our clients for new projects in the U.S. region when that time is coming. We still sit on a significant backlog. Our backlog year-on-year has grown. We are standing at EUR 2.8 billion in backlog, which, as I said, really provides the earnings visibility that we would expect and also what we have communicated to our clients. We have things also that we are working on here that we have discussed in the market where we are preferred supplier on a foundation project that is not counted in our backlog, and it's also not sitting in our vessel reservation agreements because it has not reached that stage yet. But we still have work that will hit the backlog, and we are sure that in the coming quarters that we will have positive announcements around backlog development. As I said, the backlog stands at EUR 2.8 billion at the moment and 80% of the total backlog has reached FID. And we have discussed that before. And I think that that's really a sign of the quality of the backlog where we know that 80% has already been approved for the final investment decision at the client side, meaning that, that project has also reached a contractual milestone that is important for us. And as I said, we do have a preferred supplier agreement, a sizable preferred supplier agreement. And one of the things that we discussed around our Q3 announcement was that we had some projects in the site that we would like to secure. And one of them is what we have now a preferred supplier agreement on. It's for a significant foundation project in Europe and one of the projects that was important for us for our 2028 campaign. And I'm pleased to say that we have been moving ahead as we expected on that one with our client and that we are also now in the negotiation with the client to make this preferred supply agreement into a real contract. And on '27, '28 that we discussed at length in the Q3 presentation, I'm happy to say that in '27, we consider ourselves fully booked now. We are currently working with the yard to potentially deliver the Wind Apex slightly earlier because we have a client that is ready to take the vessel straight from the yard and into a project, meaning that we are -- with a few white spaces we have left in '27, we do consider that time that we want to keep available for clients should they run into some sort of supply chain issue and really have built a solid '27 for ourselves. In '28, we are also much more positive now than we were in Q3 due to the fact that we have secured the preferred supplier agreement on this large-scale foundation project and overall are seeing positive momentum for the '28 campaign overall. In terms of the progress on the newbuilds, Wind Ace, we are at 94% completion. The naming ceremony for the Wind Ace, the official naming ceremony will be on the 15th of April, and we are looking to deliver the vessel on time. On the Wind Apex, as I said, we are 34% completion, and we are currently discussing with the yard to do up to 1 month early delivery due to the fact that we have a client who would like to take that vessel straight from the yard and into a project for a sizable project on turbine installation. In terms of the progress from the yard, a few pictures as we always have. I think that I can say that on the Cosco shipyard side, things are progressing as planned. Not many surprises there and really pleasing to see that the collaboration we have with Cosco Shipyard continues to develop, and we are very, very pleased to work with Cosco Shipyard, the quality partner for us and for the development of the company. The fully delivered Cadeler fleet as it stands today with an average fleet age of 5 years, which I believe is a very good number to have, and really also shows that we have been building a young fleet that is ready to take on the positive developments of the future. Now, I will hand over to Peter for the financial highlights of 2025. Peter Hansen: Yes. Mikkel Gleerup: Peter Brogaard... Peter Hansen: Thank you very much. Yes, the financial highlights for '25. It was really a strong year seen from a financial and operational point of view. As Mikkel said, we ended in the high end of the range that we have guided revenue of EUR 620 million as compared to EUR 249 million. Equity ratio is now at 44%. It's a decrease as compared to last year. But it's also where we see it bottom out, the equity ratio and starts to increase again. Utilization also very high, 88.9% adjusted utilization as compared to 75% last year. And that is -- the adjustment is where we say, okay, we take out what is planned dry docking and transportation from the yard. We think that is a meaningful number to look at when we get all these new vessels delivered. Market cap of EUR 1.8 billion. EBITDA, EUR 425 million as compared to EUR 126 million last year. Net profit, important number for the shareholders, of course, EUR 280 million as compared to EUR 65 million last year. And as elaborated on a backlog of EUR 2.8 billion. Three months daily average turnover EUR 7.1 million on the stock exchanges. If we first look at the last 3 months of the year, Q4 '25, very, very strong quarter, EUR 167 million in revenue, an increase of EUR 82 million compared to Q4 '25, '24 and with the adjusted utilization of 87% cost of sales is, of course, going up with the delivered vessels. And SG&A also is up because of the ramp-up that we have talked about at previous releases where we build up the organization to be able to manage these foundation projects with increased complexity. Finance net isolated for Q4 is EUR 20 million, and that is a shift you see here in Q4 finances because we have capitalized borrowing cost to a greater extent while we had more vessels under construction. Now that the vessel has been delivered then a bigger part of the finance interest is going to the P&L, and that is something you will see in '26 as well. Of course, it's the same cash outflow, but it's just whether it's in P&L or it is in CapEx. EBITDA, I think very, very strong, EUR 104 million in a quarter where Ally and also Mover were not in operation as such, but in transport to first project. That was Q4 isolated. For the full year, some of the same remarks that we had in Q4, but also what we have seen during the year, it's fair to say everything has played out exact to plan. Revenue in the higher end of the guidance. Cost of sales, everything is as according to plan. SG&A the same. So we are very, very pleased with the financial result for '25, but also the underlying operation where we have control of the important things. EBITDA, EUR 425 million. Vessel OpEx per day is EUR 36.3 million, a small increase towards last year and I think also under control. Headcount onshore average 307. The consolidated balance sheet, now we have an equity of EUR 1.5 billion. an increase of nearly EUR 300 million as compared to last year. And we see the equity ratio of 44%. I think that is something we have all along said that approximately there where we will bottom out. And of course, it's a natural consequence of taking delivery of the vessels where your assets go up and your liabilities also go up correspondingly. We still have a CapEx program now on the Wind Ace and the Wind Apex, these installment with the yard that we show here. We have signed commitment for A Class Wind Ace and we are also having ongoing RCF facility of 148 million. So together with what we expect to raise of financing on the Wind Apex, we are EUR 637 million of total financing. We are in advanced discussion with Apex and are confident that we'll be able to sign that during '26. As you may recall, it's delivered in late Q2 '27. So we have really had the goal of signing a facility -- sign commitment 1 year ahead. So we are not paying unnecessary fees in commitment fees and so forth. Interest from banks are strong. So is it from the ECA. So it will be on similar term as you have seen on previous transactions. Cash, EUR 152 million. And you can see with the A Class payments we have outstanding, that's still a significant cash surplus. This is the financing overview. You can see here that we have the RCF A and B, we have not drawn up fully yet. And since Q3, September, we have signed a Holdco financing, a second one with HSBC and Clifford Capital unsecured loan, EUR 60 million with an accordion of EUR 0 million, and it was made on very similar terms as the original Holdco with HSBC and Standard Chartered. With Apex, I have talked to that, but that is progressing according to plan. We are very confident on that financing. Then there is the outlook for '26. I think what we guide is in revenue, EUR 854 million to EUR 944 million, and EBITDA, EUR 420 million to EUR 510 million. We have put up the comparison here, of course, '25 includes revenue that you are supposed to get in '28, but was postponed and we got termination fees for that. So of course, that should be adjusted for in the comparison, but a very strong outlook for '26. What is important to understand about the outlook in '26 is exactly what Mikkel has talked about earlier in the presentation. First of all, it's a transition year for Wind Zaratan, so isolated on '26, you could argue it is financially a transition year, but it will improve the returns in '27 and onwards. So it's actually a good year for Zaratan as it is an investment year. Wind Ally and Wind Ace will be delivered in Q3 '26, but will not go on any contract and have any contractual revenue in '26 simply because we will sell direct to first projects EA2 North. We have seen in the past that on some of the wind turbine installation vessels that we can do some work before first project, but it's simply not possible on a foundation project. And it's -- again, it's a good sign because the customer wants us to be at the site as early as possible. So we are simply doing everything that we can to arrive as early as possible we can in '27. And then this Hornsea 3, when -- Hornsea you can't look at Hornsea 3 isolated in one year. First of all, it's a project where you have revenue across several years we already had in '24, '25. But as illustrated by the slide, maybe the precent, we now see that the revenue on the project goes up due to changes on the project, not due to Cadeler-speific things, but due to something designed by the developer. But that means for Cadeler, two things. The total project goes up, earnings goes up, but the timing is different. So some is pushed into '27. So when you look at '26 and the outlook, you should also remember that. [indiscernible] evaluating that year. And back to you, Mikkel. Mikkel Gleerup: Thank you, Peter. As this is something that still remains very important between '24 and '25. We are -- we have been working on biofuel -- fuel blending in our fuels, and that has been successfully introduced across the fleet in 2025, together with our clients and our sustainability team. We have developed a new circularity strategy. We have more than 30% women in leadership, and that was achieved in 2025. We have set a new target of 40% women in leadership by 2030, and also on governance, the CSR leadership group established to execute key ESG priorities. In terms of our path to zero, we have set a target of a net zero target in 2035 and a 2030 target of 50% intensity reduction. Obviously, we are going up in intensity in the beginning, and that's largely due to the fact that we are delivering lots of vessels that are still burning fuel. But we have a path towards achieving our targets here, and we have maintained our targets. And it is as -- what is described on this slide, it's adoption of green fuels, it's enabling electrification, optimizing energy consumption, which we believe is one of the big things because really education and training of teams on board and clients is one of the real big savers here. And that is how we will achieve the first part of this journey. Second part of the journey is continuing to enable electrification and again, optimizing the energy consumption. And also as we start to see it, getting the green fuels on board, which will form a larger part in the second part of this journey. At the moment, the reality is that the green fuels are not available to us. So although we have a portion of our fleet on the newbuilds that can burn these green fuel types, we are not able to buy them at the quantity that we need them, and it would more be an R&D project at the moment. So we believe that the second part of the journey will have a greater availability of this fuel type, and that is something that we at least will support that with the demand for these green fuel types when it is available to us. In terms of commercial outlook, which, of course, is important because I think in all honesty, we are coming from a 2025 where we were facing a very negative narrative in general in the industry due to a lot of factors. We are seeing milder winds blowing over the offshore wind space and also continued growth of the industry and the deployment of offshore wind globally. And as we say here, after '28, '29, we expect a very strong growth towards the end of the decade. Europe has been raising the bar and as declared by the North Sea Summit, the 9 member states of the North Sea Summit have declared a target of 15 gigawatts per year outbuild between 2030 and 2040, and we are very, very pleased with a target like that, because that is, in our opinion, how you build a supply chain that you actually set a target what should the supply chain be able to push out per year in this region. And this is not the entire European target. This is for the member states of the Green Sea -- the North Sea Summit, sorry. So in all Europe will be a higher number than this. Outside the fact that there's an annual outbuild target, there's also a financial plan to how to achieve this. And that is also what has been lacking in the more arbitrary targets that were more setting a target for 2040, 2050 in the past. So all in all, we really are pleased with seeing these targets, and we believe that, that's a very strong data point for the future and also for the demand situation for the future. Another very real data point is the U.K. auction round 7, where the U.K. government awarded record volumes. Really, it was 70% above what was expected and the budget went up to 200% of what was the original budget. So also a very strong data point. But another strong data point is that the U.K. auction round 8 has already been shifted forward, so we can expect that already to happen in July 2026. And these are projects that are happening towards the end of this decade and the beginning of the next decade. So already today, we are in dialogue with clients for work that is taking place in '29, 2030, 2031, 2032, 2033 and so on. So that is a very, very positive data point for us. And then we also do see a lot of private capital coming back into offshore wind, Apollo committing USD 6.5 billion to acquire 50% of Hornsea 3 and KKR forming a joint venture with RWE for offshore wind projects, and there are many, many other examples of this. Altogether, strong growth in the space and in the industry. And as we have said, a much better feeling about the '28 situation for Cadeler, although we still recognize that for the industry, '28 for some can be a difficult year, then we say today that we have a much better feeling about 2028. We still believe that there will be an undersupply of capable vessels in the market, and that will start in '29, 2030. We believe that, in particular, on the foundation side to begin with, of course, because they go in first and then secondly, on the VTG side. It happens for a multitude of different reasons. It's efficiencies. It's the efficiency on the larger turbines. It's the more complicated projects. It's the raw efficiencies in terms of how many turbines and foundations these vessels can transit with, but it's also the fact that there are a lot of vessels that are reaching the end of the useful life in the beginning of the next decade. So vessels that are counted today because they, in theory, can install a turbine, they will not be counted after the beginning of the 2030 because simply they are falling out because they are coming to end of useful life. As the fleet stand today, Cadeler still sits on the largest fleet in the world, and we believe we have the most versatile fleet of really the Tier 1 assets that can support our clients with the targets they have for continued outbuild of offshore wind. We have also decided to distribute this slightly different and first look at which vessels do we believe are able to efficiently install 15-megawatt turbines, and the picture looks somewhat different here. And with the targets that are being set in the North Sea Summit by European government, by Asian governments at the moment, then we believe that there is still a significant undersupply as we come into the next decade of the capable vessels that will always be chosen first by the clients. And if we look on the foundation side, the picture is even more problematic if we want to deliver the targets that are currently being set and also backed up by auctions in many different countries around the world. A few words on Nexra, our business platform for the aftermarket services in offshore wind. We believe that the O&M market will continue to demand -- the demand increase will continue to grow, and we believe that the market is shifting towards long-term agreements. We have seen that with our agreement on Wind Keeper with Vestas, and I think there are other examples in the market as well. So we believe that the whole O&M story and strategy for Cadeler is an important strategy because it will create a longer and more transparent revenue stream on part of the fleet and also it will be able to generate utilization on the installation fleet if there are small gaps between installation projects. And that is important because we have always talked about the importance of keeping a high utilization. And hence, that is something that we really believe is a strong advocate for the whole development of the Nexra business platform. We also believe that Nexra will grow as a business and also at some point in time, potentially even be a bigger business than the installation business, but that is in the years out in the future. But of course, every time we install a turbine, the whole ecosystem for turbines installed grows, meaning that there are more work to do for the Nexra platform to service our clients with -- as it stands today, mainly -- the main component exchanges that we do from a jack-up. In terms of the development of Nexra and an update on that, I think that we saw it and have always seen it as a very strong market, a market that can stand on its own 2 feet, a market that is profitable and it's also a diversification of income streams for Cadeler. We signed the first contract for an O&M campaign in Taiwan and showing that when a vessel is sitting in a region that is complicated to transit back to, for example, Europe from, then you can do these O&M campaigns in the spot market and still upkeep a very healthy financial year for the asset. And I think that, that is something that is important because after this, we have also announced another project yesterday morning in the same region for the same vessel. There's a dedicated team for Nexra today, we are continuing to build the team. I think that it's also fair to say that we get positive feedback from our clients and the fact that we are now having a dedicated team to discuss aftermarket services with them because they have dedicated teams to handle that part of the value chain for them. We believe that as we grow, we will also be better at understanding the needs and the execution requirements and really a very, very strong mandate from all over this company here and from top to bottom to grow Nexra into the strength vehicle we believe it can be. We did strategic fleet expansion in Nexra last year with the acquisition of Wind Keeper, we believe that we did a very, very strong deal and executed very, very fast on this, but also was able to pin a contract -- a commercial contract to that vessel very, very soon after the acquisition of the asset. We took the vessel back to Europe. We did the modification to the vessel that we believe was necessary, and we are now working with the client on a project with the vessel and very pleased to see that. And O&M services in 2025 forms around 1/5 of our total revenues, and that also shows the significance of what we already are doing in O&M. Continuing the growth journey, as we have said, we are in an industry that growth and as we're also saying to you today, we are more positive and have a very positive and optimistic view about the years out in the future. And that is also why that we are looking at continuing the story of Cadeler. We evaluate opportunities to expand into attractive and synergetic systems -- segments, sorry, like, for example, the strategic O&M offering. We are open to both organic and nonorganic growth. We believe that scaling the organization and have a bigger, more versatile, more flexible offering to our client is something that the client is willing to pay a premium for and something that will also secure that Cadeler will always take more than our proportional share of projects in the industry simply due to the derisking of our clients' projects that we can provide. In terms of regional expansion, we are where our clients want us to be, and we are working with the projects that we believe in and the projects that we believe will go from development to FID and to finally execution. That is how we look at it. That's how we have always looked at it, and that's how we'll continue to look at it. We are monitoring and applying new technologies, and we believe that efficiency still will be driving a lot of the value in the industry and also a lot of the sustainability in the industry. So we are very open to discussing efficiency gains with our clients. And we are also willing to do our part in what was the North Sea Summit, which was really trying to make a more competitive offshore wind industry by being more efficient with what we do. And we believe that, that is definitely something we can do if we work together in the whole value chain. And then strategic partnerships have been one of the foundation and one of the pillars that Cadeler is standing on really making sure that we are developing structure -- strategy to strengthen our key strategic partnerships with our clients, including the long-term agreement that we believe is out there and also doing the scopes with the clients that, that they are asking for. So really trying to understand, be early with our clients, trying to understand what it is that they require from us and then be able to deliver that quality-wise and safety-wise when they need it. That is very important. In terms of key investment highlights, largest and most capable and versatile fleet. We believe that, that means redundancy for our clients. And as I already said, that is something that our clients are willing to pay a premium for and also what we believe will secure a more than proportional share of market to Cadeler. We believe that strong relationships and partnerships and our industry-leading position is also something that will be continuing to support the whole growth of the company. We have global reach and experience. We have worked in all key markets, and we are happy to continue to work in all key markets if our clients want us to do so. We believe there's a structural undersupply and an increasing market demand, and we are already starting to see signs of very, very, very strong demand as we move into the next decade. We have a strong track record and backlog, and we are very, very much looking forward to continue to work with our clients in the future. With that said, I think that we are moving into Q&A. Operator: [Operator Instructions] Our first question comes from Martin Karlsen from DNB Carnegie. Martin Karlsen: I understand that -- can you hear me okay, sorry, it was some... Mikkel Gleerup: We can hear you, yes. Martin Karlsen: I think I heard during the prepared remarks that you said the Wind Apex would be delivered early and do turbine work. Could you talk a little bit about the background for using the vessels for turbines and not foundations and the decision process behind that? Mikkel Gleerup: Yes, that is a good question. The reason we are discussing it directly that we are looking at delivering the Wind Apex early is because we have been asked whether we were looking at potentially delivering her late. And just to make clear that that is not a thought at all, it's the opposite. We have evaluated opportunities in the industry and the best opportunity, we believe, for Apex right after the yard is to embark on a turbine installation project. The reason for that is that working with the client on a turbine installation project potentially opens up opportunity for other things. And hence, we have decided that here, the best use of the capacity we do have available, as you also heard in my presentation, I said that we consider ourselves fully booked in '27 now. So basically, what we have available for clients now is becoming limited. And this is the opportunity we have for the client, and hence, we have decided to go with the client because we believe that it's the best overall decision for Cadeler to start with a turbine installation project. It doesn't mean that Apex will stay on turbine installation projects, but the first project will be a turbine installation project. So what it means is that she will earlier generate revenue compared to if we did a foundation project. And with the long -- duration of the contract we're looking into, that will also run into a significant part of 2028, but also a potential for something coming on the back of that with the same client. Martin Karlsen: Could you remind us about how much time and cost there would be to get it back to foundation mode? Mikkel Gleerup: So there is a mission spread, but that is typically part of the project. When you sell a foundation project, the client is contributing to the mission spread there. And typically, it would take somewhere around 2 to 4 months to put her into foundation mode with mobilizing all the equipment on the vessel. Martin Karlsen: And for 2028, you definitely came across as more optimistic, but it seems to be more Cadeler specific than for the industry as a whole. Can you talk a little bit to why Cadeler have been more successful than the industry for '28 and what has changed since last quarter? Mikkel Gleerup: Yes. I think that what we do say, when we talked about '28 after the Q3 announcement, we also said that it looked like a year that could be challenging for the industry. And what we are saying now is that we -- that is still the case. We believe that there are still some companies that will have challenges in 2028, but that we today feel much better about '28 than we did around the Q3 because there were still some things that we believed in at that point in time, but that had to happen. And now we are saying that we are seeing that, that is happening. And hence, we are much more confident on 2028. And one of them is, of course, the preferred supplier agreement on a large-scale foundation project. That is important for '28, but that's not the only thing. It is also how other things we are working on have progressed. So all in all, we are much more positive about '28. But it doesn't mean that everybody else will have the same feeling. But for Cadeler, that is the case. But I also think there is a progression from the Q3 call to now where we are saying today that 2027, we can say we're fully booked now. Martin Karlsen: And last question, you're about to get into a real cash-generating mode with all the newbuilds and delivered. Could you talk to how you look to allocate capital ahead between shareholder returns, delevering, and you also spent some time in the presentation today talking about growth opportunities. Mikkel Gleerup: Yes. I think that, as we have said before, capital allocation ultimately is a Board decision. But I think it's realistic to believe that we will be spending our capital in 3 buckets. One is to delever the company. One is to continue to maintain the position we have in the industry. And then the last bucket is, of course, returning capital to shareholders in some shape or form. And I think that if we look at where we are moving in terms of generating capital, all 3 buckets are possible at the same time. And I think that, that's where I will land it at this point in time. Operator: Our next question is from Jamie Franklin from Jefferies. Jamie Franklin: So firstly, I just wanted to clarify on Hornsea 3 and appreciate the useful slides in the presentation. If I look at Slide 12 specifically, as you understand it correctly, essentially, we're now going to have a much more progressive ramp-up in revenue through the year from that project. So it's going to be very back half weighted. And it looks like the expectation is first turbine installed around 3Q. So if I assume that the margin and EBITDA contribution should really start to sort of kick in from the second half. Is that a fair assumption? Mikkel Gleerup: Yes. I think overall, what you're saying is a fair assumption. And as we are saying that -- and of course, this is what is complicated to sometimes explain when you have projects and calendar years because overall, Hornsea 3 for us is a more value-creating project today than it was when we signed it. But the way the revenues and profits are stretched over time is different. And I think that, that is what we are trying to explain today, and it's due to decisions that have been made by others than Cadeler, but where -- it's in our interest, but also where we are contractually obligated to deliver on this new method. And I think one of the key things on the project without diving too much into the detail is that the flow of the foundations when they come into the project is slower. So we are not building up the buffer we had in the beginning. So the monopile delivery is over a longer period of time, and that is out of Cadeler's control. And it's due to things that is related to the fabrication yards on the monopile foundations. Jamie Franklin: Okay. Got it. And then secondly, just on operations and maintenance. So obviously, you've announced a few shorter duration awards to Nexra platform recently. And as you mentioned, there's been this 10-year O&M contract announced by one of your peers. Could you give us a sense of how you expect to balance the sort of longer-term agreements with the shorter-term contracts? Is the idea to sort of keep Zaratan and Scylla available for more spot O&M while Wind Keeper kind of takes the longer-term contracts? Or could we see you enter into a longer-term contract with a specific one client on those assets? Mikkel Gleerup: The question is, yes, that could be expected that, that would happen, but it all depends on the project economics. There are limits where we believe that it's better to stay in the spot market rather than to sign up to a long term. And for us, that is an internal evaluation that is happening between us and the team that is dealing with the clients on these long-term opportunities because obviously, there are benefits of having a long-term contract, but the benefit of that can be outweighed by, let's say, what you're sacrificing in terms of annual revenues. So for us, it's a balance. And if we believe that we can generate more money by having the vessel in the spot market and being available to our clients when they need us, then that is the decision we will go for. And I think we have discussed it before as well that one of the real benefits of being, let's say, active in the O&M market is the social capital you're building with your client because when they have problems, if you are able to come and help them and fix them, that is something that is very much appreciated and also where you're able to generate stronger relationships and partnerships with your clients. So I -- per se that the long-term agreement is not just what we are aiming for, but of course, if they are good enough, if they live up to our criteria, then we are happy to enter into them. Jamie Franklin: Okay. Very clear. And finally, there was a wind turbine installation vessel order announced by shipyard Hanwha Ocean for about $530 million last month, very high price tag, obviously, relative to what you paid for your newbuilds. Is there anything you can say in terms of what is driving those higher vessel prices? Is it simply a function of kind of shipyard capacity or material inflation? Any thoughts there would be helpful. Mikkel Gleerup: I think the reality that we are looking at today is that the shipyards are incredibly busy. So even if you wanted to deliver a vessel in short time, you were not able to. I know that this vessel is it looks on paper like a short time line, but that is mainly because they have been working on it a long time before they actually announced it. It's a vessel targeting the domestic Korean market with a lot of Korean companies going together in that vessel. It's a repeat M-Class vessel more or less that they have paid $530 million for. I think that the underlying practice for the price is a real tightness in the yards, but also in general, what it costs to build a jack-up today. And I think that there are, let's say, that is -- if you look at the price for ordering one vessel, I think that, that is -- you're probably seeing significantly increased prices to what we built at back in -- when we ordered our vessels. Operator: Our next question comes from Anders Rosenlund from SEB. Anders Rosenlund: Could you break down the order backlog indicatively on '26, '27, '28 and '29 and beyond? Mikkel Gleerup: Unfortunately, we don't do that, Anders. We only give guidance 1 year ahead. So we don't give guidance year-by-year on the backlog. Anders Rosenlund: Also, do you expect to see more of your competitors to place newbuilding orders for '29 and 2030 or beyond delivery given the outlook comments that you coming with today? Mikkel Gleerup: I believe that based on the supply and demand balance we are looking into in the beginning of the next decade and the tightness in the yards that I would be surprised if there were not several companies already looking in the yards. Operator: Our next question comes from Daniel Haugland from ABG Sundal Collier. Unknown Analyst: This is [indiscernible] from China Securities. And thank you for taking my questions. I have 2 questions. The first question is about the foundation installation business. And I noticed that actually the foundation business includes quite large preparation works and it has larger amount. And could you please share with us what's your target of the foundation business in the future? Would the volume or the amount be higher than next year? You just mentioned that next year, the future revenue would be -- maybe would be higher than the installation revenue. So could you please share with us about the foundation business in the future? And your target or your strategy? This is my first question. And the second question maybe for... Mikkel Gleerup: Can we take them one by one. Can we just take them one by one. Unknown Analyst: Okay, okay. Mikkel Gleerup: Thank you. I think that to answer your question, we have had a humble approach to the full scope foundation C&I projects. And in 2026, we will be executing the Hornsea 3 project. In 2027, we will be embarking on the EA2 project with ScottishPower Renewables. So we are on a journey here where we are building up together with our clients, two of the biggest developers in offshore wind worldwide. And together with them, we are building up these capabilities to ensure that we do this safely and with the quality that both we and they expect fairly. But our long-term target is, of course, to execute several foundation projects in parallel in a year. That is how we have built the fleet, and that is how we are building the team and, let's say, the protocols around this. So let's say, we have a fully delivered capacity three A Class vessels that are targeting the foundation market. And we would certainly expect that these three A Class vessels would all be doing foundation work in parallel at some point in time in the future. But when I address the fact that I believe that the O&M market could be as big as the installation market, it is because with the outbuild targets that we are seeing in the industry, there will be a lot of requirements for O&M. And hence, we say this, but we cannot say when it will happen or whether they will inflect or whatever. But we do believe that there will be a case for the fact that the O&M market as such will be a very value-creating market to be in and also potentially bigger than the installation market. Operator: Okay. Great. And the second question is about the financial expenses. And I noticed that in 2025, the financial expenses are a little bit higher. Could you give us some color about the financial expenses in the near term or in the 1 to 3 years? Because with our 2 vessels delivered in 2026 and 2027, these expenses cannot be go into the -- cannot be capitalized and this should be go to the P&L. And could you give us some colors about that? Peter Hansen: That is absolutely correct, and also what I talked to in Q4 where you saw net or -- finance net was around EUR 20 million. And that is what you should expect to see going forward and then less and less goes to CapEx when we get one vessel delivered here in '26, then it will be less '27, we get the last one delivered and then it will be to current plans, nothing that we can capitalize. So that is the picture we see. So Q4 is more representative for '26 than the full year. Unknown Analyst: Okay, great. Thank you so much. That's very helpful. Thank you. Mikkel Gleerup: Thank you. I don't know whether we missed Daniel from ABG. Operator: Yes, we have a question from Daniel. Daniel Vårdal Haugland: I was a little bit back in the line there. So I have a couple of questions on 2027 that you maybe can kind of enlighten me on because I think you now say that 2027 is getting fully booked from your perspective. So what type of utilization level are you kind of targeting or at least some kind of range when you're talking about kind of fully booked this because I think based on announcements, it looks like there's a lot of white space, but obviously, you guys have looked it through. So... Mikkel Gleerup: Yes, so I think... Daniel Vårdal Haugland: Any commentary on that would be helpful. Mikkel Gleerup: Yes. No, that's a totally fair question. I think we have guided from the beginning of the journey of utilization between 75% to 90%, and that is also the target in 2027. And that is an adjusted utilization because, obviously, to assume that a vessel is busy when it's transiting from Asia and back to Europe, for example, that is not possible, even though we would love to install turbines all the way. But -- so that's how we look at it. And then as Peter also said, when he went through his numbers that we exclude planned dry dockings and stuff like that. So the adjusted number, we are expecting between 75% to 90%. And for '27, yes, it is correct that we are considering ourselves to be at the moment fully booked. Daniel Vårdal Haugland: Yes. And just to clarify, then you kind of include this potential contract that you talked about for the Apex. Mikkel Gleerup: Yes, that's how we have to do it because there is a potential contract that is negotiated. And -- but of course, nothing is firmed before it's signed and there's ink on paper. But of course, when we are in a process where we believe that this is something that will materialize, then it's also something where we are saying with what we know today, we think that we are in a situation where we don't have much other stuff to sell. Daniel Vårdal Haugland: Okay. And one question on the Orca. It seems like that will be working together with the Ally on Hornsea 3 on secondary steel. It seems from the slide that you kind of indicate that going through Q1, maybe into Q2. Is that kind of correctly assumed? Mikkel Gleerup: Yes, it's correct that Orca is starting almost side by side with the Ally being mobilized now for the campaign to go to -- on to Hornsea 3, sorry. It was a valuation we did when we secured the project because it was our option to either go with an offshore construction vessel or with one of our jack-ups. There were benefits in the jack-up in terms of the weather downtime during the winter and hence, the progression on the project. And that's why -- and with the project economics, of course, that we were able to provide to our -- one of our own assets that we decided that the O Class vessel was the best option for the task. Operator: Thank you. That's all we have time for today, and thank you for your participation. I will now hand the floor back to Mikkel Gleerup for any closing remarks. Mikkel Gleerup: Yes. Thank you, everybody. And if we did not have time to take your questions, then you all know where to reach Peter and myself or Alexander. And we are, of course, happy to take offline discussions with all of you. But thanks a lot for taking the time to listen to us today. We're looking forward to catch up with you as we move ahead. Thank you.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Concentrix First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now hand the call over to Elise Brasell, Corporate Communications. Please go ahead. Elise Brasell: Thank you, operator, and good morning, everybody. Welcome to the Concentrix First Quarter 2026 Earnings Call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. This call contains forward-looking statements that address our expected future performance and that, by their nature, address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future expectations, events or developments. Please refer to today's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10-K and in our other public filings with the SEC. Also during the call, we will discuss non-GAAP financial measures, including adjusted free cash flow, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP EPS and constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company Investor Relations website under Financials. With me on the call today are Chris Caldwell, our President and Chief Executive Officer; and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth strategy, and Andre will cover our financial results and business outlook. Then we'll open the call for your questions. Now I'll turn the call over to Chris. Christopher Caldwell: Thank you, Elise. Hello, everyone, and thank you for joining us for our first quarter 2026 earnings call. Today, I'd like to start by giving you an overview of how we're thinking about the quarter, and then I'll turn it over to Andre to talk more about the specifics of our results. Overall, in the first quarter, we continue to win the right business, drive the right revenue mix and execute on our strategy, allowing us to come within our guide for both revenue and profit. Our solutions are driving value both from automating work or when combined with the human to drive performance. Our overall wins with technology are up more than 61% year-over-year in the first quarter, highlighting the shift in our go-to-market offerings and client acceptance. When we look at our bookings quarter-on-quarter, our signed annual contract value for solutions, including AI, more than doubled, and we're seeing sequential increases in expanding AI license consumption across our client base. Our pipeline of opportunities to continue to be solid and represent a continued progression and shift to a higher solution mix. Our proprietary iX suite of AI products our third-party technology partners and our deep domain expertise continue to be differentiators that open the door for us to win larger, more transformative deals with our clients. While this might initially compress some existing revenue and margin, when these programs reach scale and full production, the margin is accretive, and we generally see revenue growth across our portfolio of services into these clients. As an example, we closed, close to 60 enterprise iX suite deals in the quarter including our largest iX Hero contracts to date with 2 Fortune 50 companies. Both clients will use our proprietary AI technologies to modernize their ability to create more efficient personalized and effective interactions with their customers while allowing us to sell additional solutions into these accounts. Looking forward, we are continuing with our focus of securing complex work and high-value services in our client base, growing our share of wallet, using our extended offerings, allowing clients to consolidate work with us, leveraging our own IP and third-party platforms to differentiate ourselves in the market and driving internal efficiencies to fuel continued investment in areas of new growth. In summary, we delivered another quarter with revenue growth, and we are on track to meet our expectations for the year. We are winning the right business and successfully executing while making the right investments in the business for long-term revenue and margin growth. I would like to thank our game changers for their tireless pursuit of excellence with our clients and their trust and partnership that we have with our clients. With that, Andre, I'll turn it over to you. Andre Valentine: Well, thanks, Chris, and good morning. I'll review the details of the first quarter and then discuss our outlook for the second quarter, remainder of 2026. We delivered revenue of approximately $2.5 billion, an increase of 1.9% on a constant currency basis and over 5% on a reported basis. Looking at constant currency growth by vertical. Revenue from banking and financial services clients grew 13% year-over-year. Revenue from retail, travel and e-commerce clients grew 6% largely driven by growth with travel and e-commerce clients. Media and Communications revenues grew 3%, largely with clients outside the U.S. and global entertainment and media companies. Our technology and consumer electronics vertical and our health care vertical both decreased about 6% driven by lighter volumes than clients expected and shore mix. Turning to profitability. Our non-GAAP operating income was $295 million. The midpoint of the guidance range we provided on our last call. Adjusted EBITDA in the quarter was $348 million, a margin of 13.9%. Non-GAAP diluted EPS was $2.61 in line with the guidance range we provided in January. GAAP results for the first quarter reflect a $6 million loss on the sale of 2 small nonstrategic businesses. One of these sales closed in the quarter with the second expected to close later this year. The assets and liabilities of the pending sale are reflected in the balance sheet as assets held for sale. Total net proceeds from the 2 sales will be approximately $20 million. Our GAAP results for the first quarter and our expectations for GAAP results for the second quarter also reflect restructuring charges related to cost actions that we're taking to align our cost structure and invest in higher growth and higher profit areas. We expect the combination of the actions taken in the first and second quarters of 2026 to drive approximately $40 million in annualized savings over and above investments in growth. This will contribute to sequential profitability growth in the second half of 2026. Complete reconciliations of non-GAAP measures to the comparable GAAP measures are provided in today's earnings release. Adjusted free cash flow was negative $145 million [ in the ] quarter, reflects an increase in accounts receivable at the end of the quarter, resulting from the timing of cash receipts. The related receivables were all collected in the first week of March. As a reminder, free cash flow in our business is seasonal with negative free cash flow in the first quarter and robust free cash flow generation in each subsequent quarter. This pattern is expected to recur in fiscal year 2026. We're confident in repeating our previous guidance for between $630 million and $650 million in adjusted free cash flow this year. We returned approximately $65 million to shareholders in the quarter, which included repurchasing $42 million of our common shares or approximately 1.05 million shares at an average price of approximately $40 per share. The remaining $23 million in shareholder return was in the form of our quarterly dividend. In February, we issued $600 million of 3-year senior notes maturing March 1, 2029. The new notes carry an interest rate coupon of 6.50%. The proceeds from the new notes were used to retire $600 million of 6.65% senior notes that mature in August 2026. $200 million of the 6.65% senior notes maturing in August 2026 remain outstanding, and we expect to repay them with strong free cash flow in the second and third quarters. At the end of the first quarter, cash and cash equivalents were $234 million and total debt was approximately $4.75 billion, bringing our net debt to $4.51 billion. Our off-balance sheet factored accounts receivable borrowings were approximately $129 million at the end of the quarter. At the end of the quarter, our liquidity was nearly $1.4 billion including our $1.1 billion revolving credit facility, which was undrawn. To summarize, in the first quarter, we delivered revenue and profitability in line with our guidance range. We also took proactive steps to manage upcoming debt maturities while continuing to invest in growth. Now I'll turn to our outlook. For the second quarter, we expect the following: second quarter revenue of $2.46 billion to $2.485 billion. Based on current exchange rates, we expect an approximate 75 basis points positive impact of foreign exchange rates compared with the prior period. The guidance implies constant currency revenue growth for the quarter, ranging from 1% to 2%. As we've said, our goal is to be conservative in our revenue guidance, and we are being prudent with the current geopolitical situation. We expect second quarter non-GAAP operating income of $290 million to $300 million, this implies a non-GAAP operating margin of 11.8% to 12.1%. Second quarter non-GAAP earnings per share will be expected to be $2.57 to $2.69 per share, assuming approximately $67 million in interest expense, 60.9 million in diluted common shares outstanding and approximately 4.9% of net income attributable to participating securities. The non-GAAP effective tax rate is expected to be approximately 25% for the second quarter. Our expectations for the full year non-GAAP metrics remain unchanged from our earnings call in January and can be found in today's release. As I mentioned earlier, we continue to expect to generate between $630 million and $650 million in adjusted free cash flow this year. In addition to our strong free cash flow, we expect aggregate proceeds for approximately $40 million from asset sales, including the sale of the 2 businesses I mentioned earlier. The remaining proceeds will come from the sale of owned properties that are no longer being utilized. We are committed to reducing our net leverage to below 2.6x adjusted EBITDA by the end of fiscal 2026. In summary, our overall demand environment remains solid. The margin headwinds we have seen in recent quarters are being managed, and we are confident in our ability to drive year-over-year profitability growth in the second half of 2026. We're confident in the continued strong free cash flow generation of the business and our plan to reduce net leverage over the balance of the year and we are in a strong competitive position to drive long-term outperformance. Now operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: Chris, can you specify approximately how much revenue in 1Q was related to AI and the iX suite? And how are you pricing these solutions? And can you give us an idea of how you're looking at investments related to AI in 2026? Christopher Caldwell: So let me answer the questions in a bit of a backwards way. So just in terms of how we're pricing these solutions, our iX Hello solution, which is the fully autonomous solution that we have basically is priced by consumption. So we put it in for very small or de minimis fees. And then based on how many contacts that are fully automated, we get paid for. And so as you can imagine, when we put it in, we see a negative margin for the first little while. And then as it scales and grows, we see a positive margin similar to what you'd expect from a SaaS or software type of business. On our Hero product, it is a subscription basis, where we sell on a per-seat subscription of how many humans are actually using the product to drive the business. And as we talked about, at the end of last year, we ended Q4 at $60 million of ARR. We continue to add to that. We're not releasing numbers on a quarterly basis, but our expectation is to be at or above $100 million by the end of this fiscal year. If we reach that sooner, we will update you on that. But so far, we're actually a little ahead of plan from where we expected based on what we've sold within the first quarter. And we have a very, very strong pipeline going into the second quarter that we've already started to see some good uptake with -- on our proprietary AI products. In terms of the percentage of our business with AI within our business in Q1. Ruplu, the challenge that we have is that what we're seeing in the marketplace is that as you think about AI solutions, we're seeing clients adopt more than one AI solution, and sometimes they're adopting more than one AI solution from us. Sometimes, they're doing some things internally. So the way we look at it is of the revenue we service -- of the clients we service, how much of that has AI involved in it? And the reality is it's the vast majority of our clients are using our AI, their own AI, some other bits and pieces of AI. What we also look at is our success rate of AI implementations because in the marketplace, there's a lot of people who are talking about AI, but they're not getting the success rate. And we're seeing very, very high success rates. Very, very high success rates on our AI implementations driving real tangible value for clients. And so that's what we're very excited about as we're going into the second quarter. Ruplu Bhattacharya: Okay. details there, Chris. For my follow-up, Andre, can I ask you a question related to the cadence of margin improvement. If we look at the guidance, the implied operating margins go from 11.8% this quarter to about 12.5% in the -- for the full fiscal year. You mentioned a couple of things like there's cost reduction actions you're taking. I think Chris mentioned like the pipeline indicates a better mix. And I think you also said that margins improve over time in contracts. Can you help us get comfortable with how we should think about this margin progression? It looks like the EPS guide for next quarter is slightly below the Street estimates. So can you help us just think about how you're thinking about the ramp and what's giving you confidence that you can get to 12.5%, which would mean above 13% operating margin for the fourth quarter? Andre Valentine: Sure. Happy to do that, Ruplu. And the guidance is very much consistent with what we said entering the year, which was we thought that margins would be somewhat compressed in the first half, and then we would see sequential margin expansion in the second half of the year that would get us to year-over-year margin increases in the second half of the year. Driving that is certainly the result of the cost actions that we're taking in the first half. Other drivers are -- if you look at the revenue guide, there's roughly, depending on where you are in the guide, $100 million to $150 million of additional revenue coming online in the second half of the year over the first half. That's going to flow through at absorb the capacity that we've added into the business and will certainly drive revenue at a fairly high flow through as we go forward. Then you have some of the transformational deals, as Chris alluded to, getting to kind of full scale and full production and reaching the intended margins on those projects. And then that's really it. And so we have a great deal of confidence in our ability to drive the expansion in margin that begins. First, you see kind of stable to slightly expanding margin here in Q2, a bigger uptick in Q3 as we go sequentially, thanks to revenue coming online and the cost actions and then a further step up in the fourth quarter, which is kind of a traditional pattern of a step-up in margin as you go from Q3 to Q4. Ruplu Bhattacharya: If I can just ask a clarification on that. Andre, you had also mentioned in prior quarters that some customers, both in Europe as well as North America. We're looking to move operations offshore, and that was impacting revenues in the near term and the margins would have improved over time. Can you update us on how that is impacting results currently? Also, you had talked about supporting some customers whose volumes were not materializing and you had laid out 2 or 3 options that you had. Can you give us an update on where that stands? And are customer volumes coming back as you had expected? Or are you taking some remedial actions? Andre Valentine: Sure. Happy to do that. Well, yes, absolutely, the trend towards moving work offshore continues. As we talked about, I believe, on the last call, we have as we see it roughly 15% of our revenue is delivered out of North America and Western Europe that we think over time, as the capacity to perhaps move offshore, we provided in our revenue guide entering the year. for roughly a 2-point headwind from shore movement. We think we're still in line with that. And as we think about what that means from a margin perspective, particularly the commentary that I made about utilizing capacity that we've built ahead of revenue. A big piece of that is that shift offshore filling up capacity that we've added over the last couple of quarters in advance of that revenue. So that is how we would think about the impact of shore movement. Obviously, when those programs get offshore, margins are improved. When they get -- when the programs get the full run rate. Back to the commentary about volumes not materializing. As you recall last year, second half of the year, actually starting in the second quarter, we saw impacts from tariffs, delaying some programs. We said that, that would eventually -- we've worked that through the system through either having the volumes materialize or shedding the excess capacity that we've added in advance of those programs. That is pretty much playing out in line with our expectation. We saw improvement in that situation as we expected in Q1, and we think that's fully out of our system kind of as we exit Q2. Operator: Your next question comes from the line of Luke Morison with Canaccord Genuity. Lucas Morison: Starting with Andre. So you sold those 2 small nonstrategic businesses in the quarter for, I think you said, $20 million combined, obviously, pretty small, but can you just talk about the philosophy behind those divestitures? Is this potentially the beginning of a more active portfolio pruning effort? Were those more opportunistic? Are there other parts of the portfolio that you consider noncore? Just any help there. Andre Valentine: Yes, happy to do that. Yes, so we're not really looking to shed anything else at this point in time. We're always kind of looking at the portfolio of what we have in the business. These 2 businesses were quite small, not strategic, not growing, not accretive to overall margins. And so it just made sense to exit those. We'll continue to look at the portfolio over time and see if there are other things that make sense, but I wouldn't expect certainly nothing imminent there and nothing really that we're working on. Lucas Morison: Got it. Helpful. And then, Andre, the 2 verticals you mentioned that were down 6% in the quarter. I wonder if that was related to the customers that you were referencing in your last question. And then maybe double-clicking there. You attributed that to lighter volumes than clients expected and shore mix. Can you just help us disaggregate those 2 factors and then whether or not you have line of sight to those verticals stabilizing in the back half of this year? Andre Valentine: Yes. So I'll bifurcate the 2 because they're not exactly the same. So health care, we actually saw lighter volumes than expected, largely related to changes in Medicare membership for some of our clients as well as participation in the Affordable Care Act program. And so that impacted our revenues in the health care vertical. We don't see that really returning to growth here for a couple of quarters. And so that is kind of where that vertical stands. With respect to tech and consumer electronics, there -- the impact is a little bit around underlying volumes. Even as we consolidate a share within some of those clients, underlying volumes are down, a little bit of impact of automation there. That's about half of the revenue change there and then shore mix being the other half of that kind of 6% constant currency reduction. That vertical, you've seen some volatility in the past 8 quarters. Some quarters we grow a little bit, some we shrink. We think that could go up or down as we go through the second half of 2026 based on what we see in the pipeline and opportunities to continue to gain share within the client base. Operator: Your next question comes from the line of David Koning with Baird. David Koning: I guess my first question, just longer-term margins. I know you've had some puts and takes, but if we think back to, I think, '22 to '24, you had 14% or so margins. We're lower than that now. And I know there's some factors. But things that should make it go up, the Webhelp synergies, scale, shift to AI, offshore, like all those should be positive tailwinds can those tailwinds drive margins back to at least where margins have been or hopefully higher? And how fast could they get there? Christopher Caldwell: David, it's Chris. You're right. I mean when we look at the business and kind of some of those AI; implementation, the transformational implementation and look at sort of programs that are running at scale, running the way we'd expect and everything else that kind of goes along with it. We're in that range. And our expectation is we continue to build on that as we get some of these other programs up to scale as we put in the new AI. A lot of the Webhelp synergies we've invested in developing our AI and changing our go-to-market platform, which we talked about last year and this year. And as we talked about in the prepared remarks in terms of the annual contract values effectively doubling as we went into Q1 as we talk about sort of our attach rates increasing, all of those are going to kind of give us some momentum and leverage. I don't want to guide past 2026, but it's very clear to Andre and I, that our expectations is we get this back to historical margins and then we can progress past there. Timeline, I think, as earlier question around where we see our margins at the end of Q4 this year, you can start to see kind of how we're incrementing up to get back to those historic margins. David Koning: Yes. Okay. That's helpful on that. And then, I guess, banking was very strong in the quarter as was the retail segment. Maybe just refresh a little bit on those, is growth in those 2 sustainable? And is it some market factors happening right now or any one-off impacts that are happening? Maybe just kind of walk through those again. Christopher Caldwell: Yes. So banking, you saw last quarter was quite strong, and we expect there to be fairly strong strength through the course of the year, sort of high single-digit, low double-digit growth based. And what we like about it is that it's very widespread. We're doing very well in banking, BFSI across both fintechs, top kind of 200 global banks, sort of the traditional enterprise banks and some new entrants who are trying to disrupt the market. And so really, we're seeing broad-based success in that. What's really driving a lot of the growth is actually this combination of the solutions of the banks now coming to us for more complex work. So very large transformational deal we won last year that we talked about is in the BFSI. That's starting to come through to fruition this year and driving the performance and profitability as we expected. And we're seeing more of that coming through where traditionally, we haven't been able to sell some of our tech solutions into the banking and BFSI sector, and now we are. So we see that kind of sustained growth. In the travel, transportation and e-commerce sector, it's really both e-commerce and travel that are doing well. In the e-commerce side, we see that quite sustainable. We are winning net new clients as well as consolidating share in that. And again, it's a mix of the new solutions we're bringing to the table as well as people looking at our footprint and seeing benefit in how we can deliver consistently around the world. And then on the travel side, we've got a strong travel portfolio, both in short-term stays portfolio to longer stay portfolio to airlines, to consolidators to e-commerce platforms that deal with travel. And again, we're seeing broad-based support. And what we like is what's going into those accounts is, again, these kind of complete solution sets that's allowing us to get spend that historically hasn't been outsourced. Technology spend, which historically hasn't come to us and then consolidation as well. So we see that as sustainable as well. Don't ask me if jet fuel goes up to $200 a barrel. But at this point, we're very confident in what we can see with the pipeline in that -- in those verticals. Operator: Your next question comes from the line of Vincent Colicchio with Barrington Research. Vincent Colicchio: Chris, did you see any change or any signs of sentiment change or client behavior once the geopolitical issues started recently here? Christopher Caldwell: Yes. So Vince, we've talked to a significant amount of our clients. Some are being impacted, but very de minimisly so far, things have been fairly robust. Our exposure to this is about 1% of revenue, give or take, which is sort of our Middle Eastern operations. And so far, we haven't seen sort of an impact at this point in time. I think people are just being very, very cautious right now. But so far, it's fairly steady. Vincent Colicchio: And Andre, to what extent did excess capacity negatively impact margin this quarter? Andre Valentine: Yes. It's in the 20 to 40 basis point range. And so that as we think about opportunities to improve profitability as we get into the second half of the year, we think that -- and here I'm just really talking about the physical capacity mostly. As we grow into the physical capacity, we think we see a 20 to 40 basis point improvement in second half. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Cheetah Mobile Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Helen Jing Zhu, Investor Relations of Cheetah Mobile. Please go ahead. Jing Zhu: Thank you, operator. Welcome to Cheetah Mobile's Fourth Quarter 2025 Earnings Conference Call. With us today are our company's Chairman and CEO, Mr. Fu Sheng; and our company's Director and CFO, Mr. Thomas Ren. Following management's prepared remarks, we will conduct the Q&A section. Please note that the management's prepared remarks are presented by AI agent. Before we begin, I refer you to the safe harbor statement in our earnings release, which also applies to our conference call today as we will make forward-looking statements. At this time, I would now like to turn the conference call over to our Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng. Sheng Fu: Good evening, everyone. Thank you for joining us. In 2025, we finished stabilizing the business and built a stronger foundation for Cheetah Mobile. During the year, our total revenue grew 43% year-over-year, driven by continued growth in both our Internet business and AI and Others segments. In the fourth quarter, AI and Others already accounted for half of total revenues, reflecting the increasing contribution of our new growth initiatives. More importantly, we achieved full year non-GAAP operating profitability, our first time in 6 years. Our Internet business remained resilient in 2025, generating approximately RMB 460,000 in adjusted operating profit every working day. This consistent operating cash flow forms the financial backbone of the company and allows us to invest in robotics and AI in a disciplined and sustainable way. Our second highlight is robotics, which is emerging as a key structural growth driver. For full year, robotics revenue grew approximately 31%. In the fourth quarter alone, robotics revenue reached about RMB 60 million, up 94% year-over-year and 43% quarter-over-quarter. A voice robot in China achieved 100% year-over-year growth for 3 consecutive quarters, accounting for high single digits of the fourth quarter's total revenues. This progress is driven by our strategic focus on core strength in voice robotics and the integration of AI agent technology to enhance product experience. We are now seeing our voice robot become a must-have solution in receptions, guided tours, retail environment, hospitals and service halls as they deliver proven measurable value. We recently introduced a new version of our voice robots, which comes with built-in skills like guiding, patrolling and advertising, enabling end customers to start using them right away, our robotic arm business mainly in serving overseas markets is making up high single digit of the first quarter's total revenues. We focus on long-term demand from research institutions and the R&D teams that value openness and the customization. This customer base is sticky and repeatable, supporting long-term demand, building on our proven indoor autonomous mobility technologies. We are introducing a smart wheelchair, targeting developed regions such as Western Europe and North America. This product is positioned as a premium solution for users who value safety, independence and confidence in daily mobility. We are seeing a clear shift in demand as users increasingly value safety, assistance, and intelligent features in mobility products, while scalable solutions in the market remain limited. By applying our experience in service robots we are able to meaningfully improve the user experience. During my own recent recovery, I personally used our smart wheelchair and saw a clear improvement in safety and convenience. Importantly, we can deliver these benefits without significantly increasing the costs compared to traditional high-end electric wheelchairs, making this a more practical and accessible product for users. We have entered into framework agreements with established mobility brands who will manage branding, distribution and aftersales services. Initial shipments are expected to begin in the second quarter of 2026, representing an early-stage commercial validation of this product category. Across the industry, more companies are starting to test and deploy service robots. We believe the next 1 to 2 years will be a validation phase, where ROI and reliability will matter most. You don't need a robot that looks like a human. You need a robot that works every day, delivers measurable value and it's easy to operate at scale. This is exactly where our current products are positioned. Our Internet business remains strong, generating steady cash flow, which allows us to invest in AI in a disciplined and sustainable way. For more than a decade, we have built utility applications serving hundreds of millions of users. This product DNA shapes how we approach AI, rather than competing in model development we focused on turning AI capabilities into practical tools that help users complete real tasks. During the Chinese New Year, I spend a lot of efforts experimenting with an AI agent system built on the OpenCloud framework starting from a single agent that could barely complete basic tasks, the system evolved into a multi-agent team capable of running tests continuously. In one scenario, the system generated personalized New Year messages for more than 600 colleagues and managed the entire sending workflow automatically. What we see emerging is not simply a new AI tool but a new way to organize digital work. AI agents can automate entire workflows from information gathering to processing and distribution, significantly improving productivity. Building on these learnings, we introduced EasyClaw based on OpenCloud and open source agent framework for both domestic and overseas markets. EasyClaw is our AI coworker platform that helps users create and deploy task-oriented AI agents capable of executing real-world tasks autonomously. At this stage, we focus on execution capability rather than scale. We are already seeing a continued increase in user engagement as reflected in the rapid growth of our total token usage. We are building EasyClaw into an agentic operating system that changes how users interact with software and machines. By integrating EasyClaw into our PC products, we are improving user experience and driving higher conversion and ARPU. In robotics, EasyClaw allows users to program and customize robots using natural language, lowering customization barriers. This helps us deploy faster, reduce cost and scale more easily, making our products more competitive. Some investors may ask how we compete with our training foundation models. We believe the real advantage in the agent era lies not in the model itself, but in the systems built on top of it, including task orchestration, tool usage and cost management. By leveraging open ecosystems and leading APIs, our product can evolve as models continue to improve. Finally, our global DNA remains a core competitive advantage. We continue to expand both our AI tools and robotics businesses internationally with a disciplined approach. Looking ahead to 2026, we do not provide specific financial guidance, but we see continued structural improvements. We believe our robotics business will maintain strong growth momentum as commercial validation deepens and become a more important part of our revenue mix. At the same time, AI-enabled products will gradually enhance engagement and monetization efficiency across our software ecosystem. We will increasingly apply AI internally to accelerate the development, aiming to further improve operational efficiency. As we grow, we will continue improving transparency and disclosure, credibility to data and our focus remains clear. Execute with discipline and net results compound over time. Cheetah is entering its next phase of development combining digital coworkers through AI agents and physical coworkers through service robots supported by real operating cash flow and disciplined financial management. We are building the foundation for our next stage of growth. Thank you. Thomas Jintao Ren: Thank you, Fu Sheng. Hello, everyone, and thank you for joining us. Unless otherwise stated, all financial figures are presented in RMB. 2025 marked a year of meaningful operational recovery and improved financial discipline for Cheetah Mobile. During the year, we continued improving operating discipline and cost structure across the company. We concentrated resources on commercially validated use cases in robotic products and practical AI applications, while leveraging open source ecosystem and third-party models to improve R&D efficiency and optimize infrastructure costs. This approach allows us to accelerate iteration without significantly increasing fixed costs. For the full year 2025, total revenue grew approximately 43% year-over-year to RMB 1,150 million. Although we reported a GAAP operating loss of RMB 179 million for the year, this represented a substantial improvement compared with operating loss of RMB 437 million in 2024. On a non-GAAP basis, operating profit reached RMB 14 million compared with a non-GAAP operating loss of RMB 232 million, in the prior year, reflecting improved operating leverage. We ended the year with USD 215 million cash and cash equivalents. Turning to our segment performance. Our Internet business continued to serve as a stable cash generating platform for the company in 2025. Revenue from Internet business increased 19% year-over-year to RMB 615 million with Internet revenue, Internet value-added services revenue increased 21% year-over-year in 2025, contributing 65% of segment revenue, supported by both paying user growth and ARPU expansion. In addition, we observed that many users subscribe for periods longer than 12 months, reflecting the recurring nature of our utility applications and strengthening revenue visibility. In terms of profitability, the Internet business generated approximately RMB 115 million in adjusted operating profit in 2025, maintaining healthy margins and strong operating cash flow. As Fu Sheng mentioned earlier, the Internet business generates roughly RMB 460,000 in adjusted operating profit per working day which provides predictable cash flow to support strategic investments in new initiatives. Looking ahead, we expect the Internet business to remain stable and profitable while continuing to provide financial flexibility for the company to invest in long-term growth opportunities. Turning to our AI and Others segment. Revenue from this segment increased 85% year-over-year to RMB 535 million in 2025, as a result, this segment accounted for 46.5% of our total revenue compared with 35.9% in 2024, reflecting the growing contribution from our emerging businesses. Within the segment, the robotics business continued to scale since the second half of 2025, making up 27% of the segment's revenue and 13% of total revenue in 2025. Robotics revenue increased 31% in 2025 driven by deployment of voice robot in China and continued demand for robotic arms in overseas markets. Other businesses, namely overseas advertising agencies, service and multi-cloud management platform within this segment also contributed significantly to revenue growth, benefiting from increasing overseas expansion by Chinese enterprises. At the same time, we continued to improve operating efficiency to more selective investment and disciplined cost control. For the full year, adjusted operating loss from the AI and Others segments reduced by 42% year-over-year to RMB 274 million as we continued scaling the business while maintaining disciplined investments. Turning briefly to the first quarter performance. Total revenue reached RMB 309 million representing a 30% year-over-year increase and a 7% quarter-over-quarter increase, while Internet revenue declined slightly year-over-year, in the fourth quarter it increased quarter-over-quarter as we continue shifting toward a subscription-driven business model. In addition, user subscription revenue within the Internet segment increased 32% year-over-year and 16% quarter-over-quarter as we chose to focus on subscription business model, which supports a healthier product and user experience. Revenue from the AI and Others segment reached RMB 153 million, accounting for nearly half of total revenue in the quarter. With this segment, robotics revenues increased by 94% year-over-year and 43% quarter-over-quarter to about 19% of the fourth quarter's total revenue. Other than that, our revenues from overseas advertising agency service and multi cloud management platform also contributed to this segment's year-over-year growth. On a non-GAAP basis, the company generated operating profit of RMB 15 million in the fourth quarter compared to RMB 42 million operating losses in the same period last year. We believe the improvement we achieved in 2025 reflected structural improvements in both our cost structure and revenue mix. Looking ahead, our priorities remain clear: disciplined growth, continued improvement in operating efficiency, balanced and disciplined capital allocation with stronger financial discipline, clearer strategic focus and increasing contribution from our emerging businesses, we believe the company is entering a more stable and predictable operating phase. Thank you. We are now ready to take your questions. Operator: [Operator Instructions] The first question today comes from Thomas Chong with Jefferies. Thomas Chong: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, can we move to the next question? Operator: The next question comes from [ Nancy Lu ] with JPMorgan. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Thank you. Operator: The next question comes from Cheng Ru Li from Guoyuan Securities. Cheng Ru Li: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Thank you. Operator: The next question comes from [ Yongping Diao ] with Guotai Haitong. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you, operator. Please move to the next question. Operator: The next question comes from [ Jie Zhu ] with GF Securities. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Operator: The next question comes from [ Wei Feng ] with Mizuho Securities. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Operator: The next question comes from Lydia Lin with Morgan Stanley. Chenyueya Lin: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Operator: The next question comes from Vicky Wei with Citi. Yi Jing Wei: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Operator: The next question comes from Zeping Zhao with ICBC. Zeping Zhao: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Yes. Thank you. Operator, please check if we have any further questions. Operator: We have no further questions at this time, which concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Jing Zhu: Thank you so much for joining our conference call today. And if you have any further questions, please do not hesitate to let us know. Thank you so much. Bye. Sheng Fu: Bye-bye. Operator: The conference has now concluded, and we thank you for attending today's presentation, and you may now disconnect your lines.
Operator: Good morning, everyone, and welcome to the Perma-Fix Fourth Quarter and Fiscal 2025 Business Update Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the call over to your host, David Waldman of Crescendo Communications. David, the floor is yours. David Waldman: Thank you, Jenny. Good morning, everyone, and welcome to Perma-Fix Environmental Services Fourth Quarter and Year-end 2025 Conference Call. On the call with us this morning is Mark Duff, President and CEO; Dr. Lou Centofanti, Executive Vice President of Strategic Initiatives; and Ben Naccarato, Chief Financial Officer. The company issued a press release this morning containing fourth quarter and 2025 financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. I'd also like to remind everyone that certain statements contained within this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and include certain non-GAAP financial measures. All statements on this conference call other than statements of historical fact are forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performance of the company to differ materially from such statements. These risks and uncertainties are detailed in the company's filings with the U.S. Securities and Exchange Commission as well as this morning's press release. Company makes no commitment to disclose any revisions to forward-looking statements or any facts, events or circumstances after the date hereof that bear upon forward-looking statements. In addition, today's discussion will include references to non-GAAP measures. Perma-Fix believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures is available in today's news release on our website. I'd now like to turn the call over to Mark Duff. Please go ahead, Mark. Mark Duff: All right. Thanks, David, and good morning, everyone, and thank you for joining us today. 2025 was an important year for Perma-Fix as we focused on strengthening our operational foundation and positioning the company for the next phase of growth tied to the Department of Energy's Hanford cleanup mission. For the full year, revenue totaled approximately $61.7 million, reflecting stronger performance in our Treatment segment and improving waste volumes across several of our treatment facilities. While the timing of certain government programs affected activity levels during the year, we made significant progress preparing our facilities, workforce and infrastructure to support the increased waste volumes expected as the Direct Feed Low-Activity Waste or DFLAW, program transitions into its operational phase. Throughout the year, we also made targeted investments in personnel, infrastructure and plant capabilities to ensure we're fully prepared to support the next phase of activity at Hanford and across other DOE cleanup programs. As many of you know, the DFLAW program and the Hanford tank waste program represents one of the most significant environmental remediation efforts currently underway in the United States, and we believe Perma-Fix is uniquely positioned to support this mission, given our specialized treatment capabilities and our long history of supporting DOE waste management programs. One of the most significant milestones in the year was the renewal of the permit for our Perma-Fix Northwest facility. This permit significantly expands our permitted processing capacity to approximately 1.2 million gallons of liquid mixed waste annually, effectively tripling our liquid processing capacity and also authorizes treatment of up to 175,000 tons of waste through macro encapsulation annually. Combined with our investments in automation, facility upgrades and workforce expansion, these improvements meaningfully strengthen the role Perma-Fix Northwest can play in support of multiple Hanford-related waste streams and other DOE emission objectives as activity ramps in the coming quarters. In the recent press release, DOE announced the need to extend the DFLAW hot commissioning phase. However, waste is expected to be received through the DFLAW liquid waste treatment processes beginning in May at our Northwest facility with dry waste expected to be received in April. The liquid waste streams are -- anticipated waste streams are expected to grow above original estimates by as much as 20% as described by DOE based on changes made and the process flow, which will include grouting a portion of the effluent waste instead of using DFLAW vitrification processes as originally designed. Our regulatory supplemental analysis is under review that includes using Perma-Fix Northwest grouting capacity, to treat the affluent to enhance production levels at the DFLAW facility. The DFLAW facility has processed about 50,000 gallons of tank waste through February and the melters remain hot which produces steam resulting in generation of waste to be included as affluent to Perma-Fix Northwest. For investors trying to better frame the timing of the DFLAW opportunity, DOE planning documents indicate the system is expected to ramp progressively through hot commissioning, beginning -- which began in October of of 2025. And within 12 to 18 months of that start date debut plans to reach operational phase at approximately 40% capacity before increasing towards 80% capacity as additional systems come online and that's required to be done within 3 years based on the tri-party agreement at Hanford. We view this as an important indicator of the size and durability of the opportunity in front of us, while also recognizing the exact pace of that ramp remains completely dependent on DOE execution and site operating conditions. Initial estimates regarding revenue potentials remain at about $1 million to $2 million per month beginning in Q2 and ramping up through the year. At a recent Waste Management Conference in March, DOE leadership specifically addressed the importance of implementing a grouting program to supplement DFLAW towards meeting the department's goals for diving tank closures by 2040. DOE stated that this program is working towards treating up to 200 million gallons of waste by 2040 from the Hanford tanks through the DFLAW program and supplemented by the Grouting program to be initiated in 2026. The number has grown from the original 56 million gallons estimated based on the expectations due to the fact that they will be generating 1 to 3 gallons of wastewater from each gallon retrieved due to the need to add liquids to the tank to retrieve the waste. Over the past several months, Perma-Fix Northwest has continued to make significant investments in automation and information systems of personnel training to ensure the facility can operate efficiently at high throughput levels and meet or exceed expected production rates as a broader range of waste streams begin to arrive. The Hanford remediation programs are expected to generate sustainable waste streams over time, which we believe can create consistent long-term treatment demand and recurring activity for our facilities. In addition to supporting DFLAW program, we expect to participate in several other Hanford related waste streams and site programs that will generate additional treatment demand over time. These increases in receipts include providing solidification, treatment support to high-volume contaminated water from the Hanford site as well as increasing our Transuranic Waste Processing program by 100% beginning this month, supported by additional shifts at the Perma-Fix Northwest facility. As waste receipts increase, we expect to utilize the expanded capacity to support a growing volume of treatment activity tied to both Hanford Mission and other DOE programs. Operationally, our Treatment segments delivered meaningful improvement during the year. We saw higher waste volumes, improved plant throughput and stronger waste mix, which together drove significant year-over-year growth in treatment revenue. As a result, treatment revenue increased approximately 29% year-over-year, reflecting both higher activity levels and stronger pricing dynamics associated with the waste streams we processed. Importantly, our treatment backlog increased by approximately 51% year-over-year and approximately -- to approximately $1.9 million in revenue, providing improved visibility as we enter 2026. This backlog growth reflects increasing demand for our specialized treatment capabilities across both government and commercial waste streams. Another area of progress during the year was international activity. Revenue from foreign entities increased approximately 163% year-over-year to approximately $6.4 million, reflecting growing global demand for our specialized waste treatment services. Our international markets continue to represent an attractive growth opportunity for us as many countries face similar challenges related to complex nuclear and hazardous waste management and we continue to see an expanding pipeline of potential treatment projects in Canada and other international markets. Turning to productivity more broadly. We have seen a number of encouraging developments over the past several months that we believe support our growth outlook for 2026. These include opportunities tied to Soil Sorting, work for a commercial uranium mining client, additional treatment work related to Canada and other international markets, our weapons production-related waste treatment programs and remediation work supporting a major university laboratory environment. Some of these opportunities are already moving into execution, while others remain in final [indiscernible] and start-up phases and together, they reinforce our confidence in improving activity as we move through the year. We also want to set expectations appropriately for the first quarter. While Perma-Fix does not typically provide formal guidance, it's important to recognize that factors are expected to make the first quarter softer than the stronger activity we tend to expect to begin for the second quarter. These factors include recent delays in the DFLAW affluent receipts, which shifted expected waste receipts out by several months, also normal seasonal weaknesses in field activity during January and February and ongoing efforts at Perma-Fix Northwest to process stored waste and prepare all -- to prepare all of our resources for the increase in Hanford-related activity expected later in the coming months. While the Q1 numbers are not finalized, losses in Q1 will likely exceed $4 million in negative EBITDA on about $13 million in revenue. Despite those near-term impacts, we've seen strong activity in March and I believe the second quarter should represent an inflection point as additional waste receipts and project activity begin to ramp. The focus on stored waste, I mentioned has resulted in timing-related shift in revenues from Q1 to Q2 due to applicable revenue recognition rules, resulting in a movement of approximately $2 million in revenue generated at Perma-Fix Northwest to be recognized in Q2, while they're actually processed in Q1. We also continued advancing the development and commercialization of our PFAS destruction technology. During the quarter, our engineering team focused on completing construction and installation of our new generation 2.0 PFAS Destruction System at our Oak Ridge facility, the upgrade system -- the upgraded system is designed to increase our PFAS destruction capacity by up to 3x our current rate, while incorporating engineering improvements intended to reduce operating costs and improve reliability and production rates. PFAS continues -- PFAS contamination continues to receive increasing regulatory and environmental attention worldwide, and we believe technology is capable of permanently destroying these compounds will play an important role in the future of remediation efforts. We also continue to see strong interest in our technology as an alternative to incineration with our PFAS Perma-FAS system, providing permanent destruction of PFAS compounds at a lower total cost, while affording air emissions. We believe the ability to permanently destroy PFAS compounds and eliminate long-term environmental liability represents a compelling advantage for our customers evaluating alternatives, traditional -- to traditional disposal methods. Over the past several months, we've secured several field projects supporting PFAS remediation at regional airports and continue to see additional airport-related opportunities currently moving through procurement processes. More broadly, we're continuing to develop strategic relationships with companies involved in PFAS remediation and AFFF removal as we work to expand the deployment of our technology across both government and commercial markets. Taken together, we believe these developments position our PFAS platform to support increasing demand for cost-effective permanent PFAS destruction solutions as remediation activities continue to expand. In our Services segment, revenue declined during the year, primarily due to the timing of project mobilizations and procurement cycles, including delays earlier in the year associated with the transition to the new administration and related policy adjustments. The partial federal government shutdown in October also impacted procurement for timing of government-related customers. In addition, we've seen the normal seasonal timing efforts of weather and delayed project mobilization is during the first quarter. Importantly, our Services business remains project-based and therefore, quarterly activity levels can vary depending on project timing and scope. Nevertheless, we continue to see opportunities in this segment tied to nuclear services, decommissioning work and government remediation programs, and we believe the progress we've made during the year positions us well as activity levels increase. In fact, I'm pleased to report we've won over $30 million in new Services backlog and submitted over $40 million in new bids just during Q1. We look forward to providing further updates on our bid pipeline in the future. Finally, I want to highlight what we believe is one of the most significant long-term opportunities in front of the company. In December, the Hanford tank contractor issued an RFP tied to the tri-party agreement to retrieve 22 tanks over approximately the next 12 years for commercial grouting and offsite disposition of the waste as part of a long-term remediation effort tied to the retrieval and stabilization of tank waste at the Hanford site. The RFP estimated that this contract will begin in January '28 for total -- for a volume of tank waste up to 50 million gallons to be grouted at commercial facilities. Perma-Fix Northwest is exceptionally well positioned for this opportunity given its location within the mile of the Hanford site as currently permitting -- its current permitting profile and its expanding processing capability currently available. While this opportunity is not expected to begin until later in the development cycle, we believe it underscores the scale of the long-term duration of Hanford-related work and is now taking shape and the strategic advantage Perma-Fix can provide and is recognized by DOE. So when we step back and look at the broader picture, we see the recent delays in DFLAW effluent receipts from hot commissioning activities as relatively modest in relation to the size of the opportunities in front of us. Between the DFLAW ramp, additional Hanford related-waste streams, the grouting program now in development for up to 200 million gallons of waste to be treated, expanding international work, a growing treatment backlog and advancing PFAS and remediation opportunities, we believe the opportunity for Perma-Fix to deliver meaningful growth and improved profitability beginning in the second quarter and continuing into the coming years has never been stronger. Thank you, and I'll now turn the call over to Ben for the financial discussion. Ben Naccarato: Thank you, Mark. Beginning with revenue, our total revenue from the continuing operations in the Fourth Quarter was $15.7 million compared to last year's fourth quarter of $14.7 million, an increase of $1 million or 6.9%. Our Treatment segment revenue increased by $2.6 million, while Services segment was down $1.6 million. In the Treatment segment, the increase was a result of higher volume, offset by lower average price, which was the result of a change in waste mix. Reduction in the Services segment revenue was due to lower start-up of new projects to replace completed projects from prior year. For the year ended 2025, our revenue was $61.7 million compared to $59.1 million in 2024, an increase of $2.6 million or 4.3%. In the Treatment segment, revenue was up $10.1 million, while the Service segment dropped by $7.6 million. As with the quarter, the Treatment segment benefited from increased volume and it also had higher average pricing related to waste mix. The Services segment continued to feel the effects of reduced project work related to timing of project start-ups and awards. Turning to our gross profit. For the fourth quarter, gross profit was $1.2 million compared to $594,000 in Q4 2024. Gross profit in the Treatment segment increased by $983,000 as a result of increased revenue, offset by higher labor and maintenance expense. Services segment gross profit was below prior year by $365,000 due to lower revenue and lower margin projects. However, that was offset, partially, by reduced fixed overhead costs. For the year ended 2025, gross profit was up by $6 million. Most of the improvement came from the Treatment segment where higher revenue and improved margins were partially offset by the increase in fixed cost at the plants. Gross profit from the Services segment was relatively flat as the impact of lower revenue was offset by drops in both variable expenses and drops in fixed overhead. Our total SG&A costs for the fourth quarter were $4.2 million compared to $3.9 million in the fourth quarter last year, while SG&A for the full year was $16.4 million compared to -- in 2025 compared to $14.4 million in 2024. Our SG&A expenses in the quarter were up from higher marketing costs related to payroll and trade shows, while administrative expenses increased due to payroll and legal expenses. Our SG&A costs for the fiscal year 2025 were up by $1.9 million from higher payroll expenses in both marketing and admin as well as higher trade show and legal expenses. Our net loss for the quarter was $5.7 million compared to last year's net loss of $3.5 million. Note that the current year results include an adjustment to one of the company's discontinued operations of $2.7 million related to a long-term remediation cleanup. For the year ended December 2025, net loss was $13.8 million compared to a net loss of $20 million in the prior year. Again, our net loss for 2025 included the $2.7 million recorded in the remediation reserve for our discontinued operations, as previously discussed. And note also that in 2024, our net loss included approximately $8.2 million of income tax expense related to the full valuation allowance established on our U.S. tax deferred tax assets. Our basic and diluted net loss per share for the quarter was $0.31 compared to a loss per share of 22% in the prior year. This includes the impact of $0.15 per share from the adjustment to the remediation reserve within our discontinued operations. Loss per share for the year ended December 31 was $0.75 per share compared to a loss per share of $1.33 per share in 2024. EBITDA from continuing operations, as we described in this morning's press release, was a loss of $2.7 million compared to a loss of $3 million last year. For the year ended 2025 EBITDA was a loss of $9.7 million compared to a loss of $13.8 million in 2024. Turning to balance sheet in comparison to 2024. Cash on the balance sheet was $11.8 million compared to $29 million in the year ended 2024. Unbilled receivables were higher in '25 compared to '24 by $3.8 million, primarily due to the timing of waste shipments in the Treatment segment. Our net property and equipment was up $3.5 million, primarily from capital spending which included the construction of our PFAS reactors. Intangibles and other assets were up $1.4 million from interest earned on the finite risk sinking fund as well as increase to permits and joint venture investments. Our waste treatment backlog for the year-end was $11.9 million compared to $7.9 million in the prior year. Long-term liabilities related to discontinued ops were up $2.7 million, again, due to the increase in the remediation liability at one of our [indiscernible] discussed facility. Total debt at quarter end was $2 million, excluding debt issuance costs, which is mostly owed to PNC Bank. Finally, I'll summarize our cash flow activity, cash used by continuing operations was $10.3 million, cash used by discontinued operations, of $441,000. Cash used for investing in continuing operations was $4.9 million, primarily for cap spending and permits. Cash used for investing of discontinued ops was $54,000. And cash used for financing was $981,000 representing monthly payments to our term and capital loans of $631,000, payments related to finance lease and other debt of $327,000. The payment of offering costs from last year's equity raise of $195,000 and offset by net proceeds from option exercises of $172,000. With that, operator, I'll now turn the call over for questions. Operator: [Operator Instructions] Our first question is coming from Howard Brous of Wellington Shields. Howard Brous: I just have a couple of quick questions. You started talking about Q2 and the performance. Can you give us a better sense of what you're referring to? Mark Duff: Sure, Howard. Yes, we have a lot of confidence in Q2, Howard, based on a couple of things. One is, as you know, it's really been about 2.5 years since our Services Group has really established a strong backlog of projects. And for numerous different reasons, a lot of it was just a cyclical thing with the changing of contractors at the prime levels and other market conditions. But that's really changed significantly in the last several months, and we're excited about where the Services Group is going. First, we just received a new contract award for a demolition project for a radiological facility at a National Lab. We hope to be announcing that in details -- some details on that in the next few days. We've also mobilized 3 new projects into the field in the last 2 weeks that will generate waste that we'll receive in process. There's projects that have better margins than most. And we've also got a pretty significant backlog of -- probably I should say, pipeline of opportunities we've submitted bids on, with -- squarely within our core competencies for radiological facility demolition and remediation as well as decontamination. So those looked really good for the summer, and it puts services in -- back in a position of carrying more weight than it has. And that typically bolsters our treatment shop as well. But along with that, we're also -- the other component or why we believe Q2 will be better, is related to Northwest. Just a little more detail on Northwest. There's a project up there that includes taking all the surface water waste that Hanford accumulates in selling ponds on site. And the -- evaporate that and make a brine out of it and they sent us the brine. And that program will start up, as we plan to start April 1, and we'll start receiving waste a few days after that. That's about $1.5 million or so a month revenue stream that's very important to us, and that will go for an extended period of time. It's a very sustainable waste stream as a runoff and from rainfall as well as from groundwater treatment activities and those types of things all comes to us, and we treat it and send it back. Secondly, DFLAW, as I briefly mentioned in this somewhat complicated, but bottom line is that they're in high commissioning now and they're run -- they're still running waste through the facility in smaller quantities not at a sustainable level. But they do generate what they call blowdown water. That's the water they use in the scrubber systems to address their effluent requirements. That waste was going to be pumped back into DFLAW and make glass out of it. In a press release a couple of weeks ago, about a month ago, I do -- we said, instead of us making glass out of that blowdown water why don't we treat it, and then we can do more tank waste, 20% more. And so they work with us, and they're going to be shipping us that waste here as soon as their supplemental analysis gets through the public comment period, which is mid -- late April, and then we should start seeing that sometime in May. So that should also be an additional waste stream from DFLAW along with some dry waste from processing. And lastly, the TRU waste program, as I mentioned, has doubled in size. So going from 1 shift to 2 shifts. That's added about $750,000 to $1 million a month as well. All this together, along with the $2 million I mentioned is going to be bumped from Q1 to Q2 due to revenue recognition rules. April looks like a great month and the Q2 altogether and Q3, looks like a very sustainable return back to profitability based on what we're seeing right now. So we're excited about Q2, Howard. Howard Brous: Going back to grouting. It seems that the -- excuse my voice, the 200 East area where the waste treatment plant is, they have a plan to grout the waste of the 200 West area. Can you comment about that? Mark Duff: Yes. It's important to understand there's 2 different components of the Hanford site. The West area is where there's -- the DFLAW does not have an infrastructure included. It's a distance, a good distance from the actual DFLAW plant. So as determined they're going to basically commercially grout all the tanks out there. And under the Trump administration, they're being very aggressive about it. And that's what the large RFP I mentioned in my script is all about. It's basically a $4 billion estimated value. There's a lot of flexibility in it. In other words, they may use other contract vehicles that may make multiple awards. But the bottom line is they're set up to really begin high-volume grouting at about the 3 million to 4 million-gallon a year range, but it does expand a little beyond that in the next 2 to 4 years. And we're in a great position for that being the only local facility local. And I'm sure they want backups to us or maybe supplementals to us. That remains to be awarded here sometime in the third quarter. But in parallel with that, the East side where DFLAW is, DOE has been somewhat vocal that instead of all the waste going to DFLAW that's currently being pumped into staging tanks to go to DFLAW, they can start grouting some of that waste. In other words, they have 1 million gallons of storage for DFLAW while that's sitting there, they could be pumping it out for grouting as well as probably get the DFLAW. So there's an opportunity for supplemental grouting to occur and we're in a really good position for that as well. And that's something we're looking at doing in the third quarter or fourth quarter if they get to the regulatory hurdles they're planning to. So both those components could start impacting us in the next 12 months and certainly in the next couple of years, but presents a very significant backlog opportunity for the company. Howard Brous: Last question, I want to address PFAS. In terms of volume and capacity, where are we headed? Mark Duff: Yes. With new systems have been delayed a couple of months due to supply chain issues, which we seem to be facing all the time. Everything is on site now. We're going through the installation process. We poured concrete and things are rolling. So we're really on track for late April, early May to start testing. And once that new system comes online, we'll be basically in a position to do about 3,000 gallons a day. And backlog has been pretty good at the Gen 1 system. We've made some improvements through the last quarter, 2 quarters, really, where we are able to start recycling our chemistry, and that allows us to lower our rates. As I mentioned before, our target is really to undercut incineration. We can do PFAS treatment cheaper than the incinerators can and that's been kind of the shift in the industry to total destruction. It's kind of our competition. So our sales focus is squarely right now on making sure we're getting as much incineration competitor waste as we possibly can. And it's going really well. And again, we continue to do a lot of partnering on that. And we believe once we get the capacity up to 3,000 gallons a day total capacity with the new system and the old system as well that we'll be able to get even greater backlog because we can store more and commit to higher our throughput. So that's really where we're going. We're still doing some R&D on the smaller components, smaller systems to be field deployed. Right now, we're really focused on the new system and getting it operationally ready and rolling. Operator: [Operator Instructions] And our next question is coming from Aaron Spychalla of Craig Hallum. Aaron Spychalla: Maybe first on DFLAW, can you just kind of speak to the visibility into that waste stream starting. You mentioned some solids in April and liquids in May. And it sounds like still expecting that $3 million to $6 million a quarter as that ramps. Maybe just kind of walk through that timeline as well. Mark Duff: Sure, Aaron. It's been difficult. DOE has not been real public on the operations of DFLAW overall other than it's operating. And so it's difficult to understand how much waste is going in. What the issues are they're dealing with to get to an operational phase. In other words, getting through their punch list to make everything -- make sure everything is working at capacity. So it's difficult to project it. But we do know that, that blowdown water, the EMF water I mentioned should be -- as soon as this supplement analysis is done to change the direction where it was originally tended ongoing. We should start to see that in -- at about 10,000 gallons a month and ramp to 4x that as operations gets underway. So that's an important waste stream for us. That's a big portion of the overall DFLAW waste incineration itself. Not all of it, probably not even half of it. And there's a lot of other waste that are being generated that are basically being stored with -- at the Bechtel facility that we expect to start receiving in April. We don't have a lot of clarity on that at this point, Aaron, in regards to volumes and that type of thing, what the overall impact will be. But we know between the 2, we should be, as I mentioned, in $1million, $1.5 million to $2 million a month here, particularly by mid-quarter of Q2. And the clarity on that, I think, will increase as they get through some of these punch list items. DOE is totally dedicated to getting this facility up and running as fast as safely possible. And so it's difficult to really nail down schedules on when the waste really beginning to flow like we anticipate it will. Aaron Spychalla: Understood. And then maybe on international volumes, you kind of highlighted growth there in 2025. Just how are you thinking about the opportunities there as we look to 2026 and beyond? Mark Duff: Yes. We just wanted some work, Aaron, from Canada again to do some liquid treatment and at our Florida facility as well as the DSSI facility here in Oak Ridge. That's going to be a pretty good backlog. That will begin here mid-April and run pretty much through the summer and could be going longer than that. We've also got several other projects for different clients throughout Canada that would be likely to begin in Q3. The Mexico waste we did last year, there'll be another tranche of that out for bid here. It's already been out for bid. That won't likely get rolling probably until Q3 or Q4. And we continue to get strong waste from Germany, and that also is expected to be sustainable here through the latter part of the year. Then our TRC project is going very well in Italy. Unfortunately, even though it's ahead of schedule, actually, the remediation process is for pulling the is for pulling the drones out of the ground that will start here in April. So all the permits are done, all the paperwork is done and now it's actually a field work. That's not our scope. That's another company, another contract. And our scope will be to characterize as drums as come out, they come out and that won't start until Q3. And we'll start seeing any of that waste probably until Q1 of '27. So to answer your question, we probably won't see the same revenue levels as last year, but they'll be close, but probably 25%, 30% less than we saw last year with it ramping up in Q4 and have a stronger '27 of international waste. Aaron Spychalla: All right. And then on the permit, the expanding the capacity with everything going on at Hanford, just maybe talk about -- you've made investments, but just how you're preparing to handle all the volumes there? Mark Duff: Yes, Aaron. We just submitted our proposal on that a few weeks ago, and we've been pretty vocal about what our capacity expectations are. Right now, as I mentioned, we can do 1.2 million gallons a year of liquids. And what we're proposing DOE is that we will be submitting a permit mod through that permit here in the next few weeks and that permit mod will include ramping that up to an additional 3 million gallons on top of that. So worth a total of 4.2 million gallons total capacity for liquid treatment. That will cover all the waste streams we're talking about, plus the 3 million or 4 million in grouting for the tanks. And that permit mod is expected to take 6 to 9 months to get through the system. And we will be beginning to install or modify our facility to support that as well with investments here beginning in the second half of the year to get to that level. So the big deal about that permit renewal is a lot of things that are important to it, but the one that's probably most important since it's approved, now we can do permit mods. While they were reviewing that permit application, renewal application. For the last 16 years, we couldn't do mods to it because they kept saying, if you want to do a mod, we're going to stall on you or put your renewal down and pick up your mods, so you won't get your renewal. Now we have a renewal, we can do mods, and they'll be quicker and more efficient because they're not that complicated and allows us to be flexible on these things and to implement some new technologies, expand our current capacities and those kinds of things. So we really feel like being at a capacity of 4.2 million gallons a year based on the fact that the new administration is looking at such a large volume of waste that we should be able to get pretty much full capacity in the future. I don't know when that will be, a lot of it depends on how fast they can get it out of the tanks. But our capacity is not going to be a critical path, and we'll be very aggressive on what we can produce and what we can treat based on our capability. Aaron Spychalla: And then just maybe one last one on the balance sheet. Can you kind of talk about cash flow expectations? It sounds like there's some receivables at year end? And then just how you're thinking about CapEx and investments in '26, you kind of talked about some maybe in the back half. Ben Naccarato: Aaron, yes, the balance sheet, we still have a number of capital initiatives to support the increased productivity expected. And -- but our working capital remains in good shape. We don't normally comment on any kind of cash raises at this time. So right now, we're comfortable with our balance sheet at 12/31, and we will evaluate that as the opportunities and the capital needs come above. Operator: Our next question is coming from Walter Schenker of MAZ Partners. Walter Schenker: Just to get back to PFAS. So the original unit is -- it's a question, is operating commercially and treating waste streams currently, while you build the second unit? That's the first question. Mark Duff: That's correct, Walter. It runs -- it does about 650 gallons a day, and it's running about 4 days a week consistently. There was some downtime associated with it, our average is around 4 days a week. And again, we've taken what we've learned from that system and engineering issues with that and perfected it to the next system. So that next system will be more efficient in operations. But yes, it does about 650 for the gallons today. Walter Schenker: And as a range, not a specific number, for your ability to eliminate those PFAS chemicals, pricing is roughly where? For gallons? Mark Duff: Really, it depends on volume, but if we get a big volume, we typically discount, and it also depends on the characteristics of the PFAS concentrations and those types of things. But to give you a range, for bigger totes, we can do between $11 and $15 a gallon. For smaller quantities like a drum or buckets, a lot of that AFFF comes in smaller quantities, it can be above $30 a gallon. So it just depends on the quantities we're getting. As we get to the larger volumes that we can handle with the new system, we'll be pushing for larger volumes to receive, so we don't have to handle as much. But just to kind of give you a range, Walter, $10 to $15 a gallon is a pretty good range for higher volumes. Walter Schenker: And on higher volumes with that price range, a range for some sort of operating profit margin? Mark Duff: It's typical -- we try to design our system from the very beginning to stay in alignment with our other waste treatment margins, which incrementally our target is 60% to 70% incremental margins on average. So some maybe more, some maybe less depending on a lot of different factors, but it's generally alter in line with our treatment margins across the company. Walter Schenker: And my last question, the second unit to get you up to 3,000 gallons, the CapEx to build that was roughly what? Or is roughly what? Since it's not up yet? Mark Duff: Yes. It's in the -- correct me if I'm wrong, Ben, the $5 million -- $4 million to $5 million range, yes. Operator: Thank you very much. While we appear to have reached the end of our question-and-answer session. I will now hand it back over to the management team for their closing comments. Mark Duff: Okay. Thank you, Jenny. And overall, we believe that Perma-Fix is entering a period where the strategic investments we've made over the past several years are beginning to translate into meaningful growth opportunities. We've significantly expanded our treatment capacity at our Perma-Fix Northwest facility strengthened our operational infrastructure, increased our treatment backlog and expanded our international project activity. At the same time, we continue to advance our additional opportunities across government and commercial markets, including projects related to nuclear remediation, weapons production and waste treatment, international waste streams and emerging PFAS destruction solutions. Importantly, the transition of the DFLAW system into its operational phase along with several additional infra-related waste streams and long-term remuneration initiatives currently under development represent meaningful catalysts for increased activity at our Northwest facility. While the timing of certain waste receipts and project mobilizations may create some variability in near-term quarterly results, we believe the second quarter should mark the beginning of a broader ramp and activity as additional waste streams begin moving through the -- and for cleanup system and new product work begins contributing to the revenue. As activity levels increase and we utilize more of this expanded treatment capacity, we believe higher throughput across our facilities should allow us to better absorb fixed operating costs and achieve meaningful margin improvement. When we consider the combined impact of the DFLAW ramp, additional Hanford cleanup programs, the tank retrieval and grouting initiatives currently under development, expanding international opportunities and the continued advancement of our PFAS technology, we believe the long-term opportunity for Perma-Fix has never been stronger. With that operator, thank you. Operator: Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.
