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Operator: Thank you for your continued patience. Your meeting will begin shortly. Press 0 and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. Welcome to the Health Catalyst, Inc. Fourth Quarter and Year-End 2025 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. We kindly ask that you limit yourself to one question. If you have any follow-up, please re-enter the queue. We ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press 0. I would now like to turn the call over to Matt Hopper, Senior Vice President of Finance and Investor Relations. Good afternoon, and welcome to Health Catalyst, Inc.'s earnings conference call for the fourth quarter and full year 2025. Matt Hopper: Which ended 12/31/2025. My name is Matt Hopper, Senior Vice President of Finance and Head of Investor Relations. With me on the call today are Ben Albert, our Chief Executive Officer, and Jason Alger, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-Ks furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. During today's call, we will be making forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our future growth, financial outlook for the first quarter and full year 2026, our ability to attract new clients and retain and expand our relationships with existing clients, market conditions, macroeconomic challenges, bookings, retention, operational priorities, strategic initiatives, growth strategies, the demand for, deployment, and development of our Ignite data and analytics platform and our applications, timing and status of Ignite migrations and associated churn and pressure from clients, the impact of restructurings, and the general anticipated performance of our business. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may materially differ. Please refer to the risk factors in our most recent Form 10-Q for 2025 filed with the SEC on 11/10/2025, and our Form 10-Ks for the full year 2025 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. Non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. A reconciliation of non-GAAP financial measures for the fourth quarter and full year 2025 and 2024 to their most comparable GAAP measures is provided in our press release. With that, I will turn the call over to Ben. Ben Albert: Thank you, Matt. Thank you to everyone for joining us today. Before we discuss the quarter, I would like to briefly acknowledge the recent leadership transition at Health Catalyst, Inc. I stepped into the CEO role last month following Dan Burton's departure as CEO and from the Board of Directors. I want to thank Dan for his many years of service, mission-driven foundation he helped build, and his support during this transition. We are focused on the future and on positioning Health Catalyst, Inc. for long-term success. There are significant opportunities ahead, and I am confident in strengths that continue to differentiate this company. Our mission, our people, and our core capabilities provide a solid foundation delivering meaningful value to our clients and shareholders. My priority is to build on these strengths, address our challenges with clarity and discipline, and move the company forward with a renewed sense of focus and execution. In my time as President and COO, I conducted a comprehensive review of the business. I have spent 25 years in this industry, and I bring the benefit of an outsider's perspective combined with an insider's understanding of our operations. That dual vantage point gives me clarity on where we are strong and where we need to change. Not only do I see clear value creation opportunities ahead, I also see areas where we can operate with greater focus, rigor, and accountability. We have already moved quickly to tighten leadership focus and execution discipline, including appointing general managers to lead our interoperability and cybersecurity businesses and transitioning our Chief Commercial Officer role to a strong internal successor who is already driving sharper commercial alignment. We have also opened searches for both a Chief Operating Officer and a Chief Marketing Officer to strengthen operational rigor and to clarify and elevate our position within the market. At the same time, we are reviewing our cost structure to ensure we are strategically allocating capital with increased discipline, and we are focused on expanding technology bookings and margins while driving cash flow generation as outcomes of this work. We are taking a fresh approach to how we execute, and I am confident that these actions will put the company on a stronger long-term trajectory. First, our core value proposition is strong. Our clients continue to rely on Health Catalyst, Inc. to manage costs, improve clinical quality, and drive consumer growth. We have a track record of delivering measurable outcomes, and when we are focused and aligned, we can create real value for our clients. Second, the review made it clear that we need to be more focused and more consistent in how we execute. We have allowed too much complexity into our go-to-market motions, our packaging, and our implementation and migration work. This has at times created friction for our clients and slowed our ability to deliver value. We will address this by aligning the organization around a smaller set of priorities, improving clarity across teams, and holding ourselves accountable for predictable, measurable outcomes. Third, we have a clear opportunity to sharpen and simplify our commercial story. Our solutions resonate most when we articulate them through the lens of the problems clients are trying to solve. We have not been consistent in how we describe the full value we can deliver across cost efficiency, clinical quality, and consumer experience. We will tighten our positioning, simplify how we package and present our offerings, and implement a more predictable and focused go-to-market motion that highlights what makes Health Catalyst, Inc. so compelling. We are refocusing on what we do best, a back-to-basics approach. At our core, we are built to deliver measurable outcomes across cost efficiency, clinical improvement, and consumer experience. While the market often thinks of us primarily as a data platform business, our data platform infrastructure has always been a means to an end. The real value of Health Catalyst, Inc. is in the IP, deep healthcare expertise, and high-value applications we have built or acquired over 15 years, grounded in thousands of improvement projects and billions of dollars in validated impact. That is who we are, that is what we believe the market needs, and that is where we will focus our energy. Additionally, as AI continues to play a bigger role, we expect our valuable data assets and expertise will become an increasingly important driver of competitive differentiation. With these learnings as our foundation, our priorities going forward are clear. We will strengthen and simplify our commercial engines to drive technology ARR bookings. We will improve retention through more predictable migrations and clear client value realization. We will increase efficiency and reduce time to value by eliminating operational complexity and scaling work through automation and global resources. And we will better leverage our IP, combining our data foundation with the expertise, content, and AI-enabled solutions that allow us to solve some of healthcare's most pressing problems. These actions begin now, and they will guide how we operate and execute throughout the year. We have also heard a consistent message from our investors. They want our business to be easier to understand with clearer indicators of performance and a more streamlined narrative about what we do and how we create value. I agree with that feedback. As part of our renewed focus and discipline, we will simplify how we communicate our business model, our priorities, and our progress so that our direction is easier to track and evaluate. As part of this work, we are also evolving the way we measure and communicate performance. We will focus on providing a new set of bookings and retention metrics that are easier to understand, align directly with our execution, and clearly reflect how we operate the business. You will see us simplify our reporting, improve transparency, and reinforce accountability through clearer indicators of progress. So while I have already executed an initial comprehensive review as President and COO, as CEO our review of opportunities ahead will not stop, and I will continue to evaluate all aspects of the business to ensure we are focusing on maximizing returns for our investors. This includes a detailed review of our product portfolio, our investment mix, and our cost structure. We are assessing where we can simplify and where we should concentrate our resources. This is a shift in how we have operated. We are changing, and we will be more focused and disciplined in how we allocate capital and build long-term value. Given this work, and the significant impact some of it may have on our financial results going forward, we are not yet in position to provide annual guidance. Today, we are sharing first quarter revenue and adjusted EBITDA guidance only. We believe this is the prudent approach to ensure we are providing initial transparency, and as we continue our strategic and operational review, we plan to come back to the market with our full-year revenue and adjusted EBITDA guidance no later than our first quarter earnings call in May. With that, I will turn the call over to our Chief Financial Officer, Jason Alger, to walk through the financial results. Jason Alger: Thanks, Ben. For the full year of 2025, we generated $311,100,000 in revenue and $41,400,000 of adjusted EBITDA. In the fourth quarter, we continued to demonstrate strong cost control and operating leverage even as we navigated a dynamic demand environment. From a growth standpoint, we finished the year with 32 net new logos, ahead of our target of 30 net new logos but below our initial expectation of 40 that we began the year with. These net new logos had an average ARR plus non-recurring revenue near the midpoint of the $300,000 to $700,000 range. Our TAC plus TEMS dollar-based retention closed the year at 90%. For the fourth quarter of 2025, total revenue was $74,700,000 compared to $79,600,000 in the prior-year period. Technology revenue was $51,900,000 and professional services revenue was $22,800,000. The year-over-year decline primarily reflects lower professional services revenue from reductions in our FTE service offerings and our exit of unprofitable pilot ambulatory TEMS arrangements. For the full year of 2025, as I mentioned, total revenue was $311,100,000, which represented 1% year-over-year growth. Technology revenue increased 7% year over year to $208,300,000, while professional services revenue declined 8% as we continue to prioritize margin improvement and resource efficiency. Adjusted gross margin for the fourth quarter was 53.5% compared to 46.6% in the prior-year period. For the full year of 2025, adjusted gross margin was 51.1%, driven by technology gross margin of 67.4% and professional services gross margin of 18.3%. These results reflect the benefit of restructuring actions implemented during the year, partially offset by migration-related cost headwinds. In the fourth quarter of 2025, adjusted operating expenses were $26,200,000, representing 35% of revenue, compared to $29,200,000, or 37% of revenue, in 2024. For the full year of 2025, adjusted operating expenses were $117,700,000, representing 38% of revenue, compared to $123,400,000, or 40% of revenue, for the full year of 2024. The year-over-year change reflects the continued impact of our restructuring actions, disciplined headcount management, and tighter control over discretionary spending. On a sequential basis, adjusted operating expenses declined by $2,000,000 compared to the third quarter of 2025, driven primarily by the full-quarter benefit of actions we initiated earlier in the year, including workforce optimization, professional services contract restructuring, and operating efficiency initiatives across the organization. From a GAAP expense standpoint, we would note that we did incur impairment charges on goodwill and intangible assets of $110,200,000 during 2025. These charges were primarily due to the decrease in our consolidated market cap and revisions to our forecast, and not a write-down of any specific acquisition. These charges were also the main driver in the change in GAAP net loss from $69,500,000 in 2024 to $178,000,000 in 2025. Adjusted EBITDA for the fourth quarter of 2025 was $13,800,000 compared to $7,900,000 in the prior year. For the full year of 2025, adjusted EBITDA was $41,400,000, representing 59% year-over-year growth. As we look ahead, we remain focused on driving operating leverage, aligning our cost structure with our revenue profile, and prioritizing investments that support future technology margin expansion and technology revenue growth. Our adjusted net income per share in the fourth quarter and full year of 2025 was $0.08 and $0.19, respectively. Weighted average number of shares used in calculating adjusted basic net income per share in the fourth quarter and full year of 2025 was approximately 71,000,000 and 69,900,000 shares, respectively. Turning to the balance sheet, we ended the year with approximately $96,000,000 of cash, cash equivalents, and short-term investments, and $161,000,000 of term loan debt outstanding. For Q1 2026, we currently expect total revenue of $68,000,000 to $70,000,000 and adjusted EBITDA of $7,000,000 to $8,000,000. As we enter 2026, we continue to manage the business with a focus on operational efficiency while balancing targeted investments to support disciplined growth and retention initiatives that we expect will benefit results in the future. We have invested in migration-related personnel and contractors and are adding R&D investments in AI and India. These investments may create near-term financial pressure; we believe they position the business for cost structure improvement in the second half of the year and beyond. Our Q1 2026 revenue is expected to decrease compared to Q4 2025 due to three primary drivers. First, we expect a reduction in TEMS-related revenue due to downselling and our further exit from certain lower-margin TEMS arrangements. This contributed approximately $2,000,000 of the decrease. Second, we continue to see pressure associated with the DOS to Ignite migration. We expect revenue to decline by about $1,500,000 in Q1 2026 compared to Q4 2025 related to data platform pressure. Third, we expect an approximately $1,500,000 decrease in non-recurring revenue in Q1 2026 compared to Q4 2025. This is primarily driven by timing of project completions or certain renewals. A reminder, project-based non-recurring revenue can fluctuate quarter to quarter. We have made substantial progress in migrating our DOS clients to Ignite, but as discussed on previous earnings calls, we still have work ahead. Across 2026 and 2027, we have been notified of roughly $12,500,000 in DOS-related ARR downsell and churn. In addition, we currently estimate $52,000,000 of DOS-related ARR that may be subject to negotiation in 2026 and 2027, of which $35,000,000 is estimated to be data platform infrastructure ARR. Data platform infrastructure—or the data warehouse and related infrastructure—is where we are seeing the highest degree of pressure. While we do expect some level of further churn of this ARR, as Ben mentioned, we are putting plans in place that are designed to retain a large part of this balance. After 2027, we would expect to generally be through the data platform infrastructure migration headwind. We have maintained strong application relationships with our clients even when data platform infrastructure downselling occurs and do not generally lose enterprise relationships entirely. We expect our success in maintaining application relationships to continue in the future. As we approach 2026, although full-year guidance is not being provided, we anticipate that several prevailing trends will persist. These include a sustained emphasis on technology-led bookings through a sharper commercial approach and an ongoing focus on improving technology ARR retention through operational excellence and differentiated applications. With that, I will turn the call back to Ben. Ben Albert: Thanks, Jason. In closing, I want to thank our clients for their continued partnership and our team members for their commitment during a year of meaningful progress and transition. We are focused, disciplined, and aligned around the areas that matter most. We are committed to clear and understandable communication as we move forward. We look forward to updating you on our progress in the quarters ahead. Operator, we are now ready to take questions. Operator: The floor is now open for questions. Thank you. Our first question is coming from Stan Berenshteyn with Wells Fargo. Your line is now open. Stan Berenshteyn: Hi. I guess, if it is one question, I would like to maybe ask about the comments you made around the strategic review in the prepared remarks. Does that include the possibility of selling the company? Thank you. Thanks, Dan, for the question. Appreciate it. Ben Albert: We are really focused on how we best position our company for long-term success. And so as we have done this strategic analysis, we are turning over every rock and looking at the company and looking at how we can best position the company for shareholder value. We see tremendous opportunity ahead in some of the things that we do related to helping better manage costs for our clients as they are really in a challenging market right now, helping drive that consumer experience. And, of course, the foundation for Health Catalyst, Inc. is the clinical quality work that we do. And the ability to do that all together in one is a really huge differentiator for us as an organization. So we are really doing this assessment to best position ourselves for success and align to create shareholder value. Stan Berenshteyn: So is that a yes or is that a no? Thank you. Ben Albert: Appreciate the question. We are just in an assessment mode. I have been one month into the role and really just driving value as we are after. Stan Berenshteyn: Thanks so much. Operator: Thank you. We will go next to Richard Close with Canaccord Genuity. Your line is now open. Richard Close: Yes. Thanks for the question. Jason, maybe if you could go over the transition impact, I guess, with respect to the first quarter and then I think you said $52,000,000 in terms of the data platform for the remainder of the year. It went by pretty quick, so if you could just go over that again and then maybe provide a little bit more detail on exactly what is going on there? Jason Alger: Yes. Yes, I would be happy to. Appreciate the question, Richard. So, yes, definitely wanted to provide a bit more commentary related to the DOS to Ignite migration that is taking place. I did mention the $52,000,000. That would be our DOS-related revenue, which would encompass both integrated applications as well as data platform infrastructure. Really of the two components there, it is the data platform infrastructure where we are seeing the highest degree of pressure related to this migration. This would be the hosting side of the DOS platform, and that is where we have $35,000,000 of data platform infrastructure ARR that we are working with our clients on plans to retain moving forward. And so that is where we do expect to see the pressure across 2026 and 2027. Richard Close: And is it something where they are choosing another platform or competitor? Or what exactly, I guess, are you negotiating with them there on that? Ben Albert: Hi, Richard. It is Ben. Yes, at the data platform infrastructure level, there are cross-industry technology solutions that come in and can enable them depending on their strategy. They still need from us in that when they do that is the expertise and the IP and the applications that we provide on top of that. So it is all part of our strategy to meet them where they are depending on what they are going to do from a data platform infrastructure approach. Richard Close: Thanks. Operator: Thank you. And we will go next to Jeff Garro with Stephens. Your line is now open. Jeff Garro: I want to follow up on the demand environment and ask what you learned in Q4 around bookings and specifically booking size and scope, deal length—or, sorry, the sales cycle length—and app attach rates for deals that landed in Q4? And if you could help translate that into expectations for bookings, or just demand generally, in 2026, that would be helpful as well. Thanks. Ben Albert: Sure. Thanks. In Q4, we did a strategic assessment to look at how our applications and solutions best resonate in the market, and it came back clear that the market is in great need of the ability to better manage their costs, to drive clinical quality, and to engage and attract new consumers to their organizations. That is because they are under more pressure than ever. I mean, profitability pockets are—there are—the payer mix is changing with more Medicare patients coming in, the commercial payments rising at the rate. They really have to be focused on how they are managing their labor costs and their clinical costs. They have to be focused on not eroding clinical quality as they are doing that, and they have to win on the consumer side. So we see activity in those areas, in particular on the cost and labor side, and continually the clinical quality side. So that is where we see the greatest impact and opportunity, and that is representative in the funnel as well. Operator: Thank you. Our next question comes from Elizabeth Anderson with Evercore. Your line is now open. Elizabeth Anderson: Hey, guys. Good afternoon, and thank you so much for the question. I think you talked a little bit about your sharper commercial alignment going forward. Can you talk about when you are going out and you are talking to clients, where do you see it as your sort of right to win with the current portfolio that you have? Thanks. Ben Albert: I will just expand on the prior question because I think that is really where we are strong. The market is in real need of better managing their costs and driving clinical quality. And when you are managing costs, you cannot do that at the expense of your clinical quality in healthcare. And I think the market—this is really early for the market because the cost pressures they are under are growing and are very significant. And so as our right to win, as we have 15 years in this industry, we have done thousands of projects. We have tremendous content and intellectual property to enable our AI, to help guide our clients through change management, to navigate these really rough waters. So the challenge for us is we have not done a good job of telling that story. We are bringing in a Chief Marketing Officer. We have done the strategic assessment. We are turning over every rock. We are talking to our clients. We are talking to partners. We are talking to industry leaders. And the reality is this is a huge need, and it is something that is going to grow, we believe, going forward. And so that is where we are leaning in, and that is where you are going to see our story evolve over time so the market really understands what Health Catalyst, Inc. is all about. Elizabeth Anderson: Got it. Thank you very much. Operator: Thank you. We will go next to David Larsen with BTIG. Your line is now open. Jenny Shen: Hi. This is Jenny Shen on for Dave. Thanks for taking my question. I think you highlighted how despite some of the retention declining to sub-100% levels, you generally maintain and retain most of your clients, especially your enterprise ones. Can you kind of just give us a split? Is it like 50/50 between customers actually rolling off completely or just downselling—just getting a dynamic between the difference between roll-offs and downsells? Thank you. Jason Alger: Yeah. I appreciate that, Jenny. It is definitely a much lower percentage than you mentioned. We do not generally lose enterprise relationships. So where we are seeing the pressure, like I mentioned in the prepared remarks, is on the data platform infrastructure side, and that is where we could see downselling related to that. But, typically, from an application relationship standpoint, including those integrated applications, we generally see that clients are electing to keep those applications for the future. Jenny Shen: Great. Thank you. Ben Albert: Thanks. Operator: Our next question comes from Jessica Tassan with Piper Sandler. Your line is now open. Jessica Tassan: Hi, guys. Thanks for taking the question and nice to meet you, Ben. I was hoping maybe—you know, appreciate the comments on cost and clinical quality as being sources of pipeline strength, but I guess what specifically are the names of the Health Catalyst, Inc. apps that fit into those categories and what do they do? And then can you just talk about how the data platform disintermediation could potentially dilute the value of the applications or at least, you know, commoditize the applications layer and what you are doing to protect against that possibility. Thank you. Ben Albert: Jessica, nice to meet you as well. As we break down our applications across those three categories that we talk about, we have applications that deal with cost intelligence, which would really focus more on some of the clinical services and some of the supply chain work they are doing within the organization to make them most efficient in terms of the procedures that they are doing and being as effective as possible. But when they are making the choices, making sure that clinical quality stays high or even grows. Looking at the labor side, we have something called Power Labor that also fits within the labor within the cost management side of the equation, and the ability to do both at once for an organization is incredibly powerful as well. As you look at the clinical side, there are applications around measures. There are applications that are supporting ambulatory. In today’s world, if you do not have a great ambulatory strategy, it is going to be very challenging to execute and grow with your access. So that blends into the consumer side where we have tremendous consumer intelligence applications as well. So we could spend a lot more time on each of those, and I would be happy to talk about those at length, but there are applications that support each bucket going forward. And I want to just reiterate one thing though: the benefit is, of course, we can go deep on any one of those applications. So this goes back to meet you where you are. If someone has a challenge and they are using a lot of visiting nurse labor that can be incredibly expensive, or not staffing their OR times effectively or efficiently—things like that—we can really help them become more efficient, but again, all with that clinical foundation. As an organization, how are you making these changes? How are you solving these problems while not disrupting your clinical quality? In fact, you are improving your clinical quality, and that is just the core of Health Catalyst, Inc. Operator: Thank you. And we will take our next question from Sarah James with Cantor Fitzgerald. Your line is now open. Sarah James: Thank you. How should we think about the durability of margins if revenue stays under pressure for another few quarters? And can you help us frame the orders of magnitude of the levers that are under your control for 2026? Jason Alger: Yes. Appreciate the question. As we think about gross margins moving forward, there is pressure associated with the DOS to Ignite migration from a technology margin standpoint. That would mostly be the duplicate hosting costs, the duplicate cost structure that we do put in place. We are working to optimize there and remove those costs as quickly as possible, but that does have an impact on Q1 2026. And then from a professional services adjusted gross margin standpoint, we do see pressure associated with the migration personnel that we are adding to assist with the migration. That is to move these migrations as quickly as possible as well. But that is a near-term impact that is impacting Q1 2026 as well. Once we are through the migration, we do expect these to be costs that would be removed from our books moving forward. But we will see the impact in 2026 and a bit of that impact as well as we move into 2027 and continue the migration initiative. Sarah James: Got it. And just to take a step back on that, does that mean that 2026 would be your transition year, returning to growth in 2027? Or is there still a path to positive year-over-year growth for 2026? Jason Alger: Yes, still evaluating. We are not in a position to guide, and we will be providing the 2026 guide on our next earnings call at the latest, but we are not in a position to comment on the 2027 growth expectation at this point. Sarah James: Got it. Thanks. Operator: Thank you. We will go next to Daniel Grosslight with Citigroup. Your line is now open. Daniel Grosslight: Jason, I want to go back to the comments you made around the $12,500,000 of DOS-related ARR churn impacting 2026 and 2027 and then that additional $52,000,000 at risk. Can you kind of just break down for us how much of that combined $65,000,000 that is at risk will impact 2026, and the quarterly cadence of those impacts? And then of the $52,000,000 of ARR subject to negotiation now, what is the realistic success rate you are targeting for these negotiations? Jason Alger: Yes. Appreciate the question, Daniel. As we look at the $12,500,000—starting there—that is DOS-related ARR where we have been notified that the client is looking to downsell or churn related to that. We expect about 75% of that to impact 2026 at different points throughout 2026. More of that will come on probably around midyear and going into the later half of 2026. And around the $52,000,000, that would be DOS-related ARR, which does include the integrated applications and the data as well. And that is where the $35,000,000 would be the piece associated with the data infrastructure. We are working with those clients on negotiation, on migrating those clients to Ignite, and we do expect to continue to see pressure associated with the migration, and that is where we do expect to see some downselling related to the data infrastructure, but would expect to be able to retain those application relationships with the clients. So we are working on a plan with the individual clients, but we will provide more on that, Daniel, as we provide our full-year 2026 guide. Daniel Grosslight: Okay. Thank you. Thanks. Operator: Thank you. And we will go next to Richard Close with Canaccord Genuity. Your line is now open. Richard Close: Yes, thanks for the follow-up. I am just curious on any of the acquisitions that you have done since being a public company. I know VitalWare has been a pretty strong contributor, but can you talk about any of the other acquisitions that you have really seen decent growth in that app layer? And which ones—I guess this has been asked—but which ones really fit into these three priorities now? Ben Albert: Thanks, Richard. This is all part of the assessment in terms of how these applications align to the priorities as we head forward and where we can drive the most shareholder value, the most client value, and the most growth for the organization. Ultimately, we are all about driving measurable improvement, and that measurable improvement comes in those three areas that we talk about. So most of our applications align to those areas, and we see opportunities across, and so we just have to figure out through this assessment which ones are going to create the most value for us going forward. We are super excited to do that, and we will be able to come back with much more clarity no later than our next earnings call when we provide guidance and with a little more thoughts on that assessment. Richard Close: Okay. Thank you. Jason Alger: Thank you. Operator: At this time, there are no further questions in queue. I will now turn the meeting back to Ben Albert for any additional or closing remarks. Ben Albert: Thank you, everyone. We really appreciate you joining today. We look forward to the next call where we will be able to provide guidance and more results from this assessment. Thank you. Operator: This concludes today's Health Catalyst, Inc. fourth quarter and year-end 2025 earnings conference call. Please disconnect your line at this time. Have a wonderful day.
Operator: Good afternoon, and welcome to Jefferson Capital's Fourth Quarter and Full Year 2025 Conference Call. With us today are David Burton, Founder and Chief Executive Officer; and Christo Realov, Chief Financial Officer. As a reminder, this conference call is being recorded. This call may contain forward-looking statements regarding the company's plans, initiatives and strategies and the anticipated financial performance of the company, including, but not limited to, sales and profitability, expected benefits of the Bluestem acquisition, expectations on the market and macroeconomic factors, and expected collections and growth in certain collections. Such statements are based upon management's current expectations, projections, estimates, and assumptions. Words such as expect, believe, anticipate, think, outlook, hope, and variations of such words and similar expressions identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. Such risks and uncertainties are further disclosed in the company's most recent filings with the Securities and Exchange Commission. Shareholders, potential investors, and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements, except as required by law. Also, during this conference call, the company will be presenting certain non-GAAP financial measures. Reconciliations of the company's historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's earnings press release. And now I'll turn the call over to David Burton. David Burton: Thank you, operator, and thanks, everyone, for joining our investor call. On January 9, we completed our first follow-on offering post IPO, which substantially improved our float and liquidity and reduced the J.C. Flowers ownership to 53%. I'd like to welcome our new investors to the call. We appreciate your support, and we look forward to delivering on the investment thesis we laid out in the road show. Let's dive into our fourth quarter financial performance highlights. We again generated strong results for shareholders. We delivered record collections at $245 million, up 41% versus the prior year period, and we continued to perform well on our underwriting expectations. We generated record deployments with $381 million invested, up 6% versus the fourth quarter of 2024, which had also been a record quarter. Our estimated remaining collections also reached a new record at $3.4 billion, up 23% year-over-year, driven by our continued deployment performance and attractive anticipated returns. Revenue for the quarter was a record $155 million, up 30% versus the prior year period. We delivered a sector-leading cash efficiency ratio of 71%, driven in part by strong collections from the Conn's portfolio purchase. Adjusted EPS for the quarter was $0.69. The previously announced Bluestem portfolio purchase closed on December 4, and we believe the transaction solidifies our leadership position as a strategic acquirer of a wide spectrum of dislocated consumer credit portfolios. We're pleased with the portfolio's performance to date and expect Bluestem to be a meaningful contributor to our financial results in 2026. Next, I'd like to offer a brief market update and cover some of the macroeconomic indicators to provide better context for why we remain confident in the investment opportunity for our business. I'll start with delinquency trends, which remain elevated across all nonmortgage consumer asset classes and create favorable portfolio supply trends. An important component to better understand the state of the consumer is the current level of personal savings. During the pandemic, consumers accumulated abnormally high savings as a result of the unprecedented levels of government stimulus, which served as a financial cushion against life's unexpected events. By the end of 2022, the excess savings had been depleted. And in fact, the current level of personal savings at $831 billion is substantially lower than the long-term prepandemic average from 2013 to 2019 of $1.1 trillion, which is -- which becomes even more pronounced when adjusted for inflation. This suggests that consumers have a more limited ability to absorb unanticipated temporary financial hardships, which is an important driver for delinquency and charge-off volumes. Next, regarding the insolvency market, we've seen a well-pronounced increase in the number of insolvencies, both in the U.S. and in Canada from the pandemic trough in 2021, which in turn has fueled the resurgence in supply of insolvency portfolios. Insolvency valuation and servicing requires highly specialized expertise, a robust data set to develop accurate forecasts, and a technologically advanced servicing platform. And we remain one of the very few debt buyers in the U.S. and by far, the largest debt buyer in Canada that can take advantage of this market opportunity. Finally, this backdrop is also underpinned by a low level of unemployment, which supports the expected liquidation rates on our existing portfolio and gives us confidence in underwriting new purchases. Our portfolio performance is less sensitive to changes in unemployment compared to an originator. And despite the recent negative surprise on unemployment, current employment levels are still very favorable for our business. All of these trends point in one direction, elevated levels of consumer delinquencies and charge-offs, which we're seeing across all consumer asset classes and which we believe create a long runway for a robust portfolio supply over the coming quarters, coupled with strong collection performance on our existing book and on any future portfolio purchases. Next, I'll review our outstanding 2025 performance in the context of our long-term financial results, starting with 2019 as a prepandemic full-year reference. We have successfully navigated credit cycle fluctuations, changing market dynamics, and evolving regulatory framework, and a global pandemic, while continuously improving our financial performance through a combination of sustained growth and acute focus on returns. We delivered a 27% revenue compounded annual growth rate, a 37% net operating income compounded annual growth rate, and a 43% net income compounded annual growth rate from 2019 through 2025, showcasing our growth trajectory, efficiency improvements, and the profitability of the business. I believe there are very few debt buyers globally who can demonstrate this level of profitability and recurring growth through changing market and economic conditions. I'd also observe that Jefferson Capital is much better positioned today to take advantage of opportunities relative to earlier periods in our history. We have a much more scaled operation and are much more broadly diversified both geographically and across asset classes, which allow us to evaluate a substantially wider funnel of opportunities. We also have a more sophisticated collection capabilities today and a lower cost to collect, which in turn should further improve our net returns. And today, we have a much more robust funding structure with proven access to both the banks and the unsecured debt capital markets at an attractive borrowing cost. Simply put, Jefferson Capital is in a solid position to continue to deliver on its outstanding financial track record in the coming years and to build shareholder value. Moving on, I'd like to review in more detail some key performance trends for the quarter. Our collections, as I mentioned, were $245 million, up 41% year-over-year, driven by strong deployments in 2023 and 2024. The Conn's portfolio purchase represented $36 million of collections for the quarter and the Bluestem portfolio, which closed on December 4, represented $14 million. We've completed all necessary servicer transitions for Bluestem and the portfolio is performing according to expectations. More broadly, our collection performance on the overall portfolio continues to reflect the accuracy of our underwriting models. A key trend in collection performance has been the increase in legal channel collections. Jefferson Capital utilizes the legal channel as a means of last resort in instances where we believe the account holder has the ability but not the willingness to engage or pay. We have achieved a number of important process improvements, specifically in the United States, which have significantly compressed the timing from placement of the account to filing of the suit, which in turn has accelerated suit volumes. The inventory of suit-eligible accounts has increased given the significant growth in deployments over the past 3 years. So over time, we expect to see continued growth in legal collections. Our portfolio purchases for the quarter were $381 million, up 6% despite the fourth quarter of 2024, including the Conn's portfolio purchase. Returns remain attractive, and we remain confident in the deployment landscape. As of December 31, we had $274 million of deployments locked in through forward flows, which is an important building block of our deployment strategy for the coming quarters. I will note that our business is subject to pronounced seasonality. The fourth quarter is typically the largest quarter for deployments as credit originators aim to dispose of nonperforming portfolios ahead of year-end. Deployments then tend to decelerate in the first quarter as portfolio sales activity declines as originators want to take advantage of consumer liquidity related to tax refunds in the United States. Our estimated remaining collections as of December 31 were $3.4 billion, up 23% year-over-year with ERC related to Conn's and Bluestem comprising $140 million and $296 million of our U.S. distressed ERC, respectively. Our ERC is relatively short in duration due in part to the lower average account balances in our portfolio with 58% expected to be collected through 2027. We expect to collect $1.1 billion of our December 31 ERC balance during the next 12 months. Based on the average purchase price multiples recorded in 2025, we would need to deploy approximately $582 million globally over the same time frame to replace this runoff and maintain current ERC levels. I would note that as of December 31, we had $225 million of deployments contracted via forward flows for the next 12 months. Lastly, I'd like to review in more detail another core pillar of our business model and a critical building block of our differentiated return profile, our best-in-class operating efficiency. We seek to own the high value-added aspects of the purchasing and collection process, including portfolio and consumer payment performance data, extensive analytical and modeling capabilities, certain proprietary technological capabilities, and the collection process and techniques that we believe create both a competitive advantage for the company as well as a significant barrier to entry. In contrast, we seek to outsource the aspects of the collection value chain that we view as commoditized or operationally intensive and do not produce a competitive advantage, such as running large domestic call centers. We utilize Champion-Challenger performance measures, allocate portfolio segments to the best servicers, and our internal collection platform competes for market share against external collection service providers. Our mostly variable cost structure provides flexibility to scale deployments depending on market conditions. The benefits of our relentless pursuit of operating efficiency are evident in our efficiency metrics relative to the rest of the sector. As I mentioned, our cash efficiency ratio for the quarter was 71%. It was aided by the collections on the Conn's portfolio, which carry lower cost to collect given the significant portion of paying accounts in the Conn's portfolio and to a lesser extent, the Bluestem portfolio, which benefited the month of December. Excluding the Conn's and Bluestem portfolio collections and expenses, the cash efficiency ratio would have been 68%, which remains materially higher than other public companies in the sector. Our leading operating efficiency is a powerful competitive advantage and coupled with the strong returns on our differentiated investment strategy supports consistent, attractive shareholder returns. With that, I would now like to hand the call over to Christo for a more detailed look at our financial results. Christo Realov: Thank you, David. Taking a closer look at the financial details for the fourth quarter. Revenue was $155 million, up 30% year-over-year, driven by continued strong deployments and higher net yields. Changes in recoveries were $0 million for the quarter, reflecting the accuracy of our modeling and our execution against our underwritten forecast. Operating expenses were $84 million, up 30% year-over-year compared to an increase in collections of 41%. Court costs increased to $17.7 million, or 86% year-over-year, as a result of the trends in the increased legal channel volumes that David reviewed in his comments. This is an upfront expense to support future collections through the legal channel and the accelerated time to suit pulled forward these expenses. We expect core costs to remain at this level given the increased inventory of suit-eligible accounts resulting from the significant overall portfolio growth over the past several years. Adjusted pretax income was $51 million for the quarter, up 15% year-over-year, resulting in adjusted pretax ROE of 44.8%. We realized a material level of collections on portfolios purchased in 2023 and '24, including the Conn's portfolio purchase, which in turn drove adjusted cash EBITDA to $178 million for the quarter, up 34% year-over-year. Finally, for the fourth quarter, Jefferson Capital recognized portfolio revenue of $15.5 million, servicing revenue of $1.3 million, and net operating income of $10.7 million related to the Conn's portfolio purchase. Separately, we recognized portfolio revenue of $5.4 million and net operating income of $2.5 million related to the Bluestem portfolio purchase, which closed on December 4. Moving on to the full year results. We delivered strong performance in 2025, while setting several important operating milestones by recording the highest annual collections, deployments in ERC in the company's 23-year history. That performance in turn drove record revenue, net operating income, adjusted pretax income, and adjusted cash EBITDA. Our cash efficiency ratio for 2025 was 74%. And excluding the Conn's and Bluestem portfolio collections and expenses, the ratio would have been 69.7%. Our credit profile remains strong and positions us well for future opportunities. As of December 31, our net debt to adjusted cash EBITDA improved to 1.9x, a level which is significantly lower than our publicly traded peers. Over the long term, our target leverage ratio is in the range of 2x to 2.5x on a sustained basis. Our balance sheet is solid with ample liquidity to support growth, create strategic optionality, and pay our quarterly dividend. On October 27, we completed an amendment of our senior secured revolving credit facility, which achieved a number of capital structure objectives and substantially improved the terms. We increased the aggregate committed capital by $175 million to $1 billion and added 2 new lenders to the bank group. We refreshed the tenor of the facility to 5 years with an effective 2.5-year extension. We improved pricing by 50 basis points across the grid and eliminated the credit spread adjustment for an aggregate interest expense savings on the drawn balance of the facility of 60 basis points. We also reduced the nonuse fee rate for unutilized commitments by 5 basis points. The facility had $232 million drawn at December 31, and we have earmarked $300 million of capacity to repay our 2026 bonds in May of 2026. Given the maturity was fully prefunded with a $500 million unsecured issuance in 2025 and at this point we are not taking on any market risk, we plan to keep the bonds outstanding as long as possible to take advantage of the attractive 6% coupon. This strong liquidity profile is a critical component of our value proposition to sellers who value certainty of costs in periods when portfolio activity increases, but funding markets could be constrained or unavailable. With regard to our capital allocation priorities. Our primary focus remains on deploying capital to purchase portfolios at attractive risk-adjusted returns. Our Board has declared a regular quarterly dividend of $0.24 per share, which represented a 4.7% annualized yield as of February month end. The dividend offers an attractive component of shareholder return, which is not available from other public companies in the sector, and it also reinforces long-term discipline around investment returns. In conjunction with the follow-on equity offering in January, we also repurchased 3 million shares or approximately 5% of the total legally issued shares for $59 million. This was a tactical share repurchase where the company used its capital to support the offering and to reduce the sponsor overhang. We will evaluate open market share repurchases at the appropriate time while also aiming to maintain liquidity in the stock. Finally, we have a long history of successful M&A, but we intend to remain disciplined and opportunistic. Now we will be happy to answer any questions that you may have. Operator, please open up the lines. Operator: Our first question comes from the line of David Scharf with Citizens Capital Markets. David Scharf: I guess probably obligatory to lead off, Dave, with maybe just some questions about your thoughts about maybe some of the macro uncertainties and whether it's employment headlines or the prospect of sustained elevated energy costs. Do any of these factors color how you're viewing the purchasing environment and maybe the types of bids you're putting in? Just trying to get a sense for whether it's just too early to really conclude that the macro in the U.S. has shifted much or whether you feel like we're starting to see some of the signs that maybe people saw in 2022 when inflation set in? David Burton: Thanks for the question, David. I guess let me answer that question in 2 different ways. The first way would be that the incremental pressure that energy costs would have and some modest deterioration in employment could have. That modest on-the-margin impact is likely to really just impact delinquencies and charge-offs. That minor movement is not apt to change liquidation rates on charge-off accounts. because a charge-off tends to be a consumer who has had 1 of 3 things happen: either they've lost their job, they've had a divorce, or they've had a health care issue that has either caused them to incur an uninsured medical bill or a health care situation that keeps them out of work temporarily. And so, I think the net of the current environment is probably a net positive for us on the supply side and not likely, and certainly, we see no indications of it impacting expected liquidation rates. David Scharf: And maybe just as a follow-on, shifting to the deployment side and purchase volumes. The information on the visibility that the flow deals provide over the next 12 months is helpful. I'm curious, do you ever -- well, I guess, number one, are there any trends among your sellers broadly in terms of either a willingness to engage in more flow deals or less? And I guess related to that is, as you plan out the year, is there usually a percentage of total deployment that you'd like to have locked in, in January 1 by flow deals? Or is it just more opportunistic based on the terms that are out there? David Burton: So very insightful questions. I hope I'll be able to remember all of the questions, so I can answer them all. I'll start with, do we target a specific percentage of our deployments for forward flows? And the answer to that is we don't. Our history has been about half of our deployments have been in forward flows. But if forward flows were pricing in a way that wasn't meeting our return targets, we would not feel a need to reach in order to have this composition that we've historically had in the past. So we've been -- we continue and have been from really our inception to be very returns focused. As it happens, areas and sectors that we are a leader in have a consistent pattern of forward flows. And so that level has been relatively consistent. And you can see that our numbers don't move that much in terms of future committed forward flow volume. And with respect to your second question, which is, is there a market trend toward more forward flows or less. And I would say I need to answer the forward flow question by geography. The United States is the most prevalent market to offer forward flows. Most markets outside of the United States that we operate in have a much lesser emphasis on forward flows. And as a result, I would say Canada is probably the next highest percentage of forward flows that we have as a percentage of total deployments. And then the U.K. and then LatAm, which virtually has none. We actually, I think, had the first forward flow of any one or any seller in the Colombian market. But what I will -- I also want to point out is it's not just a geographic differential that exists. There's also differential across asset classes. Auto, as an example, which is an area where we are a leader, has historically been hesitant to embark on forward flows. There are some, but as a percentage of total deployment, it tends to be a much lower percentage. That is a sector that I think now, given some of the challenges that the auto sector has faced, we're hearing more discussions about forward flows, but I don't think that, that's manifested itself yet in any elevated level of forward flows for Jefferson Capital just yet. But I am hopeful that our long-term leadership in that market and that more sellers are discussing forward flows in that space that, that will lead to more forward flows because we do like to have committed future purchases at good returns. David Scharf: No, interesting opportunity. I guess maybe just one more to wrap up. I guess this would be for Christo. Given the pace at which the Conn's portfolio runs off throughout this year as well as the half-life on the Bluestem collections, should we see -- I know you're not providing guidance, but when we think about the efficiency ratio, should we see a reversion towards that 68% level by the end of the year? Or are there other efficiencies and process improvements that would keep the ratio at 70% or above even as those 2 low-cost collection portfolios...? Christo Realov: Yes. look, I think we certainly have a substitution effect that you see. You can see that the headline cash efficiency ratio trended down over the course of 2025 as the collections coming