Laurence Tam: Good morning, everyone, for those who are based in China and Hong Kong; and good evening for those based in the U.S. This is the 2025 WuXi AppTec results call. My name is Laurence Tam. I'm a China health care analyst at Morgan Stanley. We're honored today to have the full team from WuXi AppTec to present the 2025 results in English. The format of the call will be 2 parts. First, I'll let management go through their prepared remarks. You can refer to the slides on the webcast. And then the second part will be a Q&A session. [Operator Instructions]. With that, let me now pass it on to the Head of IR at WuXi AppTec, Ms. Tang Ruijia, to introduce management and to start the prepared remarks. I'll pass it on to you, Ruijia. Ruijia Tang: Okay. Thank you, Laurence. Welcome, everyone, to WuXi AppTec's 2025 Annual Results Conference Call. We released our financial results last night and have posted the latest on our company website. During today's call, we will make forward-looking statements. Although we believe that our predictions are reasonable, future events are uncertain, and our forward-looking statements may turn out to be incorrect. Accordingly, you are strongly cautioned that the reliance on any forward-looking statements involves known and unknown risks and uncertainties. In addition, to supplement the company's consolidated financial statements presented in accordance with IFRS, we provide adjusted IFRS financial data. We believe the adjusted financial measures are useful for understanding and assessing our core business performance, and we believe that investors may benefit from referring to these adjusted financial measures by eliminating the impact of certain unusual and nonrecurring items that are not indicative of the performance of our core business. However, these adjusted measures are not intended to be considered in isolation or as a substitute for the financial information under IFRS. All IP rights and other rights pertaining to the information and materials presented are owned by WuXi AppTec. Audio recording, video recording or disclosure of such materials by any means without the prior consent of WuXi AppTec is prohibited. This call does not intend to provide a complete statement of relevant matters. For relevant information, please refer to the company's disclosure documents and information on Shanghai Stock Exchange, Hong Kong Stock Exchange and the company's website. As usual, in today's call, there will be a Q&A session after our presentation. Please kindly share with us your name and institution before asking questions. With that, please allow me to introduce our Co-CEO, Dr. Minzhang Chen, to present our 2025 annual results. Minzhang, please? Minzhang Chen: Thanks, Ruijia. Good morning, and good evening. Thank you for joining our 2025 annual earnings call. We will begin on Slide #5. In 2025, WuXi AppTec beat full year guidance and achieved record performance in both revenue and profit. Total revenue achieved RMB 45.46 billion. Notably, revenue from continuing operations grew 21.4% year-over-year to reach RMB 43.42 billion. Our adjusted non-IFRS net profit grew 41.3% year-over-year to RMB 14.96 billion with non-IFRS net profit margin further improved 5.9 percentage points year-over-year to 32.9%. Next slide, please. The company remains focused on enhancing our core capabilities and capacity to better meet customer demand. With continuous capacity expansion by end of 2025, our backlog for continuing operations reached RMB 58 billion, growing 28.8% year-over-year. This does not include business operations we sold or discontinued such as clinical research services. Next slide, please. Slide 7 shows our diversified revenue streams of continuing operations. Based on customer headquarters, revenue generated from U.S. market grew 34.3% year-over-year. Japan, Korea and other regions grew 4.1%. Europe and China saw some decline, mainly due to fluctuations in project delivery timing. This diversified revenue structure reflects our global footprint and capabilities to enable health care innovations. We believe it will continue to underpin the stability and the resilience of our performance. Slide 8, please. So as an enabler of innovation and a trusted partner and contributor to the global pharmaceutical and life science industry, the company continues to drive sustainability, embrace initiatives with sustained recognition by leading global ratings. In 2025, we achieved our first MSCI AAA and CDP Climate Change A Rating, maintained CDP Water Security A, and EcoVadis Gold rating, and were included in the S&P Global Sustainability Yearbook for the fourth consecutive year. And meanwhile, our near-term greenhouse gas emissions reduction targets have been successfully validated by SBTi. As a committed UNGC participant and PSCI supplier partner, we actively embrace global initiatives and are dedicated to integrating sustainability into our business strategy and operations. Next slide, please. For over 2 decades, WuXi AppTec has remained steadfast in our commitment to safeguarding customers' IP and adhering to the highest standards for quality and compliance. In 2025, we completed 741 quality audits and inspections from global customers, regulatory authorities and independent third parties as well as 60 information security audits by global customers. This means, on average, we welcome 3 quality audits per day and over 1 information security audit per week, all with no critical findings. Currently, 20 of our main sites are ISO and IEC 27001 Certified, covering all main sites in China. IP is a lifeline for both our company and our customers. We uphold integrity as our foundation and enforce a zero tolerance policy against any infringement. This is our core value and our highest responsibility and commitment to our customers. Now let's move on to the segment performance. So please turn to Page 9. WuXi Chemistry's CRDMO business model drives continuous growth. In 2025, WuXi Chemistry revenue grew 25.5% year-over-year to RMB 36.47 billion, benefiting from continued process optimization and enhanced capacity efficiency driven by the growth of late-stage clinical and commercial projects. Our adjusted non-IFRS gross profit margin steadily improved 5.9 percentage points year-over-year, reaching 52.3%. Our Small Molecule Drug Discovery (R) business continues to generate downstream opportunities. In 2025, we have successfully synthesized and delivered over 420,000 new compounds to our customers. Meanwhile, 310 molecules were converted from R to D in 2022 (sic) [ 2025 ]. As we continue to strengthen the capabilities of our integrated CRDMO platform, we consistently enhance the internal conversion of molecules at different stages. Our Small Molecule D&M business remains strong, and the Small Molecule CDMO pipeline continued to expand. In 2025, Small Molecule D&M business revenue grew 11.4% year-over-year to RMB 19.92 billion. Meanwhile, the company continued to build small molecule capacity. In 2025, our Changzhou, Taixing and Jinshan API sites all successfully passed FDA on-site inspections with no single observation. By year-end, total reactor volume of small molecule APIs reached over 4,000 cubic meters. WuXi TIDES, our New Modalities business, sustained rapid growth. With the sequential ramp-up of new capacity released in 2024 and 2025, TIDES' revenue almost doubled to reach RMB 11.37 billion in 2025. As of year-end, TIDES' backlog grew 20.2% year-over-year. TIDES' D&M customers increased 25% year-over-year and its number of molecules increased 45% year-over-year. In September 2025, we completed Taixing peptide capacity construction ahead of schedule. The company's total reactor volume of Solid Phase Peptide Synthesizers has reached over 100,000 liters. Next page, please. So driven by Following the Molecule and Win the Molecule strategies, WuXi Chemistry's Small Molecule CRDMO pipeline efficiently converts and captures high-quality molecules and delivering sustained business growth. This reflects our customers' strong trust in our technical capabilities, our service efficiency and our quality system. In R stage, we delivered more than 420,000 new compounds in 2025, representing a significant scale. At the same time, the complexity of these molecules continue to increase, demonstrating the sustained demand from early-stage R&D customers for high-quality services. Building on this strong foundation, we continue to enhance the synergy between our R and D capabilities by strengthening the conversion of molecules from R to D. The new compounds synthesized in R stage serve as a continuous funnel, driving downstream demand for our D&M services. Moving to the D&M stage, we added 839 molecules to our pipeline in 2025 with 310 of them converted from R to D. As of year-end, our Small Molecule D&M pipeline reached 3,452 molecules, including 53 (sic) [ 83 ] commercial projects, 91 in Phase III, 377 in Phase II and 2,901 in Phase I and preclinical. Notably, commercial and Phase III projects increased by 22. As our late-stage pipeline grows, the complexity and the quality of molecules continue to grow. This deepens our collaboration with customers and lays a solid foundation for sustained long-term growth. Next page, please. Our TIDES business has maintained rapid growth over the past few years. So in 2025, TIDES' revenue grew a strong 96% year-over-year to reach RMB 11.37 billion, nearly double. We have been continuously enhancing our capabilities and capacity to better meet customer demand. Now I will hand over to our Co-CEO, Dr. Steve Yang, to talk about WuXi Testing and WuXi Biology. Steve, please. Qing Yang: Thanks, Minzhang. Please turn to Slide #14. In 2025, WuXi Testing revenue returned to positive growth, increasing 4.7% year-over-year to RMB 4.04 billion, of which revenue from drug safety evaluation service grew 4.6% year-over-year, maintained its leadership position in Asia Pacific. Adjusted non-IFRS gross profit margin declined year-over-year as the impact of market pricing were gradually reflected in revenue through backlog conversion. However, with our differentiated capabilities and enhanced operation management, margins continue to improve sequentially quarter-over-quarter. We actively enable customers in global licensing deals, supporting nearly 40% of the successful out-licensing projects from Chinese customers since 2022. Our new modality business continued to expand with revenue contributions exceeding 30% in 2025, maintaining a leading position in multiple areas. Meanwhile, we continue to advance automation. Our DMPK team launched a proprietary all-in-one compound identification software solution, improved efficiency by 80% (sic) [ 83% ] in spectral interpretation and metabolite identification for nucleic acids and peptide test articles. Finally, in 2025, our Suzhou and Shanghai facilities successfully passed multiple regulatory inspections by FDA, by OECD, NMPA and PMDA. This underscores the high quality of our GLP operations and our quality systems. Let's turn to Slide #15, please. WuXi Biology follows the science, strategically builds differentiated capabilities in emerging areas, and we actively expand our global customer outreach. This allows us to efficiently generate downstream opportunities for our CRDMO model, continuously contributing more than 20% of our new customers. We efficiently enable global customers through our integrated in vitro and in vivo drug discovery capabilities for biology, the cross-regional collaboration, end-to-end point in emerging areas. WuXi Biology revenue resumed positive growth in 2025, growing 5.2% year-over-year to RMB 2.68 billion. The adjusted non-IFRS gross profit margin was 36.9%, down 1.9 percentage point, reflecting market pricing dynamics. We closely follow market conditions with a flexible pricing strategy, maximize our value in generating downstream opportunities. Our revenue growth was driven by advancement in our comprehensive in vitro screening platform and enhanced in vivo pharmacology capabilities. Our non-oncology in vivo business maintained a competitive edge, serving as a key growth contributor to WuXi Biology. Our new modality business continued the momentum with the revenue contribution exceeding 30% in 2025, supported by rapid new customer expansion in multiple areas. Now I would like to turn the call to our CFO, Florence, to discuss our financial performance. Florence, please? Florence Shi: Thank you, Steve. Let's turn to Slide 17. We would like to recap on the company's financials. In 2025, we beat our full year guidance and achieved record high performance in revenue, profit and cash flow, all aspects. Thanks to the visibility provided by our CRDMO business model, we proactively planned our capacity and capabilities. As new capacity ramped up efficiently quarter-over-quarter, we timely supported the growing demand from late-stage clinical and commercial projects. Meanwhile, we continued to drive quality growth, strengthen our technological expertise and improve operational efficiency. In 2025, our adjusted non-IFRS gross profit reached RMB 21.89 billion. Adjusted non-IFRS gross profit margin expanded to 48.2%, up 6.6 percentage points year-over-year. Adjusted non-IFRS net profit grew 41.3% to RMB 14.96 billion. Correspondingly, adjusted non-IFRS net profit margin improved by 5.9 percentage points to reach 32.9%. Net profit after deducting nonrecurring items grew 32.6% to RMB 13.24 billion and net profit attributable to the owners of the company surged 102.6% (sic) [ 105.2% ] to RMB 19.15 billion (sic) [ RMB 19.19 billion ]. Building on our robust business growth, we sharpened our focus on the CRDMO core business and continue to enhance our investment management capabilities. This resulted in pretax investment gains exceeding RMB 8 billion in 2025. further boosting our net profit attributable to the owners of the company. Consequently, our diluted earnings per share reached RMB 6.61 (sic) [ RMB 6.63 ], more than doubling year-over-year. Please turn to Slide 18. With sustained business growth, particularly the rapid increase in late-stage clinical and commercial projects, combined with enhanced operational efficiency and financial management, our 2025 adjusted operating cash flow reached a record high of RMB 16.67 billion, growing 39.1% year-over-year. This fully demonstrates the sustainable momentum driven by our high-quality molecules and projects. We continue to actively advance our global capacity expansion as planned with CapEx payment of RMB 5.54 billion in 2025. Now I'd like to hand over to Minzhang to share the company outlook. Minzhang, please. Minzhang Chen: Okay. Please turn to Slide 20. Okay. We remain focused on our unique integrated CRDMO core business, accelerating the growth of our global capabilities and capacity. We provide highly efficient and exceptional services to our customers, benefiting patients worldwide and driving long-term growth. We will also drive the O in our CRDMO model operations. By driving optimized management and operations, we aim to continuously improve, improving efficiency and strengthen organizational resilience to navigate dynamic market conditions. With customers' ongoing demand for enabling services, our CRDMO business model and management execution, the company is confident to sustain rapid business growth. We expect total revenue to reach RMB 51.3 billion to RMB 53 billion in 2026, with continuing operations revenue growing 18% to 22% year-over-year. By continuously driving quality growth, realizing scale efficiency and enhancing operational excellence, while proactively managing new capacity ramp-up and exchange rate challenges, we are confident in maintaining a stable and resilient adjusted non-IFRS net profit margin in 2026. Finally, CapEx for 2026 is expected to reach RMB 6.5 billion to RMB 7.5 billion. Along with business growth and efficiency improvements, we expect adjusted free cash flow to reach RMB 10.5 billion to RMB 11.5 billion. Next page, please. While accelerating the growth of our global capacity and capabilities, we remain committed to rewarding shareholders and actively upholding the company's value. The Board proposes a cash dividend distribution plan totaling a record RMB 5.7 billion in 2026. Specifically, we plan to maintain the 30% annual cash dividend payout ratio, expecting to distribute 2025 dividend of RMB 4.71 billion, while continuing our interim dividend plan of RMB 1 billion in 2026. To continuously attract and retain top talent, we proposed the 2026 H-share incentive Trust plan. Under this plan, no more than HKD 1.5 billion worth of H-shares will be granted if 2026 revenue reaches RMB 51.3 billion. An additional HKD 1 billion worth of H-shares will be granted if revenue reaches RMB 53.0 billion or above. This aims to strengthen management resilience and align our team for long-term shared growth. Importantly, all underlying H-shares will be purchased in the open market at prevailing market prices with no dilution to existing shareholders. Thanks for your attention, and we are now open for questions. Laurence Tam: Thanks a lot, Minzhang Chen, Steve Yang, Florence and also Ruijia. We will now enter the Q&A session. [Operator Instructions] So let me start off with the first question. First of all, let me congratulate management on a fantastic 2025 and a very positive 2026 guidance. Obviously, this year, there's a lot of uncertainty in the markets and also, we have experienced a lot of volatility. Despite that, the company delivered a very positive 2025 and a continuing operations revenue growth range expected for 2026 of 18% to 22%, which means that the midpoint is 20% growth in 2026 for continuing operations, which gives investors a lot of visibility. One of the key concerns this year from investors for the CXO industry is the exchange rate. Year-to-date, the U.S. dollar has depreciated against the RMB. So the first question is, in the context of this renewed guidance, how does management think about the impact of currency exchange? And what is your outlook or guidance for each of the 3 business units? Ruijia Tang: Yes, thanks. We do consider the FX movement and the challenges. So I also would like to appreciate everyone who recognize, even with not only the FX, but with all the complexity and the volatility in the macro environment we are navigating, every company is navigating today, we still provide a very clear and narrow guidance range of our total revenue, which is only about like 3% of our top line, at the beginning of the year, which is pretty consistent with our historical practice. Basically, that reflects the strong visibility in our CRDMO business model and our confidence in our execution capabilities, same as the management capabilities on the FX movement as well. Laurence Tam: Thanks a lot, Ruijia. So the second question is a little bit on geopolitics. Obviously, the situation in the Middle East has escalated in recent weeks, and investors are worried about the rise in oil prices and the impact on raw material costs. Your margins improved significantly last year. And this year, the guidance is that margins would be stable. How would you think about the impact of geopolitics and oil prices on your margins going forward? Florence Shi: Yes, I will comment on the cost fluctuations that could be impacted. So first of all, our global operations are running smoothly as usual, okay? We acknowledge there are potential risk to certain upstream raw material costs, but it takes time to transmit through the broader supply chain. We haven't seen any direct or quantifiable impact on our operations or cost, but we will closely monitor the situation and the market dynamics as everyone did. We have mature and diversified procurement network in place in past 25 years. On top of that, we are constantly optimizing our manufacturing process, driving operational efficiency, which helps us focus on the certainty of meeting the customer demands in need and remain committed to deliver exceptional services. Laurence Tam: Thanks, Florence. So we get to sell-side and investor questions now. So I will first start with 2 questions from Goldman Sachs, Chen Ziyi. So his first question is the company continued to be highly committed to TIDES' CapEx. So he would like to understand a bit more on the pipeline behind the CapEx budget beyond injectable peptides, which has been a key driver in the past 3 years? And what would be the next key modalities that could potentially be the new focus, for example, siRNA, antisense oligos, oral peptides or any new modalities that biopharma is thinking about at the early stages? Minzhang Chen: Well, so right now, there are many modalities. It's a combination. So there is no single modality that can replace all. So we have small molecules, we have peptides, and we have oligos, and we have all kinds of conjugates. But currently, the demand for peptides itself is so high, so we continue to build the capacity and to meet the market demand for the peptides. At the same time, we're also seeing oligonucleotide is growing. And although the market is still small, but we see that there are many, many molecules in the pipeline, and also it's going from rare disease now to a very broad to general disease. So the growth will be fast. And also small molecule. Now the molecules became more and more complex. So to manufacture, in large scale, very complex molecules, needed very technical capabilities as well as manufacturing capacities to meet the market demand. So we are doing all this. Laurence Tam: Thanks, Dr. Chen. So Ziyi's next question is there's been some debate on what will be the impact of pharma's announced big CapEx on building internal capacity, particularly in the U.S.? What is WuXi AppTec's view on that? Have you sensed any change on client outsourcing strategy in the past 6 to 12 months? Minzhang Chen: Yes. So in the pharmaceutical industry, historically, all the API drug products are manufactured internally. And then some of the work is done by the CMO, CDMO. And so this has a long history. So it's nothing new that the large pharma is also manufactured internally, nothing new. But we just committed continuously to improve our capabilities and to invest in capacities and provide the best service and meet the customer needs. Laurence Tam: Thanks, Dr. Chen. So the next few questions are coming from Michael Luo of CLSA. His first question is, can WuXi AppTec give us some color on the current utilization rate of the company's 4,000 cubic meter small molecule API capacity? And also, do you still have any plan to expand capacity in this area this year? Minzhang Chen: Yes. Our current capacity is highly utilized. And we have the -- well, because we don't really talk about the capacity for the -- we are building the capacity for small molecules, but actually, we have the land and we continuously build the small molecule capacities to meet the demand. So we grow double digit, over 11% last year, to almost RMB 20 billion for the Small Molecule D&M. So that means a lot of capacity. And this year, we expect accelerated growing from the Small Molecule D&M. So there will be more capacity. So we continue to build new capacity for small molecules. And if you go to our Taixing site, we have the land and we continue to build the new plants all the time. Laurence Tam: And his next question is, beyond obesity and diabetes-related projects, can management highlight any pipeline products or areas that may become meaningful contributors to revenue growth in the next 3 to 5 years? Minzhang Chen: Yes. So our business model is a CRDMO business model. So we have a very broad pipeline. So for example, currently, our D&M pipeline for small molecules, we have more than 3,000 molecules. And so, as a funnel, we continuously have the project moving to the late phase and the commercial projects. And many of those projects are very high-quality molecules. Clearly, GLP-1 right now has the most demand in terms of volume. But also, we have quite a few very promising high-quality molecules into the late phase and the commercial stage. For example, the PCSK9 molecule, autoimmune molecule, pain, neuroscience. So we have a number of that. Just the number I gave in the Investor Day last year, 2024, the Drug Hunter named top 10 molecules, and we work on 8 of them. Again, just a few days ago, they published 2025 top 10 molecules, and we work on 7 of them; and the best-selling small molecules, the top 10, we work on 4 of them. So we work on many of the high quality as big large volume molecules. But of course, right now, GLP-1 is still the #1, no doubt about that. Laurence Tam: Thank you. His next question is, can management share how you're thinking about CapEx allocation this year, in particular, which business areas or capacity building are likely to be the key focus going forward? Florence Shi: Yes. I think the CapEx spending really reflects our business model and our global expansion strategy. So a majority of our CapEx spending will be put on the CDMO capacity expansion, because our business generates more and more downstream D&M projects. And also, we're accelerating our global expansion in U.S., Europe and also the Middle East in future. But at the same time, we are also expanding the capacity for both small molecule and new modalities in China as well. Laurence Tam: Okay. Thank you, Florence. His last question is, given the recent volatility in the Middle East, has the company's strategic approach to the region changed in any way? And also which types of business or operations, if any, do you see as potentially suitable for the Middle East over time? Qing Yang: Yes, our global capacity and capability building is our long-term strategy. Clearly, that will continue. And we have announced a memorandum of understanding with government agencies with Saudi Arabia late last year. And our strategic initiatives in Saudi Arabia continue to proceed. We are engaging with relevant stakeholders and develop tactical plans for the next step. So that continue. Our CRDMO business model and our globalization of our capacity and capability is really the key to our continued growth, and we will continue to build the global capacities. In terms of what suitable area in Saudi Arabia, we are going through a deep dive with the advisory of local strategic advisory firms to understand local regulatory requirement and what are the suitable capabilities we should localize. Based on our preliminary feedback, clearly, there are lots of opportunities. We will likely start in the discovery space and then gradually expand to other part of our global platform. Laurence Tam: Thanks, Dr. Yang. Next, we have 3 questions coming from CICC's Wanhua. First question is, what is the current capacity utilization rate of the company's solid phase peptide capacity, which now exceeds 100,000 liters? What level of utilization does the company expect to reach in 2026? Are there any plans for further capacity expansion? Minzhang Chen: Yes. The peptide capacity currently is highly used. So as a result, actually, we just started 2 new TIDES buildings, so for both peptide and oligo, we just started 2 TIDES building construction in our Taixing site. In the meantime, we also built a new plant in Singapore for TIDES. So in short, yes, our capacity is highly utilized right now, and we are building new capacities to meet the growing demand. Laurence Tam: Thank you, Dr. Chen. Her second question is, what is the progress of U.S. and Singapore sites? And is it currently in line with expectations? How will these new facilities coordinate with the company's domestic capacity? And has there been any change to the expected time line for commencing operations? Minzhang Chen: Both projects are on time, on schedule and on budget. So our U.S. plant, which is in Middletown, Delaware, is for drug products. So it will have both oral solid dosage and injectables once completely operational. So hope Q4 this year, we're going to start the operation of the oral solid dosage, and a year later, Q4 next year, we're going to start the injectable business. Yes, this is the U.S. plant side. For the Singapore side, it's also on schedule and on budget, and the first plant will be operational next year, '27, and that is for API. So this way, then we will have a dual supply chain for the customers, so they can either get made in China or made outside China, which is in Singapore, for API. On the drug product, U.S. side is mainly for the U.S., North American market customers. And we also have a drug product facility in Switzerland, which is mainly for the European market. Laurence Tam: Thanks, Dr. Chen. Her last question is, the company has seen a significant increase in inventory. Is this mainly related to stocking for large orders? When are the corresponding orders for these inventories expected to be recognized as revenue? Florence Shi: Yes. I think this truly reflects our business model of our CRDMO business. Our inventory is being built based on the orders in hand. At the same time, as we have the capabilities to capture the high-quality molecules, which is more complex and takes longer manufacturing process, so that's why the inventory growth is higher than the revenue growth. I think that's a further validation of the high-quality growth trajectory of our business. Laurence Tam: Thanks, Florence. So next, we'll go back to Ziyi Chen from Goldman Sachs. He has a question on AI. So in the past 2 months, U.S. CRO company share prices have been hit hard by concerns on AI and how it could pose competitive pressure on pricing or volume for lab services and clinical services. What is WuXi AppTec's view on the impact of AI, particularly on its Testing and Biology segments? Qing Yang: So first of all, our Biology and Testing business remain robust, both in terms of the return to positive growth, as we reported, and also our outlook for 2026. We actually believe AI in combination with human intelligence could be a huge enabler, not only for our industry, but specifically for our company, and help us to increase efficiency, at the same time, increase our ability to anticipate and forecast the future in terms of customer needs and in terms of capacity utilization. This is an area we have invested heavily in terms of our ability to using operational data to make our animal room scheduling, study scheduling, reactor cleaning as well as other aspects of work become more efficient. The example we cited during the presentation on spectral resolution and interpretation for our DMPK team is a good sign. That situation is obviously very different from as we have seen in other sectors such as in enterprise software. Secondly, we do believe our wet lab capabilities to generate massive data and with high quality and consistency is actually very important for companies who are interested to build a new model and algorithms to increase their prediction capabilities. And we had opportunity to work with many leading companies in this space. And so while they may have models that have the potential to generate new hypothesis, at this stage most of those models require high-quality data, and we are uniquely positioned to provide those data. So this is actually a driver to more business for our Biology and Testing business. And finally, we believe, for our CRDMO model, with more advancement in ability to unlock either target space or come with new hypothesis to design molecules, it will only accelerate the flow of new ideas into project start, and that will ultimately benefit the funnel, the CRDMO funnel, in a world where research and discovery become even more globalized and decentralized. Laurence Tam: Thanks, Dr. Yang. So now we have 2 questions coming from Chen Chen of UBS. First, U.S. FDA has announced that it plans to drop the standard requirement of 2 Phase III or pivotal trials. Instead, the FDA's default position will be for Phase III trial for drug approvals. Do you think that it would accelerate drug approvals and benefit your new orders growth? Qing Yang: I will start and then invite Minzhang for additional comments. So first of all, any regulatory streamlined process will benefit from patients. Secondly, any acceleration in clinical development potentially will drive more demand and more timely demand for drug substance and drug product to supply clinical trial. And if that shortens clinical development time frame, it will help actually accelerate the commercialization drive. So we think all of those initiatives that shorten the time to patients will be beneficial for our CRDMO model. Minzhang, any additional comments? Minzhang Chen: No, I think that's well said. Laurence Tam: Thank you, Dr. Yang, Dr. Chen. So her next question is, one of your biggest clients announced a 10-year plan to invest USD 3 billion in expanding its oral dosage supply chain in China, focusing on oral GLP-1 manufacturing. And one of your peers, a CDMO, has received part of this investment, actually USD 200 million initially. Do you think you can also benefit from this multinational investment in China and to what extent? Minzhang Chen: Well, so we all know that GLP-1 drugs, no matter it's peptide or small molecule, has a huge demand and so this announcement, this investment just further proved that, yes, the demand is very high for the molecule. So because the demand is very high, and we are the major player in this field, so we believe we will benefit from the opportunities. I don't want to comment on the specific partnership or collaborations, but -- so the USD 3 billion investment, right now it's only USD 200 million, so we have to spend the rest. Laurence Tam: Thanks, Dr. Chen. So the next question comes from Huang Yang of JPMorgan. What is WuXi AppTec's positioning in oral small molecule GLP-1 CDMO business? Minzhang Chen: Well, we had a double-digit growth last year, and we are accelerating the growth for the small molecule this year. And part of the contribution of this growth is from the GLP-1 small molecule. Laurence Tam: Okay. And his next question is, it seems that Small Molecule D&M business will have better growth in 2026 versus 2025. What would be the main drivers for that? Minzhang Chen: Well, it's just demand, high demand, because the drug will be approved this year, I believe. Laurence Tam: Okay. Next, we have 2 questions coming from an investor from Franklin Templeton. "Hi, this is Harry from Franklin Templeton. Congrats on the robust performance. So firstly, what is the revenue breakdown? What is the mix do you see? And how do you see the geographical mix changing? Growth, obviously, is very strong in the U.S., while Europe and China are showing some recovery." So let's first address this question. Minzhang Chen: Florence, do you want to comment on the mix? Florence Shi: Okay. Yes. I think because we follow the customer, follow the molecule, and follow the science. So the geographic revenue growth really demonstrates where the innovation comes from, where's the customer need, our capabilities and the capacities. We do see the strong growth from across all the regions, and we believe that we can better deliver and execute in 2026. Minzhang Chen: Thanks, Florence. Yes, we see the PO growth across all the regions for 2025. So we believe that's growth for all the regions in 2026, but particularly the growth was strong last year in U.S. So that's why the percentage of the other regions relatively becomes smaller, but we expect the growth for all regions this year. And the small decline in China and Europe last year was mainly due to the delivery schedule of some large projects, but the growth momentum is there. Florence Shi: Yes. I think that's basically proof we have very good position everywhere. And we continue to see the strong growth in U.S., in China, and Europe and all the other regions. Laurence Tam: Okay. And his next question is on the TIDES business. How do you see sustainability of its growth? Minzhang Chen: Yes. So the largest product that we are making, the demand will continue to grow in the next many years by market forecast. So the demand will continue to grow. We also are working on quite a few late phase, very promising projects, which potentially could be big products as well. One more step back, we are a CRDMO, so we have a very big pipeline, not only in small molecules, but also in peptides and also in oligonucleotides. We have a pipeline and that pipeline continues to funnel the projects into the late phase and commercial projects. And that's where our sustained long-term growth comes from. Laurence Tam: Okay. And on oligonucleotides, what is WuXi AppTec's differentiation from the other oligo CDMOs or manufacturers? Minzhang Chen: Yes. So like all other modalities like peptides small molecule, if you can find a place that has quality, speed, cost, technical capability and the capacity, you tell me. So I think it's the same. So we put all this together, and I think that's our unique advantage. Laurence Tam: And his last question is, can you give us some color on the general time line that it takes for a new facility to be built and to contribute in a meaningful way to earnings? Minzhang Chen: So in China, we can do that in less than 12 months from start to fully operational. Laurence Tam: So we have 2 questions next coming from Nomura's Zhang Jialin. So firstly, what is the range for the TIDES business gross margin? Do we calculate over 60%, is this about the right range? And how should we think about the margin trend for TIDES? Minzhang Chen: Well, I don't believe we disclose the margin for TIDES. Florence, can you answer that? Florence Shi: Yes. We don't disclose the specific margin. But I think the margin naturally reflects our capabilities, the capacities and the value creation to the customers. Laurence Tam: Okay. His next question is, how is the current Middle East situation or conflict impacting the company's investment view in Saudi Arabia in the midterm? Qing Yang: As I already mentioned earlier, we don't see any near-term disturbance changing our long-term strategy. Our long-term strategy is strengthen CRDMO model, build global capacity wherever there is a customer need. And we're continually engaging with stakeholders in Saudi Arabia and proceed with evaluation of different localization options. Those continue to proceed based on our plan. Laurence Tam: Thanks, Dr. Yang. So next, we'll go to Citi's John Yung. You initially guided continuing operations revenue to grow 10% to 15% for 2025, and you delivered 21% plus. Now the same guidance for 2026 is a range of 18% to 22%. Should we also expect this guidance to be prudent and that you are confident to beat it? Florence Shi: Rather than calling our guidance prudent, I would view it as responsible to the market, right? And I appreciate you track our records. We are navigating a lot of the complex and volatile macro environments today, but we do have the confidence to execute the guidance we provide to the market. Of course, we will closely monitor and give the updated time line to all the investors if we see any different situation. Laurence Tam: Thank you, Florence. So next, we'll go back to Ziyi Chen's question. So 2026 guidance has been very clear and exciting. He would like to understand the growth sustainability a bit more. What is the reasonable growth expectation beyond 2026, when the TIDES business will be slowing down given the large base and key product cycles. What could be the key growth driver beyond 2026? Florence Shi: I think we have the confidence to keep the sustainable growth. And basically, we follow the molecules, and the CRDMO model really gives us the confidence. We will continuously capture the high-quality molecules and follow the science. And we do have the capabilities and capacities to better serve our customers. Laurence Tam: Okay. And going back to Nomura's Zhang Jialin, he has a follow-up question. Can management help us understand the competitive landscape of siRNA CRO space and the growth outlook? How much will it contribute to the current TIDES segment? Minzhang Chen: Yes. So there are many players out there that have provided the CDMO service on the oligonucleotides, specifically, I think siRNA. And also siRNA has a very large percentage in our pipeline as well. Like I said, we continue to focus on the service we provide, and we continue to focus on both the quality service, the capacity, the speed and the competitive cost. So I think with our unique advantage, we just focus on providing the best service and win the competition in the end, just like we do in every modality in our business. Laurence Tam: So next, we have an investor question. WuXi AppTec has RMB 42-plus billion of backlog expected to be converted in 2026, but you're guiding for RMB 51.3 billion to RMB 53 billion of total revenue. So that means roughly an extra RMB 9 billion to RMB 11 billion will need to come from new orders signed and delivered within the year. In the current environment, with trade policy uncertainty, how confident are you in that year booking assumption? And has Q1 2026 order activity remained consistent with that trajectory? Florence Shi: Yes. I think you're right. You noticed. Actually, in our total backlog, it is expected to convert -- like 70% of our total backlog is expected to convert into the revenue in 2026, which is within the next 12 months. I think our ability to convert orders into revenue with speed and efficiency actually reflects our strong execution capabilities across our whole organization. And if you compare with the historical number, actually the percentage is significantly improved, which also demonstrates we have more and more late-stage clinical and commercial projects on hand. That really enhances the near-term visibilities and the certainty of our growth trajectory. As I mentioned, with all the efforts we are making, we do have the confidence to deliver our guidance. And of course, we always try to beat it, right? So I don't see there is any big concern about the new orders coming in the conversion. Laurence Tam: Okay. Great. Thanks, Florence. So last question, let me wrap up by touching a bit on geopolitics. We haven't really talked about the 1260H list from the U.S. Pentagon. Obviously, it was released shortly in February and then withdrawn within like an hour. And a lot of investors looked at that list and saw WuXi AppTec being on there together with a lot of big Chinese companies. Does the company have anything to say on that? Obviously, Sino-U.S. relations were moving in a positive direction in the months prior to that with obviously, the BIOSECURE bill not naming the WuXi companies. What is the company's view on relations between the 2? Qing Yang: Yes, I'll take that question. So as you mentioned that we have seen that in February the list was put on and withdrawn. So at this time, the final 1260H list for 2026 has not been officially published. And there's no definitive timetable at this time as to when this is going to publish, no one actually knows, and we won't make any prediction or speculations for the timing of the U.S. government's actions. At the same time, they are very confident that WuXi AppTec shall not be included in the 1260H list. We are a publicly traded company listed in Hong Kong and Shanghai with a transparent corporate governance. The company is not owned or controlled by any government or affiliated with any government or military organization. So at this moment, the company will continue to monitor the situation and take all necessary actions to correct any misinformation and clarify any misunderstandings. And in terms of BIOSECURE Act, you mentioned that -- we all know that the bill was passed as part of the NDAA at the end of last year. Since then, there's no recent development on the implementation. So we'll continue to monitor. Laurence Tam: Thank you very much. So we're coming up to the time limit. So let me pass it back to management to do concluding remarks. Minzhang Chen: All right. Thank you all for joining today's earnings call. So 2025 is the 25th anniversary of WuXi AppTec. So for the past 25 years, WuXi AppTec has been dedicated to lowering the barriers to R&D and advancing health care innovation worldwide. Entering 2026 with a sharpened focus on our core CRDMO strategy, we are accelerating the growth of our global capabilities and capacities, further improving production and operational efficiency and delivering greater value for customers and shareholders. Staying true to our founding aspiration, we will remain committed to doing the right thing and do it right, enabling our partners to deliver life-saving therapies to patients in need and advancing our vision that every drug can be made and every disease can be treated. Thank you all. Laurence Tam: Thank you very much to WuXi AppTec's management and the IR team. This will conclude the presentation. Thank you all for joining. Florence Shi: Thank you. Ruijia Tang: Thank you. Qing Yang: Thank you. Laurence Tam: Bye.
Operator: Good evening, and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's Fourth Quarter 2025 and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'll now turn the meeting over to your host for today's call, Ms. Lara Zhao, 17EdTech's Investor Relations Manager. Please proceed, Lara. Lara Zhao: Thank you, operator. Hello, everyone, and thank you for joining us today. Our earnings release was distributed earlier today and is available on our IR website. Joining us today are Ms. Sishi Zhou, Chief Financial Officer; and myself, Investor Relations Manager. Sishi will walk you through our latest business performance and strategies and I will discuss our financial performance in more detail. After the prepared remarks, Sishi will be available to answer your questions during the Q&A session. Before we begin, I'd like to remind you that this conference call contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties or other factors, all of which are difficult to predict and many of which are beyond the company's control. These risks may cause the company's actual results, performance or achievements to differ materially. Further information regarding these or other factors -- other risks, uncertainties or factors is included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. I will now turn the call over to our Chief Financial Officer, to review some of our business development and strategic direction. Sishi? Sishi Zhou: Thank you, Lara. Hello, everyone. Thank you all for joining us on our fourth quarter and full year 2025 earnings conference call. Before we begin, I would like to note that the financial information and the non-GAAP numbers in this release are presented on a continuing operational basis and in RMB, unless otherwise stated. Let me begin with our latest business update. In the fourth quarter of 2025, we continued to deliver steady progress in our core business with top line growth on a year-over-year and quarter-on-quarter basis. Our school-based subscription model business continued to expand, contributing a growing share in total revenue, emerging as a key contributor during the quarter. Meanwhile, we successfully launched our new consumer-facing product, [ ETIC, ] which is closely aligned with the National AI plus education initiative. Leveraging the brand recognition and user trust cultivated over the past decade. Our new AI membership products have achieved strong presale orders and received highly positive market feedback since its launch, demonstrating its robust growth prospects in the quarters ahead. Notably, the robust preseale demand for our new products generated a significant increase in free cash flow. At of quarter end, we maintained a healthy cash balance of RMB 407 million, reflecting the promising trajectory of our new AI-powered offering and the positive expectations for future cash flow. Now let me go into more details. In the fourth quarter of 2025, we recorded net revenues of RMB 38.9 million an increase of 94.6% on a quarter-on-quarter basis and a 6.4% growth on a year-over-year basis, driven by the growing contribution of recurring revenue under subscription model as well as our consistent commitment to cost control. Gross was restored to a normalized level of 46.1% in Q4, a 12.5 percentage point increase on a year-over-year basis, benefiting from sustained efficiency improvements, our net loss narrowed by 16.8% year-over-year. We also generated positive net operating cash inflow in the quarter driven by the strong momentum of our new [ CN ] business and continuous improvement in operational efficiency. During the quarter, our school-based subscription model business maintained positive progress, contributing a growing share of total revenue. The increase in net revenues from this segment reflects its recurring nature as it continues to scale effectively. The steady progress of our school-based subscription business has not only strengthened our financial health, including gross margin and other key metrics, but also helped us reach a broader base of potential users and enhanced brand influence, laying a solid foundation for the launch of our [ CN ] business. In response to the national initiative of embedding AI throughout the entire educational process and guided by our mission to make learning a wonderful experience, during the quarter, we successfully rolled out AI personalized learning membership product, [ ETIC ] targeting [ CN ] users. Levering to the user trust built over years, strong brand endorsement from our district level and school-based projects as well as mature smart hardware capabilities and solid AI foundation with new AI membership product has garnered a strong market enthusiasm and a robust preorder volume. In the design of this product, we are committed to enabling users to achieve a more personalized, effective and enjoyable learning experience in less time. It deeply integrates our hardware and software capabilities together with the exclusive content resources we have built over the past decade. Our Smart Pen captures full process writing data while respecting traditional play and paper habits. It efficiently digitalized handwritten notes and exercise responses, visualizing users thinking process rather than simply uploading final answers. By visualizing these thinking patterns, we are able to deliver personalized learning diagnostics, generate AI-powered customized practice nodes and intelligently recommend similar learning exercises, enabling highly efficient and focused learning practice. Users' own notes taken with this [indiscernible] with support for custom tag, categorization and quick search. As a result, users can quickly identify their learning areas for improvement without spending extra time manually organizing paper notes comparing practice notes or searching for relevant problems. In addition, our AI panel provides study supervision based on personalized diagnostics and over tailored learning plans aligned with the local learning schedules and individual progress. This allows users to focus on their growth areas and improve efficiently. These personalized practice and planning capabilities are backed by our 10 years of deep insight into local learning profiles supported by massive data from large-scale regular full scenario usage across our platform. The product also features interactive tools, including AI Q&A and AI transmission, et cetera, along with a suite of value-added learning resources. Notably, we have introduced Toby Smart Rabbit, an intelligent learning companion that provides emotional support through natural voice interaction. It reminds users to study, offers encouragement and makes the learning experience warmer and more engaging, helping users stay consistent with the personalized learning journeys. Looking ahead, we will continue to explore innovation practices in AI plus education and steadily reiterate and upgrade our products. Our business segments, serving [ GN, BN and CN ] users will grow in synergy as we further strengthen our brand influence and enhance user value. The above concludes the business update. Now I will turn the call over to Lara to walk you through our latest financial performance. Thank you. Lara Zhao: Thanks, Sishi, and thank you, everyone, for joining the call. I will now walk you through our financial and operating results. Please note that all financial data I talk about will be presented in RMB terms. We are pleased to announce healthy financial results for the first -- for the fourth quarter of 2025 with top line growth of 94.6% on a quarter-on-quarter basis. Gross margin for the fourth quarter of 2025 was 46.1%, representing a 12.5 percentage point increase on a year-on-year basis compared to the same period last year. Meanwhile, our continued focus on operational efficiency resulted in narrowing losses in the fourth quarter and the fiscal year of 2025. Despite an increase in sales and marketing expenses in support of the launch of our new AI-powered consumer business, we achieved a reduction in total operating expenses for the fourth quarter and full year of 2025 by 10.9% and 24.3%, respectively, resulting in narrowing losses by 16.8% and 20.0%, respectively, on a GAAP basis. Next, I will walk you through our fourth quarter financials in greater detail. Net revenues in the fourth quarter of 2025, we recorded net revenues of RMB 38.9 million compared with RMB 36.6 million in the fourth quarter of 2024, representing a 6.4% increase on a year-on-year basis which was primarily due to the increase in net revenues from the school-based subscription model business, which is demonstrating its recurring nature as it continues to scale. Cost of revenues for the fourth quarter of 2025 was RMB 21.0 million, USD 3.0 million, representing a year-over-year decrease of 13.6% and from RMB 24.3 million in the fourth quarter of 2024, which was mainly due to the fewer district level project deliveries for our teaching and learning SaaS offerings as a result of a new -- as a result of growing proportion of recurring revenue and the subscription model that requires fewer hardware and software deliveries. Gross profit for the fourth quarter of 2025 was RMB 17.9 million, USD 2.6 million compared with RMB 12.3 million in the fourth quarter of 2024. Gross margin for the fourth quarter of 2025 was 46.1% compared with 33.6% in the fourth quarter of 2024, representing a 12.5 percentage point increase on a year-on-year basis. The increase was largely attributable to higher contribution from the school-based subscription business with higher margins as well as enhanced operating leverage as our subscription model business growth. Total operating expenses for the fourth quarter of 2025 were RMB 72.5 million which is USD 10.4 million increased RMB 8.9 million of share-based compensation expenses representing a year-over-year decrease of 10.9% from RMB 81.4 million in the fourth quarter of 2024. Sales and marketing expenses for the fourth quarter of 2025 was RMB 40.2 million, including RMB 1.7 million of share-based compensation expenses, representing a year-over-year decrease of [ 99.0 ] from RMB 20.2 million in the fourth quarter of 2024. This was primarily attributed to the increased market workforce and related expenses in support of the launch of our new AI powered consumer business. Research and development expenses for the fourth quarter of 2025 were RMB 16.3 million, USD 2.3 million, including RMB 2.9 million of share-based compensation expenses representing a year-over-year decrease of 3.8% from RMB 17.0 million in the fourth quarter of 2024. The decrease was primarily due to the decrease in the share-based compensation compared with the same period last year. Generating and administrative expenses for the fourth quarter '25 were RMB 16.0 million, USD 2.3 million, including RMB 4.3 million of share-based compensation expenses, representing a year-over-year decrease of 63.8% from RMB 44.2 million in the fourth quarter of 2024. This was primarily due to the decrease in share-based compensation and the effect of one-off expenses in impairment loss provision in the fourth quarter of 2024. Loss from operations for the fourth quarter of 2025 was RMB 54.86 million, USD 7.8 million compared with RMB 69.1 million in the fourth quarter of 2024. Loss from operations as a percentage of net revenues for the fourth quarter of 2025 was negative 142 -- 140.2% compared with negative 188.8% in the fourth quarter of 2024. Net loss for the fourth quarter of 2025 was RMB 53 million compared with net loss of RMB 63.7 million in the fourth quarter of 2024. Net loss as a percentage of net revenues was negative 160 -- 136.1% in the fourth quarter of 2025 compared with negative 174.2% in the fourth quarter of 2024. Adjusted net loss non-GAAP for the fourth quarter of 2025 was RMB 44.1 million, which is USD 6.3 million compared with adjusted net loss non-GAAP of RMB 40.1 million in the fourth quarter of 2024. Adjusted net loss, non-GAAP, as a percentage of net revenues was negative [indiscernible] in the fourth quarter of 2025 compared with negative 109.5% of adjusted net loss as a percentage of net revenues in the fourth quarter of 2024. Please refer to the table captioned reconciliations of non-GAAP measures to the most comparable GAAP measures at the end of this press release, for reconciliation of net loss under U.S. GAAP to the adjusted net loss non-GAAP. Cash and cash equivalents, restricted cash and term deposits were RMB 407.0 million which is USD 58.2 million as of December 31, 2025, compared with RMB 359.3 million as of December 31, 2024. Going forward, we will continue to strengthen our core strength with the advancement of AI capabilities serving as a key driver of our sustainable growth. At the same time, we will further enhance cross-business synergies and reinforce our business resilience to support long-term development. These integrated efforts enable us to combine our respective strengths and deliver consumer-centric offerings that truly resonate, creating a sustainable growth pathway that generates lasting value for both learners and shareholders. With that, we conclude our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Operator: [Operator Instructions] I'm showing no questions. I'll now turn the conference back to Ms. Lara Zhao for closing comments. Lara Zhao: Thank you, operator. In closing, on behalf of 17EdTech's management team, we'd like to thank you for your participation on today's call. If you require any further information, please feel free to reach out to us directly. Thank you for joining us today. This concludes... Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the NRx Pharmaceuticals Q4 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, March 24, 2026. I would now like to turn the conference over to Michael Abrams, CFO. Please go ahead. Michael Abrams: Thank you, Joelle, and welcome, everyone. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward-looking statements under the United States federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning factors that could cause results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward-looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements. Information presented on this call is contained in the press release issued today and in the company's Form 10-K, which may be accessed from the Investors page on the NRx Pharmaceuticals website. Joining me on the call today is Dr. Jonathan Javitt, our Founder, Chairman and CEO. Dr. Javitt will provide an overview of our company's progress as reported yesterday on Form 10-K, following which, I will review our financial results. Following their prepared remarks -- these prepared remarks, we will address investor questions. I will now turn the call over to Jonathan. Jonathan? Jonathan Javitt: Thank you, Mike. Good morning, everyone. Thank you for joining us. 2025 was a pivotal and transformative year for NRx and for its HOPE Therapeutics subsidiary. We've advanced each of our programs with a drug approval anticipated for KETAFREE over the summer potential for drug approval this year for NRX-100 and a dramatically expanded opportunity for NRX-101. Our HOPE therapeutics clinics are demonstrating EBITDA positive revenue growth. Most importantly, given our low cash burn, we only need to be successful on one of those fronts to reach pro forma profitability by the end of the year. Of course, the 10-K only demonstrates the impact of first quarter of clinical operations, i.e., the fourth quarter was our first quarter of operations so you can interpolate that over a full year. We've ended 2025 a far stronger company than when the year began. Our 10-K documents a year-over-year reduction in expenses from operations even as we move far closer to potential FDA approval. We eliminated all convertible debt from our balance sheet and ended the year with a $7.8 million of cash on hand. More importantly, with the growing revenues from operations and ongoing ATM activities, we anticipate adequate cash resources to support operations at least through 2026 by which time we aim to be a fully commercial pharmaceutical company and to own a substantially larger clinical network. Let's start with an overview for each of our development programs beginning with our Abbreviated New Drug Application or ANDA for preservative free ketamine, which we call KETAFREE while we're waiting for a final trade name from FDA. In August 2025, FDA approved our suitability petition for our proposed strength of preservative-free ketamine. We filed the ANDA in September 2025. And in November, received notification that FDA noted no significant deficiencies and agreed to review the file. Last week, we were notified by FDA of a preliminary determination of bioequivalence to the reference branded drug, which is Ketalar. This is a key determination in any generic application. Our room temperature stability data has continued to support at least 3 years of room temperature stability. And we've manufactured 3 registration batches of KETAFREE in anticipation of summer 2025 approval -- 2026 approval. The company has additionally submitted a citizen petition seeking to have benzethonium chloride, a toxic preservative included in all currently approved ketamine products and it's really in there for antiquated reason, we've petitioned to have it removed from all presentations of ketamine. The FDA has just notified us that their review of expectation is ongoing. This preservative is the subject of a detailed toxicology report that we posted on the public record, which casts a considerable doubt on the assumed safety of this chemical including potential cytotoxicity and neurotoxicity. Notably, benzethonium chloride is not categorized by FDA as GRAS or generally recognized as safe. And the law requires that all ingredients of drugs must be safe. This report has been submitted to FDA in support of our citizen petition. As a preservative-free version of ketamine is an important invention, we filed a patent application with USPTO to protect our intellectual properties surrounding this product. The existing market for Ketamine has been projected at approximately $750 million a year, and we believe KETAFREE made in the United States and offered without any toxic preservatives offers patients and clinicians a superior option. As you know, we're also pursuing an innovative new drug application under FDA Fast Track Designation for Ketamine, which we've designated NRX-100. When we met with you in Q4, our intent was to submit this NDA based only on data from existing clinical trials which we've summarized for you in the 10-K and various other presentations. However, in Q4, FDA announced a significant policy change for the first time inviting companies to submit real-world evidence and supportive effectiveness without a requirement that the evidence submitted be personally identifiable. In our estimate, this provided an important opportunity to strengthen our case for approval and to substantially broaden the indication we were seeking, whereas we originally anticipated seeking only accelerated approval as we shared with you at the time, the FDA policy change to open the path to seek full approval. Accordingly, we partnered with Osmind Inc. to leverage their database on more than 65,000 patients treated with intravenous ketamine, and approximately 6,000 patients treated with intranasal ketamine. Summary data are presented in the 10-K and demonstrate the benefits that thousands of Americans have already received in reducing depression and suicidality with intravenous ketamine. As we shared with you, we were granted an in-person meeting at FDA headquarters with the leadership of the FDA Division of Psychiatry Products, the Office of Neurosciences and the leadership of the FDA Center for Drug Evaluation research. The minutes of that meeting demonstrate FDA's willingness to review not only the clinical trials data, but also the real-world evidence. More importantly, FDA guided us to seek full approval rather than accelerated approval and to seek a substantially larger indication for depression in patients who may have suicidality rather than only those who already have suicidality, an indication that we believe applies to more than 10 million Americans. Our aim is to package the data FDA have requested by the end of Q2 with the potential for decision date otherwise known as a PDUFA date by the end of the year or in the opening months of 2027. We're confident that seeking FDA's alignment on this expanded pathway was the right thing to do for our patients and our shareholders. As we shared last year, the product is already manufactured. The manufacturing modules are complete and already in the hands of the FDA and 3 registration batches are manufactured and in the warehouse in anticipation of approval. Again, we have stability data to support at least 3 years of room temperature shelf stability. In August 2025, FDA granted us an expanded Fast Track designation for NRX-100. This expanded designation goes beyond the prior grant simply for suicidal bipolar depression to now include all patients with suicidal ideation in depression including bipolar depression. Suicidal depression is a massive problem in the United States. In fact, the Center for Disease Control estimates that nearly 13 million Americans seriously consider suicide each year and this leads to an American dying from suicide every 11 minutes. In June, the FDA created the Commission's National Priority Voucher program that affords substantially faster review times of once 2 months versus the standard 10- to 12-month review, enhances communication throughout the review process and creates potential for accelerated approval, and full approval of NRX-100. The first 2 tranches of vouchers have been granted. We remain optimistic for NRX-100's chance to receive a voucher, given that CMS targeted drugs other than bulk ketamine, have been underrepresented to this point. Further, we're confident that NRX-100 meets the program's criteria and is a prime candidate to receive a voucher. Moving on from ketamine. We've experienced what we believe to be transformative change in our NRX-101 program. As you know, we originally developed NRX-101, a fixed-dose combination of D-cycloserine and lurasidone to address the needs of patients with suicidal bipolar depression. While we hope to get back into the clinic with a pivotal trial to prove the value of NRX-101 at high doses to treat patients with that condition. A near-term opportunity appeared that offers a far broader potential application for D-cycloserine the active ingredient of NRX-101. As we illustrated in the 10-K, there's a rapidly emerging body of evidence suggesting that D-cycloserine or DCS at low doses has the potential to drive neuroplasticity which is the process by which brain cells form connections to other brain cells and especially to augment the clinical effect of transcranial magnetic stimulation or TMS. Accordingly, we appointed Professor Joshua Brown, MD PhD of Harvard McLean as our Chief Medical Innovation Officer. Dr. Brown is a principal investigator on NIH funded and DARPA-funded projects that highlight the future of neuroplastic care including the use of D-cycloserine and transcranial magnetic stimulation or TMS, for treating depression, PTSD and suicidality. Today, we're announcing that we're on the path to developing a patentable sustained release presentation of D-cycloserine to provide an extended release profile suitable for enhancement of TMS efficacy. Prior clinical trials have shown a doubling of clinical response in patients with depression and an eightfold increase in remission from depression versus standard TMS therapy. However, DCS, D-cycloserine, which is a tuberculosis drug has always been a somewhat unstable and problematic molecule that degrades rapidly, if not carefully formulated and it is stable in our current formulation. Moreover, its absorption profile in the human