out of the Conn's portfolio declined. And now we're going to essentially reup and the Bluestem would have virtually the same impact, and it's similar in size. And we expect that to effectively take, of course, over the course of 2026, as we have discussed before. We also provide the underlying cash efficiency ratio, excluding any collections and expenses from both Conn's and Bluestem, and that would be in the high 60s as a underlying trend, excluding the impact of performing portfolios. Operator: Our next question comes from the line of Mark Hughes with Truist. Mark Hughes: David, your commentary about supply is very interesting. Any way to characterize how much of an increase you've seen? Is it single digits, double digits? I wonder if you could maybe give us a little more detail there. David Burton: And that's specifically as it relates to volume of charged-off accounts or insolvencies. Mark Hughes: Yes, just the opportunity set that you're seeing. David Burton: Yes. I would say there's a couple of things at play. First, there's this seasonality aspect where the fourth quarter is the biggest quarter that originators tend to sell. And then because the tax season in the first quarter tends to be a trough. And so you have both of those things going on. Those impacts are probably bigger than any impact on underlying charge-off trends. And so these are difficult quarters to gauge a steady state. And so I wish I had a little bit more clairvoyance for you. But I think the second quarter probably would be a better quarter to begin making something more conclusive. I think one thing I could say is we are -- the era of supply of elevated levels of supply began some time ago and broadly, it's continuing. Mark Hughes: Very good. How about the returns? Have the return profiles been reasonably stable when you look across your book and what you're buying? And your returns have obviously been very attractive. Is that -- are we looking at being able to maintain that or a little bit better, maybe a little more competitive? How do you see that? David Burton: Yes. So I would say that our returns have been pretty stable. And I think pricing is pretty stable in the market and fairly predictable. And that our win rates, which is another gauge of the level of competition, have been steady. Mark Hughes: Then, Christo, the tax rate this quarter for the adjusted number, was it the similar 14%, 15%? And then what should we use for 2026? Christo Realov: Yes. I would say for 2026, we now have a full clean year. And as such, I think something that's in the 24% to 25% is appropriate to estimate the tax provision. So call it 24.5% would be what I would use for '26 for full year. Mark Hughes: And how about for 4Q, the adjusted EPS number, is that based on a -- I think just doing the math on the release, it was 14.5% tax rate? Christo Realov: Yes. Although if that's the effective tax rate, that is true, I would not -- that effectively takes into account the full year tax provision that's required, except that we are only getting taxed as a taxpayer for half of the year since the IPO. So that is not indicative of anything going forward. Going forward, it should be relatively straightforward. There isn't anything special from a tax perspective other than the fact that we're not paying cash taxes. But for the purpose of estimating the tax provision going forward, 24.5%. Mark Hughes: Then I'm sorry, I missed this when you were talking about the potential share buybacks in the future. What's the current authorization? What's your posture on that? Are you -- do you tend to be active...? Christo Realov: No, the posture is that the $3 million that we repurchased was very much a tactical repurchase in conjunction with the follow-on offering. At present time, our focus is on deploying capital at attractive risk-adjusted returns in portfolio purchases. We will evaluate open market share repurchases in the future. But at present time, we, of course, are also focused on developing better liquidity and better float for our investors. Operator: Our next question comes from the line of John Hecht with Jefferies. John Hecht: Congratulations on wrapping up a pretty busy year. First question is just thinking about deployments. You guys are diversified from a product and geographic perspective. Maybe can you give us the characteristics of the deployments where -- in which markets and which products? And was there any shifts in that deployment that are worth calling out over the past couple of quarters? David Burton: I think the one of the most prominent and promising shifts has been an increase in deployments in insolvencies, which is an area that, obviously, we have very limited competition because there's only a couple of companies that have the ability to value or service those accounts in the U.S. and in Canada. And our deployments correspond quite closely with how the filings have increased across the country. And then I would say other trends in deployments, obviously, our ability to undertake these attractive deployments in Bluestem and Conn's, I think, represent a unique capability and a good and a very attractive risk-adjusted return profile. And so I think that obviously is a change in our composition versus '23 and prior. So I think the trends have been relatively similar to quarters in the past. And we're -- they all reinforce the markets that we're in, our asset class specialization as being attractive, and the geographic diversification and the geographies we picked have, again, reinforced our investment thesis for those markets. So we're obtaining attractive returns across really all of the spaces that we're in, both asset class and geographies. John Hecht: And then a follow-up is, obviously, acquisitions, you have good organic growth and then you've had successful acquired growth over time as well. How do we -- how would you describe the pipeline now? David Burton: So I'm going to separate my comments into these runoff portfolios that in the form of like Conn's and Bluestem, which we have a unique capability set to value, navigate, integrate, and execute on. During '25, we saw more of those opportunities than we've ever seen. but that resulted in 2 very large purchases. And sometimes a process like that takes a long time to conclude. And so we're eager to evaluate opportunities in that space, and we're active. But there's, of course, no certainty on any one of those. Our hope would be that while we've done this successfully in the installment loan space and in credit card that we could, over time, expand our capabilities to include some of the other asset classes that we're in. Operator: Our next question comes from the line of Bose George with KBW. Bose George: Actually, in terms of areas of potential growth, have you seen pricing become more interesting in areas like prime credit cards? Or is that still not quite there yet? David Burton: I would say prime credit card continues to be an area that our win rate has been pretty consistent. So I don't know that we're seeing much change in pricing of those assets. And we obviously would welcome pricing to reflect better returns in those asset classes, but we're not really seeing much in the way of change, even though there has been a modest increase in supply. Bose George: And then just there's obviously been a lot of concern about AI-driven white-collar job loss. It seems very early to think about what that means, but is that something that you guys have thought about in terms of the way it potentially impacts supply performance? Or is it just early for that? David Burton: Yes. I think it would be early for that. And of course, it depends on who you read as to what the impact is going to be. I've read the full gamut of how all the -- formation of all these AI companies is leading to more demand for staff. But at the same time, there's efficiencies that are happening by the deployment of AI in various parts of other companies. So hard to know. I certainly don't consider myself an expert. What I do know is that we look at employment trends pretty closely. And we have a long way to go before an elevated level of unemployment would begin causing concern for us with respect to our ability to achieve our underwritten collection forecasts. Operator: Our next question comes from the line of Robert Dodd with Raymond James. Robert Dodd: Congrats on the year and the beginning of the new one. Most of my questions have actually been already answered. On the tax season, to your point, we're at the beginning of the year, it is tax season in the U.S. If we look at it, there's always been 50 million returns filed and processed even though it's pretty early in season. That's about 1/3 of the total. So it's that you expect for. So it's a pretty decent sample and the average refund is up almost 9%. So are you seeing anything in the data to your point, the macro doesn't seem to be hurting you and the tax season may be of benefit. So are you seeing anything unusual at all? Any increase in utilization of payment plans or increase in spot payments? Obviously, it's -- that's Q1. You probably don't want to talk about it, but I'm going to ask anyway. David Burton: I certainly don't blame you for the question. And your insights and instincts, I think, are very rational. I would say -- I think the comment that I can share is that things are in line with expectations. I wouldn't suggest anything materially higher or lower. And so we continue to expect to achieve the underwritten forecast that we have in place for the quarter, which obviously includes some seasonality in the expectation. And as you also note that we have very modest changes in expected recoveries and changes in collection performance relative to expectations during a quarter or so, which I think actually netted to 0 this quarter. So I know that's very different. And that might also be why some questions -- there are questions around this area. But that has typically not been an area where we generate incremental earnings. Robert Dodd: One more, if I could. On the -- to Christo, the efficiency ratio. Obviously, there's a number of factors with a bit of seasonality and obviously, Conn's, Bluestem rolling off as we go through -- not rolling off, but Bluestem having a declining benefit as we get towards the second half of the year. But to your point, if we back that out and you give us the -- you do give us the underlying excluding that, are there any new initiatives? You're always working on that efficiency to improve the IRR with the Champion-Challenger model, the Mumbai center, et cetera. Are there any new initiatives in the works that can improve the underlying number if we look through the Conn's, Bluestem impact as we go through the course of this year and maybe a little longer term as it's hard to move that number in a 12-month window? Christo Realov: So you point out that we have historically had a strong emphasis on each year having a myriad, literally dozens of initiatives aimed at improving our efficiency and effectiveness. And this year is no different. We have our laundry list of things we're going to tackle this year. But we don't really like discussing what those are. But I think the historical trend of cost to collect improvement is one that I think is a trend that ought to continue pending our -- assuming we have continued success against those initiatives as we have in past years. Operator: Our next question comes from the line of Randy Binner with Texas Capital. Unknown Analyst: I'm mostly covered at this point. But the one thing that stuck out to me that I thought was interesting is you mentioned these process improvements that are leading to, I think, more effective suit activity in the collection process. And I think of the court system as being slow still, and maybe I'm not thinking of it the right way. But can you explain a little bit more like how those process improvements have helped in that area? David Burton: First of all, again, you're actually right. The court systems are not moving any faster. Well, I shouldn't say that because, of course, there are lots of jurisdictions and some might be. But in the aggregate, I would -- I don't have any expectation for the court process themselves to work faster. What is -- where we have made the most inroads in our efficiency is all the things we have to do before filing the suit. And as you may or may not know, various courts and asset classes and states have different requirements with respect to what has to be available and included with the suit at the time of filing. And that list of things has gotten longer over time as those requirements and expectations have become more defined. And so, a process which, call it, 10 years ago had much less stringent requirements with respect to what needed to be included at the time of filing suit has massively become more involved. that complexity added time to the process. And we spent a fair amount of time engineering efficiencies in that area, which began more than -- at the beginning of last year and concluded in the third quarter, at which time we saw that the ramp-up and the acceleration in our suit volume. So you're right, it's not the courts, it's everything we do before to prepare an account for suit. Unknown Analyst: But I guess the follow-up is, does it lead -- all that is great, the automation of the process. Does it lead to a better result? Or is it just more is getting through the process faster, so we're seeing it faster? David Burton: Yes. So there's really 2 aspects of it that are improvements. The first is you just have this compressed time frame, which obviously also has an NPV impact. If you start the suit sooner, you're going to get to the collections from that suit sooner. The other aspect is to the extent that after starting the process, there was components of the process, which then required incremental materials that were not provided right upfront, that then would cause a fair amount of delay, if you will, or added time. So there's a secondary compression that also has occurred from the process that we implemented. Operator: Our next question comes from the line of Gowshi Sri with Singular Research. Gowshihan Sriharan: Can you guys hear me? David Burton: Yes. Gowshihan Sriharan: Building on that collection strength you've shown all year, can you talk about the quality of those collections, specifically whether you're seeing any change in the mix between onetime settlements, payment plans, and now with the legal recoveries that you talked about, would that make the cash flow profile more durable as we move through 2026? David Burton: Let me see if I can answer that in a way that gets at, I think, what you're looking at. The distribution of payment types and payment size has been pretty consistent over the last couple of years. I would say there was a different payment pattern that occurred during the government stimulus, which did involve more settlements and higher onetime payments, but that has reverted to the mean by the end of 2022. Gowshihan Sriharan: And with the legal channel, you've leaned harder into the legal channel with court costs almost doubling, and I think you've alluded to that in a question. As we look at 2026, how should we think about the returns for the legal channel? Is there still room to scale that profitably? Are you reaching more of a near steady state? David Burton: So I would say that the volume of legal accounts corresponds to our underwritten expectations. And as we deployed more capital and bought more portfolios and more volume, that inherently creates more volume to the legal channel. But because the expense of court cost is recognized upfront, it's just a little bit more pronounced when that volume enters the legal channel. But I would not characterize our effort in legal and the volume growth in legal as necessarily inconsistent with our underwritten expectations. It's not like we're having some type of material uncovered inventory that now has become incrementally profitable. Again, we are in line with the underwritten expectations. And because we just deployed more in '23 and '24 and '25, in particular, in U.S. distressed and really in the U.K. and to a lesser extent, in Canada, that just is -- as those accounts work through the voluntary collection process and we complete that, those that are eligible for legal and are profit generating after considering court costs, those just naturally flow to the legal channel at that time. Hopefully, that is helpful. Gowshihan Sriharan: One last question. Given the supply backdrop that you've outlined, are there any parts of the market where you have consciously decided to walk away from either for pricing reasons or the return thresholds are not attractive? David Burton: No. Operator: And we have reached the end of the question-and-answer session. Therefore, I will now turn the call back over to CEO, David Burton, for closing remarks. David Burton: Thank you. Looking forward, we're excited about the growth prospects for our business for the remainder of this year and beyond. We've built an outstanding platform over the last 23 years, and we're in a great position to capitalize on opportunities as the market continues to evolve. Thank you all for joining us today, and we look forward to providing another update on our first quarter earnings call. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.
Operator: Good afternoon, everyone, and thank you for standing by, and welcome to the Corvus Pharmaceuticals Fourth Quarter and Full Year 2025 Business Update and Financial Results Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Zack Kubow from Real Chemistry. Please go ahead, sir. Zack Kubow: Thank you, operator, and good afternoon, everyone. Thanks for joining us for the Corvus Pharmaceuticals Fourth Quarter and Full Year 2025 Business Update and Financial Results Conference Call. On the call to discuss the results and business updates are Richard Miller, Chief Executive Officer; Leiv Lea, Chief Financial Officer; Jeff Arcara, Chief Business Officer; and Ben Jones, Senior Vice President of Regulatory and Pharmaceutical Sciences. The executive team will open the call with some prepared remarks followed by a question-and-answer period. I would like to remind everyone that comments made by management today and answers to questions will include forward-looking statements. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by those statements, including the risks and uncertainties described in Corvus' annual report on Form 10-K for the year ended December 31, 2025, and other filings the company makes with the SEC from time to time. The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. With that, I'd like to turn the call over to Leiv. Leiv Lea: Thank you, Zack. I will begin with a brief overview of our fourth quarter and full year 2025 financials and then turn the call over to Richard for a business update. Research and development expenses in the fourth quarter of 2025 totaled $9.9 million compared to $6 million for the same period in 2024. R&D expenses for the full year 2025 totaled $33.7 million compared to $19.4 million for the full year 2024. For both the fourth quarter and full year 2025, the increases in R&D expenses were primarily due to higher clinical trial and manufacturing costs associated with the development of soquelitinib as well as an increase in personnel costs. Net loss for the fourth quarter 2025 was $12.3 million compared to a net loss of $12.1 million for the same period in 2024. Included in the net loss for the fourth quarter of 2025 and 2024 were noncash losses of $0.7 million and $2.2 million, respectively, from Corvus' equity method investment in Angel Pharmaceuticals and a noncash loss of $2.3 million in the fourth quarter of 2024 associated with the change in fair value of the company's warrant liability. Total stock compensation expense for the 3 months ended December 31, 2025, was $1.6 million compared to $0.8 million for the same period in 2024. As of December 31, 2025, Corvus had cash, cash equivalents and marketable securities totaling $56.8 million compared to $52 million at December 31, 2024. In January, we closed an upsized underwritten public offering that included a premier group of biotech investors and generated net proceeds of $189 million including the net proceeds from this financing, pro forma cash at December 31, '25, was approximately $246 million, extending our cash runway into the second quarter of 2028. I will now turn the call over to Richard, who will discuss our clinical progress and elaborate on our strategy and plans. Richard Miller: Thank you, Leiv, and good afternoon, everyone. Thank you for joining us today for our update call. In 2025, we made significant progress advancing the development of soquelitinib, our first-in-class selective ITK inhibitor that is designed to rebalance or reset the immune system. This was highlighted by the presentation of final results from our Phase I/Ib trial in peripheral T-cell lymphoma in an oral session at the ASH Annual Meeting and the recent announcement of data from cohort 4 of our Phase I atopic dermatitis trial, which showed that soquelitinib could become a leading therapy for atopic dermatitis and potentially other inflammatory diseases. Shortly after the data announcement, we completed a $200 million financing, reflecting high investor interest in the opportunity for soquelitinib and ITK inhibition given our strong data to date, its unique mechanism of action and its broad potential to help patients across multiple areas of medicine. As a result, we are entering 2026 in a position of strength with ongoing enrollment in our Phase III PTCL trial, our recently initiated Phase II atopic dermatitis trial and the opportunity to expand into mid-stage trials for other important inflammatory diseases such as hidradenitis suppurativa and asthma later this year. Based on our current plans and anticipated time lines, our cash runway extends beyond key data readouts for all of these programs. On today's call, I will recap the highlights from our cohort 4 data announcement, share the latest on our plans to present additional data from the trial at an upcoming medical meeting and provide an update on our Phase II trial. I will also review our pipeline expansion plans and key upcoming milestones. The results from cohort 4 and the full Phase I trial show that soquelitinib's emerging clinical profile appears to provide substantial advantages in the treatment landscape for atopic dermatitis. One, it is an oral medication. Two, it has a novel mechanism of action that combines tissue selective and target-specific precision with ability to affect multiple inflammatory signaling pathways. Three, it appears safe and effective in a broad range of patients, including those who have received prior systemic therapies; and four, it produces durable responses with no disease rebound. Based on our market research, this profile would be considered a significant advancement for patients with atopic dermatitis. So we are excited that soquelitinib data further elevates its profile and potential. It shows one of the strongest EASI 75 results at only 8 weeks of therapy and the durability of responses with no disease rebound may provide the opportunity for new approaches to therapy of immune diseases, including the potential for soquelitinib to be an intermittent therapy. Overall, if the current profile continues to be supported by larger clinical trials, we believe soquelitinib will be very well positioned to be among the leading options for the treatment of patients with moderate-to-severe atopic dermatitis. I will now review key highlights from our recent data announcement. First highlight, efficacy. For cohort 4, which was designed as a randomized placebo-controlled trial with drug given over an 8-week treatment period, the mean percent reduction in EASI was 72% versus 40% for placebo that was statistically significant at 0.035. 75% of patients, 9 of 12 achieved EASI 75 and 1 additional patient was in EASI 74. 25% of patients achieved EASI 90 and 33% achieved IGA 0/1. 11 of 12 patients achieved EASI 50. The only nonresponder was a patient who was refractory to previous therapy with both Dupixent and Rinvoq. Two of the EASI 90 patients were resistant or nonresponsive to prior systemic therapies. 20% of placebo patients achieved EASI 75 or 17% if you include 2 patients that missed the day 56 evaluation and on later evaluation, never reached EASI 75. In addition, 2 placebos required rescue medication due to disease flares versus none in the active group. The 2 placebo patients who were EASI 75 were both patients who had not received prior systemic therapies. None of 7 placebo patients who received prior systemic therapy achieved EASI 75, whereas 3 of 5 active patients who received prior systemic therapies achieved EASI 75. The cohort 4 results confirm our hypothesis from cohorts 1 through 3, which is that extending the treatment duration would deepen responses. The data also show that soquelitinib is superior to placebo in every efficacy endpoint evaluated. And when compared to other agents, we believe the results obtained so far for soquelitinib place it among the most active agents, oral or injectable approved or under development for atopic dermatitis. Second highlight, durability. Starting with cohort 3, we took a more systematic approach to measuring the remission duration with a longer blinded post-treatment follow-up period of 90 days compared to 30 days tracked for cohorts 1 and 2. The cohort 3 data show that responses observed at day 28, the last day of treatment were maintained or slightly improved out to 118 days or 90 days without therapy. This compares to other systemic therapies for atopic dermatitis, which all show a rapid rebound in disease that starts as soon as 1-week after stopping therapy. We see no rebound phenomenon with soquelitinib, both in cohorts 3 and 4. We believe that the induction of T regulatory cells by soquelitinib could be responsible for this durable suppression of inflammation and sustained disease remission. We have seen this in preclinical experiments and biomarker data shows an increase in circulating Tregs in Cohort 3 patients. The demonstration of circulating Tregs is quite remarkable as usually, these cells are very rarely found in the blood. It is likely that these cells are migrating to and concentrating in sites of disease as we have found in our animal models. Third highlight, broad applicability. 