body more closely resembles a sharp spike rather than a steady state. We're excited that after a long period of research and development, we found a path to an innovative modern version of DCS that is better suited to maintaining a steady state in the blood during TMS treatment. NRx has more than 25,000 manufactured doses of NRX-101 at the appropriate strength and has launched a nationwide expanded access program to enable physicians who are performing TMS and want to add the benefit of D-cycloserine to access this medication at no charge to the patient under expanded access and federal right to try laws while we await a confirmatory Phase III trial of NRX-101 to augment the effects of TMS. That trial is planned to start this summer, and we expect non-dilutive federal sources to support that trial. The market estimate for this newly validated indication for NRX-101 is in excess of $1 billion. We're collaborating with Dr. Brown and his DARPA-funded initiatives related to D-cycloserine and TMS that have attractive support because of the clear implications for supporting the needs of military personnel, veterans and first responders in addition to the tens of millions of civilians who need this treatment. In recent months, we've had the opportunity to brief on these activities at senior-most levels within the Department of War, the Department of Veterans Affairs and both House and Senate leadership who are concerned about the welfare of our troops and veterans. That's why some of you noticed my attendance in the gallery at this year's State of the Union address. Our clinics have contracts to treat military personnel through TRICARE and to treat veterans through direct contracts with the VA. We first established a cooperative research and development agreement with the VA in 2018. In September 2025, HOPE Therapeutics initiated revenue generation upon closing its first acquisition of Dura Medical located in Naples and Fort Myers, Florida. HOPE subsequently added Cohen & Associates in Sarasota, another revenue-generating site, an EBITDA-positive clinic that's now part of our HOPE network. Dr. Rebecca Cohen, Founder of Cohen Associates has been appointed as HOPE Medical Director. In December, HOPE was the first organization in Florida to launch 1-day TMS treatment for severe depression combining D-cycloserine and TMS. The 1D protocol has been reported in the peer-reviewed literature to achieve 87% response and 72% remission from severe depression in 6 weeks following a single day of TMS treatment combined with D-cycloserine. By way of comparison, if you look at the SPECT-D trial, antidepressants have been reported only to demonstrate about half that response. We're currently opening additional clinics in West Palm Beach, Sarasota, Boston, Denver, with the expectation that we'll have a far more robust network by the end of the year with revenue to match. Although there are many more milestones described in our 10-K, I'll end with our newly declared partnership with Neurocare AG of Munich and Atlanta, Georgia. Neurocare manufactures the top-selling TMS device in the U.S. today, the Apollo machine, which has installed at more than 400 clinical locations in the U.S. with many more internationally. Our aim is to leverage our mutual strengths to achieve the benefits of integrated care in neuroplastic integrated psychiatry that were achieved in renal dialysis through integration. Those results were achieved several decades ago by DaVita and Fresenius Medical. Those 2 organizations demonstrated that combining integrated pharmaceutical and medical device development with a quality-driven approach to patient care could transform clinical outcomes for patients with end-stage kidney disease, and they created organizations that are currently valued at $15 billion and $30 billion, respectively. We aim to take that same model into the future of interventional psychiatry for the treatment of PTSD, depression, autism, traumatic brain injury and Alzheimer's. Working together with our academic partners, our government partners and now with the leading medical device partner we'll do everything in our power to bring hope to life. I'll now turn it over to Michael Abrams, our CFO, to review our 2025 financial results. Mike? Michael Abrams: Thank you, Jonathan. For the year ended December 31, 2025, NRx Pharmaceuticals reduced its loss from operations by approximately $2.3 million to $16.2 million from $18.5 million for the year ended December 31, 2024, which was primarily driven by a decrease in research and development expense. For the year ended December 31, 2025, research and development expense decreased by approximately $2.4 million to $3.8 million as compared to $6.2 million for the year ended December 31, 2024, primarily driven by a decrease in clinical trial and development expense. Finally, general and administrative expense for the year ended December 31, 2025, decreased by approximately $0.4 million to $13.1 million as compared to $13.5 million for the year ended December 31, 2024, primarily driven by certain ongoing cost reduction initiatives. As of December 31, 2025, we had approximately $7.8 million in cash and cash equivalents. Management believes that the current available cash resources in concert with anticipated growth in total clinic revenue, ongoing cost reduction initiatives and current availability and trends in connection with the company's active at-the-market offering, will be sufficient to support ongoing operations through the end of 2026. Our singular focus remains advancing our primary drug development initiatives and planned clinic acquisitions to build long-term value for our shareholders. With that, I will turn the call back over to Jonathan. Jonathan? Jonathan Javitt: Thank you, operator. We're now ready to take questions. Operator: [Operator Instructions] Your first question comes from Tom Shrader with BTIG. Thomas Shrader: Congratulations on all the progress. Just an update on how you see building KETAFREE inventory? Is that something you will wait to do? You will do externally? Or do you have a lot already? And then you're quoting the generic value of ketamine. Do you think if you have -- I mean, I guess, how confident are you that if you had the only available ketamine that maybe the current generic price isn't so relevant. And how much increase in price do you think the market would bear. And then I have a DCS follow-up. Jonathan Javitt: Thank you, Dr. Shrader. You always ask wonderful questions. As far as inventory goes, as I said earlier, we've already manufactured 3 registration batches. Those batches are in the warehouse. KETAFREE is up on what's called a blow-fill seal assembly line. So for those of you who don't deal with pharma manufacturing every day, most injectable drugs are sold in glass bottles. To do that, you have to actually buy glass bottles somewhere. You have to clean them, sterilize them, fill them, put a stopper and put a crimp on. Both those seal works very differently. You take a hopper full of polyethylene pellets, you melt them down into molten polyethylene. You blow them with air into the shape of a vial, the machine fills that vial automatically seals that vial with a little more polyethylene, puts a wrapper on it, puts it in a box, puts it on the pallet all without any human being touching it. You can make 1 million units of drug in the same time and at about half the cost as you can make 10,000 vials of traditional glass-filled injectable product. So we've just asked our manufacturer to do a first production run, we anticipate having a couple of hundred thousand units in the warehouse at the time of generic approval. With regard to the effect of having the only preservative-free ketamine on the market, should the citizen petition be granted, probably Wall Street analysts will do a much better job of projecting what that might do to pricing models than we can. But I agree with you that if it's a product the market wants, the market will probably pay for it. Thomas Shrader: Great. And then a quick question on the extended release D-cycloserine. Is there -- is it known that, that would have the same effect? Is there a clinical data that you don't need the spike? Or do you think you have a little clinical work to do? Jonathan Javitt: I think that, that's work that can be done in vitro. Really, what we're looking for is a neuroplastic effect from D-cycloserine and there's a lot of reason to believe that continued exposure of the neurons to the drug is what matters. But we have the ability in brain slices to look at the dendritic sprouting and to look at the effects. In general, you do want a steady state of drug to create a biological response. But I agree with you, it's certainly something worth continuing to look at. And as you know, from Dr. Brown's resume, he's probably done more of this than anybody in academia. Operator: Your next question comes from Patrick Trucchio with H.C. Wainwright. Patrick Trucchio: Congrats on the progress. Just a couple of questions on each program. Just first on NRX-100. I was just wondering if you can talk a little bit more about the Type C meeting with the FDA and how that now enables an NDA filing for NRX-100 without additional clinical trials? And specifically, how is the FDA viewing the role of the 65,000 to 70,000 patient real-world data set in this submission? And then separately from that, as we think about the broader treatment-resistant depression label, how should we think about the expansion of the addressable patient population impact on payer coverage and prescriber adoption if approved? Jonathan Javitt: So to start with the Type C meeting, the most important way it enables FDA review of existing clinical trials data and real-world data without the need for additional clinical trials is that that's what the FDA told us. They did not demand additional clinical trials as a precondition to reviewing an NDA filing. And when you look at the data available, there are now multiple clinical trials that have demonstrated that intravenous ketamine is far superior to placebo, far superior to active placebo and noninferior on efficacy to electroshock therapy. But of course, there's a huge safety difference between NRX-100 between ketamine and electroshock in that the electroshock group had 30% memory loss, whereas memory loss was not seen in the ketamine group. So while technically, you would say it's not inferior because the design was noninferiority based on the MADRS scale. From a patient's perspective, it's a far superior treatment. Do me in favor and restate your second question? Patrick Trucchio: Yes. Just on the broader treatment-resistant depression label, how should we think about the expansion of the addressable population and the impact on payer coverage and prescriber adoption if the drug is approved? Jonathan Javitt: Well, if you look at the narrower indication, we were originally forecasting which would have been people with active suicidality. That would have been about 3 million, 3.5 million patients a year reporting to CDC numbers. But if you look at the much broader population of people with depression who may from time to time have suicidal ideation, the CDC numbers would suggest that you're talking about an addressable population of 12 million or so people. In terms of payer coverage. Payers have told us in the past that as long as our course of treatment is less than about $10,000 a year, it's unlikely to have substantial formulary restrictions. Mental health is one of the most rapidly growing challenges that payers face in insurance coverage and a treatment that has the potential to rapidly stabilize people, keep them out of the hospital, keep them at work, keep them productive is highly attractive to payers. And you've seen that with SPRAVATO, you've seen SPRAVATO rapidly grow to what's estimated at a $2 billion market today. And that's the market that we would seek to share if NRX-100 is approved as we've expected. Patrick Trucchio: Right. And with the ANDA showing favorable preliminary bioequivalent determination, I'm wondering what remains before final approval in the third quarter of this year? Jonathan Javitt: Well, the Office of Generic Drugs has to do its process. They're going to continue to examine our stability data. They'll have to do a pre-approval plant inspection. They'll have to go through the whole litany of final checks associated with any drug approval. But we think clearing the bioequivalence hurdle is a major turning point. Operator: [Operator Instructions] Your next question comes from Edward Woo with Ascendiant Capital. Edward Woo: Congratulations on all the progress as well. Assuming that you get the approval for the ANDA in Q3 2026, can you talk a little bit about your commercial strategy and how you expect to commercialize it? Jonathan Javitt: Well, there are 2 large segments of buyers for ketamine under the existing label. One is hospital surgery centers, et cetera, that already buy ketamine and then there are the clinics who are using it for psychiatry for pain control, et cetera. On the former side, we've been approached by a number of organizations that already sell to those hospitals. Their names are well known and anybody who's currently selling into that marketplace is interested in a modern preservative-free presentation. So we'd be unlikely to build our own sales force to go into hospitals because the average person selling injectable drugs into a hospital is representing a number of drugs, not just one. On the other hand, the clinics that use ketamine are much smaller number. They're well known, they tend to belong to the same associations, and we do expect to set up a medical liaison service relatively small number of representatives can cover a large swath of the clinics. So we believe that it's a very compact commercial footprint, one that's easily financeable within our available resources. Operator: There are no further questions at this time. I will now turn the call over to Jonathan for closing remarks. Jonathan Javitt: Thank you. So thank you for joining our call today. As you can see, we've made progress towards 3 potential drug approvals in the near term. And we have this new pipeline target that could be a much larger use for NRX-101 than we ever anticipated. With the continuing development of the HOPE Therapeutics network for care delivery, we believe that we've really taken transformative steps to turn NRx Pharmaceuticals into a commercial stage company that has the potential to save lives on a daily basis and to bring a return to our investors. We finally reached that long-awaited inflection point where we're generating revenue, we expect to increase revenue and we really appreciate the extraordinary dedication and hard work of our team to support that long-term initiative and the patience of our investors and the support of our investors while we've made that turn. Our goal of bringing hope to life is closer than ever. Thank you so much for participating. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to Tongcheng Travel 2025 Fourth Quarter and Annual Results Announcement Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ms. Kylie Yeung, Investor Relations Director of the company. Please go ahead, ma'am. Kylie Yeung: Thank you. Good morning, and good evening, everyone. Welcome to Tongcheng Travel's 2025 Fourth Quarter and Annual Results Conference Call. I'm Kylie Yeung, Investor Relations Director of the company. Joining us today on the conference call are our Executive Director and CEO, Mr. Hope Ma; our CFO, Mr. Julian Fan; our Chief Capital Officer and President of Wander Hotels and Resorts, Ms. Joyce Li. For today's call, our management team will provide a review of the company's performance in the fourth quarter and full year 2025. Hope will brief us on the company's strategies. Joyce will discuss our business and operational highlights, and then Julian will address the details of financial performance accordingly. We'll take your questions during the Q&A section that follows. As always, our presentation contains forward-looking statements. Such statements are based on management's current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, which may cause the company's actual results, performance or achievements to differ from those in the forward-looking statements. This presentation also contains some unaudited non-IFRS financial measures. They should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of non-IFRS measures, please refer to our disclosure documents in the IR section of our website. Now let me introduce our CEO, Hope. Hope will be presenting in Mandarin, and our colleague will provide the English translation afterwards. Hope, please go ahead. Heping Ma: [Interpreted] In 2025, China's travel industry and the company entered a new phase of high-quality development. Over the past year, we witnessed resilient travel demand with increasingly diversified trends as immersive and experiential consumption continues to gain popularity. Amid this backdrop, we deeply dive into user needs and comprehensively optimize our travel products and user experiences. As a result, both our user base and ARPU demonstrated robust growth in 2025 with APU reaching a record high. The robust business growth reflected the ongoing enhancement of our service quality and the expanding influence of our brand. The year 2025 was a year of challenges and opportunities for us. In response to consumers' diversified and personalized needs, we continuously enriched our product offerings, facing growing expectations for premium services. We consistently improved our service quality. Amidst AI-driven technological revolution, we proactively embraced new frontier technologies with an open attitude. All these showcased our strong organizational agility and exceptional execution capabilities, further reaffirming our commitment to our user-centric mission of make travel easier and more joyful. The Chinese government sees travel as a vital pillar of national economic development. The latest 15th 5-year plan has explicitly stated the commitment to expanding the supplies of high-quality travel products and to enhancing travel service standards with the goal of establishing China as a premier travel destination from the pilot implementation of autumn and winter vacations in certain regions to the longest spring festival holiday on record. These expanding holiday arrangements underscore significant governmental support for the travel industry. In terms of demand, travel has become an essential part of people's pursuit of a better life with seasonal themes such as spring flower viewing, summer retreats, all foliage tours and winter snow activities continuously gaining popularity. In the coming year, we will remain focused on domestic market and deep dive into user needs, aiming to further solidify our leading position in the mass market. Simultaneously, we will make intensified efforts to capture growth opportunities in the outbound travel market to propel our global expansion strategy. On the operational front, we will continue to implement technological innovation and product upgrades centered on user experience while enriching membership privileges and deepening user engagement. In 2021, we tapped into the hotel management business. After several years of rapid expansion, it has now gained meaningful scale. The integration of Wanda Hotels and Resorts in 2025 marked a pivotal milestone in the development of our hotel management business. This strategic move strengthened our brand portfolio and ecosystem while substantially elevating our competitiveness and market influence. By consistently executing our strategy and leveraging our strong Internet DNA, we are well positioned to accelerate the segment expansion in 2026, laying a robust foundation for our long-term sustainable growth. Amidst the rapid advancement of AI technology, we are devoted to expanding the application of AI in our business process, further optimizing operational efficiency and enhancing user experience. Building on our user-centric value proposition, market acumen and superior execution capabilities, we are confident that we will continue broadening our competitive moat in the travel industry. Moving forward, we will continue to export our technologies and expertise to empower our partners and support the broader industry ecosystem while strengthening our commitment to corporate social responsibility to foster sustainable industry growth and create greater value for all stakeholders. Next, I will hand over the call to Joyce. She will share with you our business and operational highlights of the fourth quarter and the full year of 2025. Joyce, please go ahead. Joyce Li: Thank you, Hope. 2025 was a pivotal year of growth and achievement for our company. Beyond the steady expansion of our domestic business, our outbound travel and hotel management businesses made remarkable progress, contributing meaningfully to the overall growth momentum of the company. During the past year, we acutely grasped users' evolving preferences and precisely captured emerging demand. This enabled us to once again deliver solid growth across all business segments, highlighting our excellence in strategic execution, operational efficiency and organizational agility. Throughout the year, our accommodation business sustained robust growth momentum and achieved a record high in room nights sold. In early 2025, we identified a notable shift in users' preference towards high-quality hotels. In response to the changes, we strategically reallocated operational resources to meet this evolving demand, resulting in an approximately 5 percentage point year-over-year increase in the proportion of high-quality hotels sold on our platform. In the meantime, we prioritized enhancing user experience. We not only offer the best value for money products and services, but also provided faster and more responsive support to user requests to further strengthen our presence in the mass market. As for our international business, we continue to enhance our product capabilities by deepening partnerships with third-party providers as well as expanding our product and service offering. In addition, we leveraged our domestic user base to drive cross-sell initiatives and execute the precision marketing campaigns targeting high potential users. All these efforts collectively led to nearly 30% growth in our international room nights sold in 2025. In terms of our transportation business, it continuously demonstrated strong resilience throughout the year. Over the past year, we placed a strong emphasis on improving both user experience and engagement. At the core of the efforts is our Algorithm-driven Huixing system, which leverages advanced algorithm capabilities to provide users with viable and accessible travel solutions by utilizing a comprehensive range of transportation options. The intelligent system significantly enhances the overall travel experience for users. In the fourth quarter, we launched skiing-themed marketing campaigns and rolled out various benefits to skiing enthusiasts so as to reinforce our positioning as an experience-driven platform and further engage our user base. On the international front, we focused on improving operational efficiency by implementing a more disciplined subsidy policy and expanding our VAS offerings. As a result, we achieved a balanced growth in both volume and revenue throughout the year with volume growth of nearly 25% for 2025. As mentioned at the beginning of the speech, 2025 marked a milestone year for our hotel management business with significant progress achieved. This year, we successfully completed the acquisition of Wanda Hotels and Resorts, a company that possesses a renowned portfolio of upper upscale and luxury hotel brands with strong market presence in China. In addition to its hotel management expertise, the company is the only hotel management firm in China with proven specialization in operating scale resorts. This unique capability can help us strengthen supply chain resources in the travel industry, thereby enhancing our influence and competitiveness. Furthermore, Wanda Hotels and Resorts operates its own in-house design institute which is recognized as one of the leading hospitality design teams in China and has received numerous prestigious international awards. The team possesses strong capabilities in designing and managing large-scale hotels as well as convention and exhibition centers. Its design solutions serve not only its own properties, but also high-end hospitality projects across the industry. Following the acquisition, the Wanda Hotels and Resorts team underwent a seamless integration process, resulting in a significant boost to its vitality and optimized organizational capacity and refined strategic direction. This strategic integration has improved our brand portfolio, strengthened our market presence and accelerated the sustainable growth of our hotel management business. Regarding our eLong hotel technology platform, we remain focused on expanding our geographical footprint while prioritizing quality growth throughout the year. The platform also offers technology-enabled hotel management solutions featuring a proprietary property management system, a smart marketing solution, [indiscernible] and service robots for automated in-room delivery. By the end of December, our total number of hotels in operation exceeded 3,000 with more than 1,800 in the pipeline. Looking ahead, we are committed to further expanding our asset-light hotel management business through network expansion and ecosystem enablement. This strategic approach will position us to achieve leadership in China's hotel industry and establish a second growth engine for the company. Traffic operation has been the foundation of our success, leveraging the Weixin Mini program, we have effectively reached a broad user base across China, in particular, those in lower-tier cities. Over the past year, the Weixin ecosystem continued to serve as a critical traffic channel, where we focused on enhancing operational efficiency. At the same time, our stand-alone app, a key driver of new user acquisition, demonstrated strong growth momentum over the past 4 quarters. To attract younger demographics, we rolled out a series of innovative products and engaging marketing campaigns to enhance user mind share and solidify our positioning as an experience-oriented travel platform. As such, the average DAUs of our stand-alone app posted more than 30% growth year-over-year in 2025. Additionally, social media has played an increasingly vital role in engaging users, particularly those younger audiences. During the year, we stepped up our efforts in social media platforms to connect with younger travelers and broadened our user reach through effective and targeted user engagement. We have accumulated the most extensive user base in China's OTA industry. For the 12 months ended December 2025, our annual paying users climbed to 253 million, representing a year-over-year growth of 6%. In addition, the accumulated number of passengers served on our platform over the past 12 months continued to expand and reached 2,034 million with an annual purchase frequency exceeding 8x per user. Moreover, our annual ARPU for the year further rose to RMB 76.8, reflecting a year-over-year growth of 5.5%. Besides our MPU also maintained a growth trajectory throughout the year and increased by 6% year-over-year to 46 million for 2025. As an innovation-driven company, we fully embrace new technologies such as Gen AI to transform our business. In December, we rolled out collaboration with Yuanbao, enabling users to access to our travel booking services via the Weixin Mini program by searching travel itineraries on Yuanbao app. In mid-March last year, we introduced our AI-powered travel planner, DeepTrip, which integrates the supply chain capabilities and market insights of our platform with the resuming capabilities of DeepSeek. Over the past few quarters, we have continuously refined its functionality, incorporating social features to enhance its shareability among users. In the fourth quarter, we embedded a map tool to give users a clearer visual representation of their travel destinations. By the end of December, approximately 6.8 million users in total have utilized DeepTrip. Additionally, we extended its application to some business scenarios by integrating DeepTrip into air ticketing service. We aim to address users' prebooking inquiries as well as helping them find competitive ticket prices, which not only improved operational efficiency, but also enhanced overall user experience. In customer service, AI now covers around 80% of user inquiries, demonstrating its important role in streamlining operations and enhancing user experience. Over the past year, we have consistently advanced the integration of AI in every phase of the customer service process, which not only reduced the workload of customer service staff, but also improved overall operational efficiency. Furthermore, we have made continuous advancements in AI capabilities to enhance its precision in identifying user requests and delivering timeless, contextually relevant and human-like responses. By leveraging AI-driven solutions, we aim to further optimize customer interaction, reduce response time and maintain seamless user support as we continue to grow. In pursuit of global excellence in ESG practices, we have achieved milestones in improving our ESG performance over the past few years. Notably, in 2025, our MSCI ESG rating was elevated to the top AAA level, surpassing 95% of global industry players. In addition, we were included in the S&P Global Sustainability Yearbook China for the third consecutive year, and we were also honored with the Industry Mover Award for our remarkable progress in driving sustainable development within our sector. All these achievements have not only demonstrated our leadership in ESG performance among global peers, but also reflected our resilience and excellence in corporate sustainability in the face of market uncertainties, evolving policy landscape and dynamic social development, we remain dedicated to further strengthening our ESG practices and contributing to a more sustainable future. I'll stop here and give the call to our CFO, Julian. He will share with you the detailed financials in the fourth quarter and for the year of 2025. Julian, it's your turn. Lei Fan: Thank you, Joyce. Good evening, everyone. Over the past quarter, China's travel industry showcased remarkable resilience driven by rising demand for immersive and experiential travel experiences across both traditional holiday hotspots and newly emerging destinations. Leveraging our profound understanding of evolving traveler preferences, we delivered another quarter of robust performance, capping off a highly productive year. In the fourth quarter of 2025, we achieved healthy growth in both top and bottom line. We reported net revenue of RMB 4.8 billion, representing a 14.2% year-over-year increase from the same period of 2024. We executed targeted marketing campaigns to strategically prepare for the 2026 Chinese New Year, while upholding rigorous cost discipline to ensure financial prudence. During the fourth quarter, our adjusted net profit rose to RMB 779.8 million, reflecting an 18.1% year-over-year growth. The increase was principally fueled by the enhanced economies of scale and the optimized operations of our OTA business. Our core OTA business revenue registered a 17.5% year-over-year increase to RMB 4.1 billion during the fourth quarter of 2025. Our accommodation reservation business achieved RMB 1.3 billion in revenue for the fourth quarter of 2025, representing a 15.4% increase from the same period in 2024. The revenue increase was primarily driven by growth in hotel room nights sold, coupled with a modest rise in ADR. In our domestic accommodation business, we proactively explored diverse accommodation scenarios to capture emerging growth opportunities, including themed offerings tailored to specific demand such as winter vacation and exam season space. For our outbound accommodation business, we strengthened cooperation with third-party partners to expand product offerings as well as our destination footprint catering to growing user demand. In the fourth quarter, our ADR once again achieved year-over-year growth, benefiting from growing consumer demand for high-quality hotels and our proactive adjustment to user subsidy strategies, supported by precise and disciplined marketing strategies. Our net take rate remained stable year-over-year. Our transportation ticketing revenue for the fourth quarter reached RMB 1.8 billion, marking a 6.5% year-over-year increase compared with the same period of 2024. During the past quarter, we heightened our focus on improving user experience. We actively expanded travel supply chain and enriched VAS offerings to deliver a broader range of mobility options and ensure seamless travel experience for users. As for our international air ticketing business, it achieved balanced growth in both volume and revenue, which aligns with our long-term strategy. In the fourth quarter, our international air ticketing revenue increased to more than 7% of our total transportation ticketing revenue. Our other business segment maintained stellar growth momentum with revenue reaching RMB 916.7 million in the fourth quarter, representing a growth of 53% year-over-year. This growth was mainly propelled by outstanding performance of our hotel management business and the consolidation of Wanda Hotels and Resorts. Our tourism business achieved a revenue of RMB 777.5 million, which was largely flat year-over-year. mainly due to our proactive reduction in prepurchased business as well as softer demand for Southeast Asia and Japan. In terms of profitability, our gross profit increased by 18.5% year-over-year to RMB 3.2 billion for the fourth quarter of 2025. The operating profit margin of our core OTA business remained flat year-over-year for the fourth quarter of 2025, while the operating profit margin of our tourism business has been affected by the one-off goodwill impairment. Our adjusted EBITDA increased by 28.6% and reached RMB 1.3 billion in the fourth quarter of 2025. Adjusted net profit grew by 18.1% to RMB 779.8 million in the fourth quarter of 2025. Adjusted basic EPS for the fourth quarter of 2025 was RMB 0.33 with a 17.9% year-over-year increase compared to the same period in 2024. Service development and administrative expenses in the fourth quarter of 2025 increased by 6.8% from the same period of 2024. Excluding share-based compensation charges, service development and administrative expenses in total accounted for 18.1% of revenue in the fourth quarter compared with 18.6% of revenue in the same period of 2024. Selling and marketing expenses in the fourth quarter of 2025 increased by 22.7% from the same period of 2024, excluding share-based compensation charges. Selling and marketing expenses accounted for 32.4% of revenue in the fourth quarter compared with 30.2% of revenue in the same period of 2024. Now let's move to our results for financial year 2025. Our net revenue in 2025 achieved RMB 19.4 billion, representing an 11.9% year-over-year increase. The core OTA revenue achieved RMB 16.5 billion, representing a 16% year-over-year increase. Our accommodation reservation revenue was RMB 5.5 billion in 2025, representing a 16.8% year-over-year increase. Our transportation ticketing revenue reached RMB 7.9 billion, representing a 9.6% year-over-year increase. Other business revenue for 2025 achieved RMB 3.1 billion, representing a 34.4% year-over-year increase. Our tourism revenue for 2025 reached RMB 2.9 billion, representing a 6.9% year-over-year decrease. In terms of profitability, our gross profit in 2025 increased by 15.7% year-over-year to RMB 12.9 billion. Adjusted EBITDA for 2025 improved by 26.9% year-over-year to RMB 5.1 billion. Meanwhile, adjusted net profit for 2025 increased by 22.2% year-over-year to RMB 3.4 billion. Adjusted basic EPS for 2025 was RMB 1.45 with a 20.8% year-over-year increase. As of December 31, 2025, the balance of cash and cash equivalents, restricted cash and short-term investments was RMB 12.3 billion. We highly appreciate our shareholders' consistent support and are committed to delivering sustainable capital returns. Our Board of Directors has proposed a final cash dividend of HKD 0.25 per share, marking a 38.9% increase from last year. This reflects our commitment to enhance capital returns to shareholders. Over the past year, China's travel industry has demonstrated increasingly prominent trends towards diversification and personalization as consumers place growing emphasis on emotional value and unique experience-driven travel opportunities. Notably, the 2026 Spring Festival represented the longest holiday period on record. During the 9-day holiday, consumers divided their holidays into multiple shorter trips such as homecoming visits and vacation travel. Incremental demand from multiple trips during the festival has driven robust growth in our business volume. In addition, the pilot implementation of spring and autumn vacations initially launched in Zhejiang and Sichuan has been expanded to include more regions such as Jiangsu and Anhui. We believe this initiative will help stimulate travel consumption and provide additional momentum to the growth of the tourism industry. Such supportive government policy, combined with sustained strength in user demand, fuels our optimism about the upward trajectory of China's travel industry in the coming year. Moving forward, we will remain focused on our core OTA business, providing users with diverse domestic and international travel products while sparing no effort to enhance user experience. As we continue to improve operational efficiency in domestic OTA operations, we will actively expand our outbound business to bolster our global brand presence. Additionally, our hotel management business will enter a new phase of high-quality growth, building a solid foundation for the company's long-term sustainable development. Concurrently, we will continue to adopt technological innovations as well as deepening the integration of AI technology with our supply chain capabilities, striving to better meet user needs. Last but not least, we will strengthen our corporate social responsibility to support the healthy development of the travel industry and to create greater value for our stakeholders. With that, operator, we are ready to take questions now. Thank you. Operator: [Operator Instructions] We will now take our first question from the line of [ Xi Wei Liu ] from Citi. Unknown Analyst: Xi Wei From Citi. Congratulations to the company on a solid operating performance. I have 2 questions. The first about outbound travel. There have been many flight cancellations between China and Japan recently. How has this impacted your outbound business? Could you share the regional breakdown of your outbound markets? And what are your 2026 targets for outbound revenue growth and profitability? The second about large model and AI strategy. The company has actually rolled out some partnerships with large models so far. In the long run, as AI model portals become more important, how will the company position itself? Joyce Li: Thank you, Xi Wei for the question. The first one is in terms of outbound travel. We did observe a decline in Japan-bound travel volume given the current circumstance. However, the overall impact on our business has been limited as outbound travel accounts for only around 5% to 6% of our total transportation and accommodation revenue. And at the same time, outbound travel demand remains resilient, and we have been seeing users shift to alternative destinations rather than cancel their travel plans. During the Chinese New Year holiday, shop to middle-haul destinations within a 5-hour flight regions such as South Korea, Singapore, Malaysia, Hong Kong and Macau remain among the most popular choices, while demand for Thailand also shown signs of gradual recovery. In addition, demand for long-haul travel increased year-over-year with European destinations such as Italy and Spain seeing particular strong growth. We have been actively adjusting our product offerings and marketing focus to capture this demand shift. Overall, given the relatively small contribution of our outbound travel to our core OTA business and the substitution effect across destinations, we do not expect a material impact on our overall performance. And looking ahead to 2026, our priority remains to further improve the quality of growth by enhancing pricing discipline, optimizing marketing efficiency and strengthening cross-selling from air tickets to accommodation and other travel products. At the same time, we will continue to deepen partnerships with global suppliers to improve service capabilities and user experience. Overall, we expect the international business to continue expanding in scale and become an increasingly meaningful contributor to our revenue. Over the next 2 to 3 years, growing business volume and expanding the user base will remain the key priorities while maintaining a strong focus on improving growth quality and profitability. We expect the revenue contribution from the outbound segment to increase to around 10% to 15% with increasing operating leverage over time. And in terms of the AI cooperation, our AI strategy focused on enhancing both user experience and operational efficiency as we continue to evolve from a traditional OTA toward a more intelligent travel platform. We see AI as a core capability that helps us better understand user needs, improving decision-making and optimize service delivery across the entire travel journey. At the same time, AI-driven efficiency improvements are significantly enhancing staff productivity and optimize our cost structure, which we believe will be an important driver of margin improvement over time. On the user side, we have integrated our proprietary travel-specific AI with advanced large language models to develop DeepTrip, which supports itinerary planning, travel inspiration and personalized product recommendations. By combining AI capabilities with our real-time supply and transaction ecosystem, DeepTrip provides a practical and actionable solution and enables a seamless end-to-end booking experience. We will continue to iterate its functionalities to better support users across different travel scenarios. And as a positioning of us, I think that we have been started exploring the partnership with large AI platforms and large model ecosystems. For example, we enabled traffic [ redirection ] from Yuanbao to our mini programs and apps. So our strategy is to actively participate in the emerging AI ecosystem by positioning our platform as a trusted travel service partner with deep market insights and a strong understanding of user behaviors. Leveraging our long-term accumulation of transaction data and operational experience, we are able to provide users with more accurate recommendations and practical bookable travel solutions on our AI platforms. Users who enter through AI platforms complete their bookings within our mini programs or apps and the related user and transaction data remain within our ecosystem. This allows us to maintain direct user relationships, accumulate valuable behavior insights and continuously optimize our product services and personalized recommendations. It also enables us to strengthen user engagement and lifetime value, which remains a key competitive advantage for our OTA platform. Going forward, we will continue to monitor development of the AI ecosystem and expand partnerships where it makes strategic sense, while maintaining our focus on strengthening our product service offerings, operational capabilities and user experience. Operator: We will now take our next question from Wei Xiong of UBS. Wei Xiong: First, I want to get your thoughts on regulations because recently, an OTA peer has been under antitrust investigation. So how should we think about the implications to the OTA sector? Do you foresee any impact on OTA's business model or lead to any change in the competitive landscape? Lei Fan: Thank you, Wei Xiong, -- please go on. Wei Xiong: Yes. Sure. So second question is on the hotel management business, which is set to become our second growth engine. So I wonder, could management elaborate your strategic focus and planning for this year? And what are the key operational goals and financial metrics that we look to achieve in 2026 and in the medium term as well? Lei Fan: Okay. Thank you for the question, Xiong, Wei. In terms of the investigations, as you mentioned, we closely monitor regulatory developments recently. At this stage, we have not observed any material changes that would impact our day-to-day operations. Tongcheng has always operated with a strong focus on compliance and fair cooperation with our partners. We believe a well-regulated market environment is beneficial to the long-term healthy development for the company and also for the industry. We will continue to adapt our business practices as required to ensure full compliance in the company. Overall, we remain focused on executing our strategy and delivering sustainable growth and profitability improvement. In terms of the hotel management plan, I think Joyce will have her words. Joyce Li: Thank you, Xiong, Wei. Actually, following the completion of the Wanda Hotels and Resorts acquisition, the integration has progressed smoothly and is better than our expectations. We have achieved rapid organizational alignment, revitalized organization and teams and further refined the strategic direction of the business. Overall, the post-acquisition integration has been very successful. On the synergy front, we are beginning to see encouraging early results. The addition of the Wanda's upscale and luxury brands has enhanced our overall brand portfolio and strengthened our positioning in the middle to high-end segment of our hotel management business. At the same time, the integration has enabled better resource sharing across business development, operations and membership, which is gradually improving operational efficiency. It also further reinforced Tongcheng's presence within the accommodation supply chain. From the other perspective, Tongcheng also empowers Wanda Hotels and Resorts through our technology capabilities. By providing standardized system tools and digital solutions, we help improve internal operational efficiency while reducing research and development efforts and lowering system maintenance and third-party service costs. From a financial perspective, the acquisition has already delivered a positive contribution at the operational level as Wanda Hotels and Resorts is an established hotel management company with a solid operating track record. The consolidation has enhanced our revenue scale, optimized the business mix and strengthened the earnings visibility of the segment. As we move forward, our development strategy will remain disciplined with a focus on balancing scale expansion with operational efficiency and healthy returns, ensuring sustainable and high-quality growth of the business segment. With continued expansion of scale and improving operational efficiency, together with the contribution from Wanda Hotels and Resorts, we expect the hotel management segment to maintain strong revenue growth with a further improvement in profitability from 2026 onwards. Thank you. Operator: We will now take our next question from the line of Brian Gong of Citi. Brian Gong: Two questions here. First is, how do you -- how is the travel consumption trend for the industry in the first quarter considering recovery on hotel ADR. Do we still expect teens level on room nights growth this year? Second question is that recently, [indiscernible] has been under government's investigation. Do you think this will impact their cooperation with us and their stakeholding on us? [indiscernible] is adjusting their hotel business to comply with government's requirement. How will this impact the industry and us? Lei Fan: Okay. Thank you for the questions, Brian. In terms of the first quarter's performance and also the industry outlook, actually, during the Chinese New Year holiday, as we mentioned in the prepared remarks, the China travel market continued to demonstrate very solid demand. According to the Ministry of Transport, national passengers throughput during the 9-day Chinese New Year holiday reached a throughput record 8.2% year-over-year growth during the holiday with decent growth for both long-haul and short-haul travel. Our passenger throughput of railway and airline increased by around 10% and 7% year-over-year, respectively. Meanwhile, according to the industry statistics, overall hotel ADR increased during the Chinese New Year holiday among all segments. With demand for family reunions concentrated in the pre-holiday period, we observed a pickup in passenger throughput during the latter part of the Chinese New Year holiday this year. In response, we promptly adjusted our operational resources, strengthened supply coordinations with our partners and enhance the targeted marketing efforts to capture the rebound in travel demand and improve conversion efficiency in the latter part of Chinese New Year holiday. So as a result, we continue to outperform the industry in the first quarter and also during the 9-day Chinese New Year holiday with especially strong momentum in our accommodation business. Average daily room nights sold increased by 30%. Specifically, room night growth for 3-star and above hotels significantly outpaced that of lower-tier properties. This reflects our ability to respond effectively to changing user preferences as more travelers place greater emphasis on higher quality accommodation experiences. As a result, our hotel ADR in quarter 1 maintained a positive trend during the period and once again exceeded the industry average. For transportation business, we continue to focus on improving monetization, while average daily air ticket volume was broadly in line with the overall market. And also for the room nights growth in the full year of 2026, actually, I cannot provide a very clear numbers here because of the short booking window. But as we mentioned, looking into 2026, we continue to view the long-term fundamentals of China's travel market positively. Consumer preferences are increasingly shifting towards experiential-oriented spending with growing interest in event-driven and themed travel such as concerts, exhibitions and outdoor activities. At the same time, travel is becoming more integrated into everyday lifestyle, supporting more frequent and diversified travel demand. In addition, supportive policy measures aimed at expanding domestic consumptions and promoting high-quality tourism development provide a favorable backdrop for the whole industry. And also for the second question about the investigation, actually, we don't monitor any change on the cooperation with Trip and also, we don't monitor any change of the shareholder structures or potential change of the shareholder structures. So currently, as I mentioned in previous question, we're just focusing on our own execution and long-term competitiveness improvement. So actually, our strategy remains very consistent, focusing on enhancing our user value, improve the ARPU, strengthening our product and service capabilities and deepening cooperation with our suppliers through a mutual beneficial approach. And also, at the same time, we will continue to take a disciplined and prudent approach while monitoring the industry regulatory development. Thank you for the question. Operator: We will now take our next question from Yang Liu of Morgan Stanley. Yang Liu: I have 2 questions. The first one is also related with AI. Could management elaborate more about the DeepTrip's contribution to the business, especially on the business -- overall business volume and also cross-selling side? And my second question is regarding the marketing intensity this year, given the geopolitical risk in both China and Japan and also Middle East this year, will management adjust the outbound business marketing intensity? Yes, that is my second question. Joyce Li: Thank you. The first question is concerning our DeepTrip. As I mentioned, DeepTrip is our AI-driven travel planner that use the reasoning power of DeepSeek and our platform supply chain advantages to create personalized travel itineraries. Since launch, DeepTrip has served about 7 million users with orders placed through the platform steadily increasing over the past few months. Over the past quarters, we continue to enhance DeepTrip with the goal of strengthening user awareness and building long-term trust. We have been continuously upgrading its user-facing capabilities to support more comprehensive travel planning. Key enhancements include the integration of trend transfer data to enable seamless multimodal itineraries. The addition of social sharing features to improve engagement as introduction of a map tool in the fourth quarter to provide a more intuitive visualization of travel plans. In addition, DeepTrip has been embedded into our air-ticketing service to help users address pre-booking inquiries and identify more competitive fare options, delivering a more seamless booking experience. Beyond user-facing applications, we have also extended DeepTrip into different business scenarios to improve operational efficiency. We integrated customer service agent capabilities into DeepTrip to respond to customer inquiries directly within DeepTrip and guide users to human support when needed. For corporate clients, we piloted a travel booking suggesting tool customized according to travel profiles, business travel policies and past bookings. In the future, DeepTrip will continue to serve as a platform for understanding and addressing users' comprehensive travel needs across diverse scenarios. We will further leveraging our AI capabilities across various business segments to provide valuable solutions to users, thereby strengthening our competitive advantages. Additionally, we have begun the cooperation with [indiscernible] to acquire more traffic. We're also actively exploring potential collaborations with our AI agent platform to further broaden our reach and engagement opportunities. We remain committed to leading AI innovation, continuously increasing the investments in this area and delivering cutting-edge user-focused features to elevate our user travel experience. And in terms of the current circumstance in terms of outbound business, we have seen considerable growth potential in the outbound tourism market. As the travel habits evolve, more travelers are eager to explore the international destinations. The number of outbound tourists is still significantly lower than the domestic travelers, revealing a substantial opportunities for expansion in this area. At present, we believe that there are only a limited number of Chinese OTA players have the capabilities and resources to actively drive outbound business. This situation place us in a favorable positioning facing relatively low competitive pressure and allowing us to fully capitalize on the growth potential of the market. Again, our strategy and confidence are anchored in the long-term growth prospects of China's outbound industry and our competitive advantages. While we remain agile in our short-term tactics in response to the market conditions, I think our business momentum remains unaffected. Thank you. Operator: In the interest of time, we will take our last question from Thomas Chong of Jefferies. Thomas Chong: Congratulations on a solid set of results. My first question is about our future growth driver and the take rate trend for accommodation and transportation. And my second question is relating to margin. How should we think about the 2026 margin trend as well as the margin driver in the future? Lei Fan: Thanks for the question, Thomas. For growth, actually, the company's focus remains on achieving a high-quality growth in 2026 by balancing scale expansion with operating efficiency improvement, while continuously enhancing our user value and ARPU. So in the first quarter and also the second quarter, we will prioritize healthy and sustainable growth across our core OTA segments, supported by improved operational efficiency and more refined resource allocation. At the same time, we will continue to strengthen our competitiveness positioning and capture growth opportunity to future expand our market presence. Within the core OTA business, we anticipate that the accommodation business will grow faster than transportation business through the whole year. For accommodation business, we believe that the growth will be driven by volume expansion and ADR improvement, as we mentioned a lot of times. Our volume is expected to continue outpacing the market growth, while our ADR will benefit from the ongoing upgrade in hotel star mix driven by shifts in user preference. So we think it's enough to support a very nicely growth for accommodation business by these 2 reasons. So this year, in terms of the take rate of the accommodation, we expect that the take rate may be stable year-over-year at 2025. For transportation business, volume growth will be in line with the market and still one of the reasons of the revenue growth for transportation. While our take rate improvement driven by cross-sell and VAS will continue to contribute to the revenue growth of the transportation segment. Also, we expect the hyper growth for other revenue, mainly due to Wanda consolidation since the middle of October last year and the hyper growth of our original hotel management and PMS business and also our Black Whale business, the membership business. In terms of the profitability, as we promised, the margin improvement is one of the very important strategic priorities for the company. For the reasons, one, for our core OTA business, the improvement in operational efficiency will continue to be an important driver of profitability over time. In particular, we are leveraging AI technologies to enhance both customer service automation and R&D efficiency, which help improve staff profitability and overall operating efficiencies. For the development of our hotel management business, including eLong Hotel Technology platform and Wanda Hotels and Resorts, we will continue to support its high-quality expansion with a near-term focus on scaling the business, while the return profile is expected to improve progressively as the business matures. For our international business, we will maintain a very prudent approach as we continue to build the foundation for future growth and cultivate the company's next growth engine over the coming years. Last, in terms of the marketing investments, our marketing dollars may fluctuate slightly depending on market opportunity. For example, in quarter 4 last year and quarter 1 this year, we identified strong early booking demand for the 9-day Chinese New Year holiday period and therefore, increased our marketing investments to capture early demand and gain market share. At the same time, we will continue to strengthen ROI management across different marketing channels. So overall, we will continue to balance growth opportunities with disciplined cost management while focusing on improving operational efficiency across the business and improve our margins. Thank you. Operator: That's the end of the question-and-answer session. Thank you very much for all your questions. I'd now like to turn the conference back to Ms. Kylie Yeung, for closing comments. Kylie Yeung: Thank you. We are closing the call now. If you wish to check out our presentation and other financial information, please visit the IR section of our company website. Thank you, and see you next quarter. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Welcome to the Sanara MedTech Fourth Quarter and Full Year 2025 Earnings Conference Call. Please note that this conference call is being recorded, and a replay will be available on the Investor Relations page of the company's website shortly. The company issued its earnings release earlier today. Before we begin, I would like to remind everyone that certain statements on today's call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For more information about the risks and uncertainties involving forward-looking statements and factors that could cause actual results to differ materially from those projected or implied by forward-looking statements, please see the risk factors set forth in the company's most recent annual report on Form 10-K. This call will also include references to certain non-GAAP financial measures. Reconciliations of those non-GAAP measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release available on the Investor Relations section of our website. Today's call will include remarks from Seth Yon, President and Chief Executive Officer; and Elizabeth Taylor, Chief Financial Officer. I would now like to turn the call over to Mr. Yon. Please go ahead, sir. Seth Yon: Thanks, operator, and welcome, everyone, to our fourth quarter and full year 2025 earnings call. Let me outline the agenda for today's call. I'll begin by reviewing several key financial accomplishments for the full year 2025. I'll then discuss our fourth quarter net revenue performance as well as our commercial execution across the three key initiatives, our commercial strategy. After this, I'll provide an update on a few other select areas of operational progress in the quarter. Elizabeth will cover our fourth quarter financial results in further detail and review our full year net revenue guidance for 2026, which we reaffirmed in our earnings release today. I'll then conclude our remarks with some thoughts on our positioning as we enter 2026, our strategic priorities for the year and our outlook before we open the call for questions. With that said, let's get started. Looking back at our financial performance for the full year 2025, I'd like to highlight several key accomplishments to demonstrate the significant progress we've made as an organization. First, we exceeded $100 million of net revenue for the first time in our company's history. Specifically, we generated $103.1 million of net revenue for the full year 2025, representing growth of 19% year-over-year. Importantly, we accomplished this impressive performance while maintaining the size of our field sales team with 40 representatives at the end of 2025. Our field sales headcount at the end of 2025 was essentially unchanged compared to the end of 2024, 2023 and 2022. Our performance demonstrates the strength of our hybrid commercial model, which includes both field sales reps and a growing network of independent distributor partners. Together, they raise awareness of our products and educate prospective surgeon customers on their benefits and clinical applications. Second, we drove significant improvements in our profitability profile on a year-over-year basis. Specifically, we expanded our gross margins by approximately 200 basis points to 93% for the full year 2025 and demonstrated notable operating leverage. We ultimately achieved a $1.5 million or 80% reduction in net loss from continuing operations and a $7.9 million or 86% improvement in adjusted EBITDA, resulting in $17 million for the full year 2025. Third, this performance, coupled with improvements in our working capital management, ultimately enabled us to generate $6.8 million of cash provided by operations for the full year 2025. This compares to $24,000 of cash used in operations for the full year 2024. In short, our financial results in 2025 reflect the fundamental strength of our surgical business and support our recent strategic decision to focus our resources and capabilities on the surgical market. Turning to an overview of our fourth quarter net revenue performance. Our team delivered solid commercial execution in the fourth quarter, generating net revenue of $27.5 million, representing growth of 5% year-over-year. Our net revenue growth was largely driven by sales of soft tissue products with modest contributions from sales of our bone fusion products as well. As a reminder, our net revenue in the fourth quarter 2024 benefited from approximately $1.8 million of BIASURGE sales due to the industry disruption caused by Hurricane Helene. Excluding the $1.8 million of BIASURGE sales related to this dynamic, our net revenue in the fourth quarter of 2025 increased 13% year-over-year. Importantly, our fourth quarter net revenue performance came in at the high end of both the preliminary range that we provided in our press release on January 23, 2026, as well as the expectations we shared on our third quarter's earnings call in November 2025. With these results as our backdrop, I'll now share on our commercial execution. In 2025, our team continued to drive momentum across the three key initiatives of our commercial strategy, which represents important drivers of our growth. As a reminder, these three initiatives are: one, strengthening our relationships with independent distributors; two, selling into new health care facilities; and three, expanding the existing health care facilities we serve. I'll now share updates on our progress across each of these initiatives, beginning with our relationship development with independent distributors. In 2025, we significantly grew our network of distributor partners. Specifically, we ended 2025 with over 450 contracted distributors compared to over 350 at the end of 2024. Given the significant progress we've made in expanding the size of our distributor network, our team has also focused increasingly on optimizing our distributor relationships. We are doing this by onboarding newly contracted distributors, training their sales representatives and partnering with them to educate prospective surgeon customers about the clinical benefits of our products. Our partnership approach to engaging and working with our distributor remains our core component of our commercial philosophy. We believe it's one of the items that differentiates Sanara in the market and provides important advantages for our organization going forward. Turning to our second commercial initiative, adding new facility customers. We continue to leverage our network of distributor partners to begin selling into new health care facilities where our products have been contracted or approved. I'm pleased to report that we achieved our stated target, which we initially provided on our first quarter earnings call in May 2025 of selling into over 1,450 health care facilities by the end of 2025. This compares to over 1,300 facilities in 2024. We continue to see significant runway to add new health care facility customers to our base over the coming years as our products were contracted or approved for sale in over 4,000 facilities at year-end. With respect to the third initiative I mentioned, penetrating our existing facility customers, we continue to drive adoption of our products by adding new surgeon users within the health care facilities we currently serve. In both the fourth quarter and full year 2025, we realized strong year-over-year growth in the size of our surgeon customer base. We continue to add new surgeon users ranging across a variety of specialties, including our traditional focus of spine and orthopedics as well as general, plastic and vascular surgery. Despite our progress in 2025, our surgeon penetration within the over 1,450 health care facilities we serve remains relatively low. With that in mind, we believe that the opportunity to go deeper within these existing facilities remains perhaps our largest untapped opportunity for future growth. In summary, our progress across each of the key commercial initiatives leaves us well positioned as we enter 2026 with multiple levers to drive continued growth in the surgical market. In addition to our commercial execution, the broader Sanara team made significant progress during the fourth quarter with respect to multiple areas of our strategy. I'd like to take a minute to highlight several important operational accomplishments. During the quarter, we continued to wind down the operations of Tissue Health Plus or the THP segment following our decision to cease operations, which we discussed in detail on our third quarter 2025 earnings call. I'm pleased to report that the THP wind-down process was substantially complete at the end of 2025, consistent with our previously stated expectations. From a financial perspective, total cash use related to THP over the second half of 2025 was $5.3 million, below the $5.5 million to $6.5 million range we shared on our second quarter earnings call in August 2025. As a reminder, the operations of THP, which were previously reported as the THP segment are classified as discontinued operations for the three months and full years ending December 31, 2025, and 2024. And importantly, we continue to anticipate no material cash spend related to THP going forward. With this in mind, we are entering into 2026 as a leaner, pure-play surgical company focused on continuing to bring innovative products to the operating room setting. In the fourth quarter, we also continued to support the future growth of our BIASURGE product by expanding into health care facility approvals. Most notably, we secured an innovative technology contract from Vizient. For those unfamiliar, Vizient is the largest group purchasing organization in the U.S. with an extensive client base of health care facility customers. Through Vizient's innovative technology program, Vizient works with councils led by hospital experts from its client base. These councils are tasked with evaluating products and assessing their potential to bring innovation to health care delivery. Following evaluation, our BIASURGE product was awarded an Innovative Technology contract as it was deemed to offer unique qualities and a potential benefit over other products available in the market today. As a reminder, BIASURGE is a no-rinse irrigation solution that enables surgeons to cleanse wound bed more efficiently than with saline alone. It also provides broad-spectrum antimicrobial effectiveness, helping to reduce the risk of surgical site infections. Beginning January 1, 2026, BIASURGE is now available to Vizient's network of health care facility customers. We believe this contract provides approximately 1,800 health care facilities with access to BIASURGE at contracted pricing and prenegotiated terms. All in all, it represents a significant opportunity to further expand BIASURGE customer base in 2026 in the coming years. In addition to these efforts, we continue to support our surgical product portfolio by expanding and enhancing our body of clinical evidence. Our products were featured in multiple peer-reviewed studies published during the first quarter. I'll take a moment to highlight two of them. A comparative peer-reviewed in vitro study featuring BIASURGE was published in the Journal of Arthroplasty. It evaluated the effectiveness of 9 commercially available irrigation solutions, including BIASURGE. Specifically, it assessed their ability to prevent the formation of biofilm on orthopedic implant materials by two common types of bacteria that are notorious for causing severe antibiotic-resistant infections in surgical wounds. The researchers also evaluated the cytotoxicity of each irrigation solution to ensure the patient's safety. In this study, BIASURGE exhibited high antimicrobial efficacy and low cytotoxicity. It is identified as one of the two irrigation solutions that were most effective in preventing biofilm formation among the 9 products tested. Our ALLOCYTE Plus product was also featured in a long-term clinical study published in the Journal of Spine and Neurosurgery. This study evaluated the outcomes of lumbar spinal fusion that used ALLOCYTE Plus as a stand-alone graft substitute. Ten patients were followed for 24 to 36 months, demonstrated successful solid bone healing within 6 months of receiving the operation. No adverse events, including complication, graft failures or revision surgeries were reported during the follow-up period. Importantly, these patients also demonstrated sustained improvements in both neurological and clinical outcomes as well. The study's findings support our position that ALLOCYTE Plus provides a safe, biologically active alternative to using traditional autogenous iliac crest bone grafts, which tend to be associated with the complications in donor site morbidity. Our R&D team also remains focused on expanding our IP portfolio to protect and advance our existing products. As a reminder, in 2024, we submitted 11 provisional patent applications covering innovations in proprietary antimicrobial and hydrolyzed collagen technologies, including novel formulations, treatment applications and key component advancements. Over the course of 2025, our team converted these 11 provisional patent applications into nonprovisional filings, a major step forward in the progress towards securing approval while also submitting the corresponding U.S. and PCT applications for international protection. In addition to this progress, we submitted an additional three provisional patent applications that protect specific components and compositional aspects of our CellerateRX Surgical product. We look forward to continuing to expand the breadth of IP protection as well as our future product development efforts related to our surgical products. Lastly, we continue to make progress in our efforts to expand our portfolio through our partnership with Biomimetic Innovations, or BMI, with the goal of bringing OsStic to the U.S. commercial market. As a reminder, during the first 9 months of 2025, BMI achieved all of the key product development, clinical, regulatory and medical education milestones outlined under our agreement. Based on our continued progress in the fourth quarter of 2025 and the initial months of 2026, I'm pleased to report that we remain on track to introduce the OsStic synthetic injectable bone bio-adhesive to the U.S. market in the first quarter of 2027. Given its status as an FDA-designated breakthrough device, we believe OsStic will be the first synthetic injectable bone bio-adhesive available in the U.S. once it receives regulatory approval. In preclinical mechanical testing, OsStic demonstrated bonding to bone that was 40x stronger than traditional calcium phosphate bone cement. We expect OsStic to represent a new anchor product for our bone fusion portfolio and look forward to bringing this innovative technology to support the more than 100,000 periarticular fractures that occur in the U.S. each year. In summary, 2025 was a significant transition year for Sanara MedTech. Perhaps most notably, Sanara transitioned to new leadership in both CEO and CFO roles to guide the next phase of our growth and development as an organization. As a company, we navigated the strategic realignment of our business to focus solely on the opportunities in the surgical market going forward. And in tandem, our team successfully executed our strategy in the surgical market, driving significant commercial, financial and operational progress across all major fronts. Our progress this past year is a credit to the remarkable team of individuals who work at Sanara MedTech. It also reflects our team's commitment to advancing the treatment of surgical wounds for the benefit of all the constituents in the health care industry, including patients, surgeons and health care systems. With that said, I'll turn it over to Elizabeth to cover our fourth quarter 2025 financial results in greater detail and review our full year net revenue guidance for 2026. Elizabeth Taylor: Thanks, Seth. I will begin by reiterating that the operations of THP, which were previously reported as the THP segment, have been classified as discontinued operations for the three months and full years ended December 31, 2025 and 2024. As such, unless noted otherwise, all commentary that follows is on a continuing operations basis. In our earnings press release issued today, we have included tables detailing our historical results of operations on a continuing operations basis in 2025, 2024 and 2023, which aligns with our reporting going forward. Given that Seth covered our net revenue results for the quarter, I'll begin with gross profit. All percentage changes referenced throughout my remarks compare to the prior year period, unless otherwise specified. Fourth quarter gross profit increased $1.6 million or 7% to $25.7 million. Fourth quarter gross margin increased approximately 175 basis points to 93% of net revenue, driven primarily by sales of soft tissue repair products and lower manufacturing costs related to CellerateRx Surgical. Fourth quarter operating expenses increased $2.8 million or 13% to $24.6 million. The change in operating expenses was driven by a noncash impairment charge of $1.8 million in the fourth quarter of 2025, which was related to a write-down of certain IP assets in connection with our strategic shift to focus on products in the surgical market and a $1.2 million increase in research and development expenses, which was primarily due to product enhancement initiatives associated with our soft tissue repair products. Operating income for the fourth quarter was $1.1 million compared to $2.3 million last year. Excluding the aforementioned $1.8 million noncash impairment charge in the fourth quarter of 2025, our operating income increased $0.6 million or 28% to $2.9 million. Other expense for the fourth quarter was $2.2 million compared to $1.3 million last year. The increase in other expense was primarily due to higher interest expense and fees related to our CRG term loan as well as higher share of losses from equity method investments. Net loss from continuing operations for the fourth quarter was $1.1 million or $0.13 per diluted share compared to net income from continuing operations of $0.9 million or $0.10 per diluted share last year. Adjusted EBITDA for the fourth quarter of 2025 was $4.7 million compared to $4.1 million last year. Turning to the balance sheet. As of December 31, 2025, we had $16.6 million of cash and $46 million of long-term debt. This compares to $15.9 million of cash and $30.7 million of long-term debt as of December 31, 2024. For the full year 2025, we were pleased to generate $6.8 million of cash provided by operating activities compared to $24,000 of cash used in operating activities in the full year 2024. The increase in cash from operating activities was driven in part by the reduction in net loss from continuing operations and improvements in working capital efficiency compared to the prior year. Importantly, we estimate that $6.8 million of cash generated from operating activities in the full year 2025 was inclusive of approximately $9 million of cash used in operating activities related to THP. As Seth mentioned, we continue to anticipate no material cash spend related to THP going forward. Turning to our net revenue guidance for the full year 2026, which we introduced via press release in January and reaffirmed in our earnings release today, we continue to expect full year 2026 net revenue to range from $116 million to $121 million, representing growth of approximately 13% to 17% compared to net revenue of $103.1 million for the full year 2025. Lastly, we would like to share a few additional considerations for modeling purposes. With respect to operating expenses, as Seth will discuss further, in connection with our enhanced focus as an organization on the surgical market, we are investing in our field sales team and R&D initiatives to lay the foundation for strong, sustainable growth in 2026 and the coming years. With $16.6 million of cash at December 31, 2025, combined with our expected cash flows from operations, we are comfortable with our balance sheet liquidity in 2026. From a modeling perspective, as a reminder, we typically pay employee commissions and annual bonuses in the first quarter of our fiscal year, requiring a higher outlay of cash. Lastly, given the proximity to the end of the first quarter and for avoidance of doubt, we would like to provide additional transparency regarding our expectations for the first quarter net revenue results. Specifically, we expect net revenue of approximately $26.7 million to $27.2 million for the first quarter of 2026, representing growth of approximately 14% to 16% year-over-year. With that, I will now turn it back to Seth for closing remarks. Seth Yon: Thanks, Elizabeth. Sanara MedTech is providing full year net revenue guidance in 2026 for the first time in our company's history. The decision to introduce net revenue guidance was made as a part of our commitment to provide increased transparency regarding our anticipated future performance. It reflects the significant scale we have achieved as a company in recent years as well as the evolution and development of our organization across multiple fronts. As Elizabeth mentioned, we are reaffirming our full year net revenue guidance today, which reflects growth of 13% to 17% in 2026. We look forward to delivering growth within this range and providing updates on our progress throughout the year. Before opening the call for questions, I'd like to share some closing thoughts on our positioning and strategic priorities as we enter 2026. In short, we like how we're positioned heading into this year. We are entering 2026 as a focused pure-play surgical company dedicated exclusively to the operating room setting with three anchor products, two currently in the market, CellerateRx Surgical and BIASURGE and one in our pipeline, OsStic. Our anchor products possess differentiated capabilities that enable them to satisfy clear clinical needs in the treatment of surgical wounds. They are not subject to reimbursement risk, and they collectively address a multibillion-dollar annual opportunity in the surgical market. To effectively capitalize on this opportunity, we've developed an effective time-tested commercial team, model and strategy that has enabled us to achieve significant commercial scale and momentum. And based on our historically strong margin profile and balance sheet condition as of December 31, 2025, we believe we have the resources necessary to achieve our primary strategic and financial objectives this year through focused execution and disciplined capital allocation. In terms of our strategic priorities for 2026, we are focused on the following three items: First, continuing to penetrate the surgical wound market by executing our commercial strategy with our existing products. Specifically, we remain focused on driving further progress in developing our distributor network, expanding our facility customer base and adding new surgeon users within the facilities we currently serve. These three initiatives have been the foundation of our commercial success in recent years, and we see substantial runway for continued growth across each of them as we move through 2026 and beyond. Second, pursuing targeted investments in our business to support our growth in 2026 and future years. Stepping back, given Sanara's broader scope of focus in prior years, the company historically pursued investments in opportunities outside of our core business in the surgical market. Going forward, we are committed to pursuing a focused approach as a pure-play surgical company. With that commitment, we are intent on supporting our surgical product portfolio and commercial distribution network with investments that will protect and enhance our position in the surgical market and prove to be truly impactful over time. Specifically, we are investing in our surgical field sales team and R&D initiatives to lay the foundation for strong, sustainable growth. With respect to our field sales team, as I mentioned earlier, the size of our team has remained essentially consistent for multiple years with roughly 40 sales representatives. During the first quarter of 2026, we are making targeted investments to expand our sales rep coverage in key territories across the U.S. We are currently focused on onboarding and training, and we expect these new reps to become increasingly productive as they develop over the balance of 2026. With respect to our R&D initiatives, we will continue our efforts to expand the portfolio of clinical evidence supporting our anchor products while bolstering our IP protection. In addition, we are investing in several longer-term product development initiatives with a focus on pursuing enhancements to strengthening our existing surgical portfolio and address the evolving needs of our customers. These investments are designed to deepen our competitive moat and ensure that we maintain our position as a leader in bringing innovative surgical products to the market. Lastly, we are focused on bringing OsStic to market through our strategic partnership with BMI and preparing for U.S. commercialization in the first quarter of 2027. We believe OsStic represents a significant opportunity to expand our presence in the bone fusion market and provide surgeons with a truly differentiated solution for periarticular fracture repair. In conclusion, we are committed to focused execution and targeted capital allocation across these three strategic priorities in 2026. We believe our successful execution on these items will position us for strong, sustainable growth this year as well as cash generation and profitability in the years to come. I'd like to close by thanking the entire Sanara MedTech team for their exceptional work in 2025. I'd also like to thank our shareholders and customers for their continued support and to those on today's call for their interest in Sanara MedTech. With that, operator, you may now open the call for questions. Operator: [Operator Instructions] your first question for today is from Yi Chen with H.C. Wainwright. Eduardo Martinez-Montes: This is Eduardo on for Yi. Congrats on all the progress in the year. I had a question on BIASURGE, following the Vizient contract effective January 1, how much of your growth in 2026 do you think is attributable to this new volume of GPO versus organic growth in existing accounts? And do you anticipate any other of these deals to materialize in 2026? Seth Yon: This is Seth. So I'll answer that question. First of all, the Vizient contract was a really significant thing for us to accomplish and to get on to that contract. To our knowledge, we're the only [ wash ] to have done that. It will still take a little bit of time to go out and educate at the facility level. And so we haven't given guidance specific to a product in past, just talking more about soft tissue repair, which BIASURGE would fall to. So our team is working daily inside those 1,800 accounts to continue to get access into those accounts and bring that technology to life. It was a major step forward for us as we think back to a soft launch in that product just a couple of years ago. You're doing that at a pretty slow pace, right? You have to do that one facility at a time. And now to have on contract 1,800-plus facilities, we think that gives us great runway to perform in 2026, but truly well beyond that as well. Eduardo Martinez-Montes: Got it. And then if I could ask another one on CellerateRX growth. So with this new study and cost effectiveness, do you see any opportunity for -- what do you think the impact on growth and maybe reimbursement in terms of cost effectiveness? And do you expect any other studies for CellerateRX to come out during this next year that could also bolster? Seth Yon: Yes. Well, first of all, we believe strongly in clinical evidence, specific to our anchor products, CellerateRX, BIASURGE and then soon to be OsStic as well once that commercializes. So we'll continue to put energy against that from all those different fronts, both scientifically, clinically and then economically. We feel really confident in that economic study that came out. We think that facilities will see great value in that as well to showcase a product that, again, is a supply cost inside the DRG. So I think it's really important to understand for everybody on this call, we don't have reimbursement risk with that product and won't into the future. That, again, is a supply cost. So I think it only strengthens our relationships inside the hospital with the clinical evidence that we have specific to Cellerate and now the economic evidence to come alongside of that is really significant. So we think it has an impact for our numbers going forward as a result of all of that research that's been done. Operator: We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to Tongcheng Travel 2025 Fourth Quarter and Annual Results Announcement Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ms. Kylie Yeung, Investor Relations Director of the company. Please go ahead, ma'am. Kylie Yeung: Thank you. Good morning, and good evening, everyone. Welcome to Tongcheng Travel's 2025 Fourth Quarter and Annual Results Conference Call. I'm Kylie Yeung, Investor Relations Director of the company. Joining us today on the conference call are our Executive Director and CEO, Mr. Hope Ma; our CFO, Mr. Julian Fan; our Chief Capital Officer and President of Wander Hotels and Resorts, Ms. Joyce Li. For today's call, our management team will provide a review of the company's performance in the fourth quarter and full year 2025. Hope will brief us on the company's strategies. Joyce will discuss our business and operational highlights, and then Julian will address the details of financial performance accordingly. We'll take your questions during the Q&A section that follows. As always, our presentation contains forward-looking statements. Such statements are based on management's current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, which may cause the company's actual results, performance or achievements to differ from those in the forward-looking statements. This presentation also contains some unaudited non-IFRS financial measures. They should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of non-IFRS measures, please refer to our disclosure documents in the IR section of our website. Now let me introduce our CEO, Hope. Hope will be presenting in Mandarin, and our colleague will provide the English translation afterwards. Hope, please go ahead. Heping Ma: [Interpreted] In 2025, China's travel industry and the company entered a new phase of high-quality development. Over the past year, we witnessed resilient travel demand with increasingly diversified trends as immersive and experiential consumption continues to gain popularity. Amid this backdrop, we deeply dive into user needs and comprehensively optimize our travel products and user experiences. As a result, both our user base and ARPU demonstrated robust growth in 2025 with APU reaching a record high. The robust business growth reflected the ongoing enhancement of our service quality and the expanding influence of our brand. The year 2025 was a year of challenges and opportunities for us. In response to consumers' diversified and personalized needs, we continuously enriched our product offerings, facing growing expectations for premium services. We consistently improved our service quality. Amidst AI-driven technological revolution, we proactively embraced new frontier technologies with an open attitude. All these showcased our strong organizational agility and exceptional execution capabilities, further reaffirming our commitment to our user-centric mission of make travel easier and more joyful. The Chinese government sees travel as a vital pillar of national economic development. The latest 15th 5-year plan has explicitly stated the commitment to expanding the supplies of high-quality travel products and to enhancing travel service standards with the goal of establishing China as a premier travel destination from the pilot implementation of autumn and winter vacations in certain regions to the longest spring festival holiday on record. These expanding holiday arrangements underscore significant governmental support for the travel industry. In terms of demand, travel has become an essential part of people's pursuit of a better life with seasonal themes such as spring flower viewing, summer retreats, all foliage tours and winter snow activities continuously gaining popularity. In the coming year, we will remain focused on domestic market and deep dive into user needs, aiming to further solidify our leading position in the mass market. Simultaneously, we will make intensified efforts to capture growth opportunities in the outbound travel market to propel our global expansion strategy. On the operational front, we will continue to implement technological innovation and product upgrades centered on user experience while enriching membership privileges and deepening user engagement. In 2021, we tapped into the hotel management business. After several years of rapid expansion, it has now gained meaningful scale. The integration of Wanda Hotels and Resorts in 2025 marked a pivotal milestone in the development of our hotel management business. This strategic move strengthened our brand portfolio and ecosystem while substantially elevating our competitiveness and market influence. By consistently executing our strategy and leveraging our strong Internet DNA, we are well positioned to accelerate the segment expansion in 2026, laying a robust foundation for our long-term sustainable growth. Amidst the rapid advancement of AI technology, we are devoted to expanding the application of AI in our business process, further optimizing operational efficiency and enhancing user experience. Building on our user-centric value proposition, market acumen and superior execution capabilities, we are confident that we will continue broadening our competitive moat in the travel industry. Moving forward, we will continue to export our technologies and expertise to empower our partners and support the broader industry ecosystem while strengthening our commitment to corporate social responsibility to foster sustainable industry growth and create greater value for all stakeholders. Next, I will hand over the call to Joyce. She will share with you our business and operational highlights of the fourth quarter and the full year of 2025. Joyce, please go ahead. Joyce Li: Thank you, Hope. 2025 was a pivotal year of growth and achievement for our company. Beyond the steady expansion of our domestic business, our outbound travel and hotel management businesses made remarkable progress, contributing meaningfully to the overall growth momentum of the company. During the past year, we acutely grasped users' evolving preferences and precisely captured emerging demand. This enabled us to once again deliver solid growth across all business segments, highlighting our excellence in strategic execution, operational efficiency and organizational agility. Throughout the year, our accommodation business sustained robust growth momentum and achieved a record high in room nights sold. In early 2025, we identified a notable shift in users' preference towards high-quality hotels. In response to the changes, we strategically reallocated operational resources to meet this evolving demand, resulting in an approximately 5 percentage point year-over-year increase in the proportion of high-quality hotels sold on our platform. In the meantime, we prioritized enhancing user experience. We not only offer the best value for money products and services, but also provided faster and more responsive support to user requests to further strengthen our presence in the mass market. As for our international business, we continue to enhance our product capabilities by deepening partnerships with third-party providers as well as expanding our product and service offering. In addition, we leveraged our domestic user base to drive cross-sell initiatives and execute the precision marketing campaigns targeting high potential users. All these efforts collectively led to nearly 30% growth in our international room nights sold in 2025. In terms of our transportation business, it continuously demonstrated strong resilience throughout the year. Over the past year, we placed a strong emphasis on improving both user experience and engagement. At the core of the efforts is our Algorithm-driven Huixing system, which leverages advanced algorithm capabilities to provide users with viable and accessible travel solutions by utilizing a comprehensive range of transportation options. The intelligent system significantly enhances the overall travel experience for users. In the fourth quarter, we launched skiing-themed marketing campaigns and rolled out various benefits to skiing enthusiasts so as to reinforce our positioning as an experience-driven platform and further engage our user base. On the international front, we focused on improving operational efficiency by implementing a more disciplined subsidy policy and expanding our VAS offerings. As a result, we achieved a balanced growth in both volume and revenue throughout the year with volume growth of nearly 25% for 2025. As mentioned at the beginning of the speech, 2025 marked a milestone year for our hotel management business with significant progress achieved. This year, we successfully completed the acquisition of Wanda Hotels and Resorts, a company that possesses a renowned portfolio of upper upscale and luxury hotel brands with strong market presence in China. In addition to its hotel management expertise, the company is the only hotel management firm in China with proven specialization in operating scale resorts. This unique capability can help us strengthen supply chain resources in the travel industry, thereby enhancing our influence and competitiveness. Furthermore, Wanda Hotels and Resorts operates its own in-house design institute which is recognized as one of the leading hospitality design teams in China and has received numerous prestigious international awards. The team possesses strong capabilities in designing and managing large-scale hotels as well as convention and exhibition centers. Its design solutions serve not only its own properties, but also high-end hospitality projects across the industry. Following the acquisition, the Wanda Hotels and Resorts team underwent a seamless integration process, resulting in a significant boost to its vitality and optimized organizational capacity and refined strategic direction. This strategic integration has improved our brand portfolio, strengthened our market presence and accelerated the sustainable growth of our hotel management business. Regarding our eLong hotel technology platform, we remain focused on expanding our geographical footprint while prioritizing quality growth throughout the year. The platform also offers technology-enabled hotel management solutions featuring a proprietary property management system, a smart marketing solution, [indiscernible] and service robots for automated in-room delivery. By the end of December, our total number of hotels in operation exceeded 3,000 with more than 1,800 in the pipeline. Looking ahead, we are committed to further expanding our asset-light hotel management business through network expansion and ecosystem enablement. This strategic approach will position us to achieve leadership in China's hotel industry and establish a second growth engine for the company. Traffic operation has been the foundation of our success, leveraging the Weixin Mini program, we have effectively reached a broad user base across China, in particular, those in lower-tier cities. Over the past year, the Weixin ecosystem continued to serve as a critical traffic channel, where we focused on enhancing operational efficiency. At the same time, our stand-alone app, a key driver of new user acquisition, demonstrated strong growth momentum over the past 4 quarters. To attract younger demographics, we rolled out a series of innovative products and engaging marketing campaigns to enhance user mind share and solidify our positioning as an experience-oriented travel platform. As such, the average DAUs of our stand-alone app posted more than 30% growth year-over-year in 2025. Additionally, social media has played an increasingly vital role in engaging users, particularly those younger audiences. During the year, we stepped up our efforts in social media platforms to connect with younger travelers and broadened our user reach through effective and targeted user engagement. We have accumulated the most extensive user base in China's OTA industry. For the 12 months ended December 2025, our annual paying users climbed to 253 million, representing a year-over-year growth of 6%. In addition, the accumulated number of passengers served on our platform over the past 12 months continued to expand and reached 2,034 million with an annual purchase frequency exceeding 8x per user. Moreover, our annual ARPU for the year further rose to RMB 76.8, reflecting a year-over-year growth of 5.5%. Besides our MPU also maintained a growth trajectory throughout the year and increased by 6% year-over-year to 46 million for 2025. As an innovation-driven company, we fully embrace new technologies such as Gen AI to transform our business. In December, we rolled out collaboration with Yuanbao, enabling users to access to our travel booking services via the Weixin Mini program by searching travel itineraries on Yuanbao app. In mid-March last year, we introduced our AI-powered travel planner, DeepTrip, which integrates the supply chain capabilities and market insights of our platform with the resuming capabilities of DeepSeek. Over the past few quarters, we have continuously refined its functionality, incorporating social features to enhance its shareability among users. In the fourth quarter, we embedded a map tool to give users a clearer visual representation of their travel destinations. By the end of December, approximately 6.8 million users in total have utilized DeepTrip. Additionally, we extended its application to some business scenarios by integrating DeepTrip into air ticketing service. We aim to address users' prebooking inquiries as well as helping them find competitive ticket prices, which not only improved operational efficiency, but also enhanced overall user experience. In customer service, AI now covers around 80% of user inquiries, demonstrating its important role in streamlining operations and enhancing user experience. Over the past year, we have consistently advanced the integration of AI in every phase of the customer service process, which not only reduced the workload of customer service staff, but also improved overall operational efficiency. Furthermore, we have made continuous advancements in AI capabilities to enhance its precision in identifying user requests and delivering timeless, contextually relevant and human-like responses. By leveraging AI-driven solutions, we aim to further optimize customer interaction, reduce response time and maintain seamless user support as we continue to grow. In pursuit of global excellence in ESG practices, we have achieved milestones in improving our ESG performance over the past few years. Notably, in 2025, our MSCI ESG rating was elevated to the top AAA level, surpassing 95% of global industry players. In addition, we were included in the S&P Global Sustainability Yearbook China for the third consecutive year, and we were also honored with the Industry Mover Award for our remarkable progress in driving sustainable development within our sector. All these achievements have not only demonstrated our leadership in ESG performance among global peers, but also reflected our resilience and excellence in corporate sustainability in the face of market uncertainties, evolving policy landscape and dynamic social development, we remain dedicated to further strengthening our ESG practices and contributing to a more sustainable future. I'll stop here and give the call to our CFO, Julian. He will share with you the detailed financials in the fourth quarter and for the year of 2025. Julian, it's your turn. Lei Fan: Thank you, Joyce. Good evening, everyone. Over the past quarter, China's travel industry showcased remarkable resilience driven by rising demand for immersive and experiential travel experiences across both traditional holiday hotspots and newly emerging destinations. Leveraging our profound understanding of evolving traveler preferences, we delivered another quarter of robust performance, capping off a highly productive year. In the fourth quarter of 2025, we achieved healthy growth in both top and bottom line. We reported net revenue of RMB 4.8 billion, representing a 14.2% year-over-year increase from the same period of 2024. We executed targeted marketing campaigns to strategically prepare for the 2026 Chinese New Year, while upholding rigorous cost discipline to ensure financial prudence. During the fourth quarter, our adjusted net profit rose to RMB 779.8 million, reflecting an 18.1% year-over-year growth. The increase was principally fueled by the enhanced economies of scale and the optimized operations of our OTA business. Our core OTA business revenue registered a 17.5% year-over-year increase to RMB 4.1 billion during the fourth quarter of 2025. Our accommodation reservation business achieved RMB 1.3 billion in revenue for the fourth quarter of 2025, representing a 15.4% increase from the same period in 2024. The revenue increase was primarily driven by growth in hotel room nights sold, coupled with a modest rise in ADR. In our domestic accommodation business, we proactively explored diverse accommodation scenarios to capture emerging growth opportunities, including themed offerings tailored to specific demand such as winter vacation and exam season space. For our outbound accommodation business, we strengthened cooperation with third-party partners to expand product offerings as well as our destination footprint catering to growing user demand. In the fourth quarter, our ADR once again achieved year-over-year growth, benefiting from growing consumer demand for high-quality hotels and our proactive adjustment to user subsidy strategies, supported by precise and disciplined marketing strategies. Our net take rate remained stable year-over-year. Our transportation ticketing revenue for the fourth quarter reached RMB 1.8 billion, marking a 6.5% year-over-year increase compared with the same period of 2024. During the past quarter, we heightened our focus on improving user experience. We actively expanded travel supply chain and enriched VAS offerings to deliver a broader range of mobility options and ensure seamless travel experience for users. As for our international air ticketing business, it achieved balanced growth in both volume and revenue, which aligns with our long-term strategy. In the fourth quarter, our international air ticketing revenue increased to more than 7% of our total transportation ticketing revenue. Our other business segment maintained stellar growth momentum with revenue reaching RMB 916.7 million in the fourth quarter, representing a growth of 53% year-over-year. This growth was mainly propelled by outstanding performance of our hotel management business and the consolidation of Wanda Hotels and Resorts. Our tourism business achieved a revenue of RMB 777.5 million, which was largely flat year-over-year. mainly due to our proactive reduction in prepurchased business as well as softer demand for Southeast Asia and Japan. In terms of profitability, our gross profit increased by 18.5% year-over-year to RMB 3.2 billion for the fourth quarter of 2025. The operating profit margin of our core OTA business remained flat year-over-year for the fourth quarter of 2025, while the operating profit margin of our tourism business has been affected by the one-off goodwill impairment. Our adjusted EBITDA increased by 28.6% and reached RMB 1.3 billion in the fourth quarter of 2025. Adjusted net profit grew by 18.1% to RMB 779.8 million in the fourth quarter of 2025. Adjusted basic EPS for the fourth quarter of 2025 was RMB 0.33 with a 17.9% year-over-year increase compared to the same period in 2024. Service development and administrative expenses in the fourth quarter of 2025 increased by 6.8% from the same period of 2024. Excluding share-based compensation charges, service development and administrative expenses in total accounted for 18.1% of revenue in the fourth quarter compared with 18.6% of revenue in the same period of 2024. Selling and marketing expenses in the fourth quarter of 2025 increased by 22.7% from the same period of 2024, excluding share-based compensation charges. Selling and marketing expenses accounted for 32.4% of revenue in the fourth quarter compared with 30.2% of revenue in the same period of 2024. Now let's move to our results for financial year 2025. Our net revenue in 2025 achieved RMB 19.4 billion, representing an 11.9% year-over-year increase. The core OTA revenue achieved RMB 16.5 billion, representing a 16% year-over-year increase. Our accommodation reservation revenue was RMB 5.5 billion in 2025, representing a 16.8% year-over-year increase. Our transportation ticketing revenue reached RMB 7.9 billion, representing a 9.6% year-over-year increase. Other business revenue for 2025 achieved RMB 3.1 billion, representing a 34.4% year-over-year increase. Our tourism revenue for 2025 reached RMB 2.9 billion, representing a 6.9% year-over-year decrease. In terms of profitability, our gross profit in 2025 increased by 15.7% year-over-year to RMB 12.9 billion. Adjusted EBITDA for 2025 improved by 26.9% year-over-year to RMB 5.1 billion. Meanwhile, adjusted net profit for 2025 increased by 22.2% year-over-year to RMB 3.4 billion. Adjusted basic EPS for 2025 was RMB 1.45 with a 20.8% year-over-year increase. As of December 31, 2025, the balance of cash and cash equivalents, restricted cash and short-term investments was RMB 12.3 billion. We highly appreciate our shareholders' consistent support and are committed to delivering sustainable capital returns. Our Board of Directors has proposed a final cash dividend of HKD 0.25 per share, marking a 38.9% increase from last year. This reflects our commitment to enhance capital returns to shareholders. Over the past year, China's travel industry has demonstrated increasingly prominent trends towards diversification and personalization as consumers place growing emphasis on emotional value and unique experience-driven travel opportunities. Notably, the 2026 Spring Festival represented the longest holiday period on record. During the 9-day holiday, consumers divided their holidays into multiple shorter trips such as homecoming visits and vacation travel. Incremental demand from multiple trips during the festival has driven robust growth in our business volume. In addition, the pilot implementation of spring and autumn vacations initially launched in Zhejiang and Sichuan has been expanded to include more regions such as Jiangsu and Anhui. We believe this initiative will help stimulate travel consumption and provide additional momentum to the growth of the tourism industry. Such supportive government policy, combined with sustained strength in user demand, fuels our optimism about the upward trajectory of China's travel industry in the coming year. Moving forward, we will remain focused on our core OTA business, providing users with diverse domestic and international travel products while sparing no effort to enhance user experience. As we continue to improve operational efficiency in domestic OTA operations, we will actively expand our outbound business to bolster our global brand presence. Additionally, our hotel management business will enter a new phase of high-quality growth, building a solid foundation for the company's long-term sustainable development. Concurrently, we will continue to adopt technological innovations as well as deepening the integration of AI technology with our supply chain capabilities, striving to better meet user needs. Last but not least, we will strengthen our corporate social responsibility to support the healthy development of the travel industry and to create greater value for our stakeholders. With that, operator, we are ready to take questions now. Thank you. Operator: [Operator Instructions] We will now take our first question from the line of [ Xi Wei Liu ] from Citi. Unknown Analyst: Xi Wei From Citi. Congratulations to the company on a solid operating performance. I have 2 questions. The first about outbound travel. There have been many flight cancellations between China and Japan recently. How has this impacted your outbound business? Could you share the regional breakdown of your outbound markets? And what are your 2026 targets for outbound revenue growth and profitability? The second about large model and AI strategy. The company has actually rolled out some partnerships with large models so far. In the long run, as AI model portals become more important, how will the company position itself? Joyce Li: Thank you, Xi Wei for the question. The first one is in terms of outbound travel. We did observe a decline in Japan-bound travel volume given the current circumstance. However, the overall impact on our business has been limited as outbound travel accounts for only around 5% to 6% of our total transportation and accommodation revenue. And at the same time, outbound travel demand remains resilient, and we have been seeing users shift to alternative destinations rather than cancel their travel plans. During the Chinese New Year holiday, shop to middle-haul destinations within a 5-hour flight regions such as South Korea, Singapore, Malaysia, Hong Kong and Macau remain among the most popular choices, while demand for Thailand also shown signs of gradual recovery. In addition, demand for long-haul travel increased year-over-year with European destinations such as Italy and Spain seeing particular strong growth. We have been actively adjusting our product offerings and marketing focus to capture this demand shift. Overall, given the relatively small contribution of our outbound travel to our core OTA business and the substitution effect across destinations, we do not expect a material impact on our overall performance. And looking ahead to 2026, our priority remains to further improve the quality of growth by enhancing pricing discipline, optimizing marketing efficiency and strengthening cross-selling from air tickets to accommodation and other travel products. At the same time, we will continue to deepen partnerships with global suppliers to improve service capabilities and user experience. Overall, we expect the international business to continue expanding in scale and become an increasingly meaningful contributor to our revenue. Over the next 2 to 3 years, growing business volume and expanding the user base will remain the key priorities while maintaining a strong focus on improving growth quality and profitability. We expect the revenue contribution from the outbound segment to increase to around 10% to 15% with increasing operating leverage over time. And in terms of the AI cooperation, our AI strategy focused on enhancing both user experience and operational efficiency as we continue to evolve from a traditional OTA toward a more intelligent travel platform. We see AI as a core capability that helps us better understand user needs, improving decision-making and optimize service delivery across the entire travel journey. At the same time, AI-driven efficiency improvements are significantly enhancing staff productivity and optimize our cost structure, which we believe will be an important driver of margin improvement over time. On the user side, we have integrated our proprietary travel-specific AI with advanced large language models to develop DeepTrip, which supports itinerary planning, travel inspiration and personalized product recommendations. By combining AI capabilities with our real-time supply and transaction ecosystem, DeepTrip provides a practical and actionable solution and enables a seamless end-to-end booking experience. We will continue to iterate its functionalities to better support users across different travel scenarios. And as a positioning of us, I think that we have been started exploring the partnership with large AI platforms and large model ecosystems. For example, we enabled traffic [ redirection ] from Yuanbao to our mini programs and apps. So our strategy is to actively participate in the emerging AI ecosystem by positioning our platform as a trusted travel service partner with deep market insights and a strong understanding of user behaviors. Leveraging our long-term accumulation of transaction data and operational experience, we are able to provide users with more accurate recommendations and practical bookable travel solutions on our AI platforms. Users who enter through AI platforms complete their bookings within our mini programs or apps and the related user and transaction data remain within our ecosystem. This allows us to maintain direct user relationships, accumulate valuable behavior insights and continuously optimize our product services and personalized recommendations. It also enables us to strengthen user engagement and lifetime value, which remains a key competitive advantage for our OTA platform. Going forward, we will continue to monitor development of the AI ecosystem and expand partnerships where it makes strategic sense, while maintaining our focus on strengthening our product service offerings, operational capabilities and user experience. Operator: We will now take our next question from Wei Xiong of UBS. Wei Xiong: First, I want to get your thoughts on regulations because recently, an OTA peer has been under antitrust investigation. So how should we think about the implications to the OTA sector? Do you foresee any impact on OTA's business model or lead to any change in the competitive landscape? Lei Fan: Thank you, Wei Xiong, -- please go on. Wei Xiong: Yes. Sure. So second question is on the hotel management business, which is set to become our second growth engine. So I wonder, could management elaborate your strategic focus and planning for this year? And what are the key operational goals and financial metrics that we look to achieve in 2026 and in the medium term as well? Lei Fan: Okay. Thank you for the question, Xiong, Wei. In terms of the investigations, as you mentioned, we closely monitor regulatory developments recently. At this stage, we have not observed any material changes that would impact our day-to-day operations. Tongcheng has always operated with a strong focus on compliance and fair cooperation with our partners. We believe a well-regulated market environment is beneficial to the long-term healthy development for the company and also for the industry. We will continue to adapt our business practices as required to ensure full compliance in the company. Overall, we remain focused on executing our strategy and delivering sustainable growth and profitability improvement. In terms of the hotel management plan, I think Joyce will have her words. Joyce Li: Thank you, Xiong, Wei. Actually, following the completion of the Wanda Hotels and Resorts acquisition, the integration has progressed smoothly and is better than our expectations. We have achieved rapid organizational alignment, revitalized organization and teams and further refined the strategic direction of the business. Overall, the post-acquisition integration has been very successful. On the synergy front, we are beginning to see encouraging early results. The addition of the Wanda's upscale and luxury brands has enhanced our overall brand portfolio and strengthened our positioning in the middle to high-end segment of our hotel management business. At the same time, the integration has enabled better resource sharing across business development, operations and membership, which is gradually improving operational efficiency. It also further reinforced Tongcheng's presence within the accommodation supply chain. From the other perspective, Tongcheng also empowers Wanda Hotels and Resorts through our technology capabilities. By providing standardized system tools and digital solutions, we help improve internal operational efficiency while reducing research and development efforts and lowering system maintenance and third-party service costs. From a financial perspective, the acquisition has already delivered a positive contribution at the operational level as Wanda Hotels and Resorts is an established hotel management company with a solid operating track record. The consolidation has enhanced our revenue scale, optimized the business mix and strengthened the earnings visibility of the segment. As we move forward, our development strategy will remain disciplined with a focus on balancing scale expansion with operational efficiency and healthy returns, ensuring sustainable and high-quality growth of the business segment. With continued expansion of scale and improving operational efficiency, together with the contribution from Wanda Hotels and Resorts, we expect the hotel management segment to maintain strong revenue growth with a further improvement in profitability from 2026 onwards. Thank you. Operator: We will now take our next question from the line of Brian Gong of Citi. Brian Gong: Two questions here. First is, how do you -- how is the travel consumption trend for the industry in the first quarter considering recovery on hotel ADR. Do we still expect teens level on room nights growth this year? Second question is that recently, [indiscernible] has been under government's investigation. Do you think this will impact their cooperation with us and their stakeholding on us? [indiscernible] is adjusting their hotel business to comply with government's requirement. How will this impact the industry and us? Lei Fan: Okay. Thank you for the questions, Brian. In terms of the first quarter's performance and also the industry outlook, actually, during the Chinese New Year holiday, as we mentioned in the prepared remarks, the China travel market continued to demonstrate very solid demand. According to the Ministry of Transport, national passengers throughput during the 9-day Chinese New Year holiday reached a throughput record 8.2% year-over-year growth during the holiday with decent growth for both long-haul and short-haul travel. Our passenger throughput of railway and airline increased by around 10% and 7% year-over-year, respectively. Meanwhile, according to the industry statistics, overall hotel ADR increased during the Chinese New Year holiday among all segments. With demand for family reunions concentrated in the pre-holiday period, we observed a pickup in passenger throughput during the latter part of the Chinese New Year holiday this year. In response, we promptly adjusted our operational resources, strengthened supply coordinations with our partners and enhance the targeted marketing efforts to capture the rebound in travel demand and improve conversion efficiency in the latter part of Chinese New Year holiday. So as a result, we continue to outperform the industry in the first quarter and also during the 9-day Chinese New Year holiday with especially strong momentum in our accommodation business. Average daily room nights sold increased by 30%. Specifically, room night growth for 3-star and above hotels significantly outpaced that of lower-tier properties. This reflects our ability to respond effectively to changing user preferences as more travelers place greater emphasis on higher quality accommodation experiences. As a result, our hotel ADR in quarter 1 maintained a positive trend during the period and once again exceeded the industry average. For transportation business, we continue to focus on improving monetization, while average daily air ticket volume was broadly in line with the overall market. And also for the room nights growth in the full year of 2026, actually, I cannot provide a very clear numbers here because of the short booking window. But as we mentioned, looking into 2026, we continue to view the long-term fundamentals of China's travel market positively. Consumer preferences are increasingly shifting towards experiential-oriented spending with growing interest in event-driven and themed travel such as concerts, exhibitions and outdoor activities. At the same time, travel is becoming more integrated into everyday lifestyle, supporting more frequent and diversified travel demand. In addition, supportive policy measures aimed at expanding domestic consumptions and promoting high-quality tourism development provide a favorable backdrop for the whole industry. And also for the second question about the investigation, actually, we don't monitor any change on the cooperation with Trip and also, we don't monitor any change of the shareholder structures or potential change of the shareholder structures. So currently, as I mentioned in previous question, we're just focusing on our own execution and long-term competitiveness improvement. So actually, our strategy remains very consistent, focusing on enhancing our user value, improve the ARPU, strengthening our product and service capabilities and deepening cooperation with our suppliers through a mutual beneficial approach. And also, at the same time, we will continue to take a disciplined and prudent approach while monitoring the industry regulatory development. Thank you for the question. Operator: We will now take our next question from Yang Liu of Morgan Stanley. Yang Liu: I have 2 questions. The first one is also related with AI. Could management elaborate more about the DeepTrip's contribution to the business, especially on the business -- overall business volume and also cross-selling side? And my second question is regarding the marketing intensity this year, given the geopolitical risk in both China and Japan and also Middle East this year, will management adjust the outbound business marketing intensity? Yes, that is my second question. Joyce Li: Thank you. The first question is concerning our DeepTrip. As I mentioned, DeepTrip is our AI-driven travel planner that use the reasoning power of DeepSeek and our platform supply chain advantages to create personalized travel itineraries. Since launch, DeepTrip has served about 7 million users with orders placed through the platform steadily increasing over the past few months. Over the past quarters, we continue to enhance DeepTrip with the goal of strengthening user awareness and building long-term trust. We have been continuously upgrading its user-facing capabilities to support more comprehensive travel planning. Key enhancements include the integration of trend transfer data to enable seamless multimodal itineraries. The addition of social sharing features to improve engagement as introduction of a map tool in the fourth quarter to provide a more intuitive visualization of travel plans. In addition, DeepTrip has been embedded into our air-ticketing service to help users address pre-booking inquiries and identify more competitive fare options, delivering a more seamless booking experience. Beyond user-facing applications, we have also extended DeepTrip into different business scenarios to improve operational efficiency. We integrated customer service agent capabilities into DeepTrip to respond to customer inquiries directly within DeepTrip and guide users to human support when needed. For corporate clients, we piloted a travel booking suggesting tool customized according to travel profiles, business travel policies and past bookings. In the future, DeepTrip will continue to serve as a platform for understanding and addressing users' comprehensive travel needs across diverse scenarios. We will further leveraging our AI capabilities across various business segments to provide valuable solutions to users, thereby strengthening our competitive advantages. Additionally, we have begun the cooperation with [indiscernible] to acquire more traffic. We're also actively exploring potential collaborations with our AI agent platform to further broaden our reach and engagement opportunities. We remain committed to leading AI innovation, continuously increasing the investments in this area and delivering cutting-edge user-focused features to elevate our user travel experience. And in terms of the current circumstance in terms of outbound business, we have seen considerable growth potential in the outbound tourism market. As the travel habits evolve, more travelers are eager to explore the international destinations. The number of outbound tourists is still significantly lower than the domestic travelers, revealing a substantial opportunities for expansion in this area. At present, we believe that there are only a limited number of Chinese OTA players have the capabilities and resources to actively drive outbound business. This situation place us in a favorable positioning facing relatively low competitive pressure and allowing us to fully capitalize on the growth potential of the market. Again, our strategy and confidence are anchored in the long-term growth prospects of China's outbound industry and our competitive advantages. While we remain agile in our short-term tactics in response to the market conditions, I think our business momentum remains unaffected. Thank you. Operator: In the interest of time, we will take our last question from Thomas Chong of Jefferies. Thomas Chong: Congratulations on a solid set of results. My first question is about our future growth driver and the take rate trend for accommodation and transportation. And my second question is relating to margin. How should we think about the 2026 margin trend as well as the margin driver in the future? Lei Fan: Thanks for the question, Thomas. For growth, actually, the company's focus remains on achieving a high-quality growth in 2026 by balancing scale expansion with operating efficiency improvement, while continuously enhancing our user value and ARPU. So in the first quarter and also the second quarter, we will prioritize healthy and sustainable growth across our core OTA segments, supported by improved operational efficiency and more refined resource allocation. At the same time, we will continue to strengthen our competitiveness positioning and capture growth opportunity to future expand our market presence. Within the core OTA business, we anticipate that the accommodation business will grow faster than transportation business through the whole year. For accommodation business, we believe that the growth will be driven by volume expansion and ADR improvement, as we mentioned a lot of times. Our volume is expected to continue outpacing the market growth, while our ADR will benefit from the ongoing upgrade in hotel star mix driven by shifts in user preference. So we think it's enough to support a very nicely growth for accommodation business by these 2 reasons. So this year, in terms of the take rate of the accommodation, we expect that the take rate may be stable year-over-year at 2025. For transportation business, volume growth will be in line with the market and still one of the reasons of the revenue growth for transportation. While our take rate improvement driven by cross-sell and VAS will continue to contribute to the revenue growth of the transportation segment. Also, we expect the hyper growth for other revenue, mainly due to Wanda consolidation since the middle of October last year and the hyper growth of our original hotel management and PMS business and also our Black Whale business, the membership business. In terms of the profitability, as we promised, the margin improvement is one of the very important strategic priorities for the company. For the reasons, one, for our core OTA business, the improvement in operational efficiency will continue to be an important driver of profitability over time. In particular, we are leveraging AI technologies to enhance both customer service automation and R&D efficiency, which help improve staff profitability and overall operating efficiencies. For the development of our hotel management business, including eLong Hotel Technology platform and Wanda Hotels and Resorts, we will continue to support its high-quality expansion with a near-term focus on scaling the business, while the return profile is expected to improve progressively as the business matures. For our international business, we will maintain a very prudent approach as we continue to build the foundation for future growth and cultivate the company's next growth engine over the coming years. Last, in terms of the marketing investments, our marketing dollars may fluctuate slightly depending on market opportunity. For example, in quarter 4 last year and quarter 1 this year, we identified strong early booking demand for the 9-day Chinese New Year holiday period and therefore, increased our marketing investments to capture early demand and gain market share. At the same time, we will continue to strengthen ROI management across different marketing channels. So overall, we will continue to balance growth opportunities with disciplined cost management while focusing on improving operational efficiency across the business and improve our margins. Thank you. Operator: That's the end of the question-and-answer session. Thank you very much for all your questions. I'd now like to turn the conference back to Ms. Kylie Yeung, for closing comments. Kylie Yeung: Thank you. We are closing the call now. If you wish to check out our presentation and other financial information, please visit the IR section of our company website. Thank you, and see you next quarter. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Ladies and gentlemen, good afternoon. Welcome, and thank you for joining the Exor Investor and Analyst Call. Please note that the presentation is available to download on Exor website www.exor.com under the Investors and Media, Events & Presentations section. Any forward-looking statements Exor management makes are covered by the safe harbor statement included in the presentation material. Please note that this conference is being recorded. [Operator Instructions]. At this time, I would like to turn the conference over to your host, CEO, John Elkann. Please go ahead. John Elkann: Good morning, good afternoon and good evening to all of you. Thank you for being here today with us. 2025 was a difficult year in many different ways for Exor and for our companies. But it also has been a year that has helped us be more focused and be more resilient, which enables us as a company to be better prepared for another difficult year, which will be 2026. Today, we want to talk to you about our companies. We have less of them and we have more in health care. We want to speak to you about Lingotto who has reached a very important milestone in '25, reaching EUR 10 billion of assets under management driven by performance, which is exactly in line with our intentions of building an investment organization interested in performance, not in gathering assets. And finally, our financials that on the back of disposals have provided us with a strong balance sheet and also the opportunity in '25 of doing a large buyback of EUR 1 billion, which if you add to the ones that we've done in prior years taking into account our large discount has allowed us to buy up to close to 15% of our shares. Our portfolio today reflects the latest disposal, which is JD, which we were able to conclude and the money got wired yesterday, and it reflects a Exor as we move towards '26, which would be one of less companies where we'll be able to focus particularly on our larger ones. And that's where I'd like to proceed. And I'd like to start with Stellantis who has been the one that has encountered both external difficulties and internal difficulties in the course of '25. It is resetting itself and under the leadership of Antonio Filosa, it is addressing the many challenges that is confronted with, both externally but also internally. We are getting to an important year in '26 with the Capital Markets Day, where Stellantis, end of May, will present its future, where it intends to be very clear about how it will improve as a company and make sure that it is and will remain one of the leaders in what is a defining industry. Ferrari, on the other hand, has already spoke about its future in '25 in the Capital Markets Day, where it is committed to growing, but growing in a way in which the uniqueness of what it does continues to be unique. And '26 is a defining year with the launch of the Ferrari Luce, the first-ever electric car, which will also happen in the end of May with the third act of the launch that started at the Capital Markets Day presenting the technologies of the Ferrari Luce, which then had beginning of this year with the interiors and finally, the final car, end of May in Rome. I would like now to pass to my colleague, Benoit, to speak to you about Philips, which is a company in which we continue to invest in '25. And today, is in terms of value, the second largest company for Exor. Benoit Ribadeau-Dumas: Thank you, John. 2025 was the last year of the '23, '25 plan that we underwrote in 2023 when we invested in Philips for the first time. So it was good to see at the end of this plan, the company delivering a strong performance, a solid performance with, in particular, a strong margin expansion, which is the result of the ambitious reorganization and productivity plans that have been launched by the CEO, Roy Jakobs. And second, we saw also in 2025, and it was long awaited a peak in the order intake after years of moderate growth and it was -- it is paving the way for a new momentum of the company. The stock price so far has not been following the performance. So we have decided to increase our stake last year to reach 90% -- 19% economic rights. Also, we were glad to see the company announcing earlier this year the new plan, the new 3-year plan for 2026, 2028, after a phase where the focus was on execution and on exiting the quality crisis of the Sleep and Respironics business. This is a renewed ambition for the company, which is now targeting mid-single-digit sales growth and mid-teens profit margin. Of course, continuing the efforts that they launched on quality and productivity enhancement, but also accelerating in the delivery of new products fueled by AI and fueled by the high level of R&D that this company has always been part of. So we are a happy shareholder of Philips, and we are looking forward to seeing their next progresses. Suzanne on CNH. Suzanne Heywood: Thank you, Benoit. So CNH had a challenging year in 2025 because of the downturn in the agricultural market. exacerbated, of course, by some of the geopolitical events that have been going on as well as some of the changes in tariffs and that is expected to continue into 2026 as already communicated by the company. At its Investor Day in May '25, CNH presented its path to 2030, and we think this is very important because it includes a number of different measures that will strengthen the company and enable it to come out of this downturn in a strong way. One is expanding the margins of the company through the cycle. And an important part of that is addressing some of the quality issues that it needs to address within the company. It is also looking to launch a series of new products new technologies, in particular, those around precision farming, which, of course, are very, very important for our customers and also a focus on costs, in particular, supply costs for the organization. The company has a lot to do, but it also has a lot to look forward to as it comes out of this cycle, given its tremendous lineup of products, both on the agriculture side and on the construction side, so we look forward to continuing to be a shareholder in the company. I also want to take this moment to do an update on Iveco. This is an important moment for Iveco. Last year, we celebrated with Iveco the first 50 years of its history. And this -- and last year, we also agreed and are participating in 2 extraordinary transactions in relation to Iveco. The first of these is the sale of Iveco Defence to Leonardo. This is the Iveco Defence business, and this transaction closed on March 18 with the expectation that the dividends will be distributed at the end of April. This transaction for Iveco Defence secures a future for the defense business within Iveco, secures a future for it now with Leonardo, which will give it increased scale. The remainder of the business, which is the trucks, buses and engines business will be combined with Tata Motors through a tender offer, which we're expecting to close at the end of the second quarter. The total valuation of both of these transactions will be EUR 5.3 billion. I want to take this moment to thank the 2 CEOs that have led Iveco through the period since it was spun out of CNH back in 2022, Gerrit Marx and Olof Persson, and of course, their management teams as well. We wish all parts of the Iveco business, a very successful next 50 years within their new ownership. I now pass back to John. John Elkann: Thank you, Suzanne, and it's also the opportunity for me to thank the leadership team and all their colleagues at Iveco and wish Iveco an important journey ahead as it opens for the new future with Leonardo and Tata. Coming back to Exor, if we look at our unlisted companies, they delivered mixed results. The good news is that our bigger companies in terms of value have performed better than our smaller ones. Welltec had an extraordinary year, while Shang Xia continued to have a difficult year. We expect the overall companies that we have as unlisted to present themselves in '26 with strong plans ahead and continuing to do in aggregate well. I would like now to speak about Lingotto which had a very important year in 2025. Lingotto was founded in '23 to really converge all the different investment activities that we were doing in partnering and directly in Exor. We now no longer have any investments outside of our companies, which are the ones in which we are involved in their governance. And everything we do outside will be carried forward within the investment strategies of Lingotto who today are 4. Of these 4, the one that has performed the best is the intersection fund led by Matteo Scolari and the overall aggregate returns of the 4 strategies have allowed ingot to reach USD 10 billion under management. What is encouraging is this has been driven by performance and what was really -- it was really what we expected when we founded Lingotto an organization, an investment management organization where the principle is what the organization cares about. And investing is what they do in order to grow through performance rather than gathering assets. The good news is on the interest of specific parties, which we've been very selective in allowing to invest alongside us, the quality of the investors and also the quality of what their mandate is, of which most are linked to societal causes are encouraging to see how we have alongside us very capable investors which invest for important causes. I would like now to pass it to Guido to walk you through our financials. Guido de Boer: Thank you, John. So on this slide, we recap what John, Suzanne and Benoit mentioned previously. So our NAV per share started the year at EUR 178 the biggest movers in a negative sense were 3 of our largest companies, Ferrari, Stellantis and CNH contributing in total for a EUR 25 per share decline in our NAV per share. This was partly offset by decent performance of our other companies, as John just highlighted, an outstanding performance at Lingotto, going up 40% in the year. And in addition, we invested EUR 1 billion in buybacks at over a 50% discount which contributed EUR 4.7 per share, and EUR 2.5 per share. So overall, we ended at EUR 164.4, so down for the year. If we look at our objectives, which are twofold. The first one is a relative performance metric where we look at NAV per share versus MSCI World Index. And the second one is an absolute performance measure, total shareholder return. So to first go to the relative one. In 2024, we actually had a pretty good year at 9% NAV per share growth at a very challenging benchmark, where the Magnificent 7 did great in the MSCI went up by 25%. 2025, we actually had a much easier comparable because those similar 7 companies did not perform as well. but we actually declined in NAV per share, as I just showed you. And on the back of an increase in the discount, our total shareholder return is below our NAV per share growth. So then moving to the measures that we track every year to make sure we operate in an efficient and disciplined way. The first one we track is free cash flow over dividend. As a measure of the financial health that we have in terms of cash flows. That is still at a very healthy level at almost 6x, notwithstanding a decline in the dividend of Stellantis. Management cost over GAV. So an indication of how efficiently we manage our overhead is world-class it went up largely driven by the decrease in GAV increasing it as a percentage. And also loan-to-value which measures how aggressively we are levered is down to 6.9%, notwithstanding the reduction in GAV. And that's primarily because we realized EUR 3 billion of proceeds from the sale of Ferrari shares. We reinvested that partially, but we also increased our cash position. So we're in a healthy place there. So if we look at our balance sheet, which is critical in these turbulent times, we are very strong. So our loan-to-value ratio is at 6.9%. Our bond maturities are very well spread out. We refinanced EUR 600 million in 2025. And now that has a maturity in 2035. We have a payment coming up of $170 million of a private placement, which we can finance out of our cash position. And on top of this low repayment requirement in the coming years, we have a EUR 1.1 billion credit facility, which we extended and doubled in the year. and we have a EUR 1.4 billion cash position as of December 2025. So in a very healthy position indeed. So these are the financial slides that I would like to present, and I want to hand over to John for the concluding slides. John Elkann: Thank you, Guido. We entered '26 with momentum. We have to complete the transactions that we have announced. On the back of those, as Guido mentioned, we will have been strengthening our balance sheet with close to EUR 3 billion additional resources. And if we look at the returns of what we have been divesting, we're speaking about 1.4x on cost. Now in moments like the ones we are living, which are uncertain times, what is key is to have liquidity and preserve capital. So we feel that having close to EUR 4 billion, as we conduct and conclude the transactions that I described puts Exor in a very strong position in an uncertain moment of time. I would like to conclude by giving you which are the priorities that we have as a company. We want to focus and focus particularly on our larger companies because that's where we believe the greatest value is. We want to continue to simplify our portfolio by conducting to closure the transactions that we have announced and continue to divest from our other assets. And we are committed to a strong balance sheet, which is even more valuable in moments like the ones we are living and be ready to deploy capital with discipline when the time is right. I would like to thank you all for your commitment. I would like to thank you all for believing in Exor. We realize that '25 was a difficult year on the back of a difficult year that '24 was. We are also very aware that the environment in which we find ourselves is uncertain in '26 but we do feel that the last 2 years have strengthened us and we enter this difficult year stronger than we were in the last 2 years. This is why I wanted to conclude with the quote that I have at the end of our letter which I deeply believe is one of the strengths that we have as an organization. Thank you, and we look forward to answering your many questions. Operator: [Operator Instructions]. We are now going to proceed with our first question. And the questions come from the line of Monica Bosio from Intesa Sanpaolo. Monica Bosio: Good morning, everyone, and good afternoon, everyone. I have basically 2, 3 questions. The first one is, obviously, cash is king in this tough environment. But maybe should we assume that no deal will be announced across the entire 2026 and that the time frame will be longer. And the last conference call, the company clearly stated its interest for 3 main sectors, the health care, the luxury and the technology with no clear priority. Are still the sector where the company wants to invest or maybe something else changed in the selection list. And another question is on deployment of the cash. Following the EUR 1 billion buyback in 2025. I was wondering if the company is willing to execute another buyback program in the future? And if yes, could the buyback be taken into consideration jointly with the new investments? Or could it be considered only in case no significant investments opportunities arise? John Elkann: [Foreign Language]. Monica, those were all incredible questions. The timing is really linked to making sure that we find the opportune investment. And I think that in times like the ones we're living on one side, one needs to be prudent. On the other side, one needs to be patient. And we want to make sure that we are sufficiently patient to capture the best possible opportunity. In terms of interest of sectors, we remain convinced that the sectors that you mentioned are interesting sectors, technology, luxury and health care with interesting valuations. But we also think that we should be open to other sectors and not preclude ourselves better opportunities if we were to find them. We also think that the companies that we own within the sectors in which we're present remain interesting, which is the reason why we have deployed money in '25 in Philips and bioMérieux. And if you add our investment in Institut Mérieux plus bioMérieux is de facto our fifth largest investment today. So the fifth most largest company if you combine Institut Mérieux with bioMérieux. In terms of buyback, as I mentioned, we have been aggressively buying back shares, EUR 2.5 billion in the last years, which is approximately close to 15% of our capital. and with wider discounts, which we look at very favorably because they are the opportunity to do buybacks, which is a way to invest in ourselves are opportunities that, of course, we will continue to look and look with discipline. As of now, we believe that, as you said, cash is king, and it is a moment where making sure that we do have a fortress balance sheet is important. And that is also the case for our companies. we believe that our companies are all with very strong balance sheets, which is the most important thing when you do enter in uncertain times as we have learned in the past. So as much as I feel bad about '24 and '25, I also realize that they have helped us both at Exor and our companies to enter these uncertain times much stronger. Operator: We are now going to proceed with our next question, and the question comes from the line of Martino De Ambroggi from Equita SIM. John Elkann: You must be happy about Iveco. Martino De Ambroggi: No. Not anymore. The first question is on Lingotto. Could you elaborate on what is the strategy going ahead? And I don't know if it's possible just to have a fair value, current fair value, considering what happened in the past few weeks in the market turmoil. I don't know if you have an indication you can provide. The second is on the additional divestitures because if I understood correctly, you were talking about more divestitures. Is there any clue on what could be a moving part going ahead? And third, I know I repeat basically every year the same question, but now it's quite a long time with a discount to net asset value, well in excess of 50% and this morning, even much, much higher. What are the 3 main reasons justifying such a high discount in your view? Just to have a very -- your personal impression. And last, the environment is getting worse and worse. Could you provide us an update on your view on the Stellantis environment and risks considering what is going to happen? John Elkann: There's a lot of questions. So Lingotto, the strategy is very much the one that was stated in the letter that I wrote as the founder of Lingotto in '23. So this is an organization that wants to attract exceptional investors and make sure that they can do what they love, which is investing. We have 4 distinct strategies, as we have described in the past, and those remain consistent with what the strategies are. which allows us to have a diversified sets of strategies, which are different from what we do directly as Exor and it allows the right discipline also being able to have selectively third-party capital from, as I mentioned before, very solid investors. In terms of the recent events, we don't comment on where we stand on mark-to-market. And if you look at the opportunity of the discount, we actually have viewed that in a positive way because it has allowed us to buy back shares as we've done in the past. I think that it is important to stress that in moments of uncertainty, you're better off being patient than rushing, which is why for any capital allocation. Is it in buying our own companies investing more in Lingotto strategies, investing in a new company or doing buybacks? We remain prudent but studious of what would be the different alternatives. Stellantis was able to raise through an hybrid issuance which increased already a strong balance sheet and the overall execution that is being carried forward is on the right track. Giving today any further information on Stellantis is not desirable because we are, as you know, in end of May, we will be assisting to the Capital Markets Day of Stellantis. Thank you, Luigi. Operator: We are now going to proceed with our next question. And the questions come from the line of Luuk Van Beek from Degroof Petercam. Luuk Van Beek: Yes, I have 2 questions. So first of all, have you reviewed your portfolio for the potential impact of higher energy prices and any other things that are happening in the world to see the exposure and the risk level? And the second question is on the discount to NAV. Do you consider to take any measures other than just executing the strategy and delivering and testing on that reducing the discount? John Elkann: Energy prices is premature to actually see the inflationary pressures. But that is definitely something that our companies are working actively in understanding the inflationary pressures that are happening and what type of impact that would have on some of their cost structure. We believe that the discount is actually an opportunity, and that's something that we have been able to capture in the past. Operator: We are now going to proceed with our next question. And the questions come from the line of Alberto Villa from Intermonte SIM. Alberto Villa: Actually, First of all, congratulations for the annual report. It is very clear and very nice also to read. So congratulations to the team. And secondly, going back to Lingotto, it's now more than 11% of your GAV thanks to the performance and looking at the composition of the investments. The vast majority, 70% is the intersection strategy. So the public investments that had a great 2025. I was wondering if in the future, you expect to maybe take advantage of the performance to reduce a little bit the exposure to Lingotto or maybe to mix a little bit more into the to shift a little bit more into the other strategies and how you feel about private markets? So there has been a lot of rumors about the outlook for these asset classes, especially in the U.S. So wondering if you want to share with us your thoughts on that. John Elkann: Thank you. And I will, with Guido, convey your message on our annual report. There was a lot of work in doing it. So our colleagues will be very happy that you appreciated it. Lingotto is made of different strategies. We had committed in '22 on the back of the disposal of PartnerRe, EUR 6.5 billion, which had been divided EUR 5 billion into 1 large investment and into 3 to 5 smaller investments. And we executed that with Philips being the large investments and LifeNet, TagEnergy, Clarivate and Institut Mérieux being 4 smaller investment, whilst EUR 1.5 billion would have been deployed in investments, which back then were Lingotto strategies and ventures, and that has been done. We've also said that as we would be realizing the investment in what used to be Exor Ventures now managed by Ora, we would be recycling it within the strategies of Lingotto. The actual exercise that we do internally the portfolio review is exactly meant on one side to try and see how we think about what we own and the opportunity ahead. As of now, we're not considering allocating more capital to Lingotto strategies, but equally, we're not considering reducing our exposure to Lingotto strategy. Alberto Villa: Any thoughts about the private markets situation? John Elkann: In credit? Alberto Villa: Yes. John Elkann: Luckily, we're not exposed to the credit market, and we are increasing our net cash position the actual environment, as you know, is very tight. Operator: We are now going to proceed with our next question. And the questions come from the line of [ Nicola Gude from Alexco Capital ]. Unknown Analyst: Sorry to come back to the discount theme. But I mean the discount today is such that the shares are at [ 0.44 ] on the dollar, which means if you invest $100 in your share, it's $125 of value and actually probably much more because the shares are depressed in the portfolio, too. And so obviously, compared to that, it's a high bar for the acquisition of a new company. And I guess, is there room to do both in the sense you're mentioning a firepower of $2.5 billion for an acquisition. But why not return, say, $1 billion here and now and then do a $2.5 billion acquisition or something along those lines? Why is there any -- why can't both be done at the same time, I guess, because that would certainly go a long way to create NAV per share, which is the objective at the end for shareholders. John Elkann: So as I mentioned, we haven't committed to no allocation as we speak. What we have committed to is to make sure that we have a strong balance sheet, and we have liquidity. As it pertains to how we will invest it everything is open, and we will make sure that we will be disciplined in how we proceed. Operator: [Operator Instructions]. We are now going to proceed with our next question. And the questions come from the line of Andrea Balloni from Mediobanca. Andrea Balloni: I have a couple. First one is on the potential share buyback. I understand the reason why this year, you are pretty cautious. What could trigger a different decision from a macro standpoint over the rest of the year? What would you consider to be a potential positive catalyst or trigger to start eventually a share buyback program? And my second question is on the potential investment that you are considering. You have mentioned a relevant size and also a material stake that may be taken by Exor. Yet, are you scouting among listed companies such as in the case of Philips or should we expect an investment in private companies? John Elkann: Those are very good questions. On the first one, Today, we have compounding uncertainties. We have uncertainties around the overall commerce that has been triggered by changes between tariffs and regulations. We have uncertainties linked to conflicts that are happening in different parts of the world. We have uncertainties linked to markets that are moving in different directions. And finally, we have uncertainties on the deployment of a substantial new technology, which is AI, which has the power of fire or electricity, hence going to impact in many ways, the way in which companies operate, both in what they do and how they do it. So this is an environment in which we believe that it's important to be prudent and patient in order to really make sure that we can take the best out of it and I remain optimistic about the future of Exor and our companies and in some ways, having had to go through very difficult internal and external situations in the course of '24 and '25 equipped us well to what is ahead. In terms of what are we looking for, we believe that Philips is a good example of the type of companies that Exor would be a good owner of. And that is a function of 3 things. One size we have said last year that we'd like to deploy more than 5% in one company. Second, we think that public markets offer interesting opportunities. And we believe that companies that have a large shareholder or a reference shareholder empirically have proven to perform better within their industry or within an index. And third, we think that the opportunity of sectors where some of these changes that we were describing before, can lead to improvement in these companies. Our role factors that we think describe Philips as a good example. And as of now, we have been, as Benoit mentioned, been very happily involved and the outcomes so far have been good for the company and for Exor. Andrea Balloni: And a follow-up, please. Would you consider to invest a part of this fire power in some of the investments you already have in the portfolio? I'm thinking about Stellantis, Ferrari and other companies, which had a very bad trend recently. I was wondering if you might consider to increase your stake. John Elkann: As I mentioned before, that's a very good question, and that's why today making firm commitments of capital where is where I'd like to be prudent and patient because where would we invest we'd invest in our companies. We know them well. That's what we did last year in Philips and bioMérieux. We would invest in Lingotto strategies. As of now, I said, there's no intention in doing that. We would invest in new opportunities and new Philips or we would be investing in ourselves through a buyback which, as most of you have told us, is definitely very attractive, and we would agree with that. And we think that the bigger the discount is, the more attractive it is. And we have been quite deliberate and decisive in doing that over the last years. So today, we want to make sure about 2 things. One, are we equipped Exor and our companies to go through turbulent times. We believe so. Secondly, are we sufficiently patient to try and understand what is happening in order to be able to underwrite within those 4 possible allocations of capital, what is the one where we as an organization and a Board feel that, that's the best usage of capital, which we want to be disciplined in doing in the best interest of our shareholders. Andrea Balloni: Thank you. Operator: This concludes the question-and-answer session on the phone. I will now hand over for the written questions. John Elkann: So we have a question from ING, which is about the economics of our investment in Lingotto and how Exor benefit -- how it -- benefits. I will pass it to Guido. Guido de Boer: Thank you, John. So we are an investor in ingot Lotos funds. So through that fund, we receive the returns after performance fees. What helps us is that we also own the asset manager, we have co-investors in Covéa and many others that help share the cost of the infrastructure. So in that way, it makes for us a very efficient way to invest behind some of the most talented investors in the world. So I hope that answers your question. There were some follow-up questions from another person on the assets under management for Lingotto. Would you like to take that? Or shall I -- so I wouldn't say that there is a maximum in terms of assets under management for Lingotto as a whole. For individual strategies, there are and they're depending on the type of strategy. For us, what is key is that like John mentioned earlier, the objective for Lingotto not to be an asset gatherer, but an investment manager that delivers outstanding performance. So we will be very cautious that we don't grow the capital too much that it goes at the expense of performance. So that is maybe a bit more philosophical answer, but I think that is critical behind our thinking on assets under management for Lingotto. So those were the questions that we had on the webcast. If there's nothing else or I don't know if you want to make any further remarks, John. John Elkann: Thank you, Guido. Thank you all, and we'll make sure to make '26 the best possible year out of very uncertain and difficult circumstances. Thank you. Operator: Thank you all for participating. You may now disconnect your lines. Thank you.
Operator: Good afternoon, ladies and gentlemen. Welcome to the Glass House Brands Fourth Quarter and Full Year 2025 Earnings Call. Matters discussed during today's conference call may constitute forward-looking statements that are subject to the risks and uncertainties relating to Glass House Brands future financial or business performance. Actual results could differ materially from those anticipated in those forward-looking statements. The risk factors that may affect results are detailed in Glass House Brands' periodic filings and registration statements. These documents may be accessed via the SEDAR+ database. I'd also like to remind everyone that this call is being recorded today, Wednesday, March 24, 2026. On today's call, we have Kyle Kazan, Co-Founder, Chairman and Chief Executive Officer of Glass House Brands; and Chief Financial Officer, Mark Vendetti. Following prepared remarks, management will open up the call to analyst questions. Also joining for questions is Graham Farrar, Co-Founder and President. And with that, I'll turn the call over to Kyle Kazan. Kyle Kazan: Thank you, operator, and a hearty hello to all of you for joining today's call. For greater detail on results, please refer to our fourth quarter and full year earnings press release and full year financial filings. I am pleased to be speaking with you today. 2025 was a year of great progress and achievement for the U.S. cannabis industry and our company. It was also a year of challenges due to the events of this summer. Our entire team continues to rise to meet those challenges. And because of that, I am confident that we have built a stronger foundation for future growth. I am excited for the days to come. Our first half 2025 results and particularly those of the second quarter represented a new high watermark of execution across numerous key metrics, including biomass production scale, cost of production and operating cash flow yield. This strength provides a blueprint of achievable results for this company, and those results are just the beginning. 2025 was also the first full year of our strategic pricing model. This model is highlighted by our everyday out-the-door $9.99 price, including tax for a Farm Fresh 1/8 oz of our Allswell branded flower. The pricing model, combined with our team's strong execution, allowed our retail stores to consistently outperform the California market with same-store 10% year-over-year sales growth versus a 5% state decline in sales according to headset. Meanwhile, Allswell became the top-selling flower brand in California by volume. California remains the world's most fiercely competitive cannabis market. So our strength in flower and particularly our Allswell brand is something that we take great pride in. No one anywhere matches Glass House flower on price and low-cost quality. In 2025, we took steps to solidify our balance sheet and improve our financial flexibility and future cash generation. In March, we secured a new $50 million 5-year senior secured credit facility to replace our existing higher interest debt, while in July, we refinanced our high interest rate Series B and C preferred equity with the creation of a fully subscribed Series E offering. The Series E preferred equity carries a 12% interest rate paid annually, which replaced the 22.5% cumulative rate for the Bs and the Cs inclusive of the payment in kind function. In total, these financings meaningfully derisked our balance sheet without diluting investors and ensured that future capital raises would only be for strategic additions to the business. We also commenced a collaboration with the University of California at Berkeley to explore hemp-related research with aims that include the development of novel medicinal products. To our knowledge, this is the first and only collaboration of its kind in the industry, and we will leverage the experience gained as we proceed with our commercial hemp strategy and participate in any future CBD reimbursement programs. Unfortunately, our second half and full year results were impacted by unexpected events and the ongoing response to those events. As most on this call are aware, 2 of our farms were raided by federal agents on July 10 as part of a broader immigration crackdown for the California agriculture industry. In response to those events, we made the hard decision to completely revamp hiring and staffing practices for both employees and third-party labor contractors moving forward. We did this voluntarily and the resulting practices go well above and beyond what is required by both federal and state law. As outlined in prior calls, changes made and the resulting temporary staffing shortages prompted our scaling back of new planting and production in the second half of the year. Inclusive within the production, we had to delay some processing, which resulted in deteriorated product being available for sale. In the fourth quarter, we sold off the last of this older inventory. Fourth quarter and full year results reflect the impact of this temporary scale back. Fourth quarter revenue was $39 million, while in line with guidance and our expectation, this was down meaningfully from $53 million last year during the same period. Full year 2025 revenue was $182 million, down from $201 million in 2024. For both the fourth quarter and full year, the wholesale segment was where we suffered the significant drag to results as we produced reduced volumes and quality of biomass per sale. For the fourth quarter, we produced 159,000 pounds of biomass ahead of expectations, yet down from the 165,000 last year. For the full year, we produced 666,000 pounds, roughly 20% below where we were tracking at the start of July. Average fourth quarter selling price was $146 per pound, down from $220 in the fourth quarter last year, while full year average selling price of $177 per pound compared with $245 in 2024. I refer to our glasshouse selling price in these comments. It's important to note that while California pricing remains challenged, year-over-year declines in state pricing moderated in the second half of the year. So the weaker sales prices I referenced reflect our deteriorated product being available for sale and an unfavorable shift in our genetic strain mix. When we turned the farms back on for planning, our strain selection criteria was focused on those that we could quickly scale and not our usual eye on yield. For 2026, our post-harvest processing process has returned to normal levels. Meanwhile, these temporary conditions also caused an elevated cost of production. Fourth quarter cost of production was $129 per pound, up from $110 last year, while full year 2025 cost of production was $111, above our annual production cost target of $95 per pound. Lower selling prices and higher cost of production in wholesale dragged on our overall margins, resulting in a total reported gross margin for the fourth quarter of roughly 35% and an adjusted EBITDA loss of $3.3 million. Both were well below seasonal and recent levels. For the full year, gross margin was 42%, while adjusted EBITDA was approximately $17 million. For comparative purposes, at the end of the second quarter on a full year basis, our full year results were tracking well above our 2025 guidance at the time of $225 million in revenue with an adjusted EBITDA in the mid-$40 million range level. Looking ahead, Mark will provide explicit guidance, but I am pleased to say that these short-term hurdles are today largely behind us. We anticipate very strong growth in 2026 with progressive revenue scaling during the course of the year. Growth comes before factoring in the potential benefit of any sales outside of California for our cannabis plants, something that we continue to believe is achievable in the near term or any contributions from hemp sales. We have hemp plants growing and anticipate an initial harvest in the second quarter. We ended 2025 fully planted in each of our legacy greenhouses and with the first 1/3 of greenhouse 2 planted, giving our cultivation team the most acreage planted in Glass House's history. That acreage is now yielding at nearly full capacity, and you will see the full benefit of that scale reflected initially in products sold within the second quarter of 2026. The cultivation team led by Graham Farrar, has done a remarkable job of getting the greenhouses back on track to full capacity in a short period of time. In the 3 months following the raid, the number of cannabis plants in the greenhouses dropped 60%. Since bottoming out in early October, we have now roughly 20% more plants compared to early July, thanks to Greenhouse 2 and expect to add another 40% when Greenhouse 2 is fully planted by the end of the second quarter. In addition, we accelerated expansion plans with the build-out of the remaining 2/3 of Greenhouse 2 and the CapEx light retrofit and build-out of Greenhouse 4, our first commercial hemp endeavor. With current planting, we will harvest at roughly 1/3 capacity for Greenhouse 4 and will expand in the second half of this year. The second 2/3 of Greenhouse 2 will contribute to second half results while Greenhouse 4 is now planted. We expect the first crops to be available for sale this summer with plans to supply international hemp and smokeable CBD markets in the second half of this year. We are in active discussions with customers. And while we are not ready to provide explicit guidance on hemp contributions this year, we are confident that product will be sold at favorable prices relative to those currently achievable with California cannabis. Long term, we plan for greenhouse 4 production to be an eventual supplier to the reimbursable CBD market while also planning for the development of our final greenhouse, which is Greenhouse 3. Meanwhile, even with the staffing changes and more stringent controls we've implemented, our long-term cost structure remains intact. There has been a learning curve for both new employees and third-party labor contractors, but staff gain valuable experience every day. And based on the progress seen, we do not foresee a meaningful change in the cost of labor moving forward. I remind you of our $95 long-term annual target level for cost of production. We expect to be below that level in total for the final 3 quarters of 2026. Our low-cost production capabilities stem from our consolidated scale of capacity, the skill of our seasoned leadership team and favorable weather conditions in California. We will never have to pay the high and growing energy bills of indoor peers nor do we rely on third-party water supply. It is these benefits that have sustained us despite challenging California cannabis market conditions and will further separate the company whenever prohibitions are removed to open new markets. In addition to our operating results, there were many positive developments in our industry during 2025. On December 18, President Trump signed an executive order to reschedule cannabis to a Schedule III classification and authorize the development of a pilot program for reimbursable TBD products for Medicare participants. This order represents the most significant progress on drug policy reform in the past 50 years and reflects a longer overdue common sense acknowledgment of the beneficial medical and therapeutic properties of the cannabis plant. We are extremely pleased with these advancements as rescheduling and the reimbursable CBD program will permit greater normalization for the industry. Importantly, it should allow us to sell California grown production outside the state for the first time, greatly expanding our addressable market and allowing us to achieve more favorable pricing dynamics. As we continue to await Attorney General Pam bondi's final execution of this change, we are actively preparing for the opportunities ahead. We have meaningfully expanded our total cultivation capacity. We understand the reclassification of cannabis to Schedule III under the current administration can provide opportunities to export medical cannabis into international markets. As such, we have signed an agreement with a good Agriculture and Collection Practices or otherwise known as GACP consultant and are progressing towards a compliance audit. We anticipate that GACP will be a requirement for producers supplying the growing EU medical market and see it as a place where we can be strategically well positioned. We are also in active discussion with distribution partners in a number of countries for cannabis and hemp. Also in anticipation of the final ruling on rescheduling, we have established a special committee within our Board of Directors. The committee consists of Graham, Directors, Jay Nichols and Jocelyn Rosenwald, along with the newest addition to our Board, Alison Payne, the CMO of Heineken USA, along with me. The committee is tasked with oversight of new product and business opportunities beyond our legacy California cannabis business and immediate expansion areas, including the development of ongoing and future partnerships with companies in more traditional industries, including tobacco, alcohol and cosmetics. We believe widespread adoption of cannabinoid products within traditional consumer product industries is coming, and we are in active discussion to ensure that whatever form that takes its Glass House produced cannabinoids inside ensuring greater distribution and speed to market. With that, I'll turn the call over to Mark Vendetti, our Chief Financial Officer, to discuss our financial results for the quarter in detail. Mark? Mark Vendetti: Thank you, Kyle, and welcome, everyone. As Kyle highlighted, fourth quarter revenue was $38.9 million compared to $53 million in the same period last year. The decline stems from wholesale segment challenges that came as a result of stepback decisions made in the third quarter. We finished near the top of our revenue guidance for the quarter of between $37 million and $39 million, and would have exceeded it, but unexpectedly had to switch our CPG distributor in December, which decreased sales for several weeks and hurt revenue by between $0.5 million and $1 million. In addition, we had a loyalty program points adjustment in the quarter, which decreased retail sales by approximately $0.5 million. These decreased gross margin by a similar amount. For full year 2025, revenue was $182 million compared to $200.9 million recorded in 2024 as we produced at a lower overall scale. We produced 159,000 pounds of biomass in the fourth quarter, ahead of our 145,000 pounds of guidance, but down from 165,000 in the prior year period. For the full year, production was 666,000 pounds, up roughly 10% from full year 2024 levels, but down meaningfully from the 800,000 pound level we were tracking to going into the summer. Because of the reduced production volume and related inefficiencies, production cost per pound was $129 in the fourth quarter, roughly flat sequentially, but up from $110 last year. For the full year, cost of production was $111 per pound. We sold 155,000 pounds of wholesale biomass in the quarter, down from 165,000 pounds in the same period last year. For the full year, we sold roughly 643,000 pounds, up from 568,000 pounds in 2024. The average fourth quarter selling price for biomass sold was $146 per pound versus $220 last year, while the full year selling price was $177 per pound. Year-over-year price declines reflect continued California pricing challenges. However, more significantly, the sequential decline can be attributed to an unfavorable mix shift from flower to trim within the production mix and the product quality issues Kyle mentioned. For the full year, flower mix was in the high 20% range, while under normal conditions, it would have been expected to be in the high 30%. As a reminder, we have been selling higher levels of trim this year on account of improved cultivation practices which allow us to harvest and sell trim material that would have previously been disposed of. This has the effect of lowering our ASPs as the additional material is predominantly trim, which garners lower average selling prices. The greater trim volumes though were exacerbated in the second half of last year due to deterioration in product that was available for sale because of delays in processing as we faced temporary staffing shortages. As we move forward and bring on Greenhouse 2, we expect a new normal flower percent of sales in the mid-30% range. Fourth quarter consolidated gross profit was $13.2 million and gross margin was 34%. The gross margin compared to 43% in the fourth quarter 2024 with declines stemming from the lower average selling prices and higher production costs in the wholesale business. Gross margin within our retail segment improved year-over-year as a reflection of continued strong execution with our retail stores and despite a loyalty true-up. For the full year, 2025 gross margin was 42%, down from 48% in 2024, which equals the level we were tracking to heading into the summer. Fourth quarter adjusted EBITDA was negative $3.3 million, in line with the prior quarter, but down from $9 million in the fourth quarter last year. Adjusted EBITDA reflects the factors that impacted our gross margin performance as well as a modest increase in operating expenses. For the full year, adjusted EBITDA was $17 million, less than half of 2024 reported adjusted EBITDA and the mid-40 level we were guided in reporting first quarter results. Fourth quarter operating cash flow was negative $3.7 million, while for the year, operating cash flow was $11.4 million. Turning to the balance sheet. We ended 2025 with $23.4 million in cash and restricted cash compared to $29.8 million last quarter and $36.9 million at the end of 2024. Inclusive in cash spending was roughly $2 million in CapEx, which funded the continued build-out of Greenhouse 2. Additionally, the final cash number included approximately $2 million raised from the use of our outstanding ATM and $2 million received from ERTC tax credits. In addition, we paid roughly $2 million in federal income tax. For the full year, we received roughly $10 million in ERTC tax credits and have roughly $3 million in anticipated receipts outstanding. We do not have clarity on the timing of any subsequent ERTC tax credit receipts. In December and early January 2026, we completed our outstanding ATM receiving net proceeds of approximately $22 million. The shares were primarily issued to existing long-term investors with proceeds from the raid primarily going to fund the build-out of the remaining 2/3 of Greenhouse 2 and our greenhouse 4 expansion. Turning to guidance. As Kyle discussed, we ended the year back to being fully planted with legacy greenhouses and planted the first 1/3 of Greenhouse 2, giving the cultivation team the most acreage planted in Glass House history. The expanded cultivation and production will begin to be reflected in results during the first quarter, and thereafter, we are posed for meaningful growth based off our increased scale. Additionally, results will reflect incremental contributions from the final 2/3 of greenhouse 2 within the second half of the year, while we will also see initial contributions from our hemp commercial initiative with initial hemp plants expected to be harvested in late second quarter and contributing to results beginning in the third quarter. I remind that in total, Greenhouse 2 is capable of producing at roughly 300,000 pounds annually of biomass once fully operational. Our hemp greenhouse, greenhouse 4 will produce at a lesser scale given our prioritization of speed to market over greater efficiency. In time, we will further enhance the greenhouse to enable greater production capacity. We anticipate first quarter revenue to be approximately $39 million as we produce approximately 138,000 pounds of biomass, reflecting typical winter seasonality and the partial first quarter contribution of ramp scale. First quarter average selling price for wholesale biomass is assumed to be approximately $167 per pound, down from $192 last year, while cost of production will be approximately $161 per pound versus $108 last year. As Kyle referenced, starting in Q2, we anticipate our cost of production will be below our long-term annual target level of $95 per pound over the remainder of the year. As a result of the higher cost of production and lower sales price, we anticipate Q1 gross margin to be approximately 29%, which compares to 45% last year. Full year 2026 revenue is forecasted to be between $235 million and $245 million. While importantly, we note that for the second half of the year, we anticipate the company will be operating at almost a $300 million annual revenue run rate. Full year gross margin is projected to be roughly 48% this year and full year adjusted EBITDA is projected to be in the high $40 million range. Within our assumptions, full year wholesale biomass production is forecast to be approximately 1 million pounds of biomass, which is a 48% increase to 2025. We expect Q2 production to increase high single-digit percent versus Q2 '25 and production in the second half of 2026 to be more than double the second half of 2025. With the increased production, we expect the cost of production of approximately $100 per pound, which is a 10% decrease to 2025. Full year average selling price is expected to improve to the mid-180s per pound from $177 in 2025 as we expect quality and mix to improve versus 2025, particularly the second half of the year when compared to 2025. I remind you that anticipated hemp contributions are incremental to our forecast at this time, we are still deciding on the appropriate end market for supply. We anticipate no matter the end market, pricing dynamics for hemp to be favorable to the cannabis prices achieved in California. We expect first quarter ending cash to be approximately $27 million, while we forecast 2026 full year ending cash to exceed $50 million as we generate meaningful operating cash flow in the final 3 quarters this year. The forecast includes approximately $20 million CapEx to complete the full retrofit of Greenhouse 2, including adding new high-efficiency low-energy lighting and a CapEx-light retrofit of Greenhouse 4 for the hemp production. It also assumes we continue to pay the dividends associated with the preferred equity Series D and E totaling $11.6 million in 2026. And with that, I turn the call back to Kyle for his closing remarks before opening up the call to Q&A. Kyle Kazan: Thank you, Mark. As many of you know, last year, we lost George Raveling, a valued member of Glass House's Board of Directors, the Glass House family and someone who had a measurable impact on my life. While I could not be happier with the initial contributions from our newest Board member, Alison Payne, I miss Coach Dearly. Coach joined the Board when we went public in 2021 and brought with him extensive experience in marketing and corporate governance learned during his Hall of Fame basketball coaching career and time as a senior executive at NIKE. Additionally, Coach had a long and sought-after career as a motivational speaker and one of his favorite topics was resiliency and the importance and power of having a team or workforce that can be steadfast and productive in the face of challenge. I think of this topic as I reflect on the incredible effort put forth by the entire Glass House family to come back from the events of last summer and to expand in scale and business capacity. We could not have done it without each and every one of you from our team members and workers to customers, business partners and investors. I thank you for your support and look forward to the days ahead. While we applaud President Trump's signing of the executive order to reschedule cannabis, we appeal to him to pardon those many people sitting in federal prison right now for nonviolent cannabis offenses. As President Trump pardoned our current partners are Alice Marie Johnson and signed the first step Act into law, we believe that he will give these people their lives back. I am proud to work with my friend, Weldon Angelos and his Project Mission Green to release Parker Coleman and Ali or otherwise known as Jose [indiscernible] Jr., among many others. Finally, I remind everyone that we once again are planning to hold our annual investor session at the Camarillo Farm. This year, we have scheduled the event for Thursday, June 18, and I genuinely hope you can make it and we can meet you in person at the farm. Thank you again, and I will now ask the operator to open the line for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Frederico Gomes with ATB Cormark. Frederico Yokota Gomes: I want to ask about the opportunities you have outside of California. You mentioned hemp, you mentioned smokeable CBD, you're trying to get JCP compliance. So there's a lot going on. Can you help us frame those opportunities, starting with, I guess, what is it that you can do today? And what is it that depends on regulatory changes with rescheduling or even the intoxicating hemp ban and the framework there? Just so we understand what is it that the immediate opportunity that doesn't rely on regulatory catalysts and what is it that relies on those catalysts happening? Kyle Kazan: So Frederico, thanks for always asking those good questions. We've got a lot of optionality. Graham, you want to jump in on this one? Graham Farrar: Sure. Yes. Frederico, thanks a lot for the good question. And you're right, there is a lot going on right now. It's a part of the challenge and also part of the excitement. So right now, what we're growing just for clarity in greenhouse 4 is smokable CBD flower. So that is flower that is compliant with California, existing federal farm bill as well as would continue to be compliant if the new, I'll call it, the McConnell language in November comes into play. So it will be at 30 days pre-harvest less than 0.3% total THC. So compliant across the board, both today as well as if the more restrictive regulations are put in place. Target for that is predominantly -- or it's exclusively outside of the U.S. I don't think there's a domestic market for smokeable CBD, but there does appear to be a good market predominantly in Europe for CBD flower. I think they do a number of things over there. Some people use it as a tobacco alternative, some people fortify it by adding hash and other components to it. Pricing, we're investigating. We've got our first crop in the greenhouse right now. Expect to harvest towards the end of April, early May with product -- finished form product by the end of May, early June is probably the time frame we're looking at. Predominant target for that is really just to figure out and explore the markets there. Obviously, you're talking about Switzerland at 1%, Spain, U.K., Germany, all our markets over there. That is green light regulatory point of view from today forward. And again, even if the farm bill language gets more restrictive, would still be compliant. The other things we're looking at is potentially what happens with the farm bill if those regulations get put out -- pushed out as there some rumoring there are. We're not expecting that counting on that or planning on that. But if it does happen, we have continued to express our interest in THCA flower markets both domestic and rest of world. Then you have the Schedule III stuff, which we're also all waiting and watching for. In that world, I believe that there would be a path from California to other medical markets. Obviously, some steps in the middle there, and that's something outside of our control. So if you come back to it, you look at smokable CBD flower we're doing now, eyes on the THCA or farm bill market, looking at Schedule III and then the final one is the Medicare CMS projects. Some information just starting to come out on that. The way that, that would work is that we could be a supplier to accountable care organizations of products that meet the farm bill requirements. So another place where what changes in the farm bill has an impact. We've got a BOM that we are really liking or getting fantastic feedback on, I think it could be helpful for those seniors. So getting that into that framework and/or other tinctures that are compliant with the farm bill either today and tomorrow are the targets there. Kyle Kazan: And Frederico, following up on that, you can imagine just from what you heard from Graham, we see a lot of different options depending on how things go. If things don't go our way, we still see options, just fewer, but it should not impact our ability to continue to grow in greenhouse 4. Graham Farrar: And a reminder, as Mark mentioned, nothing in any of our numbers include any contribution from greenhouse 4 or hemp. So whatever happens there would be accretive above the forecast we provided. Frederico Yokota Gomes: Got it. I appreciate that color. And then just a second question for me. Just your perspective on California pricing potentially improving. It doesn't seem like it's meaningfully priced into your guidance. So I guess it would be upside to that. But do you see that pricing -- a potential improvement in pricing this year or maybe next year? I mean, how are you looking at the outlook for pricing in California? Kyle Kazan: I think a lot of this is -- it's our best estimation, and I would always rather underpromise and overperform. Because, as you know, some of this is a little bit of kind of sticking your finger in the air. You just -- you don't know what you don't know. And in the past, we've been surprised where it shoots up. We're rarely surprised when it doesn't move up. So I think we're just being cautious, but we're hopeful that we will start seeing some improvements. A little bit of that is TBD, what happens with the Strait of Hormuz moves and inflation and things like that. So there's a lot going on in the economy in California and everything. So I think it's better for us to just be cautious and hopefully underpromise. Operator: Your next question comes from the line of Luke Hannan with Canaccord Genuity. Luke Hannan: I wanted to follow up on that topic of pricing, Kyle. I know you mentioned a lot of it is just you sort of stick your finger in the air and see where the wind is blowing. But can you frame up for us, I mean, what -- I know in the past, you've talked about how long these sort of down cycles last and then also have talked about Canopy that's exiting the market. Has there been any abatement in the pace of either the price declines or Canopy exiting the market? Kyle Kazan: I would say that was quarter 4 pricing. Mark, question about licensing, do you want to take that because I know that's something you track just for fun. Mark Vendetti: Yes, sure. Luke. Kyle Kazan: Real quick. By the way, Luke, I always love talking to you. Notice you didn't say anything about congrats on our big hockey win. Luke Hannan: Nor will I. Kyle Kazan: Too soon. I apologize, Luke. Go ahead, Mark. Mark Vendetti: So we've -- I'm going to say the second half of 2025 and just looking at the first 2 months of 2026, the number of active licenses in cultivation has actually remained pretty stable. And so I think we're at a point where the big shakeout has happened and the people who are left competing in California are the better operators. And at this point, it feels like we're in a bit of an equilibrium at this point. So I don't think we'll see significant decreases in the number of active licenses going forward, and we're not thinking that happens. So we're planning on, again, a tight market and a market that -- I'm going to say our numbers don't anticipate a rebound. And if they do, as Kyle said, it should be upside. Kyle Kazan: And one more thing, Luke, I would add, part of the reason why we are so focused on greenhouse 4 and watching different legislation breaks. If we get a few of those breaks, I would imagine that we're going to step on the gas in exporting outside the state of California. We certainly appreciate the results we've been able to accomplish in a pretty -- I mean, in an extremely difficult market. But that's one of the main excitement. One of the things that makes us most excited are the opportunities that we're seeing outside of California. So -- but I think you got your answer from Mr. Vendetti. Luke Hannan: I did, and then so if we frame up just 2026, super high level then as it is, if we think of the delta between '26 and '25, it's basically all driven by just more biomass production. You talked about the lower cost of production also for the final 3 quarters of the year being -- basically in our model, I think we basically have to get down to $90 a pound. I mean, is it fair to say that that's kind of your new long-term sort of target now after you've done all the work to change your cultivation? Kyle Kazan: Well, I would say real quick. I would say if you think of one of our big investors Mr. Codes named our grower, Michael Jordan. Michael Jordan was never satisfied with 4 titles or 1 title or even 5 titles. And I would tell you that M.J. and his team, I don't know if I would say, hey, this is where we hope to go at the end of the day. Remember, right now, we grow -- I'll let M.J. tell you how many strains we grow, but in a much more national marketplace, it's highly unlikely that we're not growing just 1 or 2 strains to really launch efficiency. So we're not at that point with interstate commerce in a big way at this point. But you'd have to think that there -- wherever M.J. is now, there's more titles ahead in a much more focused agriculture market. M.J., do you want to throw in? Graham Farrar: Sure. Thanks, Coach. Yes. So I think we really had kind of 3 targets. One is you can't get good until you get going. So we want to get back on our feet, get all the greenhouses replanted after 2025. We finished 2025 with all that square footage replanted and actually we have the most acreage under cultivation that we've ever had in Glass House history. We started harvesting through that in kind of week 6, week 7 of this year, so partway into Q1. And then at the same time, we launched into finishing the expansion of Greenhouse 2, which adds roughly another 700,000 square feet. That's the second 2/3 of that. And then we also planted Greenhouse 4, our first hemp greenhouse. It's about 300,000 square feet, and we're working on retrofitting the remaining 14 acres in that greenhouse as well. So then the next step is to bring back the efficiencies. So first, we rebuilt the labor team. We've got the greenhouses replanted, and now we're bringing the efficiencies back to get us back to where we were. And then we'll look at using and leveraging that scale to get even better than that in the future. Operator: The next question comes from the line of [Mark Cohodes] with [indiscernible]. Unknown Analyst: So I could take this a number of ways, but let's start with the changes in anticipation of Schedule III you guys have made, whether it's negotiations, work on uplisting, partnerships, international changes and things you've implemented and worked on since the December 18 executive order, then we'll move on from there. Kyle Kazan: So thanks for your question, Mark. Number one, when we -- and we announced it, but we put together that Board committee with Jay, Alison and Jocelyn. I would tell you that it's bearing results better than we'd hoped. So we're super excited about that. We have signed up some folks with deep Rolodexes in Europe, in hemp, hemp testing so that we have aligned interest in folks based on our success. So we're really excited about that. I'll let Graham talk about some of the great things that he's doing at the farm since the executive order announcement. Graham, do you want to -- or should I say, Michael? Graham Farrar: Mark, thanks for the question. Yes. So obviously, the announcement on the 18th was really exciting on a number of fronts. The fact that we had a President in the Oval office talking about the medical value of cannabis is something that all of us have been waiting for a long time. We're a decade in the glass house now, and that was always the thesis that the truth was going to happen. So even just to see those words uttered was a big deal. Of course, having the President Direct Pam Bondi and company to reschedule things from Schedule 1, which means no known medical value to Schedule III, which means it does have medical value and a low potential for abuse is huge. Looking forward to her actually putting that into effect. We're doing all the work that we can now to be ready for that to happen. Those are the things like Kyle mentioned, the GACP, which stands for good Agricultural and Collection Practices certification. That's a feed into what they call GMP or good manufacturing processes, and that allows you to feed into medical markets potentially in the U.S., but probably first in the rest of world where they already have approved medical cannabis. I think we fit in real well as a producer under the Schedule III rules or existing framework. I don't see any reason that we can't be registered as a bulk manufacturer under the DEA rules. Probably it would be a Form 225 registration that would allow us to work within that model and then export outside the U.S. into other medical models. Also, of course, a reminder of our partnership with Berkeley, where they have quite a few strains that are specifically targeted around minor cannabinoids, CBD, CBDV, THCV, EBG, lots of things that are not on the tip of people's tongues, but when you start talking about Medicare and therapeutic uses and improved outcomes for patients, a lot of things there that have a lot of value, both on a kilogram basis as well as to improving people's lives. So we're working on getting those set up. And then, of course, we've got the things coming outside with hemp and the other potentials in those markets where some of those products are already allowed. So we might be able to develop things that could be both used for Medicare here in the states as well as exported into other countries that already permit their use. So a lot of exciting stuff, and we're trying to lay the groundwork for everything soon any of those lights turn green, we're ready to jam on the gas. Kyle Kazan: And Mark, one other thing in those -- for those noncannabis companies that are in other industries that are looking over their shoulders knowing cannabis is coming. The nice thing is what we've built over the last 10 years is actually the world's biggest supply chain. And as cannabis becomes a normalized industry, we are in the unique position to be able to expand that supply chain, both outdoor and in greenhouse. And those companies recognize that, and we can do it at prices where you'd expect that those industries are used to commodity kind of pricing, and that's what we can absolutely deliver. So those conversations are really exciting, and it's nice to be in the position that we've been waiting so long for. Graham Farrar: Yes. actually want to build on that one more second, Mark. One of the things as we've been talking, as Kyle mentioned, to these other companies is historically, I think we've looked at California a little bit as a box, right? We're limited to California. But if you look around and think about where things are potentially going with cannabis, all of a sudden, that turns into a strategic advantage, right? A number of these companies the Sanofi and whatnot of the world, they cannot currently play with THC. We live in the world's largest THC market anywhere on the planet in the form of California, a $4-plus billion market where we can deliver high concentration THC to consumers with customer demographic data that would make a typical CPG company jump up and down, right, where we're actually looking at license registration level data, right, being able to say, here's the best thing for people who are 6 feet tall and 42 years old. Here's their favorite product, right? We have that ability and the ability to lead that market by being able to develop products that can handle THC before the broader market can, I think, is a real advantage that we can work with. We've got a product development platform that is better than anywhere else in the world here in California with our chain of 10, 11 and possibly growing retail stores. that's something that any CPG company will value who's looking towards the future and wanting to have products that exist when these lights turn green rather than just start working on them when the lights turn green. Unknown Analyst: Okay. Final 2 questions are, where are you guys in working on uplisting when the green light on Schedule III happens, i.e., how fast can that happen for you? And two, could you talk about the range of pricing you're seeing and expect to get in hemp, both out of state and overseas? Kyle Kazan: So I'll take the first one, and I'll let Graham talk about the second because it's the second one is pretty exciting. The first one, what I would tell you, Mark, is that there are a few companies, if everybody on this call does a ChatGPT to see what a company needs to do to qualify to be able to uplist to the NYSE or NASDAQ in regards to pricing, market cap, all that kind of good stuff. You'll see there are a handful, including Glass House that do qualify. And while it's not explicit as to whether the New York Stock Exchange and NASDAQ will take us, I would tell you that the good thing that we all know is that NASDAQ and NYSE are in good competition with each other to list companies and neither of them want to miss out on this industry if the other one goes ahead and takes them. So we are excited at the possibility. And at that point, I'll leave it at that. Unknown Analyst: And the pricing? Graham Farrar: Pricing, I mean, really, what we're doing here is market research. So we've got pricing all the way from better than California to really exciting. The real piece that we're working on now is actually having some product in hand to explore those markets. We've talked to a number of folks who are interested in willing to basically contract all the supply we expect. That's not our plan on this is because we want to see and do some price discovery out there. So once we have this first harvest sometime kind of mid-late June, I think we'll have a better resolution on that, but there definitely does seem to be a market. We're exploring how big it is, and then we'll be able to scale to fit that. We'll also redirect future planning based on the genetics and form factors that people are most interested in. But where I was somewhat skeptical on the CBD -- smokable CBD market, I've become more convinced based on the conversations that we've been having and excited to learn more about it. Kyle Kazan: And Mark, for what it's worth -- sometimes it's nice just to see words and actions. Graham and I are booked to -- in April to be at ICBC in Berlin and Spannabis in Spain. And so we are taking our time to -- and making the effort to go to Europe because we absolutely see an opportunity there. Operator: There are no further questions at this time. That concludes our Q&A session and today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Paysign Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. The comments on today's call regarding Paysign's financial results will be on a GAAP basis unless otherwise noted. Paysign's earnings release was disseminated to the SEC earlier today and can be found on the Investor Relations section of our website, paysign.com, which includes reconciliations of non-GAAP measures to GAAP reported amounts. Additionally, as set forth in more detail in our earnings release, I'd like to remind everyone that today's call will include forward-looking statements regarding Paysign's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance is summarized at the end of Paysign's earnings release and in our recent SEC filings. Lastly, a replay of this call will be available until June 24, 2026. Please see Paysign's Fourth Quarter and Full Year 2025 Earnings Call announcement for details on how to access the replay. It's now my pleasure to turn the call over to Mr. Mark Newcomer, President and CEO. Please go ahead. Mark Newcomer: Thank you, Kevin. Good afternoon, everyone, and thank you for joining us today for Paysign's Year-end 2025 Earnings Call. I'm Mark Newcomer, President and Chief Executive Officer. Joining me today is Jeff Baker, our Chief Financial Officer. Also on the call are Matt Turner, our President of Patient Affordability; and Matt Lanford, our Chief Payments Officer, both of whom will be available for Q&A following our prepared remarks. Earlier today, we announced our fourth quarter and full year financial results for 2025, which demonstrated continued strength and exceptional growth across all key metrics. For the full year, revenue increased 40.5% to $82 million. Net income increased 98% to $7.6 million and adjusted EBITDA increased 107% to $19.9 million. Importantly, operating margins increased 723 basis points, providing clear evidence that we've reached a key inflection point where future revenue growth should drive increasing operating leverage and profitability. We continue to deliver strong growth in our patient affordability business. Annual revenue grew 168% year-over-year, reaching $33.9 million compared to $12.7 million in 2024 and claims processed increased by approximately 79%. For those newer to our story, our patient affordability platform helps pharmaceutical companies ensure patients can access high-cost medications by administering co-pay assistance programs. In 2025, our platform helped deliver nearly $1 billion in financial assistance to patients, supporting access to high-cost therapies for more than 840,000 individuals. At the same time, we help manufacturers better control how those dollars are spent, which is one of the key value propositions we provide. A key differentiator of our platform is our dynamic business rules technology, which helps pharmaceutical manufacturers avoid unnecessary costs associated with co-pay maximizer programs. In 2025 alone, this solution saved our clients over $325 million. And this year, we have already saved our clients almost $150 million. That level of savings represents a meaningful economic benefit for our customers and highlights the value of our platform. We added 55 programs during the year, bringing total active programs to 131 across more than 70 patient affordability clients. A mix of transition programs and new launches contributed to both immediate and long-term revenue growth. Our programs span both retail and specialty pharmacy as well as in-office administered and infused products. Oncology and other cancer treatment products remain a significant portion of our program base and biologics represent approximately 50% of claim volume across the platform. We continue to see strong expansion within our existing client relationships. For example, following the onboarding of one of the nation's largest pharmaceutical manufacturers in 2024, those programs scaled successfully throughout 2025. and we added 4 additional programs from that same manufacturer during the year. This type of expansion within large pharmaceutical clients highlights both the scalability of our platform and the durability of demand. Paysign now has active programs with 6 of the top 10 U.S. pharmaceutical manufacturers ranked by revenue. Next month, we attend the Asembia Specialty Pharmacy Summit here in Las Vegas. As in prior years, we are seeing strong interest from potential clients evaluating our solutions, and we enter the conference with a robust pipeline. Over the past several months, we've had conversations with shareholders, analysts and prospective investors to help them better understand the patient affordability business and the broader industry landscape in which we operate. Increasingly, those discussions have touched on legislative, regulatory and policy-related topics. So I thought it would be helpful to ask Matt Turner, our President of Patient Affordability, to provide some additional context. Matthew Turner: Thank you, Mark. Before addressing some of the questions we've been hearing from investors and analysts about potential headwinds to our business, I want to briefly give an overview of how our patient affordability business fits within the broader health care ecosystem. Our platform is focused on helping pharmaceutical manufacturers support patient access to high-cost branded therapies, primarily within the commercially insured patient population. These are typically branded medications where out-of-pocket cost can be significant and where co-pay assistance programs are essential to ensuring patients can begin and stay on therapy. At the same time, our platform helps manufacturers better manage how those assistance dollars are deployed, particularly in an environment where payer dynamics can introduce inefficiencies into the system. That combination of improving access while also driving economic value is what underpins the demand for our solutions. With that context, I'll address a few areas we've been asked about. First, on the expansion of the direct-to-consumer, also known as DTC and cash pay models, these programs have existed in various forms for over a decade and are not new. They were built primarily for products with little or no commercial insurance coverage. That is a very different segment from where we operate today. For the types of high-cost branded therapies on our platform, where list prices can be tens of thousands of dollars, which represents approximately 90% of the drugs in our platform, cash pay and discount alternatives are simply not a viable solution for most patients. Commercial insurance, combined with manufacturer co-pay assistance remains the most effective model for patients. As a result, we view DTC expansion as a complementary solution in certain cases, but not a meaningful substitute for our core business. Second, regarding pharmacy discount programs such as GoodRx, TrumpRx, Cost Plus or similar offerings. These products have existed for more than 20 years and serve an important role in reducing cost for lower-priced generic medications or for those patients without insurance. They are not designed for nor do they compete with branded specialty medications where commercial insurance and co-pay programs are the standard of care. Our business is squarely focused on that branded drug segment and the more than 850 specialty drugs. So these programs are simply not relevant to what we do. Third, and perhaps most important, given the current policy environment on legislative and regulatory considerations, most of the activity around co-pay accumulator and maximizer programs have taken place at the state level. And despite ongoing discussions and congressional committees, there has been no meaningful federal action to date nor do we expect any in the foreseeable future. The key reason is simply structural as a large portion of commercially insured Americans are covered under employer-sponsored health plans governed by ERISA, which limits the impact of state-level regulations. We do not see that as changing. As a result, these programs continue to operate despite changes in state laws. Importantly, demand for our dynamic business rule solutions, which helps manufacturers navigate maximizer programs continues to grow. As Mark said, this year, we have already saved our clients almost $150 million that would otherwise have been absorbed by those programs. So stepping back, we continue to monitor the competitive and regulatory landscape closely. But based on what we see today, we do not view these dynamics as a material threat to our business. If anything, they continue to reinforce the need for solutions like ours, which is reflected in the continued growth of our business and pipeline. Our differentiated dynamic business rules capability is a driving tangible ROI for our pharma customers while we enhance affordability for hundreds of thousands of consumers. Back to you, Mark. Mark Newcomer: Thank you, Matt. Turning to our plasma donor compensation business. In 2025, plasma compensation contributed $45.6 million in revenue, representing a 4% increase over 2024's $43.9 million. We believe the business will continue to exhibit revenue growth driven primarily by center filling excess capacity rather than new center openings. That said, we do expect a modest number of new center openings in 2026, maintaining our market share of just under 50%. We exited 2025 with 595 centers, an increase of 115 centers over the previous year, and we continue to engage the remaining plasma collection companies who are currently not our customers. We believe our expanded suite of donor management and engagement tools we acquired last year creates additional opportunities to grow our footprint in this space. As we await FDA 510(k) review of our donor management system, also known as a BECS or blood establishment computer system, we are actively working to integrate the BECS with a number of plasmapheresis device and strengthen our relationship with those manufacturers to make installations and transitions to our solution as seamless as possible. This integration is included in our latest filing with the FDA. Our broader suite of solutions continue to receive positive feedback from blood and plasma collection organizations across the United States, Europe and Asia, and we are highly encouraged by the long-term growth potential of this business. 2025 marked a meaningful step forward as our patient affordability business scaled and became a central driver of growth and profitability, while our plasma business continued to provide a stable foundation. We believe we are still in the early stages of our patient affordability opportunity and enter 2026 with strong momentum in which to build upon. With that, I'll turn it over to Jeff for additional details on our quarterly and full year-end financial results. Jeffery Baker: Thank you, Mark. Good afternoon, everyone. As Mark highlighted, the fourth quarter and full year results reflect both strong growth in our patient affordability business and the early benefits of operating leverage across the platform. For 2025, total revenues increased 40.5% to $82 million. Pharma industry revenue increased 167.8% to $33.9 million, driven by the addition of 55 net patient affordability programs launched during the past 12 months and a corresponding increase in monthly management fees, setup fees, claim processing fees and other billable services such as dynamic business rules and customer service contact center support. Process claims increased over 79%. This growth reflects continued expansion of our platform and increasing demand for solutions that improve patient access while helping manufacturers better manage their co-pay assistance spend. Plasma revenue increased 4% to $45.6 million, primarily due to the addition of 115 net plasma centers adding during the past 12 months, offset by a decline in average plasma donations per center as plasma inventory levels were elevated throughout much of 2025. This led to a reduction in our average monthly revenue per center as compared to the same period in the prior year. We exited the year with 595 centers versus 480 centers at the end of 2024. Other revenue increased by $671,000 or 36.2%, primarily due to the growth in usage in the number of cardholders of our payroll, retail and corporate incentive programs. More importantly, we are beginning to see the benefits of operating leverage across the business. Total operating expenses were $41.4 million, an increase of 32.6%, well below the revenue growth we experienced, which, coupled with our improved gross profit margin to 59.4% versus 55.1% drove our operating margins to 9% versus 1.7% in the prior year. We have reached an important inflection point where our fixed costs can support meaningful scalability without commensurate increased expenses. So we expect further improvements in these metrics throughout 2026. This is consistent with what Mark described earlier as patient affordability becomes a larger part of our business, we expect to see continued improvement in margins and operating leverage. Here are a few other important details to point out for the fourth quarter and full year results. For the fourth quarter, our earnings before taxes increased to $2.5 million versus $1.2 million the same period last year. Fourth quarter net income was impacted by a higher effective tax rate of 45.4%, which reduced earnings per share by $0.02 per fully diluted share versus the prior period. The fourth quarter adjusted EBITDA, which is a non-GAAP measure that adds back stock compensation to EBITDA was $5.4 million or $0.09 per diluted share versus $2.9 million or $0.05 per diluted share for the same period last year. The fully diluted share count for the quarters used in calculating the per share amounts was $61.6 million and $55.5 million, respectively. We exited the year with $21.1 million in cash, almost double from the prior year. This excludes any impact to pass-through receivables and payables we periodically have related to our pharma patient affordability business. We also continue to have zero bank debt, funding operations and our Gamma acquisition through operating cash flow. Turning to our outlook for 2026. We expect revenue of $106.5 million to $110.5 million, representing 30% to 35% year-over-year growth, with plasma and pharma contributing equally and other revenue contributing $2.5 million. Considering the seasonality in both our main health care businesses, we expect plasma revenue to be the lowest in the first quarter with tax refunds going out and ramp up throughout the remainder of the year, while we expect pharma revenues to be the highest in the first quarter and decline throughout the remaining of the year as patient affordability claims ramp down. This outlook reflects continued momentum in our patient affordability business, which we expect to remain the primary driver of growth. Gross profit margins are expected to be between 60% to 62%, reflecting increased revenue contribution from our pharma patient affordability business. Operating expenses are expected to increase 20% over 2025 as we continue to make investments in people and technology. Of this amount, depreciation and amortization expense is expected to be between $9.5 million and $10 million, while stock-based compensation is expected to be approximately $5.5 million. Given our large unrestricted and restricted cash balances and the current interest rate environment, we expect to generate interest income of approximately $3.1 million. Our full year tax rate is estimated to be between 22.5% and 25%. Net income is estimated to nearly double over 2025, reaching a range of $13 million to $16 million or $0.21 to $0.26 per diluted share and adjusted EBITDA to be in the range of $30 million to $33 million or $0.49 to $0.53 per diluted share. The number of fully diluted shares for the year is estimated to be 62.3 million. For the first quarter of 2026, we expect revenue of $27 million to $27.5 million, representing a 45.2% to 47.8% growth over first quarter 2025 and expect to have 137 active patient affordability programs and 589 plasma centers exiting the quarter. Margins are expected to expand across the income statement versus the same period last year, equating to an operating margin between 20% to 22%, net margin between 17% to 19% and adjusted EBITDA margin between 34.5% to 36.5%. Fully diluted earnings per share is estimated to be $0.07 to $0.08, while adjusted EBITDA per share is estimated to be $0.15 to $0.16. Overall, our outlook reflects continued strong growth driven primarily by our patient affordability business, along with further margin expansion as we scale. With that, I would like to turn the call back over to Kevin for questions and answers. Operator: [Operator Instructions] Our first question is coming from Jacob Stephan from Lake Street Capital Markets. Jacob Stephan: Congrats on a really nice quarter here. I appreciate all the color on the pharma industry. One thing I kind of wanted to touch on a little bit. So we're kind of hearing some pharma services providers that the drug manufacturers have actually been kind of less active recently with regards to new initiatives. I'm wondering if you're seeing any difference in behavior with your pharma manufacturers over the last few months here. Matthew Turner: No. I mean, this is Matt Turner. I would argue that it's just the opposite. If you were at JPMorgan and listening to the conversations there, nobody is slowing down anything. We were sitting there listening to Dave Ricks, the CEO of Lilly, and he was talking about the billions of dollars they're pumping into AI and the fact of doing a deal every 9 days. And almost all the presentations there really pointed to not a slowdown by any means. Everybody's pipelines are really strong right now. Almost every manufacturer has some form of a weight loss or GLP-1 type product in line. FDA calendar for PDUFA this year looks really good. So no, I mean, I don't really see a slowdown. I would say that the push for innovation is growing overall. And I think that's obviously what we've been trying to provide for the last 7 years as we built out this vertical really is the innovation side of things. So no, I don't see a slowdown from our perspective at all, especially not in the patient affordability business. Jacob Stephan: Okay. And maybe -- I mean, you did kind of touch on the GLP-1 opportunity. I'm wondering what that looks like for you guys? Do you have any current GLP-1s on the platform? And how are you thinking about attacking that market going forward? Matthew Turner: Yes. So that's -- we don't have any of the 2 larger GLP-1s that are for weight loss nor do we have the diabetes products. Those are largely retail plays, and we're certainly making a push. We've been making a push in that area. Those drugs have been in market now for a little bit. If you look at those products as well, they're very much -- they're much more of a DTC product than they are a traditional co-pay type product. It's not to say the co-pay offers aren't out there, they are. But it represents a very small subset of that actual volume is going through co-pay. So there's not a ton of upside on a GLP-1 product used for weight loss. There would be if you're looking at the diabetes side. We have one client that has the GLP-1 product. I think [indiscernible] that's coming to market. I think we're in an excellent position to win that business as we do have a very good portion of their retail as well as almost all of their specialty products. So I think we're in a very good spot to pick up a GLP-1 in the next 12 to 18 months. And I think that's as much as I can really say there. I don't -- we don't have any commitment saying that it's ours or anything and plus we don't know what the volume is going to look like there. But yes, we're certainly trying to make inroads to get access to more of those programs. Jacob Stephan: Got it. And then maybe just last one for me. Jeff, you made an interesting comment about fixed cost potentially kind of plateauing, minimal additions kind of needed. I'm wondering, from just looking at the math, that looks like around a $22 million to $23 million quarterly kind of cost basis. I'm wondering if you could kind of give me some more color on that. Jeffery Baker: Yes. So the comment really on the -- when we talk about fixed cost is like the base cost of what our business has been in 2025. So we looked at our OpEx of $41 million. The incremental costs that we have to add going forward as the business grows is certainly a lot less than what it has been historically. If you look at 2024, we were pushing -- SG&A growth was pretty much tracking with revenue growth. 2025, really strong improvements there. In 2026, we think there's even more operating leverage to win out of that business. So when you look at it, we're going to do a good job trying to control our costs. We're only looking for SG&A to grow 20%. And when you peel the onion back, keep in mind, some of that growth is related to the acquisition we did in March. It wasn't even in for a full year in 2025. So you have a full year of amortization in 2026. And then you have some stock comp increase about $1.5 million year-over-year. So take those 2, if you -- however you want to look at that and adjust it out or whatever, but our controllable SG&A is really looking very leverageable. Operator: Our next question today is coming from Gary Prestopino from Barrington Research. Gary Prestopino: I couldn't write down fast enough. Did you say you were going to exit Q1 with about 137 pharma programs? Jeffery Baker: Yes, that's correct. Gary Prestopino: And then -- and what did you say for the plasma? Was it 589? Jeffery Baker: 589. Yes, we had -- in the first quarter, we had 5 centers get sold to a competitor. So they left us and then 1 center closed. So there are 6 -- those are the 6 centers. Gary Prestopino: Okay. Okay. That's fine. And then just getting back to when you were talking about like the GLP-1s versus your high-cost branded pharmaceuticals. Is there any difference in the revenue per claim process there if you're doing basically kind of lack of a better word, it's not really a specialty drug, like, say, a cancer and oncology drug? Matthew Turner: Yes. So I mean each claim type, right, is going to have different potential transactional fees that will attach to it. If you look at the specialty -- and I would say that overall, if you just look at a base, say, pharmacy claim or medical claim, it doesn't really matter if it's specialty or pharmacy, we're going to make on that claim processing fee, we're going to make about the same. But when you look at the bolt-ons that can happen in the specialty space, they compound pretty quickly. A dynamic business rule claim is worth far more to us. than just the singular co-pay claim. So while the volume around retail products like GLP-1s or any of the cardiovascular drugs, if you go back historically and look at like Crestor, Lipitor, Plavix, Modern Day Brilinta. Sure, there's a lot of volume there, but your chance to make -- to kind of add on the additional functionality that can generate larger revenue is just not there on the retail side, which is one of the reasons we highly target the specialty space because we can make far more money on 1,000 DBR claims than we can on, say, 20,000 retail claims. So profit potential and even bottom line margin is far superior in the specialty space. That being said, we are working to bring on more retail brands so that we have a very weighted and comprehensive portfolio of products. Operator: Our next question is coming from Jon Hickman from Ladenburg Thalmann. Our next question is coming from Peter Heckmann from D.A. Davidson. Peter Heckmann: I had a follow-up, Jeff, on -- in terms of thinking about the guidance for 2026, you talked about equal contribution from plasma and pharma. I assume you're talking about from a dollar of revenue perspective. And if so, that still represents a pretty significant acceleration on the plasma side. I didn't hear in your prepared comments why that might be. And so if you could provide a little bit of additional color in terms of whether that's an increase in revenue per center or anticipation of a big addition of net centers for the year. Jeffery Baker: Yes. So -- the revenue comment -- the comment on the [ Equal ] business was revenue, both from the plasma and the patient affordability or pharma side. The one of the main drivers in the plasma, if you recall, we had 132 centers in June and July. So we're going to have those uncomped until that time, so midyear. So you're going to see the growth of plasma with those numbers for the first half of the year be much stronger than the second half of the year, obviously. My expectations haven't changed with plasma is that in a normalized year, it's about a 5% grower, and it's a very good cash cow, and we manage the business accordingly. Mark Newcomer: And let me give a little more color on the plasma revenue growth. The increase in collection efficiencies associated with the latest hardware upgrades effectively gives the average plasma center approximately 10% greater capacity. So a good way to look at that would be for every 10 centers, a collector can now get 11 centers worth of capacity, which is reducing the demand for new center openings. So that just -- it gives them the ability to collect more. Peter Heckmann: I see. That's helpful. Okay. And then just going back to the Nuvec system. Any feedback so far from the FDA or any thoughts in terms of the potential time line there for the completion of the review? Mark Newcomer: Yes. I mean it's currently under review. We expect to hear back from them within the next 60 days. And that's kind of about as much as I'll go into at this point. But so far, everything is very positive. We've gone into our substantive review with them. Operator: Our next question is coming from Jon Hickman from Ladenburg Thalmann. Jon Hickman: Could you give us some sense of where you are on the pharma side with your kind of part of the market? What's the TAM here? And where -- like are you in the second inning, third inning of growth here? Or can you elaborate? Matthew Turner: Yes. So we -- this is Matt. We always hesitate to give the TAM because it's very difficult for us to give a TAM for something that you can't -- you just -- there's no way to exactly tell the dollars are wrapped up in marketing amounts and everything else and nobody discloses exactly how much money they're paying these vendors. So we estimate the TAM is somewhere between $500 million to $850 million at any given time. We think with some of the offerings that we have, specifically the dynamic business rules that we are pushing that TAM higher as we're able to generate revenue from some of these unique offerings that we're bringing to the table. Also, as we continue to build this out and add more features, add more products, we think the TAM can expand even further upwards to $1 billion. Asking about kind of what inning we're in, I think we're in the first inning. There's still a lot of growth potential here. We don't see anything slowing down when it comes to new program acquisition. And if you look at the growth that we're doing year-over-year and not just from a dollar perspective, right, just from also throwing in the number of programs that we're adding in. Last year, it was 1 every 6-point-something days we were putting a new program up. And hopefully, this year, we have similar metrics as far as the number of programs that we're pulling in. But it's -- we're nowhere near the middle of this at all. We're very much in the beginning. And I think we'll continue to see very strong growth out of this vertical for many years to come. Jon Hickman: So a follow-up. So are you inviting competition here? Are people starting to pay attention to what you're doing? Mark Newcomer: There's always really been competition. Matthew Turner: I mean -- yes. Mark Newcomer: I mean we've come into the market and really gone up against the competition. And by bringing new functionality, new features to the market, that's part of the reason why we're winning the business. Matthew Turner: Yes. This was a very stale business that had become almost commoditized. It was treated like just picking something off of the shelf. And that made it very easy for some manufacturers. And of course, they enjoyed that when things like maximizers and accumulators weren't an actual threat to their bottom line. And as that has emerged as a bigger threat, the need for innovation was there. Unfortunately, kind of the legacy dinosaurs in the industry just never reacted. So yes, there's some new players popping up. It just -- that happens every time there's an industry that's ripe for disruption. I would say the good thing for us is we were ahead of that, and we also helped to cause a lot of the disruption. If you look at how we have sold into this industry, we have -- we've really shaken a lot of things up and forced manufacturers to rethink how co-pay programs should function as a whole, how they should pay for them. The open book pricing that we brought to the table where we're not making shading money that we can't tell people how we're getting paid, like that really was a disruptor to this marketplace. And if you kind of look at our -- the catapult that we had for growth, you go back to, I think it was 2023 when we -- in June, July, when we put out a webinar around pricing transparency and a lot of things in that area. That was really part of the lift off for us because we did show the industry there's a better way to do this. You can still make money, you can still have everything that you need. Just we can do it in a way that we're not robbing you blind behind your back, which is what a lot of other competitors were doing. Jeffery Baker: And another thing, Jon, when we look at our competitive advantage, certainly, that's one very important one. Another one is -- and we take it for granted as a payments company, but our competitors don't have the same say, insight into -- for their pharma customers' programs like we do. I mean we give our customers a web portal. They come in, they can see bank balances. They can see transaction data. They see a lot of information that we're able to provide them so they could figure out if their program is successful or not. And we take that as for granted as it's kind of table stakes as a payments company, but there -- our other competitors don't have that because they're not payments companies. And then the last thing is the dynamic business rules. I can't stress enough the fact that with 97% efficacy on first fill that's completely agnostic to the consumer that is getting their drug that we're able to identify whether that transaction is related to a Maximizer program or not. That's huge. It's unheard of and nobody else in the market has that technology. Jon Hickman: Okay. One more question. So Matt, what are you most worried about here on this side of the business? Matthew Turner: That's a tough one. I don't know that right now, we really have a lot of worries. We -- it's pretty positive on our side. If you look at what we've built out, I would say, going back 3 years, it was a lot around personnel and how would we scale this inside with people. It was about finding talent at that point that we could bring in and that could help the organization grow. And we spent the last few years really doing that. We invested a lot of time and energy in bringing the right people in creating a pathway for people that were really good to be able to grow inside the organization. And now that we have that in place, as you look at over the 55 programs that we brought in last year, we didn't have a growth issue when it came to dealing with people. We had already actually built the systems around that. So we were able to just drag people in, drop them into the right place. We have established training curriculums now. It's become a much easier lift for us. So I would say I don't really have any fears at the moment. It's all positive for us right now. And we look forward to the continued growth that we have. We're looking forward to expanding on the partnerships that we currently have. Jon Hickman: Nice results. Matthew Turner: Thank you. Operator: Our next question is coming from Gary Prestopino of Barrington Research. Gary Prestopino: Yes. I just have a follow-up. Did you give -- Mark, did you give any indication of your pipeline on the patient affordability side? I mean, at times, you have said that you feel pretty confident you're going to exit the year at x amount of programs. Could you maybe just comment on that? Matthew Turner: This is Matt. So I don't know that we've ever given that guidance this early in the year. And I'll also kind of point back to our selling cycle is for most of our opportunities is in the 90-day area. We know what the pipeline looks like right now for a number of opportunities. I think we would probably comment on that as we got a little more further down the year, exited the Asembia conference, things like that. That's really where we kind of start to narrow down what we think the pipeline will look like between now and the end of the year. Plus it gives us a chance to do a better evaluation of the FDA PDUFA calendar and what opportunities out of that, we believe are truly winnable for us. So yes, I don't think we can give a number of programs this early in the year. But hopefully, we can do that in the next quarter if everything lines up right. Gary Prestopino: All right. And you guys are doing really well. And obviously, the stock market has been a miniature disaster in the last couple of months here. Doesn't look like, obviously, the fundamentals of the business are reflected in the stock price. And I'm just wondering, as you go around and talk to investors, is it that they don't understand what's going on with your company? Is there, say, a fear that artificial intelligence is going to serve maybe your ability with your dynamic business rules? What can you pinpoint as to what is some of the hesitation among investors to grasp the story? Jeffery Baker: Yes, Gary. So when we talk to investors, everybody obviously understands the plasma business. It's kind of like retail same-store sales type stuff. And I think the biggest -- the market has been in a show-me state sort of stake with the operating leverage from the patient affordability business. Now there's a lot of noise out there always with direct-to-consumer. If you remember back when Donald Trump was going to solve all the pricing issues, he had his own Donald Trump pharmacy and he had his direct-to-consumer initiative. And quite frankly, I mean, they announced that I think there were 30 drugs or something whatever. We had 2 of them on there. And the pricing on the direct-to-consumer side for -- and again, those are cash paying customers was cheaper if you had insurance than if you paid directly to the consumer. So -- and keep in mind, there's roughly 160 million people out there on private insurance. That's what these co-pay programs are for. It's not for the cash paying customers. So I think there has -- I think people don't necessarily understand co-pay. I know for a fact, they don't understand co-pay. And we're going to work really hard in 2026 to tighten that message to make sure people understand that there is a copay -- the co-pay really exists. There's a market for co-pay. We have a better mousetrap that nobody else has, and it's showing up in the numbers. And now this year in 2025, you definitely saw the operating leverage possible. I mean our operating margin goes from 1.7% to 9%, and that's not insignificant. And then based on the guidance that I've given, we expect that to go up substantially in 2026 and beyond. So we -- I can't control the stock price or the investor community or whatever, but I think the numbers speak for themselves and eventually, the market is efficient over the long term. Matthew Turner: And one thing I'll add to, if you look at the other competitors that we have in the marketplace. If you go and look at Cencora, you look at McKesson, they both own co-pay offerings, right? But it's such a small part of their balance sheet that it never gets brought up in an earnings call. So we're really the first public company that's out here talking about this to where analysts are trying to absorb this information because for us, it's not a rounding error for McKesson, for Cencora, this represents a de minimis part of their overall portfolio. So I think it's also given the Street a chance to catch up to see this as a new offering in the market. And hopefully, they'll get behind this, and we'll have more people understand it. I think the private equity market understands this well. There's a number of private equity funds that have purchased assets like this privately. If you were to go look at the private markets, there's a lot of M&A activity happening in this space, not just the co-pay space, but patient services as a whole. It's constantly changing. So we had a chance to go down to the Cantor, HCIT conference and meet with a bunch of people and just listen to what they had to say. And it's -- there's a lot of activity in this space. It's just not in the public market. So I think that's part of the headwind for us, too, is explaining that and having people understand that this is -- there's a bigger amount of money at play here than what it just seems like on our side. Gary Prestopino: What about from the standpoint of your competitive advantages, those dynamic business rules? Is there a feeling out there? And I guess this is a stupid AI question, could AI somehow usurp what you're doing in the market? Matthew Turner: So I mean, I kind of -- I joke with clients when we talk on the phone that AI can do anything that you can dream of. I just don't know when it's going to be able to do it. I mean AI -- we don't view AI as a threat. We're working internally to build out our own AI-based systems to help us make our algorithm stronger so that we spot maximizers and accumulators easier. I think the other part of that to say is that just because they change what they're doing one time doesn't mean that we won't be right there changing it to find it. And not to go into a ton of detail, but once I have one patient, and I know that patient is impacted by a maximizer, I can -- it doesn't matter what the plan does. I can back into that patient because I know they were a maximizer patient yesterday. They're probably a maximizer patient today. So we don't think that's really a threat to our business model. We see AI on our side is actually a positive, and we're going to be implementing more of that on the patient affordability side to help us have a stronger, more robust product across our vertical. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Mark Newcomer: Thank you, Kevin. In closing, we delivered strong results in 2025. We remain confident in our long-term strategy. I want to thank you all for joining us today, and we look forward to speaking with you again in Q1. Operator: Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and thank you for standing by. Welcome to the Gemini's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ryan Todd, Head of Investor Relations. Please go ahead. Ryan Todd: Thanks, operator, and thank you, everyone, for joining this morning for Gemini's Fourth Quarter and Full Year 2025 Earnings Call. My name is Ryan Todd, Head of Investor Relations at Gemini. Joining me on the call today are Gemini's founders, Cameron and Tyler Winklevoss; and Interim CFO, Danijela Stojanovic. Yesterday, we released our fourth quarter and full year 2025 financial results. During today's call, we may make forward-looking statements, which may vary materially from actual results and are based on management's current expectations, forecasts and assumptions. Information concerning the risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. Our discussion today will also include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website and on the SEC's website. Non-GAAP financial measures should be considered in addition to, not as a substitute for GAAP measures. We'll start today's call with prepared remarks and then take questions. And with that, let me turn the call over to our founders, Cameron and Tyler. Cameron Winklevoss: Thanks, Ryan. Cameron here. 2025 was a remarkable year for Gemini. We crossed the threshold into the public markets and became a public company on September 12 after being a private company for over a decade. On that day, the price of Bitcoin was $115,000. Since then, Bitcoin has traveled down to $60,000 and then back up to around $70,000 where it hovers today. A reminder that one of the biggest challenges for crypto builders and investors is its cyclical nature. And a reminder that in order to move beyond these cycles, you need to build beyond them. We started as a Bitcoin company. We became a crypto company. We are now becoming a markets company. If Gemini's first decade was building a bridge to the future of money, today, we are building a bridge to the future of money in markets via a super app. Our first foray into people's daily financial lives beyond buy, sell and store crypto began with the Gemini credit card, which delivered strong growth last year. In 2025, card sign-ups grew nearly 15x and credit card revenue reached $33.1 million, up 185% year-over-year. Many of these Gemini credit card customers engage with Gemini multiple times a day to earn crypto rewards when they spend with the Gemini credit card. December marked a new era for Gemini with the launch of Gemini Predictions. We believe prediction markets will be as big or bigger than today's capital markets. They offer a profound and boundless opportunity to leverage the wisdom of the crowds and the power of markets to provide unique insights into the future. Our investment in securing a designated contract market DCM license from the CFTC to launch our own prediction marketplace positions us as an early mover on this new and exciting frontier. We have been building and operating regulated marketplace infrastructure for over a decade: sequencers, matching engines, order books, real-time settlement, post-trade reporting, custody infrastructure and more. This is a big part of what we do best. Our prediction markets are new instruments running on infrastructure we already know how to build and operate. As a result, we chose not to partner with a third party or license someone else's technology and instead build it ourselves. And in doing so, this also means we have chosen to invest in developing the unique operational capabilities for creating and resolving thousands of contracts on a daily basis, a new and fascinating challenge with growing complexity as we expect the cardinality of these markets to continue to explode over time. In short, we built Gemini predictions from the ground up because we want to own and operate our prediction markets end-to-end for the long term. We believe in the power of markets. Bitcoin is a store of value that is a product of market forces. The best economies are market-based. Markets are truth over the long term, and we believe that we are just figuring out how to apply them to the world around us. From politics to economic indicators, business, tech, culture and sports, prediction markets are forecasting the future more accurately and more quickly than traditional posters, experts and the media. This is a profound change in the world's source of truth and an equally profound solution to the loss of trust in our institutions and resulting epistemological crisis. The printing press created the fourth estate or the public press. The Internet created the fifth estate or decentralized public press. Prediction markets are creating the sixth estate. Decentralized information, combined with the integrity and accountability of markets [indiscernible] in the game. Like money, markets are an innovation and technology that continue to evolve thousands of years after they were first invented. From the birth of the bond markets in the Italian city states in the 12th century to the launch of the first stock market in Amsterdam in the 17th century to electronic trading replacing the open outcry of humans in trading pits on Wall Street in the 21st century, markets continue to grow and develop. Just when you thought the money experiment had reached its terminal steady state, Bitcoin emerged. Just when you thought markets were done maturing, prediction markets caught fire. Gemini was founded to help build and shape a new era of money. Today, we have a similar opportunity to help build and shape a new era of markets. Unfolding in parallel is the meteoric ascent of AI. Once these strains of technology, money, markets and AI converge, we believe they will supercharge each other in dramatic and novel ways that generate new economic activity that we are uniquely positioned to be at the center of and help build and shape to. This caldron of Promethean fire could make progress in these fields up to this point appear rather quaint. We have long felt that it is only a matter of time before we have more machines as customers than humans. Machines can't open a bank account, but they can easily plug into protocols and use crypto to become rational economic actors. Humans may have built crypto, but crypto is not so much money for humans as it is money for machines. We're just starting to see this take shape. Here's one example. For the first decade, we had 3 API protocols: REST, WebSockets and FIX. We're now adding a fourth, Model Context Protocol, or MCP, an open-source API interface designed specifically for AI agents like large language models or LLMs. While we believe AI is going to change the composition of our customer base, it's already changing the composition of our workforce and how we work. Up until recently, the impact of software engineers could differ by an order of magnitude or 10x. Great engineers would have 10x more impact than good engineers. AI has completely changed the game, expanding this paradigm by another order of magnitude at a minimum, making a 10xer, now a 100xer. Critically, we are seeing that this step change holds true for every engineer who adopts AI in their workflows. And it also holds true for non-engineering work as well. Doing more with less has never been more true or possible, and we believe this trend line is only just beginning. Notably, the force multiplier effect of AI for Gemini and our workforce is quite new. It wasn't until the end of last year that AI agents for coding and software development had a splitting of the atom moment. While different pockets of our technology organization have been experimenting with AI and their workflows for a while, AI was not core to them. For example, late last summer, when we were in the middle of our IPO roadshow, AI was used in only 8% of the code being written and shipped to production. In December, however, the future arrived. Models hit an inflection point and in combination with the internal tools we built for [indiscernible] management, AI is now too powerful not to use at Gemini. Today, AI is used in more than 40% of our production code changes, and we expect that number to climb close to 100% in the not-too-distant future. Not using AI at Gemini will soon be the equivalent of showing up to work with a type writer instead of a laptop. As a result, we have reduced the size of our workforce by roughly 30% since the start of 2026. We believe that a smaller organization leveraging the right tools isn't just more efficient, it's actually faster. Gemini started in America in 2015. Since then, we expanded our areas of operation to more than 60 countries. These foreign markets proved hard to win in for various reasons, and we found ourselves stretched thin with a level of organizational and operational complexity that drove our cost structure up and slowed us down. And we didn't have the demand in these regions to justify them. The reality is that America has the world's greatest capital markets and America has always been where it's at for Gemini. Furthermore, we are encouraged by the stated goals of the current SEC and CFTC and their efforts thus far to make the super app possible in America and usher in a new golden age of markets. So we decided it was time for us to focus and double down on America. This will allow us to build more meaningful and powerful relationships with new and existing customers. To that end, in addition to reducing the size of our workforce, we have reduced the areas in which we operate by exiting the U.K., EU and Australian markets. We expect this will help reduce our total expenses in line with our headcount reduction and meaningfully accelerate our path to profitability even in the backdrop of the current crypto market, simplify, consolidate, then accelerate. We love being a public company, perhaps a somewhat surprising statement when looking at the performance of our share price over the past 6 months since we've been public. But rather than being dispirited, we are motivated. And while it's never fun to see your stock drop, we love the feedback loop. It forces us to confront what is working and what is not working, and it makes us sharper. It's challenging, but absolutely the right challenge. We view this feedback loop as one of the greatest benefits of being a public company as growers losing a race provided invaluable feedback on the changes you needed to make in order to win. The path to the Olympics is paved in lost races and the invaluable learning that comes from them. So we welcome the feedback and love the challenge. 