35% of all patients enrolled in the Phase I trial had received prior systemic therapies, including 50% of patients in cohort 4. Dupilumab was the most commonly used prior therapy followed by JAK inhibitors and some patients received multiple prior therapies. This includes patients who were resistant to their last systemic therapy. In other words, they were nonresponsive to their prior treatment. Typically, patients that are treatment-resistant or who have gone through multiple prior therapies are more challenging, and this was confirmed when looking at the placebo patients in the trial. The response curve data showed that placebo patients who received prior systemic therapies do worse than those who did not receive prior therapies, indicating that prior systemic therapy is an unfavorable characteristic. However, the response curves for patients receiving soquelitinib are very similar across these groups, indicating that soquelitinib is not affected by prior systemic therapy experience. Together with our baseline patient characteristics, this also indicates that the patient population treated on our protocol was more unfavorable than those reported in most atopic dermatitis clinical trials. As noted above, in patients who received prior systemic therapies, the EASI 75 was 0% for placebo 0 out of 7 versus 60%, 3 of 5 seen in patients who received soquelitinib. So in terms of patient indications, our conclusions are that soquelitinib is active in patients who have received prior systemic therapies with outcomes no different than naive patients despite these patients having more unfavorable disease. Responses were observed in patients who are refractory to their prior systemic therapy. This supports our hypothesis regarding the novel mechanism of action for soquelitinib and the lack of resistance due to prior therapy experience. Fourth highlight, safety. No new safety signals were seen in cohort 4 with a longer 8-week treatment duration. In cohort 4 and the full Phase I trial, reported adverse events are similar in both placebo and active groups. No significant lab abnormalities were observed. There were no hepatic abnormalities, no changes in liver function tests. Infections were similar in treated and placebos and were minor. I'd like to make some additional comments on infection. We have received questions from investors regarding the potential for EBV viral reactivation. These questions are based on very rare reports in the literature of EBV infection in babies born with germline mutations in ITK. In a neonate, the immune system is primitive as T and B cells have not yet formed. Immune system maturation occurs during development and exposure to antigens. A germline mutation in ITK in the primitive developing immune system is completely different than transiently blocking the kinase domain of ITK with a small molecule drug in an individual with a mature immune system. We have seen no serious infections of any kind in more than 150 patients treated with soquelitinib across our lymphoma, atopic dermatitis and ALPS trials to date. This involves over 14,000 patient days of treatment with some patients on therapy for more than 2 years. In PTCL, most patients harbor EBV and other viruses such as CMV. In our Phase I lymphoma study, we identified over 30 patients with EBV virus detectable at baseline, that is before therapy in their blood measured using a PCR technique that is they are viremic. None of these patients or any other patient had any evidence of EBV reactivation or related illness during the treatment, which, in some cases, lasted over 2 years. And recall, these patients are extremely immunocompromised. One other thing to note, ITK inhibition spares Th1 cells, also known as Th1 skewing. Th1 cells are the cells responsible for eliminating viruses. Now beyond clinical results, biomarkers have been identified that support the novel mechanism of action with ITK inhibition that leads to immune rebalancing. Some of these biomarkers represent new discoveries. Briefly, the data show a decrease in IL-4, IL-5 and IL-17 cytokines, a small reduction in TARC, a reduction in Th2 cells and an increase in Tregs. In ongoing work, we are also finding very significant and interesting changes in the JAK/STAT signaling pathways that will be reported on later. With the additional information that is emerging both from the clinic and our biomarker analysis such as induction of Tregs, we believe that soquelitinib's novel mechanism of action and safety will allow for its utility in diverse indications in immune inflammatory diseases and in cancers. Our soquelitinib abstract was accepted for oral presentation at the Society for Investigative Dermatology, or SID Annual Meeting, which takes place in mid-May. We plan to present the Phase I clinical data, expanding our safety and durability data. We will also focus on our biomarker results in this presentation, which we believe will provide novel ideas regarding control of immune diseases. Our late-breaker abstract was not selected for presentation at AAD, which typically favors later-stage trials. Angel Pharmaceuticals, our partner in China, is enrolling their Phase Ib/II trial in atopic dermatitis. This is a blinded placebo-controlled trial that is evaluating a 12-week treatment regimen in 48 patients with soquelitinib doses of 100 milligrams BID, 200 milligrams QD, 200 milligrams BID and 400 milligrams QD. The patient eligibility and endpoints are the same as was used by Corvus. Depending on the results from the Phase I portion, an additional 60 to 90 patients will be enrolled in the Phase II portion of the study. This trial is open at leading centers in China that are very experienced in performing these types of trials. The study is conducted in close collaboration with the Corvus team. Results from the initial cohorts are expected late this year. Now I would like to discuss our Phase II randomized placebo-controlled trial in atopic dermatitis. We announced today that the trial has been initiated. This trial is planned to enroll 200 patients with moderate to severe disease randomized into 1 of 4 cohorts with 50 patients in each cohort. We will allow patients who have received prior systemic therapies. Doses of 200 milligrams QD, 200 milligrams BID and 400 milligrams QD will be examined along with placebo. The treatment duration is 12 weeks with an off-treatment follow-up period of 90 days. The primary end point is median percent reduction in EASI at 12 weeks, a typical endpoint for Phase II studies in atopic dermatitis. Other endpoints include EASI 75, EASI 90, IGA, PP-NRS and others. This will be an international study. We anticipate the data from this trial will be available in mid-2027. Outside of atopic dermatitis, we continue to enroll patients in our Phase III registration PTCL trial with an interim analysis expected later this year. We recently conducted a planned meeting of our outside independent Data Safety Monitoring Board. No safety signals were observed, and the study continues as planned. In December, at the American Society of Hematology or ASH Annual Meeting, we presented the final data from our Phase I/Ib clinical trial evaluating soquelitinib in patients with T-cell lymphoma. The data are supportive of the ongoing Phase III program showing that patients in the 200-milligram BID cohort, the same dose being studied in Phase III had a median progression-free survival of 6.2 months and a median overall survival of 28 months comparing favorably -- very favorably to results with other therapies. For example, median survivals with chemotherapy are less than 1 year and PFSs are less than 3.5 months. The data presented at ASH also shows soquelitinib's immunobiological effects and its mechanism of action of affecting T cell differentiation via ITK inhibition. These data support its potential in atopic dermatitis and a much broader range of immune and inflammatory diseases. We also continue to collect very exciting data from our ALPS or autoimmune lymphoproliferative syndrome clinical trial with 3 patients now on therapy for close to a year. We continue to collaborate with the team at NIAID and our current plan is to submit data for a potential presentation on the study at the ASH meeting in December. In terms of upcoming clinical trials, we plan to initiate a Phase II trial of soquelitinib for hidradenitis suppurativa and asthma later this year. There is strong scientific rationale for evaluating soquelitinib in HS, which is it is an IL-17-driven disease. In both in vitro and in vivo animal models, soquelitinib is a potent inhibitor of Th17 cells and reduces IL-17 production. Our trial design for HS is further along. At a high level, we are planning to enroll about 60 total patients with moderate to severe HS into 3 arms: 200-milligram BID, 400-milligram QD and placebo. The treatment period will be 12 weeks and the primary endpoints are safety and efficacy measured by HiSCR 50, HiSCR 75. The asthma study design is emerging and will likely involve about 150 patients treated for 3 months. In closing, our confidence continues to grow in the long-term potential for soquelitinib in atopic dermatitis, peripheral T-cell lymphoma and a broad range of additional inflammatory diseases. We are only beginning to unlock the full potential of ITK inhibition and immunomodulation, which could lead to new and better therapies for inflammatory, autoimmune and fibrotic diseases and cancers. We are building strong momentum with soquelitinib and our ITK platform, and we look forward to updating you on our progress throughout the year. I will now turn the call over to the operator for questions-and-answer period. Operator? Operator: [Operator Instructions] And your first question comes from Roger Song from Jefferies. Jiale Song: Congrats for all the progress you have made. Richard, maybe just one question related to the read-through from the data readout you will have before the Phase II, the global atopic dermatitis data mid next year. So you will have a PTCL potentially data and then also the China 12-week study data. So how should we think about the read-through from those data readouts to the Phase II AD maybe from the efficacy and then the safety perspective, particularly on the high-dose 400-milligram QD? Richard Miller: Okay. So we are anticipating that Angel Pharmaceuticals, who is conducting a placebo randomized trial and looking at different doses, will have some data from their initial couple of cohorts later this year. That would be the first data readout. That's going to be looking at 100 milligrams BID and 200 milligrams QD. But recall, they're going for 12 weeks. They're treating for 12 weeks. We've only gone up to 8 weeks. So that will be very important information for us. Then that data is unblinded. They look at that. We can report that. And then the next part of the study will look at 200 milligrams BID and 400 QD. That will be probably middle of 2027. Okay? So we'll get some data on more patients and things. Now in total, after that, the Angel goes on and does 40 -- what, 50, 60 or 60 to 90 patients in a Phase II study rolls right into that. In total, you're looking at around 140 patients or so. And that -- yes, 130, 140 patients, and that's totally completed by mid-2027 or early '27. So we'll have some data from them late this year, more data in first half of 2027. The PTCL trial will have an interim formal review in later this year. That has a futility analysis as part of it, so -- and safety analysis. And -- but the complete trial results are expected in late '27. Okay. Now what I talked about on the call was we do have also periodic safety -- outside independent safety reviews on the Phase III PTCL trial. We had one of those very recently and everything looked good, as I mentioned. Operator: And your next question comes from Li Watsek from Cantor. Li Wang Watsek: Two from us. Maybe just first on the data that you're going to present at the SID meeting in May. Rich, you talked about biomarker and durability data before. Can you just maybe set expectations for us? Richard Miller: Yes. Well, I can set expectations. The durability continues to look great. And in terms of biomarkers, the things I've mentioned previously, but we have discovered some new biomarkers, which is going to be probably the main part of the SID presentation, fascinating work around the T regulatory cells and some of the JAK-STAT signaling. And the key message there is that you're affecting different multiple cytokine pathways. Even though you're targeting a very specific enzyme restricted to T cells that can affect several different cytokines, all of which are important in inflammatory diseases like IL-5 and 4 and 17, et cetera. So plus we'll update the clinical data with the durability and a few other things. Li Wang Watsek: And then sorry, my second question is on the Phase II trial in HS. Just wondering what the benchmark that you're looking at, especially relative to the approved agents like IL-17 in the space, do you think in terms of efficacy, you have to match the biologics? Richard Miller: Well, first of all, we have to find the optimum dose, which we're going to look at a couple of different doses. But of course, the AD study informs us as well as the T-cell lymphoma study informs us on the HS trial. I would expect efficacy as good or better than what's out there, which is what the corrected HiSCR scores are, what, 25% or so. Operator: And your next question comes from Graig Suvannavejh from Mizuho. Graig Suvannavejh: Richard, congrats on the great progress we're seeing with soquelitinib across multiple indications. I just wanted to maybe touch upon a couple of things. First, just on your next data presentations, you did mention that maybe you did apply for late-breaker abstract to AAD. I think you gave us a reason why perhaps your abstract was not accepted, although I do think that Kymera does have a late breaker. I don't know their data set very well as I don't cover it, and so it's not at the top of -- or the tip of my tongue. But any thoughts on whether it is perhaps they had a bigger database because I do think that the just curious to get any thoughts there. Richard Miller: Well, Graig, what gets accepted abstracts that get accepted or even publications that get accepted. This is a capricious process, and there are a lot of factors. I don't know why they accept some and not others. I personally am shocked that Kymera with no placebo and an interesting study for sure. But I don't have an explanation for it. Graig Suvannavejh: There may not be a good one. I just thought I'd speculate... Richard Miller: I wouldn't get too worried about that. I mean I've had some really, really good papers get accepted at journals and be rejected at others. At the end of the day, it's -- 1 or 2 guys read some abstracts. I used to do it myself. You get a few hundred to review and you decide what looks good, whatever. So I don't know if I focus too much on any reasons on that. We're not very active in AAD. We've never done anything there. We don't have booths. We don't subscribe to their journals. I think that's another factor -- could be another factor, not sure. Anyway, SID is a good meeting. If anything, scientifically more rigorous, it is the meeting for early stage and translational biology and research. So we ended up, I think, in a very good place. Graig Suvannavejh: Okay. Great. If I could ask just on the Phase II trial in AD that you did start and congratulations there. I think you mentioned that data would be available in middle of 2027 and just trying to get a sense of in between now and mid-2027, will there be an opportunity for the company to provide some kind of update? Just trying to get a sense of news flow from that trial from now until mid-2027? Richard Miller: So that Phase II trial is placebo-controlled, randomized and blinded. No, we will not see that data until it's completed. And as I mentioned, the Angel trial is underway. That's also blinded and placebo controlled, but they can look at the data after each cohort, similar to what we did in our Phase I. So there will be a news flow from that in terms of the AD stuff. Graig Suvannavejh: Okay. And last question, if I could, just on hidradenitis suppurativa, just given coverage of some other companies that I have, I'm under the view that there are not very good preclinical models of HS and just wondering then how do you handicap success in HS when perhaps there are not very well established or good predictive models in HS? Richard Miller: You are correct, there are not good animal models for HS, but it's pretty clear in human studies that IL-17 is very important. Th17 and IL-17 are very important. And in fact, IL-17s are approved to treat it. So I think there's proof of principle already that if you can block IL-17, it should work. And we block IL-17 among the many other cytokines that we block. Hidradenitis suppurativa has a lot of different inflammatory cells, T cells, neutrophils, B cells, for example. And again, I think the advantage of soquelitinib is that since you're blocking multiple cytokine pathways, you actually affect many different lineages. And I think that's going to be important because when you look at the sites of disease, even in atopic dermatitis, you just don't see Th2 cells, you see a lot of different cells. So I think that, that's one -- I mean, I would say the best explanation for that is, hey, anti-IL-17 works in that disease. And we block it even better. Operator: And your next question comes from Jeff Jones from Oppenheimer. Jeffrey Jones: Since I think we've beaten HS to death, maybe talk about AD and how you guys are -- this is a different disease and indication than the dermatological ones. How are you thinking about dosing and your strategy there? Richard Miller: I think you mean asthma probably. Jeffrey Jones: Asthma, I'm sorry. Richard Miller: Yes, you mentioned AD. So well, as you know, atopic dermatitis and asthma frequently go together and drugs that work in one often work in the other. They seem to be part of the atopic syndromes. We have several -- now that's one where we do have several animal models and our drug works really well in those asthma models, 4 or 5 different models work. Soquelitinib works beautifully. In terms of dosing, I think it's the same dosing that we've talked about. The AD and PTCL studies inform the asthma. The asthma study is pretty much the same dosing regimens. There'll be no reason to change that. Jeffrey Jones: Okay. And then one... Richard Miller: Sorry, just to elaborate, remember, we have the best biomarker in the world, which is that -- and we've been doing this for years. You can give the drug, you take out the T cells from the patient, either in the blood or the sites of disease and you can measure quite accurately the drug sitting in the target. It is a clean quantitative assay. It blocks the function of that enzyme. That's a biomarker. And we know that when you give a 200-milligram dose, you pretty much completely block that. Sorry, Jeff. Jeffrey Jones: I appreciate that, Richard. And then on the ALPS trial, which you're doing with the NIH, can you maybe comment on how that -- the outcome of that might impact how you think about other indications or inform what you guys are doing? Richard Miller: So ALPS is a disease where you have such an overreactive autoimmune response to so many different things. They have antibodies to red cells and white cells and platelets and other things. And [indiscernible] and lymphocyte proliferation, abnormal lymphocytes. And we have seen really interesting results in our patients. So I think the -- that what we're learning there is similar to what we learned in lymphoma is that the drug is very active, it's safe and it's interfering with the signaling pathways that we would predict. Now I'm not sure I can say, okay, if it works in ALPS, it's going to work in lupus, even though the ALPS mouse equivalent is a model for SLE. But I don't think we're thinking of it that way. We're thinking of it as an indicator that we're affecting aberrant auto-inflammatory responses in a disease where there's no good treatments really. So it's kind of a model, if you will, but it's a human model. It is an orphan disease. There's no good therapies. Could you get approval for ALPS? Yes, you could. It's more of a childhood disease. We've been treating adults. We do intend to increase the number of sites, and we do intend to move down in age into children over the next year or so. We've been talking about that with NIH. So it's another indication, and it happens to be in autoimmune disease. Operator: And your next question comes from Aydin Huseynov from Ladenburg. Aydin Huseynov: Richard, congratulations for the tremendous progress so far this quarter in your pipeline in the drug soquelitinib. I got a couple of questions. So first, I wanted to ask about the near-term focus near-term Phase III readout interim analysis from the trial in PTCL. I was curious to hear any comments you may provide regarding the enrollment process so far? What types of PTCL you're actually enrolling? Is it NIS? Is it ALCL, follicular cutaneous? And what the physicians are using a standard of care prefer belinostat and pralatrexate? Just curious to hear overall dynamic of the trial. Richard Miller: Okay. So let's take that question first. So the trial is enrolling and it's going perfectly according to plan. The patients get randomized into either soquelitinib monotherapy 200 milligrams BID versus the investigator's choice of either belinostat or pralatrexate. Now recall, belinostat and pralatrexate are received conditional approval, accelerated approval maybe 15 years ago or so based on response rate in patients with relapsed PTCL. So in our discussions with FDA, that was the logical control arm. So soquelitinib versus those agents. Now it's not a blinded trial because you can't -- well, first of all, we don't usually do that in cancer, but you can't blind -- soquelitinib is oral, right, as we know. Belinostat and pralatrexate are given intravenously and have associated usual toxicities of chemotherapy, mucositis, blood count problems, things like that. So, so far, the trial is enrolling. We had our first safety monitoring board, and there were no new safety or different safety signals with regard to soquelitinib. Obviously, it's much safer than chemotherapy. So we win on every count on that. Now later -- now the types of patients that are enrolled are as stated in the protocol, are PTCL NOS, that's the most common one. We do allow anaplastic lymphomas that are ALK positive. The other big category would be what's called T follicular helper, which used to be what's called angioimmunoblastic lymphoma. So not CTCL. CTCL really is a little bit more of a chronic disease and is treated differently. So that's the reason not to include that in this trial. But it's pretty typical. These are the most common peripheral T-cell lymphomas. Now peripheral T-cell lymphoma, again, just to remind people, there is no fully approved treatment for relapsed disease. It has a median PFS and belinostat median PFS is 1.7 months. Pralatrexate is 3 months. And OSs are under a year. So those are really bad -- these are really bad disease. These are sick patients. I can tell you that we are very, very happy with the way the trial is going. And I think it could represent a very important breakthrough in hematology if we finish the trial and get the results that we're expecting. Does that answer your question? Aydin Huseynov: Appreciate that. I got another one for asthma, if you don't mind. Richard Miller: Sure. Aydin Huseynov: So yes, so regarding the upcoming trial design in asthma, do you plan to have a cohort with patients who may have both asthma and atopic dermatitis? And in your opinion, is there any accelerated path with small pivotal trial with patients with 2 diseases simultaneously. So essentially, that would allow soquelitinib to cure 2 diseases at the same time. And as we know, Dupixent is the only drug that treats both diseases, but maybe you can have it in one shot. Richard Miller: Well, that would be great. But I don't know -- so first of all, trying to get 2 indications on -- that's really very difficult. And you can get anecdotal information. I know some people report that. And we've had some anecdotal information about that. But the problem is you don't know how many patients are going to have both diseases concomitantly, how severe it is, what measurements you're going to use and how you power the study statistically for each disease. So it's really hard to do that. Anecdotally, it's something you would look at. You have to do a separate trial. And even Dupixent was separate trials for asthma and eosinophilic esophagitis and COPD and all those things. So it requires a separate trial. Now one thing we are considering is we're really very interested in, I would say, 2 things. One is this durability of response is quite interesting. And we think we have explanation for it. I think we have a very good immunologic explanation for it. It's very elegant and compatible with what's known about the immune responses and so forth. We also are very struck by the activity we see in patients who failed previous therapies. And I talked about that in my discussion here. So we are allowing and I don't know if I mentioned it, we are allowing patients who have failed prior therapies in our Phase II atopic dermatitis study. Now some people, many investors have been asking me, why don't you do a separate study in the resistant patients with atopic dermatitis. And that is something we are thinking about. That could be a smaller trial because the efficacy and the placebo do so -- the efficacy and placebo -- sorry, placebos do so poorly, you would presumably show a bigger difference with a fewer number of patients. But we are including both naive and experienced patients in our Phase II. I would do that in Phase III as well, which would enable you to get the total population of patients. But there's no doubt that with more and more therapies coming out in atopic dermatitis, the proportion of patients that are not treatment naive, that is that have failed the prior therapies, that pool of patients is increasing. And the pool of patients that is naive is going to decrease proportionately. Okay? So that the resistant patient becomes, I think, very attractive. So I would say the 2 exciting -- I mean, we have a lot of things that we're excited about with soquelitinib. It's oral and it's safe and all that other stuff. But the durability is, I think, a game changer, changes how you approach the disease. And I think the fact that you can think about frontline therapy or relapsed disease or multiple therapies, intermittent therapy. That's our -- it's the way we think about it. Aydin Huseynov: Congrats for the results. Operator: And your last question comes from Sean Lee from H.C. Wainwright. Xun Lee: To touch upon the durability a bit more. I think in the previous Phase I study, you guys followed the patients for up to 3 months. How long are you following these patients in Phase II? And is the study powering any way to really make a differentiation on the durability of this response? Richard Miller: So the Phase II trial has built in continued blinding of the trial out to 90 days beyond the therapy. So it's 12 weeks of therapy plus the 90 follow-up. That's baked into the protocol. However, the endpoint is the EASI score compared to placebo at 12 weeks, and that's the typical endpoint. To do something different would be sort of atypical. Now I think that in the future, this issue of how durable the responses are is something that you might study separately. But I think it stands to reason. I mean, we'll talk more about this, but we have over 90% of our patients don't relapse and follow-up now out to 3 months beyond the last dose. Over 90% of patients, disease just doesn't come back. Now you look at other agents, dupi, STAT6, whatever the IL-13s, IL-2s, whatever, these diseases come back pretty quickly. In my view, that's not a very good therapy. Best therapy is a shorter treatment duration. Disease goes away, you don't need to take your drug again for a long time, if at all, hopefully, but that's asking a lot. So the durability is important because it's important to understand why it's happening, does it pertain to other inflammatory diseases? In other words, how broad is that going to be? Is that unique to atopic dermatitis? Or is that something that you could think about for other autoimmune diseases? And that's why we're excited about that. But anyway, the answer to your question is in the Phase II, it is part of the formal follow-up is blinded, but it's not part of the statistical endpoint. The statistical endpoint is the typical one, which is EASI score at 12 weeks. Xun Lee: Okay. Got it. For the -- touching on the asthma study for our second question. As the upcoming study, will you be focusing on eosinophilic asthma with the Th2 high? Or are you targeting the more difficult to treat Th17 driven population as well? Richard Miller: We're probably going to -- so those are some of the things we're discussing now. We're leaning to taking everybody. Xun Lee: I see. Richard Miller: I'm actually -- Sean, I'm glad you brought that up because there's something -- some people say, well, we only treat Th2 disease. I don't know where that comes from. Some people said, "Oh, you're only selecting patients with atopic dermatitis that are Th2. First of all, I don't even know how to do that. But we're not doing that. Our atopic dermatitis patients are run-of-the-mill patients from U.S. centers. They have to have the necessary eligibility criteria, but we didn't enrich for any patient population. Most of our -- by the way, AD patients do not have eosinophilia. Their eosinophil counts are normal or little. So I don't think we're going to restrict it to the high EO asthma. Although I have to say the asthma study protocol has not yet been finalized, and that's still under discussion. Alright. Okay. Well, first of all, thank you, everyone, for participating in our call. We look forward to updating you throughout the rest of the year and beyond. Appreciate everybody's interest. Thank you. Operator: Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.
Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Fourth Quarter and Fiscal Year of 2025 Earnings Conference Call. Please note that the management's prepared remarks and the subsequent Q&A session will primarily be conducted in Chinese, and the corresponding simultaneous or consecutive interpretation can be accessed on the English line. As a reminder, all translations are for convenient purposes only. In case of any discrepancy, the management's statements in the original language will prevail. To listen to the original remarks by the management, please join the Chinese line. Additionally, both the Chinese and English lines are open for questions. And today's call is being recorded. Now I will turn the call over to Anne Ji, EHang's Senior Director of Investor Relations. Ms. Anne, please proceed. Anne Ji: [Interpreted] Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the fourth quarter and the fiscal year of 2025. The earnings release is available on the company's IR website. Please note the conference call is being recorded, and the audio replay will be posted on the company's IR website. On the call today, we have Mr. Huazhi Hu, our Founder, Chairman and Chief Executive Officer; Mr. Shuai Feng, Chief Technology Officer; Mr. Zhao Wang, Chief Operating Officer; and Mr. Conor Yang, Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Also, please note that all numbers presented are in RMB and are for the fourth quarter and the fiscal year of 2025, unless stated otherwise. With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu. Huazhi Hu: [Interpreted] Hello, everyone, and thank you for joining our call today. 2025 was a pivotal year for EHang as we strengthened our business foundation and made a meaningful progress towards commercialization. In Q4, we delivered a strong set of results. Quarterly eVTOL sales volume reached 100 units for the first time. Revenues grew significantly both year-over-year and sequentially, and we achieved our first ever quarterly GAAP profitability. For the full year, we delivered 221 units of eVTOL aircraft, setting a new record and successfully meeting our annual revenue guidance. We also achieved non-GAAP profitability for the second consecutive year. These results reflect years of sustained investment and disciplined execution across product innovation, regulatory certification, industrial ecosystem development and market expansion, laying a solid foundation for our commercialization progress in 2026. I am pleased to announce that the commercial operation of our flagship product, the EH216-S is entering the final count down. Following comprehensive preparation across our commercial operation system, we're about to officially open our commercial flight services to the public. After nearly a year of internal trial operations, we have established standardized procedures across the entire operational chain from route planning and fleet management to boarding services. At the same time, we have optimized our maintenance systems and safety assurance mechanisms while actively supporting the Civil Aviation Administration of China in advancing the training and certification program for our ground operating crew. Our 2 OC certified operators, EHang General Aviation and Heyi Aviation both plan to begin offering ticketed EH216-S flight services to the public this month and their operational sites in EHang Future City, our new headquarters in Guangzhou and Luogang Park in Hefei. This launch is expected to mark the world's first commercial service of pilotless human-carrying eVTOL aircraft. It also represents the completion of EHang's full life cycle ecosystem from technology development and airworthiness certification to manufacturing and commercial operations. Going forward, we are evolving from being an aircraft manufacturing to a comprehensive provider of integrated advanced air mobility solutions. 2026 marks the first year of China's 15th 5-year plan period. As the national strategic emerging pillar industry, the low altitude economy is embracing unprecedented strategic development opportunities. Supportive policy direction is now shifting from encouraging exploration to systematic advancement with the continued progress in aerospace management reform, airworthiness notification frameworks and infrastructure development. Together, these initiatives are creating a favorable policy environment for industry development. With that in mind, EHang's core strategy for this year are to move forward with a disciplined execution, strengthening our foundation while steadily advancing commercialization, operational ecosystem development and global expansion. First, it has been nearly a year since EHang obtained OC for EH216-S. Over the past year, we have been working intensively to expand our customer and partner base. At the same time, we built the operational systems required to support the commercial flights. This year, our top priority is to launch routine and scaled commercial operations of human-carrying eVTOL aircraft to the public, delivering reliable flight services and continuously improving the flight experience. Our goal is to transform scenes in science fiction into everyday reality for people. This is a milestone many people have been waiting for and so have we. But aviation has always been an industry that moves forward with patience and responsibility, especially when safety and human lives are involved. Second, we'll continue advancing our global expansion strategy. Taking the Thailand AAM Sandbox initiative as an example, we are steadily moving towards a commercial flight operations and established benchmark projects. I'm also pleased to share good news that EHang is expected to obtain the first commercial operation license for pilotless passenger eVTOL aircraft from the Civil Aviation Authority of Thailand, paving the way for regular urban air mobility services in the country. Third, we'll accelerate the commercialization readiness of the VT35. In 2026, our focus will be on advancing its time certification and conducting extensive flight test in more diverse and complex environments to fully validate its passenger flight capabilities. At the same time, we'll continue improving the performance of the EH216 series and expanding the deployment of nonpassenger products and applications, including firefighting and logistics, further broadening our market reach. Fourth, we'll further strengthen our end-to-end industrial chain integration capabilities by coordinating our R&D, manufacturing, supply chain and quality management systems. We aim to improve operational efficiency across the entire value chain, reinforce our long-term competitive advantages and contribute to the establishment of industry standards. EHang remains committed to the principles of safety first innovation-driven growth and collaborative development. We will continue advancing our technology and product innovation, expanding multi-scenario commercial operations and establishing AAM operational models in more regions around the world. At the same time, we're building a comprehensive business model combining technology, R&D, intelligent manufacturing, commercial operation services, infrastructure collaboration and industry education and integration. We believe the low altitude economy industry will evolve from demonstration programs to scale commercial operations and then to public accessible services. It will become a vital engine for activating 3 dimensional aerospace resources and cultivating new forms of consumption, truly transforming the industrial values into economic and social benefits. At this important starting point of a pivotal year, our newly appointed Chief Technology Officer, Feng Shuai, is also joining today's earnings call. Under my leadership, he will oversee our technology R&D, supply chain management, manufacturing and quality system development, driving a more integrated end-to-end management approach from technology innovation to product delivery. By strengthening coordination and the integration across the entire industry chain, we believe our innovation capability, product competitiveness and overall execution will continue to improve. With that, I would like to hand the call over to Feng Shuai. Thank you. Shuai Feng: [Interpreted] Thank you, Mr. Hu. Hello, everyone. I'm Feng Shuai, CTO of EHang. It is a great honor to join today's earnings call for the first time. I am pleased to share our progress in 4 key areas during the fourth quarter. R&D, production and manufacturing, quality management and supply chain assurance, which we refer to as the RPQS Center. We'll also briefly outline our priorities for 2026. The RPQS Center is the core engine of our technology and industrial execution. We focus on technology innovation as the foundation, production capacity as the driver, quality control as the bottom line and supply chain as the cornerstone. Together, these capabilities support the development, commercialization and scale delivery of our products. Let me walk through the key highlights in each area. Starting with R&D. The fourth quarter of 2025 marked a major breakthroughs across our core product. Our flagship passenger carrying aircraft, VT35 completed multiple critical tests, including multicopter protected transition flights and locked-to-prop fixed wing flights. The aircraft also successfully completed its first public demonstration flight in Hefei after its grand debut in October. During the quarter, we held the first type certification team meeting with the CAAC, marking a key step forward in the airworthiness certification progress. We are currently conducting flight envelope testing and aim to obtain the type certification in China within the next 2 years. For the nonpassenger business, we are also developing and deploying product and system lines under multiple application scenarios. Our new GD4.0 formation drones set a Guinness World Record with 22,580 units flying simultaneously at the China Spring Festival Gala, significantly announcing our brand visibility and generating strong demand for both drone products and performance services. In the firefighting aircraft program, we are upgrading the current models while advancing the next-generation R&D to support emergency response scenarios. For logistics, we are accelerating the development and first flight of the VT series lift and cruise cargo aircraft, developing longer endurance aerial logistics applications. At the same time, our proprietary command and control system continues to evolve as a city-level digital infrastructure platform for a low attitude economy is now being trial operations in Hefei, providing solid tech support for future skilled commercial operations and air traffic management. On manufacturing, we continue to expand our production capability and enhance the smart manufacturing capabilities during the fourth quarter. The Phase II expansion of our Yunfu production facility was successfully completed, bring our total plan annual capacity to 1,000 units of the eVTOL aircraft and components. The automated production lines have entered a trial product to stage and our smart manufacturing systems will further improve production efficiency and supply chain management. Meanwhile, additional facilities in Hefei, Weihai and Beijing are progressing as planned. Our nationwide manufacturing footprint is steadily taking shape. We follow a manufacturing to order approach, ensuring stable production planning while preparing large-scale deliveries in the future. On quality control, we maintain strict end-to-end quality control across the entire product life cycle. Throughout 2025, our quality management system delivered strong performance with steady improvements across all key indicators. The post-certification airworthiness review for our [ PC ] achieved the third zero defect pass and the EN9100 audit continues to pass. On supply chain, during the fourth quarter, we further expanded our supplier network and strengthened our supply chain resilience. Our core supplier system remained stable with a 100% on-time delivery rate for key components, fully supporting our production and deliveries. Going forward, we will continue our strategy of maintaining strong partnerships while introducing additional high-quality suppliers. This approach will strengthen our stable and scalable supply chain, providing support for future capacity expansion and new model development. The low attitude economy represents a new frontier for technological industrial innovation, strong R&D and smarter manufacturing capabilities are the foundation of our long-term competitiveness. As CTO, I'll continue leading the RPQS team to drive technology innovation, advance product development and certification, expand manufacturing capacity and smart production capabilities, maintain strict quality standards and strengthen supply chain resilience. Our goal is to efficiently translate technological innovation into real commercial deployment and provide a solid technical and industrial support for the company's long-term growth. With that, I'd like to turn the call over to our COO, Mr. Wang Zhao, for our sales and operations update in more detail. Thank you. Zhao Wang: [Interpreted] Thank you, Mr. Hu and Mr. Feng. In 2025, we advanced our business across 3 key priorities: safety, operations and commercialization. For the full year, we generated RMB 509 million in revenues and delivered 221 units of eVTOL aircraft, including 215 units of EH216 series and 6 units of VT35 series. Our Q4 performance reached a new high. We delivered 95 units of EH216 series and 5 units of VT35 series, generating RMB 240 million in revenues. In China, we continue to deepen our presence in key cities and build flagship partnerships. In Hefei, our collaboration with the local government expanded from a single product to a full product portfolio. The corporation now covers multiple applications, including the EH216 series human-carrying and firefighting versions, the 5 VT35 the GD4.0 formation drone. We also continue to strengthen our partnership with Anshun in Guizhou Province and Guizhou Tourism Group. In Q4, 30 units of EH216-S were delivered to the local market, bringing total deliveries to 50 units to this customer, supporting the development of a local low attitude economy applications. Building operational capability has been a major strategic focus throughout the year after EHang General Aviation and Heyi Aviation obtained their operator certificate in March 2025, we began to conduct extensive internal testing and operational optimization across the entire service process, from ticket booking and on-site verification to boarding and flight operations to ensure a seamless user experience. At the same time, we have established a comprehensive set of standard operating procedures covering battery charging, maintenance and fault troubleshooting to ensure the continued airworthiness and operational stability of the fleet. Based on the safety and operational experience we have accumulated, we plan to officially launch commercial operations with the EH216-S in this month. EHang General Aviation and Heyi Aviation will begin selling flight tickets to the public offering EH216-S pilotless aerial sightseeing our headquarters in Guangzhou and Luogang Park in Hefei. The public will be able to book flights through the EHang Trip and the Heyi Aviation mini programs with an early bird discount price of RMB 299 per person. This will be the world's first ticketed commercial service for pilotless human-carrying eVTOL in the urban air mobility industry, transforming the low altitude economy from a concept into a reality that is accessible to the general public. Over the past year, we have carefully refined every aspect of the operation. Our approach has always been safety first, experience-focused and sustainability driven. Delivering a high-quality flight experience for our passengers in the initial phase is crucial to building public trust and supporting long-term market adoption. Looking ahead, we will leverage the experience from our OC certification and operations to develop a comprehensive operational solution covering [indiscernible], planning, routes design, ground crew team training and operational system set up. We plan to replicate this model across more locations in China and overseas to support our customers and partners in launching commercial operations. It is worth noting that we are building a core note for our operational capabilities, a professional talent system. We're actively working with the CAAC on the trial project for the administration of licenses for the ground operating crew of large civil unmanned aerial vehicles. We have completed multiple rounds of validation and refinement of training courses. Recently, the CAAC has expanded the number of special approval license to ground operating crew for us, providing additional talent support for our upcoming commercial operations. Beyond meeting immediate operational needs, this initiative is helping establish a long-term industry talent training system. Together with the regulator, we are converting our front-line operational experience into standardized training procedures. This helps establish professional standards for a new generation of aviation talent and strengthens the safety foundation of the industry. Over time, this training framework will enable us to support partners and export our operational capabilities as commercial operation expands. On the international front, the Thailand AAM Sandbox program remains our key focus. Since its launch in October last year, we have completed a series of verification flights and ongoing trial operations. We are now working closely with the Civil Aviation Authority of Thailand to obtain the first commercial operation license under the Sandbox initiative. If approved, this could become the first overseas commercial operation of a pilotless human-carrying eVTOL. The initial Sandbox areas are planned near the IMPACT Challenger International Convention Center in Bangkok, which will also host the ICAO Second Advanced Air Mobility Symposium or AAM 2026. The CAAT and local partners have set a clear goal of operating up to 100 eVTOL aircraft across 20 Sandbox areas by the end of 2026. Our plan is to establish talent as a model for overseas operations and gradually replicate this model in South East Asia and other [ belt and road ] market. Overall, in 2025, we maintained a disciplined approach to growth, focusing on strengthening our product, manufacturing and operational systems under a strict framework of safety and regulatory compliance. We believe that building these foundational capabilities is essential to support sustainable growth and scalable international expansion in the years ahead. At the same time, the low altitude economy industry is entering an important policy window. China's 15th 5-year plan has elevated the low altitude economy to a level of strategic emerging pillar industry. This signals the transition from early demonstration programs to a new phase of national level industry development. The low altitude economy has also been formally incorporated to the newly amended civil aviation law of China, which took effect in 2026. Looking ahead to 2026, we believe the company is entering a new stage of development. Over the past several years, we have been systematically building the key capabilities required for the urban air mobility industry, including aircraft R&D, airworthiness certifications, smart manufacturing and commercial operation readiness. As these foundational capabilities continue to mature and integrate, we see 3 important shifts in our business model. First, our revenue streams will gradually become more diversified. Applications beyond a passenger transportation, including logistics, aerial firefighting solutions and commanding control systems are progressing steadily and could become additional growth drivers as the market evolves. Second, we're evolving from an aircraft provider to a one-stop low attitude operation solution provider, leveraging the operational experience of the EHang General Aviation and Heyi Aviation, along with our standardized operating systems, and we will offer integrated solutions to customers. These include aircraft deliveries, [ vertical ] construction, route planning, team build up and training and operational guidance. Third, we're establishing a clear pathway for overseas expansion that combines regulatory Sandbox programs, partnerships with local operators and systematic deployment of our technology and operational capabilities. Thailand is the first to market where this model is taking shape, and we expect to gradually expand to other regions, including Southeast Asia, Central Asia and the Middle East as global regulatory framework continue to evolve. Overall, we remain committed to a strategy of safety first and disciplined execution. For 2026, we are targeting RMB 600 million of annual revenues while continuing to scale the business at a more steady pace. As the industry is still in its early stages, we'll continue to work closely with regulators, partners and local governments to help move the low altitude economy from demonstration programs to a broader commercial adoption, unlocking the long-term potential of urban air mobility as the new form of transportation. Now I'll turn it over to our CFO, Conor, to walk us through the financial results. Chia-Hung Yang: [Interpreted] Hello, everyone. Before I go into the details, please note that all numbers presented are in RMB unless otherwise stated. A detailed analysis is available in our earnings press release on the IR site. Now I will present some key financial data. In Q4 2025, the revenues were RMB 243.8 million, up 48.4% year-over-year and 163.6% sequentially. The quarterly increase was primarily driven by higher sales volume of our products, including 95 units of the EH216 series and 5 units of VT35 delivered this quarter. For the full year, the total eVTOL deliveries reached 221 units and revenues totaled RMB 509.5 million, representing 11.7% increase year-over-year, surpassing our annual guidance. This growth reflects the sustained market demand for our products as well as our effective execution and delivery management, customer support and commercial operation readiness. Gross margin in Q4 was 62.1%, improving from 60.7% in Q4 of 2024 and 60.8% in Q3 of 2025. For the full year of 2025, gross margin was 62%, improving from 61.4% in 2024. As production scale expanded, overall cost efficiency continued to improve. Overall, the company maintained a gross margin above 60%, reflecting our strong product competitiveness, scaling production capability and display cost management in the eVTOL sector. Turning to operating expenses. In Q4, adjusted operating expenses, defined as operating expenses excluding share-based compensation, were RMB 99.3 million, representing a 26% year-over-year increase from RMB 78.8 million in Q4 2024 and an 11.4% increase from RMB 89.1 million in Q3 2025. For 2025, adjusted operating expenses were RMB 348.9 million, representing a 20% increase from [ RMB 290.1 million ] in 2024. The increase in operating expenses was primarily driven by the continued R&D innovation, expansion of our product sales and the company's commercialization efforts. As we scale our business, we have strategically expanded our sales network, strengthen our operations team and added a key R&D talent, while maintaining ongoing investments in the development and iteration of new eVTOL models like VT35 and EH216-F series and et cetera, and related technologies to enrich our product pipeline and lay the groundwork for future revenue streams. As the company's revenue continues to grow with operating expenses increasing modestly, operating efficiency has been steadily improving, particularly in the fourth quarter where overall profitability saw a significant improvement. In the fourth quarter, we achieved our first quarter of GAAP profitability with net income reaching RMB 10.5 million. Adjusted operating income for the fourth quarter reached RMB 54.3 million, representing a year-over-year increase of 99.5% and a substantial sequential turnaround from a loss. Adjusted net income for the fourth quarter was RMB 71.5 million, up 96.4% year-over-year, also achieving a sequential return to profitability. On a full year basis, the company recorded a second consecutive year of profitability under non-GAAP measures with adjusted net income of RMB 29.4 million in 2025. This not only underscores that we have captured the right direction for profitable growth, but also demonstrates our ability to translate the operating leverage into sustainable financial returns. Looking ahead to 2026, the company will continue to advance the commercial operations and sales of the EH216-S, expand its nonpassenger business and further penetration into international markets. Full year total revenues are expected to reach RMB 600 million, representing a year-over-year increase of approximately 18%. As our manufacturing and operational systems continue to mature, overseas Sandbox projects progress, global market expansion accelerates and ongoing investment in next-generation products, the foundation for our long-term growth continues to solidify. This requires us to strike a balance between strategic execution and financial discipline in our resource allocation, ensuring that every investment translates into sustainable long-term value. We will remain committed to controlling risks and enhancing efficiency and make our expansion, solidifying the financial condition for the next phase of high quality and sustainable growth and delivering long-term and stable value to our shareholders. Thank you. Operator: [Operator Instructions] Your first question comes from [ Peggy Wang with MS. ] Unknown Analyst: This is [ Peggy ] from Morgan Stanley. Congratulations on good first quarter results. So I have 2 questions today. First, it's about the license for ground operating crew since we now expect to begin commercial operation in China soon. So could, management team, could you share some more color on the progress of getting those required license for the crew team? And the second one is about the projects in Thailand. Since we are also close to obtaining license for commercial operation, what is the expected timing of revenue contribution? And how will the volume ramp up going forward? So these are my questions. Unknown Executive: [Interpreted] This is Wang Zhao. I will take your first question. As mentioned previously, we are still moving forward with the operator training program. All training materials have been submitted to the CAAC for approval, and several courses have already been authorized. We expect the first class for operators to begin in the first half of the year. The good news is that to encourage qualified operators to conduct early commercial operations, the authorities have expanded the number of specially authorized operators for EHang. In the short term, we can conduct commercial operations through these operators. In the long term, we will replenish our talent pool through the operator training program. Thank you. Chia-Hung Yang: [Interpreted] This is Conor. I will take your second question. Ever since last October, we have been conducting extensive test flights and trial operations in Thailand. The Civil Aviation Authorities of China and Thailand have communicated thoroughly and they have reached a consensus on mutual airworthiness recognition. This work is now nearing completion. We expected to obtain the first overseas commercial operation license for the EH216-S pilotless eVTOL aircraft following final approval from the Civil Aviation Authority of Thailand. So this would mean that we would truly achieve a normalized urban air mobility services. With the specific to the commercial operations side, they are still under planning. So it will be through the Sandbox initiative. So once obtaining the Sandbox commercial operation permit, the local customers will start to move forward with the purchase orders and deliveries. So we are expecting that to start in Q2. If the progress goes smoothly, there could be dozens of units for the full year of 2026. Thank you. Operator: Your next question comes from Wei Shen with UBS. Wei Shen: [Interpreted] this is Wei Shen from UBS. Congratulations on strong results. So I've got two questions. One is on the current policy changes in the domestic low attitude industries because we saw more [ colors ] mentioning about this industrial sector in the 2 sessions meetings. And my second question is on the overseas market sales guidance, whether management could share any? Zhao Wang: This is an Wang Zhao. I'll take your first question. Generally, we believe the overall macro environment in 2026 will be better than in 2025. As you know, the 15th 5-year plan has lifted the low altitude economy to an emerging pillar industry or strategic pillar industry, and the level of -- or intensity of resource allocation and policy support for this industry will be greatly enhanced in the future. And also the development of the low altitude economy was included in the newly issued civil aviation law, which will take effect this July. So this means the industry is entering a new stage where it's going to be ruled by law, governed by law and regulations and standard systems at all levels will be gradually established. This is a necessary path for the new aviation industry. For EHang, we are at the forefront of this industry, and we are contributing first-hand experience to the standard construction. And also, we expected the overall market environment to improve. Chia-Hung Yang: This is Conor. I'll take your second question. On the overseas revenue, so the overall revenue guidance for 2026 is RMB 600 million. The overseas revenue in 2025 was in low single digit as a percentage. Looking ahead to this year, as the overseas commercial operations take place in countries like Thailand, the overseas revenue is expected to increase significantly compared to last year. If things progress well, we may expect to see the revenue contribution move into the double digit as a percentage of the overall revenue. Operator: Your next question comes from Laura Li with Deutsche Bank. Xinran Li: So I want to ask about the [ RMB 600 million ] revenue guidance. So what are the assumptions underpinning that? Could you talk about diversifying the revenue through different models or the service revenue versus aircraft delivery or the OEM model versus operator model or the overseas market. So how do you see this play out during this and next year? Unknown Executive: So Laura Li, right? Xinran Li: Yes. Unknown Executive: [Foreign Language]. Operator: This is the conference operator. We have temporarily lost connection with the speaker line. Please continue to hold, the conference will recommence shortly. [Technical Difficulty] Zhao Wang: [Interpreted] This is Wang Zhao. I'll take your question. Well, in addition to the human-carrying eVTOL business, we will proactively develop the nonpassenger segment this year such as emergency firefighting, logistics, GD4.0 drone formations and command and dispatch systems. You can see that actually, we delivered 8 firefighting aircraft in December 2025. Meanwhile, during the Chinese Spring Festival Gala, our formation performance of 22,580 drugs earned EHang a new Guinness World Record and attracted significant attention. This, like I said, attracted significant attention for EHang, leading to a surge in inquiries for this business. These are all achievements from our diversified aircraft models and nonpassenger business. With our opening of commercial operations and ticket sales to the public in March, EHang General Aviation will generate some operational service revenue. But of course, the initial contribution to the overall revenue won't be large. But nevertheless, this is a good start. Thank you. Operator: Our next question comes from Fuyin Liang with Bank of America. Fuyin Liang: I have two questions for the management. The first one is about our commercial operation plan in this month in China. So initially, how do we expect the fleet size of our commercial operation in the 2 cities in China? And given the current fair price, how do we think about the unit economy model? And what's the profit margin of this operation? Unknown Executive: [Interpreted] So initially, there will be around 6 to 10 aircraft, and we will gradually increase the number of eVTOL to be used for the commercial operations. And the early bird ticket price for each passenger is set at RMB 299 per person, which will basically cover the flight costs. With the specific data, I think we'll have to give it a period of time before we can disclose further details to the public. Fuyin Liang: My second question is about our cost control. EHang had a very good OpEx control in the last quarter in 2025. So what's the reason behind that? Looking at 2026, how do we expect the OpEx and also the OpEx to sales ratio? Chia-Hung Yang: [Interpreted] This is Conor. I'll take your second question. Yes, you're right. Overall, the [ SBC ] expenses in 2025 were lower in that of 2024. So that resulted in a smaller-than-expected increase in OpEx. Looking ahead to 2026, the year-over-year growth rate for OpEx is expected to be lower than our revenue growth rate. So we are setting our revenue growth year-over-year at [ 18, ] -- from [ 18 ] and our OpEx is going to be definitely lower than that. Operator: Your next question comes from Alan Lau with Jefferies. Alan Lau: Congratulations for the company for the strong results in 4Q and also achieving commercial operation in March. So my first question is regarding to the strong delivery in fourth quarter. So we saw the company deliver units on a single quarter. So I would like to know who are the major clients contributing to such strong delivery? And do you expect further orders from the same clients? Zhao Wang: [Interpreted] This is Wang Zhao. The growth in the Q4 deliveries was primarily the result of the year long marketing efforts in 2025. Many of them were not new Q4 customers. But actually, customers who we have been discussing specific operational plans and scenarios over the previous quarters with. And that finally result in the deliveries. And like I said, so the engagement with these clients finally lead to the deliveries in Q4. Some of them were repeat customers. And the key contributions come from clients from Hefei, Wencheng, Xiamen, Guizhou, Sichuan and Guangzhou, and we expect some repeat orders or purchases from repeat customers as well in the future. Alan Lau: That's very clear. And then my second question is regarding to the commercial operation in March. So I would like to know some specifics. Firstly, do you have an exact date on when the app will be launched or the public can book their flights in the program? And then is it [ point A to point A ] flight and each time, it's 1 or 2 persons? Unknown Executive: [Interpreted] Yes, our commercial operations will be launched in March. We haven't yet disclosed the exact date as we are still fine-tuning the booking platform, the mini program. But operational readiness wise, we are ready. And as for the route, it is -- the flight is for tourism purposes, and it's from point A to point B, carrying 1 passenger. We believe this is enough to fulfill the needs of the customer. Operator: Your next question comes from Chen Yu with GUANGFA Securities. Unknown Analyst: [Interpreted] So my question is on the OC application for the existing customers or clients. So what is the company doing on the company side? And what initiatives or efforts is the company putting in to facilitate the OC application? Are there any time lines that can be shared on the OC application for these existing clients? And my second question, I'm not sure whether any other analysts have already asked the same question. Are there any updates on the QC or airworthiness application for VT35? What's the current plan? Are there any adjustments, changes or updates on that? Zhao Wang: [Interpreted] This is Wang Zhao. I'll take your first question. There will be 2, so 2 customers that have obtained the OC and their commercial operation will start to accumulate very valuable experience and become a demo of project for the rest of their clients. And we expect the training for the ground crew to begin in the first half of the year. So this will start to build the solid foundation for the expertise that's needed to conduct the commercial operation. And this would also increase the talent pool required to support the commercial operations of other clients. And particularly, our client from Guizhou has already submitted their materials for the OC. And furthermore, the policy environment is much more favorable compared to that in 2025. And we have done a lot of work, and we are ready. So we believe as we make more progress on these applications, there will be more customers that can apply and obtain their OCs in this upcoming year. Shuai Feng: [Interpreted] This is Feng Shuai. I will take your second question on VT35 certification progress. In Q4, our VT35 completed key tests, including multi-rotor protective transition and shut down and locked propeller fixed-wing flights. Additionally, we've also held a first TCT meeting for airworthiness review. And we are currently conducting flight envelope tests. We are aiming to obtain the type certification in China within 2 years. Operator: Thank you all. Given that time is limited, let me turn the call back to Ms. Anne for closing remarks. Anne Ji: [Foreign Language] [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.
Operator: Good day, everyone, and welcome to the Saga Communications Fourth Quarter and Year-End 2025 Earnings Release and Conference Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, Chris Forgy. Sir, the floor is yours. Christopher Forgy: Thank you, Matt, and it's good to have you again as our host for the conference call. And I want to thank everyone who's taken the time to join Saga's 2025 Q4 and year-end earnings call. Trust me when I say it is great to be here with all of you today. We appreciate your continued support, your interest and your participation in Saga Communications. What we believe is the best media company on the planet and not to mention the most pristine balance sheet to match. So before I make my remarks, I'd like to turn the floor over to our Saga's EVP and CFO, Sam Bush for his comments. Sam? Samuel D. Bush: Thank you, Chris. This call will contain forward-looking statements about our future performance and results of operations that involve risks and uncertainties that are described in the Risk Factors section of our most recent Form 10-K. This call will also contain a discussion of certain non-GAAP financial measures. Reconciliation for all the non-GAAP financial measures to the most directly comparable GAAP measure are attached in the selected financial data tables. For the quarter ended December 31, 2025, net revenue decreased $2.7 million or 9.3% to $26.5 million compared to $29.2 million last year. A large part of the decline in the quarter was due to reduced political revenue. For the quarter in 2025, gross political revenue was $254,000 compared to $2 million for the fourth quarter of last year. Station operating expense decreased 1.9% or approximately $400,000 to $22.9 million for the 3-month period. For the 12-month period ended December 31, 2025, net revenue decreased $5.8 million or 5.1% to $107.1 million compared to $112.9 million last year. Almost half of the decrease was due to reduced political revenue. For the year in 2025, gross political revenue was $650,000 compared to $3.3 million for 2024. Station operating expense was flat with 2024 at $91.8 million. We had 2 unusual factors that negatively impacted our fourth quarter and year-end results. A noncash impairment charge as well as the previously disclosed retroactive industry-wide rate settlement with 2 of the music licensing organizations. Recorded in the fourth quarter and also impacting the year ended December 31, 2025, we recorded a noncash impairment charge of $20.4 million, which included a charge of $19.2 million, which represents all the remaining goodwill that was previously included on our balance sheet, along with a charge of $1.2 million representing a reduction in the value of our FCC licenses in one of our markets. We recorded an operating loss of $9.5 million compared to operating income of $1 million for the fourth quarter. Without the impairment charge, operating income would have been $10.9 million for the quarter. We reported a net loss of $6.9 million for the fourth quarter compared to net income of $1.3 million last year. Without the impairment charge, we would have reported a net income of $8.2 million or $1.27 per share compared to $0.20 per share for the same period last year. For the year ended December 31, 2025, we recorded an operating loss of $11 million compared to operating income of $2.4 million for 2024. Without the impairment charge, operating income would have been $9.4 million for 2025. We reported a net loss of $7.9 million for the year ended December 31, 2025, compared to net income of $3.5 million last year. Without the impairment charge, we would have reported a net income of $7.2 million or $1.11 per share compared to $0.55 per share for the same period last year. The music licensing settlement also impacted the operating income as it increased year-end 2025 station operating expense by $2.2 million. Station operating expense for the year would have decreased by 2% in comparison to 2024 instead of being flat year-over-year. We spoke about this more in our third quarter release and conference call. As stated in the press release, the company closed on the sale of telecommunications towers and related property on October 17, 2025. This has actually been in the works for quite a few years. And finally, we're able to get the transaction we thought was the best for us and move forward on it and pulled the trigger on the closing. We recognized a gain of $11.6 million. The total proceeds including both cash and noncash, was $15.1 million. The noncash proceeds are the recognized value of the long-term nominal cost leases we entered into as a part of the transaction as we continue to operate at each of the sites we sold. The net cash proceeds from the sale after expenses was $9.8 million. This does not include the approximately $400,000 being held in an escrow account pending finalizing the landlord's consent to the transfer of 1 final tower. We anticipate this transfer will take place in the second quarter of 2026. This transaction allowed the company to monetize 24 own towers that were not reaching the full potential of tower space leased to external tower space users. Additionally, the towers were monetized at a significantly higher valuation than was being recognized in the company's overall market valuation. We will have a noncash expense reported of approximately $50,000 per quarter in 2026 or $200,000 for the year based on the accounting treatment required to record the noncash gain given the favorable lease terms we have as we continue to operate on the towers we sold. The company paid a quarterly dividend of $0.25 per share on December 12, 2025. The aggregate value of the quarterly dividend was approximately $1.6 million. The company declared a quarterly dividend of $0.25 per share on February 12, 2026, with a record date of February 26, 2026 and a payable date of March 20, 2026. With the most recent declared dividend, Saga will have paid over $143 million in dividends to shareholders since the first special dividend was paid in 2012. The company also repurchased 219,326 shares of its Class A common stock for $2.5 million during the year ended December 31, 2025. The company intends to pay regular quarterly cash dividends in the future. Consistent with its strategic objective of maintaining a strong balance sheet, and with returning value to our shareholders, the Board of Directors will also continue to consider declaring special cash dividends, variable dividends and stock buybacks in the future. The company's balance sheet reflects $31.8 million in cash and short-term investments as of December 31, 2025, and $31.5 million as of March 9, 2026. The company expects to spend approximately $3.5 million to $4.5 million for capital expenditures during 2026. I want to emphasize that for the quarter, total Interactive revenue was up 25.8% and for the year up 19.1%. The first quarter is currently pacing down mid-single digits with Interactive up 26.4%. We still have a ways to go before the increases in interactive revenue outpaced the decline in traditional broadcast revenue. Including political revenue, the second quarter is currently pacing down, and we expect to end up down mid-single digits. We are expecting return to revenue growth, including political in the second half of 2026 with revenue increasing in the range of mid-single digits. To increase the pace of the transition, we are continuing to move forward with a plan to add resources to build the digital infrastructure we need to process the interactive orders that the blended sales process is developing as well as to provide our local management teams in a number of markets that don't already have them with sales managers as well as digital campaign managers. This will allow our media advisers to spend more time calling on existing and potential clients to solicit new business as they will now have the assistance they need to help build the unique blended campaigns that are required to grow our digital business and mitigate the decline in radio ad spend. It also allows us to have the talent to monitor the performance of the blended campaigns, which will allow us to retain a higher percentage of return blended clients. The expense of this initiative will initially be more costly than the revenue it will bring in, but it is a necessary expenditure to be competitive with other digital companies and to better serve our clients in meeting their advertising needs. In totality, this will increase our market expenses $1.5 million for 2026. We have already hired most of the digital infrastructure team and are in the process of finding the right individuals for sales and campaign management. These hires will occur in the second and third quarters. We expect that having the infrastructure team in-house will reduce our digital fulfillment costs going forward. All said, we believe Saga is in a strong financial position to improve profitability as our digital initiative improves both local radio and interactive revenue. We currently expect that our station operating expense will be flat for the year as compared to 2025 when not considering the digital initiative expenses and up 3% to 4% when including an estimate for the digital initiative. We anticipate that the annual corporate general and administrative expenses will be approximately $12.3 million for 2026 and flat to 2025. And with that, Chris, I will turn it back over to you. Christopher Forgy: Thank you, Sam. Great job. Some of you may remember the 1990s uncelebrated film produced by Saturday Night Lives, Lorne Michaels. It was written by Steve Martin, a Canadian. It was called the 3 Amigos, and it featured Chevy Chase, Martin Short and Steve Martin. I won't bore you with the story, but there was a time when Saga also had its own version of the 3 Amigos. In fact, they call themselves that. These 3 Amigos consisted of Saga's founder, Ed Christian, and 2 of his closest friends and consiglieres Dave Stone and Al Lucareli. Unfortunately, all of these amigos have passed on. But the message that the last living member of the Saga amigos gave may before he passed still lives today and drives Saga's operational culture. Just 3.5 short years ago, at Ed Christian's Wake, Al Lucarelli sat down next to me after almost everybody had left the wake and said these words to me. And I quote "Chris, as only the second President and CEO of Saga's ever known, whatever you decide to do next, do it fast, do it with force and do it with purpose." We immediately want to work on the transformational change we've been talking about on these earnings calls for the past 3 years. We began to diversify our top line mix of deliverables, including our e-commerce platform, which is up 16% year-over-year and has created $2.5 million in local direct revenue in our Saga markets in 2025. Our 17 hyperlocal online news sites to complement and add credibility to our over-the-air news product grew year-over-year by 18% and contributed over $2.5 million in revenue and delivered a 31% margin, excluding sales commissions. The 2 blended solutions we use most to get advertisers wanted found and chosen, which are search and display. Search was up 59% year-over-year and generated $2.2 million and targeted display was up year-over-year, 44.8% and accounted for nearly $3.5 million. Online streaming went from a revenue stream designed really simply to over offset third-party streaming costs to transform itself into a robust vertical we rely on heavily. This stream was up 8.6% year-on-year in total. And in all of the digital revenue initiatives, as Sam mentioned earlier, we were up 19.1% year-over-year and growing. We then put into action special capital allocation and capital management plan, which included an ongoing quarterly dividend of $0.25 per share, three $2 special dividends paid to our shareholders on 10/21 of '22, January 13, '23 and January 12, '24 and followed by a $0.60 variable dividend paid on April 7, 2024. Next began a longer-term capital allocation strategy, which included a stock buyback plan. We did this by providing the means to fund this buyback without depleting any of our operational cash on hand or by adding any additional debt to our balance sheet. This entire project and then some was accounted for selling 22 of our Saga's tower sites. This plan also allows Saga to provide additional research and development and the resources necessary to develop our own growing digital platform. While this was going on, we also began and has since continued the process of expanding and diversifying Saga's Board of Directors. We also began to look for ways to cut local market expenses to create a more nimble and efficient operation while we were building the infrastructure of our digital platform. Expense reductions totaled over $1.4 million. We also began the process of selling several nonproductive assets to allow us to obtain a monetized value for the assets that is higher than the amounts recognized in the company's overall market valuation. One example is we listed for sale, the company's owned home located in Sarasota, Florida. This process was delayed, however, due to the timing of several hurricanes that ravaged the Gulf Coast. That has settled down and the market looks much more healthy for a sale. And finally and most importantly, after observing the iterations and reiterations of both our own and those of our brethren, we continue to settle in and teach and train our leadership team and our media advisers on what we refer to now as the blend. The blend is an advertiser focused, not product-focused approach. That relies on a few things we knew and a few other observations we made along the way. Saga's digital transformation strategy is an advertiser first approach that also honors, protects and grows our core competency, which is and always is radio. Now this is not easy. As I've said before, it's been very taxing on our entire operation. It's transformational, but growth requires change and change requires conflict. So so far, the juice is worth the squeeze. So how do we do this? First, by accepting and counting on the fact that radio always and only leads to a search. Radio always and only leads to research, and that's okay. Saga's digital strategy is designed to get our advertisers wanted, found and chosen more often by persuading more buyers and consumers to click on their website, call or visit their business and to search them online. You may wonder, so why sometimes the overzealous confidence in your plan, it really comes from what we know, as I mentioned earlier. And according to eMarketer, of the hundreds of billions of dollars that are spent each year in advertising, nearly 75% of these dollars are being spent on digital advertising. That number is expected to climb over 80% in 2029, just a few short years. Yet radio as an industry has laid claim to a pedestrian 0.067 or a little more than 0.5% of the digital advertising dollars that are spent, which totals in the neighborhood of $2 billion in digital ad revenue. We, radio cannot win or even compete with an approach like this. So we have to do something different. So there's clearly a significant increase in digital ad spending, and it's growing and these buyers are frustrated with unmet needs. They don't like what they're buying or who they have to buy it from. They claim they trust local radio salespeople for most of their market knowledge and advice that aren't buying it from us. Thus, education and training is key for our leadership and for our media advisers. There are too many providers with too many conflicting solutions and businesses don't know who to trust. So in this disruptive market, we need to provide simplicity, clarity and transparency to wins. And there's also a shift happening in the way consumers are buying today in the consumer behavior. Advertising strategies haven't caught up with the journey people take when they buy. There's a gap of tech meets human behavior. The blend closes that -- so in closing, the impact of all the work we have done in training, research and development and overall transformation. Not to mention the results we've seen, has galvanized our Board of Directors, our corporate team, our market leadership teams, our media advisers, our business offices, our on-air teams of content creators and our directors of content creation to finish what we started, hence, the accretive investment Sam discussed and the acquisition of people and expertise to allow us to continue to provide and build a digital strategy that is easy to understand, easy to buy, easy to execute, easy to measure and easy to renew and to buy. So again, as Al Lucarelli said, "Chris, whatever you do, do it fast, do it with purpose and do it with force." That is what we've anticipated doing and have been doing for the last 3.5 years, and we'll continue to do until the job is finished. Sam, do we have any questions? Samuel D. Bush: First, not today. But I think we can turn it back over to Matt to wrap up. Christopher Forgy: Thank you again for joining us on the Saga Q4 and year-end earnings call. We really appreciate it. I personally appreciate it. And again, trust me when I say, I'm more than happy and grateful to be here on this call today. Thank you so much. 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.