2025 marked the end of Gemini 1.0 and 2026 marks the beginning of Gemini 2.0. This starts with our shift into becoming a markets company with Gemini predictions and using the same infrastructure to power our perpetual futures contracts once these contracts are allowed in the U.S. And it continues with our plan to launch U.S. equities as the next phase of our platform, giving our customers access to the largest, most liquid markets in the world. Altogether, we have developed the foundation and building blocks for a super app, where users will be able to fulfill their existing and future financial needs all in one place, amazing awaits. Danijela Stojanovic: Thank you, Cameron and Tyler, and great to speak with everyone. Before I turn to the numbers, I'll briefly note that I stepped into the interim CFO role earlier this year after serving as Gemini's Chief Accounting Officer since May of 2025. I've been closely involved in the company's financial reporting, the IPO process and the prior 2 quarters as a public company. The broader finance organization remains fully in place, and there has been no disruption to our financial reporting or operational execution. I will begin with a few key takeaways from the quarter before walking through the results in more detail. First, revenue grew sequentially despite a materially weaker crypto trading environment in Q4. Second, the business continued to diversify meaningfully. Services revenue more than doubled year-over-year and now represent over 1/3 of our revenue. And third, the restructuring actions we announced earlier this year repositioned the company with a significantly lower cost base going into 2026. Now turning to the results. Net revenue for the fourth quarter was $56.4 million, up 13% from $49.8 million in Q3. This growth occurred despite a more challenging market backdrop. The biggest driver of that change was volatility in the crypto market. Bitcoin fell nearly 47% from its October high, and that environment put real pressure on trading volumes and transaction fees. The credit card business kept growing through it, which helped offset some of that, but Q4 was a harder macro quarter than Q3. I'll walk through the key components. Transaction revenue was $26.7 million, up slightly from $26.3 million in Q3 on spot volumes of $11.5 billion compared to $16.4 billion in Q3. Retail volumes came in at $1.6 billion and institutional at $9.9 billion. As a reminder, we earn fees from both retail and institutional customers with rates varying by order type, instant orders at the top of the range and active trader orders lower. While volumes declined, transaction revenue proved relatively resilient. This reflects improvements in fee economics across both retail and institutional trading as well as a mix shift in retail trading towards higher fee order types. Services revenue for the quarter was $26.5 million, up 33% sequentially from $19.9 million in Q3. This category continues to grow quickly and represents one of the most important structural shifts in our business. A few things worth calling out here. Credit card revenue was $16 million, up 87% from Q3's $8.5 million. We added nearly 30,000 new card sign-ups in the quarter compared to 64,000 in Q3, and receivable balances grew to $219.8 million. Staking revenue was $5.1 million, down 13% from Q3's $5.9 million, largely reflecting lower crypto asset prices during the quarter. However, we continue to see adoption of staking across the platform, including through auto staking features integrated with the credit card rewards program. Q4 was our first full quarter with Card Auto staking rewards live, which came alongside the Solana card launch in October. That feature is a great example of natural multiproduct engagement in providing customers a way to stake organically. They pick a stakable reward. It gets staked automatically on every card transaction and their staking customer without any extra steps. Staking balances at quarter end were approximately $509 million. Staking fee rate adjustment we made in Q3 also ran through a full quarter for the first time. Let me turn to expenses. Total operating expenses for Q4 were $171.7 million, essentially flat compared to Q3. Compensation and headcount expenses declined to $72.3 million from $82.5 million in Q3, reflecting lower stock-based compensation expense. Stock-based comp in Q4 was $36 million. Headcount at quarter end was 650 compared to 677 in Q3. Importantly, the roughly 30% workforce reduction that occurred in early 2026 is not yet reflected in those numbers. That impact starts flowing through in Q1 of 2026 with the full run rate savings expected to be reflected by Q3 and beyond. As of March 1, total headcount was approximately 445. Sales and marketing was $39 million, up from Q3's $32.9 million, reflecting the continued growth and momentum of the credit card portfolio and increased cardholder spending, which drove higher crypto rewards during the fourth quarter. As we've said consistently, we treat marketing as a variable line and calibrate it to what we are seeing in acquisition performance and growth opportunities. For the full year, sales and marketing was $97.1 million or $52.5 million, excluding credit card rewards and promotions, which remained in line with the $45 million to $60 million range we previously guided to. Transaction processing expenses were $7.3 million, down from Q3's $8.6 million, reflecting lower trading volumes during the quarter. Transaction losses were $6 million, down from Q3's $7.7 million. This includes a provision for credit losses on the card of $2.8 million, which remained broadly consistent with the prior quarter. Overall, credit quality across the card portfolio continues to remain stable as the book scales. Technology and infrastructure was $22.3 million, up from Q3's $20.3 million, mainly reflecting higher cloud infrastructure and software licensing costs as the platform scaled. General and administrative was $24.9 million, up from Q3's $19.3 million, driven mainly by higher professional services and ongoing public company operating costs. Full year tech and G&A came in at $154.6 million, in line with our guidance range. Now turning briefly on to full year metrics. We served approximately 601,000 MTUs as of December 31, up 17% year-over-year, reflecting continued growth in engagement as users adopt additional products across the platform. Full year net revenue was $174 million compared to $141 million in 2024, up 24% year-over-year. Transaction revenue for the year was $98 million, while services and interest revenue reached $76 million, representing a significant and growing portion of our overall revenue base. This shift towards services is a key structural change, reducing dependence on trading activity. Services and interest revenue came in ahead of the $60 million to $70 million range we provided at our third quarter earnings call. This was driven primarily by stronger-than-expected card flows with more than 116,000 new card sign-ups during the year in response to card addition launches such as the XRP card. We saw growth across several other services categories. Custodial fee revenue increased 25% year-over-year, driven by higher average crypto assets under custody. We also recognized approximately $4.8 million of advisory revenue related to services provided to a strategic customer as well as $1.2 million from new on-chain offerings, including integrations and token listing services. As we continue expanding the platform, we see increasing opportunities to drive monetization across multiple services as users engage with additional products beyond trading. Total operating expenses for the full year were $525 million versus $308 million in 2024. The year-over-year increase was driven largely by 3 main things: first, stock-based compensation tied to the IPO, including the Q3 bonus accrual that settled in equity; second, the significant marketing investments we made after going public to drive card growth; and third, continued spend in technology, compliance and public company infrastructure costs. These investments were deliberate and the restructuring actions we announced are designed to reset the company's cost structure going forward. Full year adjusted EBITDA was a loss of $258 million, which is inclusive of $33.4 million of net realized and unrealized losses. On a GAAP basis, full year net loss was $582.8 million. It is important to note that a substantial portion of the net loss relates to noncash items. These include $178.5 million of fair value losses on our prior related party instruments and mark-to-market adjustments on crypto assets as well as $85 million of stock-based compensation expense associated with the equity awards issued in connection with our IPO. We believe that adjusted EBITDA is a useful way to look at the underlying performance of the business. That said, our adjusted EBITDA result is not where we want it to be, and we've made decisions since year-end that are designed to change that. Now briefly on the balance sheet. We ended the year with approximately $252 million in cash and cash equivalents. The largest cash outflow in the quarter was the $117 million repayment of the Galaxy loan, which was completed in Q4 and removed that obligation from our balance sheet. As a result, we enter 2026 with a simpler balance sheet and lower debt levels. Following the restructuring actions announced earlier this year, we expect our normalized operating cash losses to decline meaningfully. Going forward, our focus is on continuing to narrow the gap to profitability through disciplined cost management and growth in higher-margin services revenue. The card warehouse facility had $154.4 million outstanding at year-end against $188 million in pledged receivables, supporting capacity of $250 million. As the receivables book grows, we'll execute additional funding capacity to support expected growth. On restructuring costs, the $11 million in pretax charges associated with the Gemini 2.0 plan will land almost entirely in Q1 of 2026 and are expected to be cash charges. They cover the U.K., EU and Australia wind down and the headcount reductions. Timing on some of the international pieces will depend on local consultation requirements, but we expect the full plan to be substantially complete by midyear. We expect these actions to simplify the organization and reduce our operating cost base going forward. Before I turn to the full year outlook, let me share what we are seeing so far in Q1 2026. Through February, trading volume was approximately $5.3 billion, down from Q4 levels as broader trading activity has continued to soften. On the card, payment volume has exceeded $330 million with over 150,000 open card accounts. And on predictions, approximately 15,000 users have traded since launch across more than 12,000 listed contracts. Total monthly transacting users across the platform were approximately 606,000. As always, we urge caution in extrapolating partial quarter activity. With that context, let me turn to how we're thinking about fiscal year 2026. At this time, we are not providing total operating expense guidance for the year. With the restructured cost base still taking shape and the macro environment that is difficult to forecast, we think the more useful approach is to frame the key expense categories individually. The restructuring actions we implemented earlier this year began flowing through the cost structure in Q2. Since year-end, we have reduced headcount by approximately 30% from peak levels. Because 2025 compensation reflected the full year at pre-restructuring staffing levels, the year-over-year decline is more moderate than the underlying headcount reductions. We expect compensation, excluding stock-based comp and restructuring charges to decline 15% to 20% relative to 2025. Stock-based compensation is expected to total $100 million to $115 million in 2026. 2025 included only 2 quarters of stock-based compensation at post-IPO levels following our September listing. The full year figure is higher in absolute terms, but the quarterly run rate is stabilizing as the IPO-related grant cycle normalizes. Technology and G&A is expected to range from $155 million to $190 million. The lower end reflects the post-restructuring normalized base. The width of the range reflects the variable costs that scale with card and trading activity, and we plan to narrow this range as we gain visibility through the year. Marketing expenses, excluding rewards and promotions, are expected at 10% to 15% of revenue, depending on market conditions and the opportunities we see in our highest returning acquisition channels. On the revenue side, our credit card product remains the principal engine for acquisition and growth. Predictions are still early, but with more than 15,000 users since December, we see early traction as encouraging, and it is central to where we are taking the company. While 2025 was the most expensive year in the company's history, given our IPO, the card investments and international expansion, the actions we've taken since then are designed to ensure that 2026 looks very different financially. Overall, we believe that the organization we enter 2026 with is leaner, more focused and positioned to drive improved operating leverage as we continue to scale our business. Together, we expect these dynamics to result in an improvement in adjusted EBITDA in 2026 as we operate with a more disciplined cost structure and a more diversified revenue base. To summarize, 2025 was a year of significant transformation for Gemini. We went public, scaled our credit card program, expanded and diversified revenue through services, launched prediction markets and took decisive steps to reset our cost structure. We enter 2026 with a simpler organization, a lower expense base and a more durable business model. We see the core story of Gemini today as straightforward. The business is becoming less dependent on crypto trading volumes and increasingly driven by recurring and diversified platform revenue. And with that, we will now turn to questions. Thanks, everyone. Ryan Todd: [Operator Instructions] Our first question comes from James Yaro at Goldman Sachs, who asks, could you update us on the drivers of the recent executive departures and how this fits into your new strategy? Cameron Winklevoss: Thanks for this question. So this summer was a different world. And when we IPO-ed in September, the price of Bitcoin was about $115,000 per coin. Of course, the markets dropped significantly from that point in time. But in addition, our ability to build a super app in America with predictions, there's now a path forward for that. And with the inflection point of AI, we have determined that we can move faster as a smaller, flatter AI-enabled organization that is still, of course, very much founder-led. So we think that we have the right team and the right organizational structure for today and tomorrow. Ryan Todd: Our next question comes from Matt Coad at Truist, who asks, you continue to see traction growing your user base despite the rough crypto market backdrop. What do you believe is driving this user growth? And how do you plan to cross-sell prediction markets into this large and growing user base? Danijela Stojanovic: Thanks for the question. I think I can start here and then maybe kick it off to Cameron or Tyler to speak a little bit more on predictions. So we're very pleased by the continued growth we see in our user base, particularly given the broader market backdrop. I think one of the key drivers here is we're continuing to see meaningful user acquisition through our credit card program and just alongside broader engagement driven by new products that we're introducing and diversifying our revenue base, such as predictions. So we'll hand it over to see if Cameron or Tyler want to touch on predictions a little bit more. Cameron Winklevoss: So Gemini started -- when we started in 2015, we were a Bitcoin company. And people came to us and they could buy, sell and store Bitcoin. Over time, we became a crypto company, and we added additional money words like stake, where users could stake their assets with us. And then we added the Gemini credit card, and that's become an active part of people's financial lives who want to earn crypto back every time they swipe. And we're going to continue to add things to our product where users have reasons to do more with us over time. And eventually, like a number of these activities will continue to be independent of crypto cycles. And I think that we're excited to see the engagement with prediction markets, our credit card and other things that we're going to bring to the Gemini app so that people don't have a reason to go elsewhere. Ryan Todd: The next question comes from Adam Frisch at Evercore, who asks, can you help us frame the path to sustain positive stand-alone card economics, specifically the relative contributions from rewards optimization, lower acquisition costs, provision and credit normalization and cheaper broader funding capacity? Danijela Stojanovic: I can take this one. Thanks for the question, Adam. So we're really encouraged by the progress that we made in Q4, reaching near breakeven on the card. The card business has scaled really quickly, and we believe it has a clear path to profitability as the portfolio matures. There's a few primary levers that we think of. So first, on the revenue side, we're seeing strong growth driven by interchange as spend increases. And then also important to note, interest income is still under earning relative to the size of the receivables space. So as the portfolio seasons and matures, interest income becomes a meaningful tailwind. And then on the cost side, we have several levers really. So rewards are the largest expense today, but these were intentional and front-loaded to drive adoption and really establish the credit card, and it worked. We went from roughly 30,000 open accounts at the start of '25 to now over 150,000 as of March 1. And when you think about it, the Bitcoin card has only been out for about 9 months, XRP for about 5 months. So we're just getting started with this program. And rewards are really fully within our control, and we expect to optimize those over time. And to add to that, we've also really been pleased with the organic sign-up direction on a smaller spend base. We're still averaging well north of 100 sign-ups a day, which is more than double where we were a year ago. And then we're also seeing improvements in bank fees as we scale, which will reflect better underlying economics. And then from a credit perspective, the performance is trending in the right direction. We see loss rates stabilizing and also continuing to improve as the book matures. And then finally, on funding. So while funding costs are now coming into the model, we expect those to become more efficient as the portfolio grows and also as financing options expand. The expansion of the funding facility is really an important step. And longer term, we see opportunities to lower the cost of capital and diversify funding sources as the portfolio grows. So putting it all together, we're already near breakeven on a pre-provision basis and the path to sustained profitability is driven really by a combination of portfolio seasoning, cost optimization and scale-driven efficiencies. So we don't need one single lever to do all the work. It's really incremental improvements across each of these areas that we believe will drive the card business into consistent profitability. Ryan Todd: The next question comes from Michael Cyprys at Morgan Stanley. 15,000 users have used Prediction Markets through the end of February. How has that translated to revenue? Where do you see the growth potential from there? How do you compete versus peers that have a higher number of active users? Cameron Winklevoss: Thanks for this question, Michael. So we will provide an update on revenue in the near future, but it's very early at this point. But we are very encouraged with the fact that 15,000 customers have already engaged with this marketplace, which is brand new, and we did not have even a quarter ago. So we're very excited that our users are engaging with the product. We continue to grow that number on a daily basis and add many new contracts to the offering. I think crypto is a great example. I think we started with monthly contracts. We are now down -- moved down to weekly, daily, hourly, 15-minute and just offering all these different types of intervals and ways for people to hedge and trade around the price of crypto, and we're just getting started. So we're very encouraged. I think that looking at the market as a whole, it's also very early for this market, and we see the pie only growing from here. And we think we're one of the few people who are building the full end-to-end marketplace for predictions. And we're excited that our customers -- it's resonating with them. Tyler Winklevoss: Great. And just to add on to that, we've been building technology trading systems in marketplaces for well over a decade. So this is -- this is -- these are the kind of things that we know how to do very well. We have a website, we have a mobile app. We have API interfaces. And we've been doing market surveillance. We know how to onboard customers, KYC them and build great trading and marketplace experiences. So this is very much an extension of the over a decade of experience and expertise that we've developed over the years. Ryan Todd: The next question comes from John Todaro at Needham. John Todaro: How are you thinking about capital raising and liquidity if we assume crypto volumes remain lower than 2025 levels through 2026 and 2027? Danijela Stojanovic: Thanks for the question, John. So we really appreciate it. And we're planning the business with a conservative set of assumptions, which include a scenario where volumes remain below '25 levels through '26 and '27 as well. And from a liquidity standpoint, we've taken really meaningful steps to reduce our cost base and improve cash efficiency. And really, we're focused on scaling a more durable recurring revenue streams that are less dependent on trading volumes. So our main focus is to execute on our operating plan with that discipline in mind. But with that said, we're always evaluating opportunities to strengthen our balance sheet and support sustainable growth. And if there are opportunities for this on attractive terms, we would consider them. But we're, first and foremost, focused on demonstrating the operating improvements and letting the results really create the conditions for any future transaction or capital raise. But the key point is that we aim to build a model that can sustain itself across cycles and not one that depends on near-term recovery in volumes. Cameron Winklevoss: Yes. So look, as founders, we've been building Gemini for over a decade. We don't just have our skin in the game. We have our entire bodies in the game. We're deeply committed to Gemini and the mission and very excited to continue building it and as we expand the mission into the super app. And I think one of the things that we've talked about is that, that really helps us break free of the crypto cycles and give customers things that they can do throughout their daily financial lives, whether it's using a credit card or trading predictions. We're hoping to launch U.S. equities as well, investing in U.S. capital markets and really building out a more durable story of revenue and engagement that moves beyond simply buy, sell, store or say, crypto, which is obviously very core to the business, but we want to build on that and give our customers more reasons to use Gemini. And we're seeing the beginnings of that. And I think we're really excited to keep doing that. So even if crypto prices do remain depressed for some prolonged period of time, we will be building other products that continue to drive engagement and growth of our business. Ryan Todd: The next question comes from Pete Christiansen at Citi. What is Gemini's OpEx discipline going forward? And has management put in place guardrails that helps ensure eventual profitability at the EBITDA level? Danijela Stojanovic: Thanks for the question, Pete. So OpEx discipline is a core focus for us coming out of the restructuring. We've reset the business to a lower fixed cost base, and we put clear guardrails in place around any incremental spend. So that includes being very selective on headcount growth and tying it directly to revenue or strategic priorities and also continue to manage marketing as a variable lever really based on ROI and market conditions. And so that's a real lever that we can dial up or down depending on market conditions and requiring clear payback threshold for any new investments. And just as importantly, we've become much more focused as an organization, so prioritizing a smaller set of high-impact initiatives and exiting or scaling back areas that just didn't meet our return thresholds. And that really allows us to concentrate our resources and our capital where we have the strongest product market fit and demand. So we believe that the organization is now structured to drive really operating leverage as volumes and engagement recovers. And what's important to add is we don't need to meaningfully re-expand the cost base to achieve our growth target. A lot of the growth from here really comes from just better monetization of our existing user base and also just leveraging the infrastructure that we've already built. So I'd say the right way to think about this is we have a relatively stable OpEx base coming out of the restructuring with modest or highly targeted investments layered on top rather than us returning to a broad-based spending. And if 2025 was the year of investment, I'd say 2026 is really the year of focus and discipline. Ryan Todd: The final question comes from Dan Dolev at Mizuho. Given the regulatory and competitive landscape in crypto and prediction markets, what are the biggest external risks you're managing against in 2026? And what would you point to as your most underappreciated competitive advantage? Cameron Winklevoss: Thanks for the question, Dan. So I think one of the things that we want to talk about is the fact that, obviously, there's a lot of effort to pass a crypto market structure bill. And I think what is very encouraging to see is the SEC and the CFTC in parallel are doing great work to bring about the super app era independent of a bill. And so while we are hopeful that a good bill will ultimately get passed, there is a lot of great work going on at both agencies to create a path for super apps in the event that a bill does not pass for whatever reason. So we believe like the future for crypto in America has never been brighter. And I think that sort of there is a lot of great work being done that we're excited about. I think the second point that I'd like to make is that we are one of the, I think, the few end-to-end prediction marketplaces that also has a crypto marketplace within the same organization. And so we believe there's a lot of synergies for people who want to trade, for example, a Bitcoin event contract, but also be able to trade spot Bitcoin within the same place and hopefully eventually perpetual futures down the road in U.S. equities. And so I think that being an end-to-end marketplace for both predictions and spot as opposed to plugging into another marketplace, we believe that's an advantage for us going forward. Ryan Todd: At this time, there are no more questions. Thank you all for listening, and we'll talk to you soon. Operator: That concludes today's conference call. You may now disconnect.
Operator: Welcome to Intrusion Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note this conference call is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Josh Carroll with Investor Relations. Josh Carroll: Thank you, and welcome. Joining me today are Tony Scott, President and Chief Executive Officer; and Kimberly Pinson, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to Tony, I'd like to remind everyone that the statements made during this conference call related to the company's expected future performance, future business prospects, future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Please refer to our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's conference call. Any forward-looking statements that we make on this call are based upon information that we believe as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures if we believe it is useful to investors, or if we believe it will help investors better understand our performance or business trends. With that, let me now turn the call over to Tony for a few opening remarks. Anthony Scott: Well, thank you, Josh, and good afternoon, and thank you all for joining us today. Fiscal year 2025 was a year that had an unexpected beginning and an unexpected ending along with a number of significant product milestones along the way. At the beginning of the year, we improved our balance sheet by fully eliminating our then outstanding debt and Series A preferred stock. At midyear, we rolled out production of our critical infrastructure solution to help safeguard essential assets like water, power and telecom facilities. In the third and fourth quarter, we expanded our access to our Shield Cloud solution by making 2 variations of the product available on the AWS marketplace. And towards the end of the year, we announced our partnership with PortNexus to provide secure network protection for their MyFlare safety technology, which is being deployed at schools in several states. In conjunction with PortNexus, we also launched the P.O.S.S.E program, which will give sheriffs and other law enforcement agencies critical network protection for their public safety networks. And our pilot experience with the P.O.S.S.E program is encouraging with a high adoption rate so far. And finally, we ended the year with an unexpected delay in the extension of the earlier mentioned critical infrastructure contract with the Department of War. And I'll start my detailed remarks with some more insight about this unexpected end-of-year development. Kim will provide more details on the overall numbers shortly, but our fourth quarter revenues decreased by 12%, compared to the prior year period as a result of the delayed timing of an expected contract extension for our critical infrastructure technology. But for this delay, we had expected to show quarter-on-quarter increases in revenue, and greater year-over-year increase in revenue overall. Now to be clear, the cost of providing the services for this critical infrastructure solution are included in our operating expenses, but the expected revenue is not and will show up in later periods when the contract is extended. The timing of this contract extension was and remains affected by the operational and administrative constraints associated with the U.S. government shutdown, which limited agencies' ability to initiate and process contract actions during that period. And the situation is further impacted by the events related to the war in Iran unfolding currently. This delay in funding reflects a broader trend, affecting companies with U.S. government contracts, particularly those operating within the defense sector. And while we're disappointed by this delay, we do believe that we will be able to recognize this revenue during the first half of 2026 once procurement activity normalizes, and we are continuing to support and enhance the solution that we have provided, and we look for further expansion of this solution in other regions in 2026. We're proud of our partnership with the U.S. Department of War and the critical role we play in protecting national security through our advanced cyber capabilities. We continue to view the critical infrastructure solution that we have rolled out with the Department of War as one of the key drivers of future growth, especially as cyber threats become more frequent and more sophisticated. To convert this opportunity into future growth, we've recently taken targeted steps to enhance our sales efforts and go-to-market strategy, and I'll discuss these initiatives in more detail shortly, but they are specifically designed to expand our customer base across the private sector as well as federal state and local government markets. Turning now to some fourth quarter developments. During the quarter, we announced the launch of our Shield Cloud offering on the AWS marketplace, expanding the opportunity for customers to access our Shield technology. Additionally, we've launched our Shield Cloud offering on Microsoft's Azure platform and it's now live. With availability across both leading cloud marketplaces, we've meaningfully expanded our sales reach, which will help enhance our customer pipeline and drive future revenue growth. On top of this customer access expansion effort, we've also continued to strategically invest in R&D to help provide enhanced offerings to our customers. This is evident by the recent launch of Shield Stratus, a cloud-native packet filtering solution that inspects every connection and blocks known threats immediately without the complexity or re-architecture required by traditional firewalls. Shield Stratus integrates seamlessly with AWS gateway load balancer and is a great addition to our Shield ecosystem. Now on to some of the more recent developments during the first few months of 2026. As you may recall, we began a partnership with PortNexus in 2025, who chose to embed our Shield endpoint solution into their MyFlare solution that helps provide enhanced security for education and law enforcement customer endpoints. In February, we expanded our partnership with PortNexus by launching the P.O.S.S.E program that utilizes our Shield On-Premise technology to help protect law enforcement from cyber threats. The program achieved high levels of adoption during the initial pilot. And in the pilot program, Intrusion Shield technology identified and stopped dozens of active threats. The program is now scaling across Texas, Missouri, Oklahoma and Iowa through our partnership with PortNexus. And this partnership provides distribution access to hundreds of sheriffs' departments, schools and government facilities, so an exciting development, and we look forward to working closely with PortNexus to help expand this program and increase the adoption of our technology. We also recently took steps to expand our business development efforts with the hiring of Valencia Reaves as our Public Sector Vice President of Sales; and Patrick Duggan is our Director of Channel Sales & Partnerships. These 2 additions to our team will help strengthen our U.S. business development efforts across the government sector and our channel partners. Now briefly on to our financials for the quarter and the year. Total revenues for 2025 were $7.1 million, up 23% year-over-year. This top line growth was largely driven by the contract expansion with the U.S. Department of War that I touched on earlier. Fourth quarter revenue was $1.5 million, a decrease of [ 25% ] sequentially, which was the result of the delay in the incremental funding of the Department of War contract that I previously referred to. Our operating expenses also saw a slight increase during both the quarter and the year. This increase in our expense reflects deliberate strategic investments to strengthen our business and position us to achieve our goal of creating sustainable growth and long-term profitability as well as the costs associated with the critical infrastructure deployment and operation I mentioned before. We've made meaningful progress against our goals, and we believe we're on track to breakeven operations. And finally, before I turn the call over to Kim, I'd like to wrap up by addressing some of the recent AI trends that we're seeing in the cybersecurity space. As I'm sure many of you are aware, the recent emergence of cloud code security has caused a bit of a shakeup in the cybersecurity space as some fear of this tool will change the industry by eliminating defects in software. However, I do not view this development as a threat to cybersecurity companies such as Intrusion, but more as a promising tailwind for the industry. While improved code quality is more than welcome, it's only one aspect of the landscape of cybersecurity vulnerabilities. And in fact, the rapid adoption of AI has materially increased cybersecurity risk as it has significantly reduced the cost, the technical expertise and the time required to develop and execute highly sophisticated and scalable attacks. As a result, this is only going to increase the need for cybersecurity solutions, such as the ones that we provide to our customers that help catch these malicious actors before they can cause harm. With that, I'd like to turn the call over to Kim for a more detailed review of our fourth quarter and full year financial results. Kim? Kimberly Pinson: Thanks, Tony, and good afternoon, everyone. Fourth quarter results totaled $1.5 million in revenue, a decrease of 25%, compared to the prior quarter, and 12% when compared to the prior year period, as noted earlier on the call. This was due to the delayed incremental funding of a major U.S. government contract. The timing of this award was affected by funding and procurement constraints associated with the U.S. government shutdown and continuing resolution, which affected agency's ability to approve and initiate new contract actions during the period. We believe the delay in this contract award is primarily timing related and anticipate that a substantial portion of the delayed revenue associated with this contract will be recognized in future periods. Consulting revenues totaled $1.1 million in the fourth quarter, compared to $1.5 million in the prior quarter and $1.3 million in the prior year quarter. Shield revenues totaled $0.4 million in the fourth quarter, compared to $0.5 million in the prior quarter and $0.3 million in the fourth quarter of 2024. We anticipate that the sale of our OT Defender solution and other departments of the U.S. government as well as commercially will contribute to future growth. Additionally, during 2025, we partnered with PortNexus to integrate our Shield technology into its MyFlare Alert School Safety solution. Although sales to PortNexus did not materially impact 2025 revenues, the expanded pipeline for this offering is expected to support future Shield revenue growth. Fourth quarter gross profit margin was 74%, which was slightly down from the prior year period. For the full year, gross profit margin was 76%, down approximately 93 basis points versus 2024. Operating expenses in the fourth quarter of 2025 totaled $4 million, an increase of $0.3 million sequentially, and $0.8 million year-over-year. The fourth quarter increase both sequentially and compared to prior year was primarily driven by higher sales and marketing expenses reflecting increased participation in trade shows and expanded brand awareness and product marketing programs. For the full year, operating expenses totaled $14.5 million, an increase of $1.7 million, compared to 2024. In addition to the increased sales and marketing expense, the full year increase primarily related to onetime savings realized in 2024 from the negotiation or cancellation of existing contracts, which contributed $0.5 million in savings in 2024. Increased share-based compensation of $0.8 million from equity grants made in the first quarter of 2025 and cost of living and merit increases of $0.3 million. Net loss for the fourth quarter of 2025 was $2.8 million or $0.14 per share, compared to a net loss of $2 million for the fourth quarter of 2024. The increased fourth quarter net loss is the result of the reduction in revenues resulting from the delay in the incremental funding of government contract and increased operating expense. Net loss for the full year was $9.1 million or $0.46 per share, a $1.3 million increase from the prior year. Turning to the balance sheet. From a liquidity perspective, on December 31, 2025, we had cash and cash equivalents of $3.6 million. Looking ahead, we plan to seek a small debt financing in the near term to help further support our growth initiatives. We have already begun to have some initial discussions, and we'll provide an additional update on the debt financing during our first quarter earnings call. With that, I'd like to turn the call back over to Tony for a few closing comments. Tony? Anthony Scott: Thank you, Kim. 2025 was a year of meaningful progress for Intrusion from a product development standpoint and was marked by several key improvements, including new products. And while this progress was encouraging, we're not satisfied, and we realize that we have some significant work ahead of us. As we look to the remainder of '26, we will be doubling down on our sales efforts to expand our customer base to further improve our top line growth. We're confident that we have both the right people and the products in place that will help us achieve our goal of creating sustainable growth and long-term profitability. And before I wrap up, I want to extend my gratitude to our employees. The progress we've made this past year is a direct reflection of their dedication and hard work. And to our shareholders, we deeply appreciate your patience and steadfast support throughout this journey. And with that, I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Your first question is coming from Scott Buck from H.C. Wainwright. Scott Buck: Tony, I'm curious, can you provide a little more granularity on the unit economics of the P.O.S.S.E program? Like what is the average contract value for a typical sheriffs' department deployment? And what do the sales cycles look like with your partnership with PortNexus? Anthony Scott: Sure. Well, the device that they select will depend a lot on the network bandwidth that they need at the sheriffs' department. So those could range from a few thousand dollars up to tens of thousands of dollars depending on the size and bandwidth requirements of the particular sheriff. In the case of the pilots, we use some of our lower-end appliances. So it's a few thousand dollars in terms of unit pricing on those. But what I'm encouraged by is when we -- as we've experienced everywhere else, once we show the network traffic that's getting through the traditional firewalls and other technologies they have in place and also show the outbound traffic that should be blocked -- that's not currently being blocked, it makes the sale pretty quickly. So we're seeing a high adoption rate and we're going to expand into these other states, as I mentioned on the call. And the way it works is we loan them a unit, it goes in for a week to 10 days. We do a report and show them the traffic that we see and would have blocked if we've been in place, and they love it. So we're doubling down on that. We're increasing the number of POC units, and we'll see where it takes us. So that's kind of the way it works. Scott Buck: That's very helpful. And then I wanted to clarify something in your prepared remarks. Did you say that had you not had the delay from the government contract during the quarter that we would have seen sequential revenue growth from the third quarter? Anthony Scott: Yes. Yes. That is correct -- that is correct. Yes, we were expecting to report growth, both for the quarter and -- quarter-on-quarter and year-on-year above and beyond what we reported on the year-on-year. Scott Buck: So it's safe to assume that contract delay cost you at least $0.5 million in the quarter? Anthony Scott: Yes. Scott Buck: Yes. Perfect. And then, Kim, I wanted to ask about sales and marketing expense. I think it's the highest quarterly level of spend, maybe ever. Is this the new run rate? Or given some of the comments during the call, could we expect further investment in sales in 2026? Kimberly Pinson: We will continue to invest in sales and marketing. What we saw in the first quarter approximates the run rate, but we will see some increases from here. Anthony Scott: Scott, I'd also add, we're looking for cost efficiencies elsewhere. So it's important for us now to improve that sales and marketing muscle, and we'll look for other efficiencies elsewhere as we buttress up that capability. Scott Buck: Okay. So we may not see as material an increase in total operating expense because some of those dollars will... Anthony Scott: Could be offset... Scott Buck: Could come from other buckets? Anthony Scott: Yes. exactly. Operator: Your next question is coming from Ed Woo from Ascendiant Capital. Edward Woo: Did I hear you right that you said for the delayed contract that some of your expenses have already flown through the P&L already... Anthony Scott: That's correct. We've taken all the expenses associated with that. We just are not able to recognize the revenue at this point. Edward Woo: Okay. And then... Anthony Scott: I'm sorry? What that means is when the revenue does come, it will show up in a subsequent quarter, but the expense will already have been recognized. Edward Woo: Okay. So that would be a 100% margin when it comes through? Anthony Scott: Pretty nearly, yes. Edward Woo: Okay. And then are you seeing any -- what about the sales cycle pipeline for commercial customers? Have you seen any delays, any lengthening of sales cycle? Any concerns that you're hearing from Chief Information Officers out there? Anthony Scott: Beyond the government sector, no real change. I think the one concern that we hear all the time is that the dwell time for threats is getting shorter and shorter and shorter, which means you have to react faster than ever, once some suspicious activity is noted. And I think that bodes well for Intrusion's technology because we don't rely on the presence of malware or other known signatures, we're heavily focused on reputation, which means that we can stop things in real time versus waiting for something bad to happen and then have to react to it and then remediate and so on. So we're currently having some discussions with MSSPs and so on who are attracted to that kind of capability because it helps get out in front of these attacks versus waiting for an attack to actually happen. Operator: Your next question is coming from Howard Brous from Wellington Shield. Howard Brous: A couple of questions. Tony, critical infrastructure customers that you have, can you give us a general sense of what kind of customer it is? And is he happy with the work? Is this basically expandable for that particular customer? Anthony Scott: Yes. So this solution is protecting critical water infrastructure in the Asia-Pac region, and the customer is very happy with the solution. It's working as designed, and we continue to support it. And I think there's tremendous opportunities for this to expand beyond the region where it is now. We're doing one island right now in Asia-Pac. But as you know, there's a lot of islands that the Department of War has interest in, in that particular region. And so I think the revenue opportunity that comes from this is multiplied by the number of islands that still need this kind of protection. And that's not to mention the domestic facilities as well, which fall under Homeland Security jurisdiction generally. And with our new sales capability that I mentioned on the call, we're targeting those places as well. And we've got great customer reference from this initial deployment. So we're pretty excited about the revenue opportunity in '26 and going forward. There's a lot of this critical infrastructure around, whether it's water or telecom or electrical grid kinds of things, and our solution is tailorable to each of those environments. Howard Brous: So let me digress for a moment and talk about schools children. You install this in a school, and my understanding it's in every school room, every classroom and can be activated by a teacher if there is a potential event happening, where somebody is coming into the school with a weapon. Is that fair comment? Anthony Scott: Correct. Yes, that's the PortNexus solution that we're partners with. Yes. Howard Brous: Right. So you've got thousands of school districts throughout the country, why isn't everyone adopting this? It protects our children. There's nothing more important than that. How are you going about marketing this? Anthony Scott: Well, with PortNexus, we're attending events, where school administrators look for technology. We're also marketing, as we mentioned, to the sheriffs' department because -- or whoever the local law enforcement agency is that's associated with a particular school district because it takes the combination of them to really adopt the solution. The good news is it's very inexpensive. I've mentioned a couple of people. It's the kind of thing that, in many cases, the local PTA could fund even if the school couldn't afford to do it. But you're right. I think once you see the demo of this capability and the situational awareness that it brings to the law enforcement of people within seconds of an event occurring, it's a why wouldn't we want to have this kind of thing. And so we're really looking forward to 2026 to expand this greatly across lots of markets in the U.S. Howard Brous: And how your reception so far has been? Anthony Scott: It's been outstanding, yes. Again, once you see it, you go, dah, why would I ever want to be without this kind of thing. And parenthetically, I'll say it could apply to other public venues as well. It doesn't necessarily only get marketed to schools. But any place where people gather and there's a potential for disruptions, whether it's active shooters or fire or any other kind of an event that might be disruptive, it's really important for law enforcement to get situational awareness as quickly as possible. And this PortNexus solution allows for multiple perspectives to get that situational awareness as well as alerting the authorities very quickly when an event happens. It shaves minutes off of that critical first few minutes when you have a potential to avert disaster. And I don't know anybody who's ever seen it that doesn't think that's a good idea so... Howard Brous: Anything to protect our children is a very good idea. Can you talk about... Anthony Scott: You got it. Howard Brous: No doubt about that. Talk about the kind of cost? Is it per student, per classroom, per school? Anthony Scott: It's per classroom. The PortNexus solution would go into the classroom in the case of a school and attached to or become part of the smart whiteboard that's in the classroom and then school resource officers and teachers and anybody else that should be registered -- gets registered to that location. And then in the event of an incident, the panic button gets pushed, a text goes to all the preregistered cell phones. It turns the cell phone into lights up the camera and the microphone and the GPS signal and all of that gets fed to the law enforcement authorities along with video from the fixed cameras that usually are already installed in the school. So when an event happens, the law enforcement authorities have great situational awareness and location information from multiple perspectives, it's invaluable. And we license to PortNexus the network protection aspect of it. So the revenue we get comes from the number of classrooms and then the number of schools within the school district. Howard Brous: And the margins on this are high margins... Anthony Scott: So for us, it's very high, yes, because we don't actually have to go do any install or anything. We just license our software, PortNexus' team is responsible for the installs and first-level support and so on. So it's almost pure profit for us. Howard Brous: This is a big deal. Anything to protect our children, that's a good thing. Anthony Scott: You got it. Operator: Your next question comes from James Green. Unknown Analyst: My question concerns the potential emerging technologies and the ability for your technology to interface with those things. And I'm specifically thinking about as we move forward into a day in an era, where we have humanoid robots and we have autonomous cars, we have an imminent threat, where if they're compromised they can be an immediate danger if someone compromises it. Anthony Scott: Hello. I think we may have lost you, or I couldn't hear the rest of your question. Hello, can anyone hear me? Operator: Apologies. James Green's line has disconnected. Anthony Scott: Okay. Well, I think the question was -- I'll try to answer as best I can. Yes, there's more and more software, more and more autonomous things, whether it's robots or everything in your house, the emergence of AI and everything, I think widens the aperture for cybersecurity risk significantly. And our fundamental belief is that if you're not monitoring the network that all of these things need to operate on, if you're not monitoring it in real time packet-by-packet in multiple places in your network, you're likely to miss important things that would allow you to avert a disaster. And that's what Intrusion Shield does. We look at every packet in near real time and we make a decision about whether that packet is likely good or likely bad or unknown in some cases, and we make a decision. And I have used the analogy, it's like having continuous blood monitoring in your body. Most people get their blood drawn once a year when they go to physical exam, but some bad condition might have existed for almost a year, and you wouldn't know it until you get your blood drawn and get it tested. In our case, we're doing the equivalent of looking at every single drop of blood in the body all the time, every time it moves through the body, and that allows us to very quickly detect when there's something untoward going on. And so I think that type of protection is what's going to be more and more and more important as things move forward, specifically with AI and more and more software in our lives. The threat landscape just got a whole lot bigger and needs to be monitored and managed. Operator: And James Green, your line is connected and live. Unknown Analyst: Sorry, I accidentally got the line disconnected, so I missed the beginning of what you said. But since I missed the beginning, my question was, based off those emerging technologies, et cetera, is the current form factor or technology that you all utilize? Is it easily interfaced with those potential technologies? Or is there some minor alteration necessary to be able to utilize them in that? Anthony Scott: Yes. We -- yes, so the answer to that is we can attach to the network in any form that it occurs, whether it's wired or wireless or in the cloud or in a data center or in a home for that matter. And the important thing, as I was saying in my earlier answer is to be really safe, you need to be monitoring the network each and every packet all the time and monitoring from multiple places in your network to be assured that everything that is going on in the network is desirable and necessary even in some cases. So yes, we're very flexible in that regard. And we have put the R&D effort into making sure we can handle increasingly large bandwidth as that becomes a necessity. So I think we're well prepared for the future in that regard. Unknown Analyst: Okay. And 1 other question, which is since we have all these scenarios where people are going to have local agentic things running on their own potentially private networks walking back off a cloud, the speculation that companies might be trying to have all their things working within their own system, is there a way in which the technology deals with the agentic element even internally? Anthony Scott: Yes. I think to the degree that all of these agentic tools will use the network that allows us to monitor what that activity is. And I think you're going to see in 2026, I've made this prediction a number of times, you're going to see some pretty big accidents caused by unrestrained AI, where people lose something that got out of control somehow, whether it's privacy violation or whether it's a violation of releasing intellectual property in an unwarranted way. Who knows what it could be. But I think it's easily predictable that that's going to happen in '26. And for us, the only safeguard against that kind of thing is continuous real-time network monitoring, so that the nanosecond something bad happens that you can stop it and shut off its activities. So we think we're in a good spot as all of these things come to fruition. Unknown Analyst: So like within a local network, if there's agentic misbehavior, it can be controlled from being able to infect ones outside connected potentially? Anthony Scott: Yes. Yes. One of the characteristics of malware already today, even without AI, is what's known as a call home, an infected device inside the network makes a call home to a command-and-control server externally and looks for instructions in some cases or just reports its presence in the network, where it finds itself resident and then often waits for instruction on what to do next, launch a phishing campaign or launch some sort of other kind of attack. And Intrusion technology is particularly good at stopping those call homes that would otherwise be very dangerous. Now I'll say what we don't do is we don't go fix the device that had the problem. We just point you to it and say, this device over here has apparently got a problem. It's generating call homes to undesirable place. But most managed service providers and managed service security providers and institutions already have the tools to do remediation. What they lack is the early detection of that activity, and that's where Intrusion comes in. Operator: [Operator Instructions] Your next question is coming from Jerry Yanowitz [indiscernible] Unknown Analyst: Tony, last quarter, you opened your comments by saying you're pleased to report that during the third quarter, we continue our path towards achieving our goal of creating sustainable growth and long-term profitability. Today, you opened by saying you're on the path to breakeven operations. My question is, in what quarter do you expect to have those breakeven operations? Anthony Scott: Well, can you tell me when we're going to have another government shutdown or CR... Unknown Analyst: Assuming no government shutdown and no CR, what quarter would you expect to have breakeven operations? Anthony Scott: I would -- well, it depends on new contracts that we signed. As I mentioned, we think this critical infrastructure solutions got pretty big legs. Our first contract for that was a $3 million roughly annual contract, and it wouldn't take too many more of those to get us to that goal. So it's all dependent on timing in '26 of when we would get those. But we think we're in a good position to land more of those in '26 than we did in '25 and whether it's 2 or 3 or whatever. Unknown Analyst: Would you be extremely disappointed if you weren't breakeven in the third quarter of this year? Anthony Scott: Yes is the answer. I was disappointed that we weren't breakeven right now, to be honest with you. We thought we were on a path to get there more quickly than we have been, and that's life. And there's probably some mistakes that we made that we, in retrospect, would do differently. But I think -- I still think we're on the right path, and I'm pretty optimistic that '26 is our year. Unknown Analyst: All right. So by the third quarter, we should expect to see that as shareholders? Anthony Scott: I would hope so, yes. And I'm a shareholder, so... Unknown Analyst: You have skin in the game, so I appreciate it. Anthony Scott: Yes. Operator: Thank you. At this time, there are no other questions in the queue. I'll turn the call back over to our host, Mr. Tony Scott, for any closing remarks. Anthony Scott: Well, as I said before, I just want to thank everybody for your interest in Intrusion. As I said at the beginning, it was a year that was unexpected in many respects. And I look forward to the progress that we can make in '26 with a little more stability and a little more predictability coming our way. We've made, I think, all the right investments in our tech. We've begun the strategic investments in our sales and marketing capability that, frankly, we've lacked over the last couple of years. If I had to look back, I probably was a little too slow in building up that muscle. But I'm very pleased with the team that we have now, and they're showing remarkable ability to get us into places that -- and talk to people that we hadn't been talking to over the last couple of years. So that gives me hope. These are experienced sales and marketing people, and it's just a pleasure to work with them and see the progress every single day. So I'm appreciative of everyone's patience. I know it's been a long grueling road. But I remain optimistic and excited about what we can do together in '26. So appreciate everybody's time today, and I look forward to speaking with you at the next earnings call or maybe some announcements even before then. Thanks. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.