Operator: Greetings. Welcome to CareCloud, Inc. Fourth Quarter 2025 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brendan Covello, Corporate Counsel. Please begin. Brendan Covello: Good morning, everyone. Welcome to CareCloud's Fourth Quarter and Full Year 2025 Conference Call. On today's call are Mahmud Haq, our Founder and Executive Chairman; Stephen Snyder, our Chief Executive Officer; A. Hadi Chaudhry, our Chief Strategy Officer; and Norman Roth, our Interim Chief Financial Officer and Corporate Controller. Before we begin, I would like to remind you that certain statements made during this call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21 of the Securities Exchange Act of 1934 as amended. All statements other than the statements of historical fact made during this call are forward-looking statements, including, without limitation, statements regarding our expectations and guidance for future financial and operational performance, expected growth, business outlook and potential organic growth and acquisitions. Forward-looking statements may sometimes be identified with words such as will, may, expect, plan, anticipate, approximately, upcoming, believe, estimate or similar terminology and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. These statements reflect our opinions only as to the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our press release and other reports filed with the Securities and Exchange Commission, where you will find a more comprehensive discussion of our performance and factors that could cause actual results to differ materially from those forward-looking statements. For anyone who dialed in the call by telephone, you may want to download our fourth quarter and full year 2025 earnings presentation. Please visit our Investor Relations site, ir.carecloud.com. Click on News and Events, then click IR Calendar, click on Fourth Quarter and Full Year 2025 Results Conference Call and download the earnings presentation. Finally, on today's call, we may refer to certain non-GAAP financial measures. Please refer to today's press release announcing our fourth quarter and full year results for a reconciliation of these non-GAAP performance measures to our GAAP financial results. With that said, I'll now turn the call over to our CEO, Stephen Snyder. Stephen? Stephen Snyder: Thanks, Brendan, and good morning, everyone. I'm pleased to report that 2025 was a transformational year for CareCloud, marked by exceptional financial performance, strategic acquisitions that expanded our market reach and a successful launch of our flagship AI platform. We delivered results that underscore the strength of our business model and validate our vision for the company's future. In particular, I'm pleased to be able to talk today about our revenue growth, the remarkable acceleration of our profitability and free cash flow, the current status of our capital structure, the significance of our 2025 acquisitions, the evolution of our services offering and AI platform, our market position and growth drivers as we enter 2026 and our guidance for the year ahead. First, let me start with our top line numbers. For the full year 2025, we generated revenue of $120.5 million, representing nearly 9% year-over-year growth. In Q4 specifically, we achieved revenue of $34.4 million, up nearly 22% year-over-year, demonstrating accelerating momentum as we entered this year. Importantly, we raised our revenue guidance twice during 2025 and still exceeded the final target, a pattern that reflects the underlying health and predictability of our recurring revenue streams. Second, as to profitability, we reported GAAP net income of $10.8 million for 2025, a year-over-year increase of more than 37%. We achieved earnings per share of $0.10, marking our first full year of positive EPS since our 2014 IPO, a remarkable milestone that reflects our multiyear transformation to sustainable profitability. In Q4 alone, we posted GAAP earnings per share of $0.04. Adjusted EBITDA expanded to $27.5 million with a 23% margin, up more than 14% year-over-year. But perhaps most importantly, we generated $28.6 million in GAAP operating cash flow for the full year, a 38% increase year-over-year and $8.7 million in Q4 alone, up 66%. Non-GAAP free cash flow reached approximately $20.5 million for 2025 compared to $13.2 million in 2024 and representing growth of more than 500% from 2023. This dramatic improvement in free cash flow generation has been transformational to our financial flexibility and strategic optionality. It enabled us to resume dividends on our preferred shares at the beginning of 2025 to begin paying double dividends on our Series B preferred stock starting in 2026 to address the accumulated arrearages and to fund multiple acquisitions during 2025, entirely from free cash flow generated during that year. Third, as to our capital structure, during 2025, we completed the conversion of approximately 80% of our Series A preferred shares into common. The conversion eliminated more than $7 million in annual dividend obligations, and we fully repaid our Provident Bank credit line by year-end, entering 2026 with 0 drawn on our credit line. Reducing the complexity of our capital structure remains a core priority. Fourth, we made significant strides during 2025 on the M&A front. We completed multiple transactions during the year, each strategically selected to expand our capabilities and market reach. These deals were all executed at less than 1x revenue multiples, funded entirely through the free cash flow we generated during 2025 and resulted in 0 common shareholder dilution. The most significant of these was our August acquisition of Medsphere Systems, which brought us into the inpatient hospital market. Through Medsphere, we added a suite of ambulatory and inpatient software products, including the #1 Black Book ranked Wellsoft emergency information department system. This was a watershed moment for CareCloud. We evolved from an ambulatory first to a care continuum company, able to support the full patient and clinician journey from outpatient clinic to emergency department to inpatient bed through the revenue cycle and into the supply chain. Integration is well underway. We are incorporating our AI tools into the platform, and we are already seeing new customer wins under the CareCloud umbrella. We also acquired MAP App from the Healthcare Financial Management Association, or HFMA, in October of last year, alongside a long-term joint marketing agreement. MAP App is a hospital benchmarking and performance analytics platform used by leading hospitals and integrated delivery networks to measure and compare revenue cycle metrics. MAP App identifies where a hospital is underperforming and CareCloud's RCM and AI provide the solution, a sales motion with built-in urgency and quantifiable ROI that we intend to scale in 2026 and beyond. Through Medsphere and MAP App, we now serve hospital systems and health networks, creating a natural cross-selling runway for our AI solutions and RCM services. Our 2026 growth strategy centers on penetrating these newly acquired health system customers with our RCM and AI products, exactly the kind of operating leverage that justifies these strategic investments. Fifth, we have continued to position ourselves as an emerging leader in health care IT. We recognize that the health care technology market is at an inflection point. AI adoption is moving from pilot programs to production deployment and providers are actively seeking partners who can integrate AI across their clinical and administrative workflows. We are operating in a market with a multibillion-dollar addressable opportunity in the U.S. alone for our AI front desk assistant and that is just one application in our broader AI framework. We launched stratusAI Front Desk Agent in December 2025 and are already seeing strong early traction. Hadi will provide more details on our AI products and road map. But from a business perspective, our combination of domain expertise, distribution and clinical data gives us a competitive moat that is extraordinarily difficult to replicate. Sixth, let me turn to our market position and growth drivers. In 2026, we will continue to leverage our dual platform footprint in ambulatory and inpatient markets to drive organic growth and acquisition synergies. Our primary growth vectors, ambulatory cross-selling, deeper hospital penetration of existing relationships and AI monetization represent a compounding opportunity that positions us for durable growth. As we have noted in prior calls, strategic acquisitions have been a cornerstone of our growth historically, and 2025 marked the year where we reignited that momentum after a multiyear pause during which we refreshed our financial foundation, achieved sustainable profitability and launched our AI Center of Excellence. We were patient because we wanted to acquire from a position of strength, and that patience has paid off. All of our 2025 acquisitions follow the same disciplined playbook, acquisition purchases non-dilutive to common shareholders, structured to maintain balance sheet flexibility and priced at attractive valuations of 1x revenue or less. What is particularly exciting now is that AI is further accelerating our acquisition opportunity set. We expect to remain active in the M&A front in 2026 and beyond as we identify complementary targets that extend our reach and can benefit from our AI capabilities. Seventh, turning to our guidance for 2026. It reflects continued growth with accelerating profitability. We expect revenue of $128 million to $130 million and adjusted EBITDA of $29 million to $31 million, reflecting margin expansion. We further expect GAAP EPS of $0.20 to $0.23 per share, which would represent an increase of more than 100% over 2025. We have set this guidance at levels that we believe are achievable and consistent with our track record, we intend to execute against it with discipline. As we reflect on 2025, we are humbled by the progress we have made across every dimension of our business. We exceeded previously raised revenue guidance. We delivered our first year of positive EPS as a public company. We generated exceptional free cash flow growth, increasing more than 500% over the last 3 years. We executed strategic acquisitions without diluting shareholders. We launched a transformational AI platform that is already gaining market traction, and we strengthened our market position through acquisition-driven diversification. Together, they represent a fundamental repositioning of CareCloud as a full continuum health care technology platform with AI at its core. We believe these achievements position us to deliver sustained value creation for our shareholders, clients and employees. We are entering 2026 with more momentum, more scale and a stronger balance sheet than at any point in time in our history, and we look forward to achieving our objectives in 2026 and beyond. With that, I'll turn the call over to Hadi Chaudhry, our Chief Strategy Officer, who will provide more details on our acquisition strategy and product road map. Hadi? A. Chaudhry: Thank you, Steve. Good morning, everyone, and thank you for joining today. Steve has walked you through an outstanding financial year. That performance gives us the platform to do something really important, invest aggressively and deliberately in AI. My job today is to take you inside that effort, what we have built, what's working and where we are taking it in 2026. In April 2025, we launched CareCloud's AI Center of Excellence, a fully operational production-grade initiative with one mandate, build AI solutions that create measurable impact for health care providers. This is not a research lab or a pilot program. It is the engine behind everything in our AI portfolio. We built this capability in-house because AI and health care cannot be generic. It must be trained on the right data, integrated into real clinical and administrative workflows and designed around health care-specific compliance and accuracy. The AI Center of Excellence brings together engineering, data science, clinical informatics and product development to deliver exactly that. Let me walk you through what we have launched. Our flagship AI product of 2025 is stratusAI Front Desk Agent, which reached full commercial release in December. It is an agentic AI phone receptionist, fully autonomous, operating 24 hours a day, 7 days a week, ending patient calls with natural human-like conversation. The scope of what it manages is significant, appointment scheduling, rescheduling and cancellations, real-time insurance eligibility verification and demographic capture, prescription refill routing, lab results, inquiries, referral requests and automated confirmations and reminders. When a call requires human judgment, it escalates intelligently to a live staff member. The system is deeply integrated within our EHR and practice management platforms, which means there is no manual data reentry and no third-party middleware between the AI and the patient record. Our results speak for themselves. Dr. Holden, owner of the Lung Center shared that stratus Desk Agent is now handling nearly 80% of their inbound scheduling-related calls, freeing his staff to focus on more complex patient needs. There is a fundamental shift in how our practice operates, and it is exactly the outcome we designed this product to deliver. Alongside Desk Agent, we have stratusAI Voice Audit, our conversational intelligence platform, gives practice administrators and hospital operations leaders visibility into every patient phone interaction, whether handled by AI or by the staff member. Voice Audit delivers call monitoring, quality scoring, trend analysis and patient sentiment insights. It shows what's working, where workflows are breaking down and where there are opportunities to improve the patient experience. Beyond patient access, we are applying AI deeply across revenue cycle management, the core of our business. AI capabilities are already active throughout our RCM operations, helping reduce claim errors, improve appeals and documentation accuracy and increase first pass acceptance rates with payers. Importantly, AI also allows us to shift from relying primarily on lagging indicators such as denial rates and days in account receivable to monitoring leading indicators earlier in the revenue cycle. By identifying potential issues at intake, eligibility verification, coding and claim creation, we can prevent problems before a claim is ever submitted rather than reacting after a denial occurs. Our longer-term ambition is to establish a new industry benchmark, zero-touch claims, a fully automated workflow where AI manages intake, validation, submission and payer follow-up with minimal human intervention. This enables billing teams to focus their expertise on true exceptions rather than routine processing. We are also developing AI-driven prior authorization capabilities, which represents one of the most significant administrative bottlenecks in the health care today. Prior auth delays drive revenue leakage, delay patient care and consume enormous staff time. Our approach is to use AI to predict authorization requirements, pre-populate supporting documentation and route requests automatically, reducing turnaround time and the rate of initial denials. We are also actively developing an AI-assisted medical coding product. Accurate coding is foundational to revenue cycle performance. Errors at that stage cascade into denials, delays and lost reimbursement. For clients using CirrusAI Notes, the 2 products work in concert, taking a clinical encounter seamlessly from documentation through accurate coding assignment. On the clinical side, CirrusAI Notes addresses documentation burden, a primary driver of physician burnout. It captures the clinical encounter and generates structured notes for physicians to review and sign off on rather than author from scratch. It is live and in use today, and it earns clinician trust precisely because it does not try to replace physician judgment, it removes the administrative burden around it. I want to spend a moment on the intersection of our acquisition strategy and our AI capabilities because I think this is one of the most compelling and underappreciated aspects of our story. Each platform in the Medsphere portfolio is embedded in real clinical operations, serving workflows previously outside CareCloud's reach, and none of them had a dedicated AI team behind them until now. Clients across this portfolio will also benefit from access to CareCloud's ambulatory AI-enabled solutions as our integration work progresses, bringing the full capability of our platform to bear across the care continuum. Our AI Center of Excellence is actively scoping AI enhancements across this portfolio, prioritizing the highest impact use cases in supply chain efficiency, emergency department workflow and clinical documentation. As those enhancements are completed and validated, they will be made available to the clients. To be clear about sequencing, the new clients we are winning today are selecting these platforms on the strength of what they deliver right now. Our contract win with Memorial Hospital in Ohio, deploying HealthLine for supply chain management is a strong signal of that underlying demand. As our AI capabilities for HealthLine mature, Memorial and clients like them will position to adopt these enhancements when they are ready. The same logic applies to Wellsoft. In January, Affinity Urgent Care in the Houston Galveston area selected Wellsoft, bringing our emergency grade documentation system into the urgent care settings for the first time. With approximately 11,000 urgent care facilities across the United States, this channel represents a meaningful expansion of our addressable market. The AI layer for Wellsoft is in development. And when it is ready, it will strengthen our competitive position in the channel considerably. On the AI side, MAP App becomes more powerful over time. Our road map adds recommendations that go beyond identifying a revenue cycle gap to quantifying its dollar impact and surfacing the automation that closes is fastest, moving us from analytics to action, a conversation hospital CFOs are very receptive to. The HFMA relationship also gives us distribution into hospital finance leadership that would take years to build organically. And combined with our AI road map for MAP App, we have compelling reasons to be in those conversations in 2026. Looking ahead, I want to be direct about what 2026 means for our AI strategy. We have spent 2025 building the AI Center of Excellence, the stratusAI product suite, the acquisitions that expand our platform. 2026 is the year we execute. Let me walk you through our priorities. First, we will continue expanding our AI product suite across the full platform. StratusAI Desk Agent and Voice Audit are live and scaling. CirrusAI Notes is deployed and being integrated across the Medsphere suite. AI-assisted coding and prior authorization AI are both targeted for release this year. Second, we will execute on the cross-sell opportunity at the product level. Steve outlined the strategic case Medsphere relationships, RCM capabilities, HFMA partnership. My focus is making sure the AI product are ready to support that motion. CirrusAI Notes integrated into MedSphere suite, the coding product available to hospital billing teams and stratusAI Desk Agent deployable in hospital patient access centers. Third, we will continue building the AI Center of Excellence, deepening our clinical data sets, developing proprietary models trained on health care-specific workflows and partnering selectively with AI leading infrastructure providers where it helps us move faster. The principle is always the same. Health care native AI built with right guardrails delivers better and more defensible outcomes than generic AI applied to health care settings. Fourth and most importantly, we will hold ourselves accountable to client outcomes, not just product releases. The measure of AI investment is not feature ship. It is revenue improvements, denial rate reductions, time saved per provider, patient satisfaction scores. Those are the metrics we track internally, and they are the ones we will be sharing with you as our AI business matures. I want to close with the thought on why this moment is meaningful. Providers across every care settings are seeking purpose-built AI that integrates into the systems they already use. This is precisely what we are building across ambulatory, emergency, inpatient and hospital billing operations. CareCloud sits at a rare intersection, long-standing relationships with over 45,000 providers across the care continuum, a fully integrated platform spanning EHR, practice management, RCM and our supply chain and hospital systems and a dedicated AI organization focused entirely on solving health care operational problems. We are profitable, growing company with a clear AI strategy and operational discipline to execute it. I look forward to sharing our progress with you throughout the year. With that, I will turn the call over to Norm Roth, our Interim CFO and Corporate Controller, who will walk you through the detailed financial results. Norm? Norman Roth: Thank you, Hadi, and thanks, everyone, for joining our call today. As you have just heard, we had another strong quarter and a strong finish to the year. We have accomplished and exceeded the goals we set for ourselves for 2025. In particular, we are now generating record levels of free cash flow and resumed paying dividends on our preferred shares, which started in February 2025, and we've also been catching up on the dividend arrearage for the Series B preferred stock. Further, we have fully repaid our Provident Bank line of credit at the end of the year, we had borrowed funds for the Medsphere acquisition and now have the full $10 million line of credit available. We generated $20.5 million of free cash flow in 2025, which we measure as cash from operations less purchases of property and equipment and capitalized software and other intangible assets. In 2025, we began seeking out acquisition opportunities and during the year, we completed 4 acquisitions. We continue to evaluate acquisition opportunities that will be accretive to the company. The key to growing our free cash flow continues to be reducing expenses and growing our GAAP net income. Fourth quarter 2025 GAAP net income was $2.9 million as compared to $3.3 million in the same period last year. This is our seventh consecutive quarter achieving positive GAAP net income. Revenue for the fourth quarter 2025 was $34.4 million compared to $28.2 million for the fourth quarter of 2024. There was approximately $7.2 million in revenue related to the Medsphere acquisition in the fourth quarter. Adjusted EBITDA for the fourth quarter 2025 was $7.7 million or 22% of revenue compared to $7.1 million in the same period last year. This was an increase of 8% year-over-year. For the full year, the story is similar. With our emphasis on improving profitability, revenue for the year 2025 was $120.5 million compared to $110.8 million in 2024. Our GAAP operating income was $11.3 million compared to $9.1 million in the same period last year and our GAAP net income was $10.8 million compared to a GAAP net income of $7.9 million for 2024. This was the highest GAAP net income for the company since inception. Non-GAAP adjusted net income was $14.4 million or $0.34 per share, calculated using the end-of-period common shares outstanding. Since going public, this is the first year we have had positive full year GAAP EPS. For the year 2025, adjusted EBITDA was $27.5 million, an increase of 15% or $3.4 million from $24.1 million last year. Our adjusted EBITDA for full year 2025 was also the highest amount ever achieved by the company. During the year 2025, we generated $28.6 million of cash from operations compared to $20.6 million in the prior year and $20.5 million of free cash flow as defined. The free cash flow amount of $20.5 million increased by 55% compared to $13.2 million in the same period last year. As of December 31, 2025, the company had approximately $3.6 million of cash. Net working capital was approximately $1.3 million. Now that we have repaid our line of credit, free cash flow during 2026 will allow us to increase our cash balance and build additional cushion in our net working capital. Our financial position continued to improve during the year 2025. We are happy to report strong financial results, no amounts outstanding on our line of credit, cash savings from the Series A preferred stock conversion that occurred in March 2025 and look forward to continuing to report strong results next year. With that, I'll now turn the call over to Mahmud for his closing remarks. Mahmud? Mahmud Haq: Thank you, Norm. 2025 was a milestone year for CareCloud. We delivered strong profitability and free cash flow, expanded into the hospital market through strategic acquisitions and launched an AI platform that positions us well for the future. What is most exciting is that we are just getting started. We enter 2026 with strong momentum, a stronger balance sheet and significant opportunities to drive growth across our platform. I want to thank our employees, clients and shareholders for their continued trust and support. We remain focused on disciplined execution, innovation and creating long-term value for all of our stakeholders. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question is from Allen Klee with Maxim Group. Allen Klee: Great quarter. So when I'm listening to your talk, the 2 big themes I'm hearing among others, are your emphasis on AI and acquisitions and how you can combine them and get benefits. So could you expand a little more on how you're planning on kind of monetizing the AI in 2026? You've talked about, but I think it's important. Stephen Snyder: For sure. Thanks for the question, Allen. So if we step back for those who haven't followed our story so closely, and we'll just talk about M&A first and then we'll dig a little bit deeper into the AI question specifically that you asked. So first of all, from an M&A perspective, the environment today continues to be increasingly favorable. AI is a catalyst for smaller billing companies and for health care companies that focus on delivering software products to the inpatient, also the ambulatory space because they recognize the fact that without AI, their competitive position continues to weaken in the market. So that's driving more sellers into our pipeline than ever before. Our strategy continues to be one of patience and discipline like we've followed for years. So we wait for an opportunity where the recurring revenue associated with, first of all, it has to be recurring revenue relationships, a portfolio of recurring relationships, revenue relationships. And then secondly, from a valuation perspective, we really target valuations of between 0.6 and 1x revenue. That compares very favorably to the CAC in our space, which is typically about 1.5x or greater revenue. So we move forward with these acquisitions. And then with regard to that, those base companies that are part of that portfolio, we aim to bring them from a status of typically breakeven or operating at a loss to about 25% to 30% profitability margins typically within about 9 months. So that's the base strategy. You've asked about the AI overlay to that, and that's where I think the whole strategy gets even more interesting. So if we think about the -- just as an example, if we think about the Medsphere acquisition, we've purchased software products that lack that AI capability. And what our team has been doing is that it's been really focused in on taking the core AI products, taking the CirrusAI product, the stratusAI product, taking the AI Notes applications and the like and then weaving that and incorporating that fully into those platforms. And we expect to have that done within the next couple of quarters. So we're able to take those platforms and to make them increasingly more attractive and platforms that as opposed to being -- as opposed to lagging behind where the space is, will be increasingly leading in their particular markets. So we see some exciting potential there. The second thing would be if we think about this from the perspective of revenue cycle companies, we now are increasingly using AI and automation to handle a lot of the services that before were being handled by individuals here in the U.S. or members of our team globally. So AI and automation is increasingly assisting with the back-office processing enabling us to further drive margins. And Hadi might have something else to add to that from an AI perspective. A. Chaudhry: Sure. Thank you, Steve. Just to add on to what Steve has mentioned, our strategy from the AI perspective has been the same and threefolds. One, continue to focus on the improvement and implementation of AI in the back-end operations, whether it's the basic denial management, whether it's the automation of, as an example, the referrals and verification of the benefits and the like, and then there are many others. And the second is the AI enablement or AI integration into the existing -- the product suite that we have, whether it's our own EHR practice management platform or these other companies, as Steve mentioned that we are acquiring, the team continues to focus on building the AI layer to make it more attractive and more marketable. And then continue to focus on any other net new applications that we can bring to the market such as the stratusAI FDA. Allen Klee: That's very helpful. Then it was encouraging to see like contract wins with new customers. Could you talk a little about how you think -- what was behind the win and how you think that's an opportunity going forward? Stephen Snyder: Allen, if we think about our overall sales team and our marketing team, we've expanded that team by 2 or 3x. So we have an increased team that's focused -- increased science team that's focused on cross-selling and also these net new opportunities. Having said that, we continue to see the real opportunities this year being primarily in expanding the wallet share of those existing customers, many of whom we've acquired more recently through the Medsphere and the MAP App transactions. So through those transactions, we've acquired more than 100 new hospitals and health systems who we're working with. And we see significant opportunity to sell more deeply into these existing clients by providing additional services and solutions, AI products, RCM solutions with a real focus on stratusAI and CirrusAI that can add value, and we believe will resonate with this market. So yes, 100%, we've had some new wins. We talked about a new Wellsoft win. Wellsoft is our recently #1 Black Book ranked EHR that's focused on the emergency departments. So we had a win there. And we also had a win with regard to our supply chain product as well. So we have those new wins, but we really think that the real opportunity will be continuing to cross-sell and upsell the existing customers. Allen Klee: Okay. You also -- my last question, and then I'll jump back in. The front-end AI, you mentioned -- I think you said you launched that in December. How do you think about -- and you said it's a very large opportunity, in terms of how you're targeting that and early indications you get of interest? Any comments there? Stephen Snyder: For sure. Yes. Allen, you're talking about our stratusAI product. And again, the market opportunity is estimated to be $4 billion plus. And Hadi can provide a little bit more visibility with regard to the early response, but we've really been encouraged by how well that's resonated with regards to our existing base. Our sales efforts are almost exclusively focused on our existing base, and we're getting significant traction there. But over to Hadi. A. Chaudhry: Thank you. To your point, Steve, so we are seeing a very encouraging early adoption since the launch in -- the commercial launch in December. While we are not disclosing a specific client count at this stage, but our deployment pipeline is really robust across existing ambulatory client base. And we yet need to tap into aggressively into the Medsphere client base that our team has aggressively working towards integrating across the product suite there. So at the moment, we have seen an exceptional interest from our existing client base. So we expect to share more specific adoption metrics as we progress through 2026. Operator: Our next question is from Michael Kim with Zacks Small-Cap Research. Michael Kim: So first, there continues to be a lot of uncertainty in the markets as it relates to AI and the potential impacts on SaaS companies. So just wondering how investors should think about CareCloud's exposure to AI disruption versus maybe being more of an AI beneficiary? Stephen Snyder: Thanks, Michael. And you're 100% right. The SaaS sell-off in the market has been significant and has not discriminated. It has not discriminated between companies where there really is a more significant risk than those where there isn't. We believe that the companies that are most at risk are the horizontal per seat tools for generic workflows, things like scheduling apps, basic CRM, things like -- companies like that where AI agents can replicate and fully replace that key functionality. That's really fundamentally though, not our business. And I would focus in particular in the health care space. So health care IT, in particular, has very deep industry moats that those horizontal SaaS players simply don't have. So our AI products, as an example, require rigorous testing, certification, approval by a government-approved entity with regard to -- prior to their initial launch and with regard to any fundamental changes we make to them. So the ability to -- for these new market entrances from AI companies is really very limited. And we also operate under HIPAA and a whole web of other health care-specific regulations that create substantial barriers to entry. We're also the system of record for our providers from a clinical, financial administrative perspective. And that data all lives within our existing platform. And if we think about more fundamentally, what our clients in the context of leveraging us accomplish really is in large part, shifting their risk to us. They rely upon us to securely host their data to ensure compliance, to most fundamentally produce revenue for the practice. So our SaaS offering isn't simply a stand-alone tool. It's really the technology backbone that drives our larger revenue cycle management services, which are fully integrated with it. And clients pay us based on the actual value we're producing because the overall majority of our clients pay us a percentage of the practice collections for both the EHR, the technology piece and also the RCM offering. So it's fundamentally different from many of those other companies that are really feeling -- also feeling this impact. I would say one other thing is we also have more than 25 years of proprietary data across hundreds of millions of claims. And that really -- that information and that data informs our AI products, helps us ensure coding accuracy, manage denial management, benchmarking and the like, all things that new entrants in the market don't have. So at least as we look at it, Michael, our thought is that with our valuation being 5x, 6x EBITDA, in spite of the fact we're generating, we generated this last year $20.5 million of free cash flow, we really trade -- we continue to trade at a fraction of the valuations of the market in general and candidly, even a fraction of the valuation of other health care IT peers or more than twice that. So as the market moves away from this more indiscriminate treatment of all companies that are working on some level with AI and we'll move from that to, we believe, a more differentiated approach between those companies that are truly threatened by AI and those for whom AI is actually a key part of their advantage, is a key part of their ability to add additional value to the existing relationships. And we really fall into that second camp. Michael Kim: Got it. Makes a lot of sense. And then second, clearly, earnings power and free cash flow continue to build. So just wondering what sort of assumptions you're building in as it relates to the 2026 guidance ranges and then how you think about sort of the trajectory of growth looking out beyond next year? Stephen Snyder: So to your point, Michael, for us, 2025 was a milestone year. It was our first positive -- our first year of producing positive EPS since we went public back in 2014. And we've had 7 straight quarters of GAAP profitability and free cash flow alone was up 55% as compared to 2024 up to $20.5 million in 2025. So if we think about just our EPS guidance this year of $0.20 to $0.23, that represents more than 100% growth, and we feel very confident about that guidance. Now what's driving that overall growth? It's really being driven in large part by the top line growth. And in addition to that, the integration savings with regard to the companies we've acquired and then really driven largely also by the AI efficiencies. And then add to that the fact that we've eliminated through the conversion in 2025, we've eliminated more than $7.5 million of preferred dividend obligations on an annualized basis. So the increased free cash flow really gives us flexibility to be able to fund M&A for operations. And if you just look at this most recent year, we were able to acquire all 4 companies purely from the cash flow generated during 2025 with 0 dilution to the common shareholders, also able to invest in our AI development and then fully resume payments relative to our Series A and Series B shareholders. And in addition to that, if you think about this year, in addition to all those things, we're also paying double dividends to clear up the arrearage relative to the Series B. So from a funding perspective, operations is really continuing to drive this flexibility and continues to open up new opportunities for us. And as we think even more broadly beyond 2026 and 2027, we believe that we'll continue to fundamentally expand the overall margin profile as we continue to scale. Operator: Our next question is from Michael Galantino with Chaplin Davis. Michael Galantino: Great year, great quarter. Way to finish the year strong. I've been involved with the company for a little over 9 years, and you guys have seen a lot -- we've all seen a lot of changes in the industry. I mean, nobody knew what AI was 9 years ago, and now it's the focus of the company. You guys have done a tremendous job navigating it specifically the last 2 or 3 years. I have a couple of questions. Steve, one to you on the AI front. Does the AI technology and the efforts of the company, does it save money in terms of operationally? And does it increase the margins? And I know you talked about the SaaS stocks that have been coming under -- or the software stocks that have come under significant pressure in the last 3 or 4 months, if you can address that? And the second question is, now that you have excess cash flow -- a lot of excess cash flow, which is a great problem to have, what are the focuses for the use of that money if there are no opportunities to make any more acquisitions this year? Stephen Snyder: Thanks, Mike. I appreciate your questions. So maybe I'll try to address the first one initially. And if you just -- if we think just -- if we kind of back up for a minute and think more fundamentally about the overall revenue of the company, and we go back to, let's say, the fourth quarter of 2024, and we think about our company on an annualized basis. On an annualized basis, we were at, let's say, $110 million roughly. We think about where we are today, probably $125 million. These are all very rough numbers. So we've increased the overall revenue base by about 14%, 15% roughly. And we've done all that while actually reducing the number of employees that we have today as compared to 2024. So I think that really more fundamentally, at least on a qualitative level, speaks to what we're able to do, and that's in large part driven by AI and automation. And as the year progresses, I believe you'll continue to see us being able to do far more with far less. So that -- those savings and that margin, we believe, will continue to increase as we move forward. And again, in the whole scheme of things, we're probably in the first inning. So this is really just beginning. We just launched our AI Center of Excellence less than a year ago. So these realities, the long-term realities are yet to be fully seen in the financials. But again, based upon the numbers as we see them today, we think there's significant opportunity for us to be able to reduce overall expenses associated with the revenue as we continue to grow it. The second thing is with regard to the use of that free cash flow. We continue to look for these opportunities to be able to put that capital to work with regard to these acquisitions. So acquisitions in our space, again, with a focus on being able to acquire companies from our internally generated cash flow ideally. So that would be one key focus. The second key focus would be continuing to -- as the opportunities present themselves and as our profit margins continue to grow to look for opportunities to be able to continue to enhance our overall capital structure as time progresses. That would be another opportunity that we look forward to pursuing and also continuing to invest in AI, continuing to look for opportunities to expand the existing capacity of our software products and to continue to handle an increasingly larger and larger share of the responsibilities that our clients are handling today. Michael Galantino: Just a quick follow-up. When you guys are competing for this business, who is your competition? Who's out there bidding on the same business that CareCloud is right now? Are there much larger firms? Are they smaller start-ups? Or who is our direct competition for this business? Stephen Snyder: Good question, Mike. I think to answer that, we probably would have to break that into a couple of different areas. So from an EHR perspective, we're oftentimes competing against companies like eClinicalWorks, AdvancedMD and other similar players really focused on being on the ambulatory space. So those would be 2 of the main companies plus athenahealth would be a third company where there's a greater mix and more of a focus on the integrated solution that involves the delivery both of software and also of the revenue cycle management services. From an AI perspective, the playing field is wider, and it really then depends again on the products. So for instance, our CirrusAI product, that product that's more focused, for instance, on the -- using the audio and the ambient sound from the communications between the provider and the patient in the exam room to really populate the chart, many of our competitors in this space are offering very similar solutions. Some of those solutions are native. Other solutions are through a third-party application and integrate into their platform. From the perspective, though, of the product that Hadi was talking about before, many of our competitors actually aren't offering that solution. But kind of one company maybe to think about would be SoundHound. So SoundHound has a product that is actually very similar in many respects called Amelia, and Amelia has a lot of that same functionality. But SoundHound, unlike us, does not have a vertical -- does not have a vertical approach. They're an outside player selling horizontally into this space. So they don't have their own EHR, for instance, in which they can incorporate this product. But SoundHound is also interesting because if we look at their overall valuation, it's about 20x today, 20x the EV. So compare and contrast that with ours, and we think there's a lot of opportunity for investors once the market really understands that we have a proof of concept and we are able to demonstrate real success at rolling out our solution to our existing customer base. Operator: Our final question is a follow-up from Allen Klee with Maxim Group. Allen Klee: Yes. Just on the financials quick thing. In terms of your outlook, any comments on thoughts of CapEx and capitalized software spending? And your guidance overall, does it include any unannounced acquisitions? Stephen Snyder: Great question. I'll let Norm handle the first part of that, but the answer to your second part of your question is no. It does not include any unannounced material acquisitions. Norman Roth: And I think, Allen, you're looking at CapEx and software, I think if you look at the levels from this year, I think they'd be the same or maybe a little less. So if you wanted to use that as your forecast. Allen Klee: Okay. Maybe just following up in terms of the run rate on operating expenses, to what extent -- I know you're increasing R&D, but do you still anticipate utilizing AI can get you some benefits on the expense side? Stephen Snyder: Absolutely. We do. We do. And candidly, as we sit here today as compared to a year ago, we believe we can accomplish everything that we're setting up to accomplish in terms of AI, and we can accomplish it with a smaller team than we had initially envisioned. There's been so much progress from an AI perspective in terms of the key models that we use to -- as the girding in our overall framework that we really believe that we can increasingly achieve what we're setting out to achieve from an AI perspective with a leaner team than we had initially envisioned. So I think there'll be less spending from the perspective of the AI Center of Excellence. And beyond that, the spend that -- the investments that we're making today will really continue to make us more efficient and continue to expand margins. Operator: With no further questions, I would like to turn the conference back over to Norman for closing remarks. Norman Roth: Thank you, everyone, for attending our call today. Have a great day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Here's earnings conference call. [Operator Instructions] Please note that today's event is being recorded. I will now turn the conference over to Ms. Tina Tang, the company's Manager of Investor Relations. Please go ahead, ma'am. Tina Tang: Thank you. Hello, everyone, and welcome to Here's earnings call for the second quarter of fiscal year 2026. With us today are Mr. Peng Li, our Founder, Chairman and CEO; and Mr. Tim Xie, our CFO. Mr. Li will provide a business overview for the quarter, then Tim will discuss the financials in more detail. Following their prepared remarks, Mr. Li and Tim will be available for the Q&A session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IR website at ir.heregroup.com. You can also access a replay of this call on our IR website. When it becomes available a few hours after its conclusion. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call. As we will be making forward-looking statements, please note that all numbers stated in the following management's prepared remarks are in RMB terms, and we will discuss non-GAAP measures today which are more solidly explained and reconciled to the most comparable measures reported in our earnings release and the filings with the SEC. I will now turn the call over to the CEO and the Founder of Here. Mr. Li. Peng Li: Okay. Good morning, everyone, and thank you for joining us today. Just over [ 3 months ] ago, we held our first earnings call as a pure-play portfolio company. We shared our vision of focused acceleration. Today, I'm pleased to report that we have not only maintained that momentum but also began translating it into the durable long-term value we promised. This quarter marks a significant milestone with our first full quarter operating as a dedicated IP trained company. We have a clear and firm strategy and we are continuously optimizing in execution in a rapidly changing market environment. Building on our Q1 outperformance, Q2 delivered strong results. Total revenue reached RMB 177.3 million, representing 35.4% quarter-over-quarter growth. This performance exceeded the high end of our guidance and reflects a sustained and steady momentum following our strategy. We continue to focus our flagship IPs to create an ultimate product appeal. Our flagship IP, WAKUKU contributed on the RMB 129.4 million, accounting for 73% of Q2 revenue. SIINONO is another potential flagship IP. It has been gaining momentum since its initial launch in July 2025. It's generated over RMB 19.2 million in revenue this quarter. This is not just about product's success, it demonstrates that our IP-first strategy is successfully converting more consumers into a growing base of our users. This quarter, based on our observation on changing market conditions and our evolving operational insights, we improved our strategy implementation in a timely manner. We have gained a deep understanding. Product sales for a period of time are not the only metric to measure an IPs success. The ultimate goal of our operations is to build IPs that users love and that process lasting vitality. We expanded sales contribution from off-line distributor channels. This allows users to experience IP products more intuitively. We have opened 5 offline D2C stores, positioning as a dedicated venue for brand user interaction. We are continuously optimizing the operational experience. Our online operations team has also improved our user membership system. This quarter, we refined our core operational systems. This covers IP portfolio health, product appeal, supply chain efficiency, channel effectiveness and user engagement. These efforts aim at building enduring value, not just focusing on quarterly revenue. Building on the framework we discussed last quarter, let me walk you through the performance of our two pillar growth strategy this quarter. Pillar one, IP ecosystem, moving from a creative to a systematic pipeline. In Q1, we demonstrated our ability to turn IP launches into cultural phenomena. The WAKUKU split in Shanghai was a great example. This quarter, we refined our operational approach. We identified what works and applied those licenses systematically. Our IP and product development now rely on continuously improving mechanisms, data-driven systematic engine. Let me share a snapshot of our IP portfolio. As of December 31, 2025, we had a total of 18 IPs. That includes 11 proprietary exclusive licensed and two nonexclusive licensed IPs. This diversified portfolio from our IP ecosystem condition. We have established a comprehensive end-to-end mechanism carrying everything from IP planning to production and promotion. The WAKUKU On A Roll series launched in late November 2025 it builds WAKUKU's growing success. It took our daily [ continuous ] concept to new highs. We introduced a many authorized from factor for full scenario integration. [ The only thing ] about WAKUKU is the entirely new category of [indiscernible] as everyday companies. The market response was immediate. We achieved total omnichannel sales, surpassing RMB 18 million within one week along with over 84,000 presale registrations. Our 56,000 peak concurrent online users and over RMB 100 million in total new product exposure. For SIINONO, the success of it's latest release is clear. The Whispers of "Ta" series value plus store hit over RMB 11 million in omnichannel sales within a week with more than 60 peak concurrent online users and total exposure reaching RMB 170 million. The IP journey begins at launch, but it extends far beyond this quarter. This quarter, WAKUKU was invited by the Tianjin culture and the tourism bureau to serve as a promotion ambassador. This demonstrates our success integrating IP with culture and tourism development. Recently, WAKUKU also launched a co-branding collaboration with Lukfook jewelry [indiscernible]. This continuously enhanced IP influence. We are planning to enrich our narrative grows through our live content strategy. That short-from storytelling that depends emotional connections. [indiscernible] IP influence from physical spaces into narrative spaces. It expands sustained emotional engagement between IPs and [ brands ]. Pillar two, omnichannel reach. Our approach ranges from online brand visibility to offline user experiences, we are continuously depending the connection between IP's products and the users. Our diverse channels are not just sales points. There are portals for IP user interaction and experience. They continuously empowering the IP ecosystem. Building on last quarter's massive organic reach, our members are strong. As of February 26, 2026, our total cumulative followers across major social platforms in China reached approximately 700,000 and our cumulative social media exposures exceeded RMB 1.8 billion. This growing digital footprint forms one of the foundations of our brand and IP-driven model. For off-line channels, we position our D2C stalls as brand users interaction and experience hubs. Since December 2025, we have opened 5 D2C stores in Beijing, Shenzhen and Chongqing. To date, additional two stores are in the preparation stage. A notable example is the ground opening of our Shenzhen Upperhills flagship store on February 1 this year. We invited a celebrity to serve as store manager for a day. This grew a massive ground and it generated a strong same-day sales of approximately RMB 250,000. This validates the power of our off-line experiential approach. Our Shanghai K11 pop-up generated strong social media buzz and even become a trending topic and this event has more become one of the key drivers of both traffic and sales. On 2026, New Year's Eve, we held here at [indiscernible] an exhibition and the light show in core commercial districts such as Wangfujing in Beijing, Gulou in Tianjin, and K11 in Shanghai. Through this landmark's public spaces, we achieved high traffic, which under dependent interaction between the brand and the consumers. At the same time, we are deeply leveraging the powerful and the creative tools of the AI era and innovating vigorously in the area of smart sales Terminals. We expect to deploy our intelligent sales robots to more offline locations for user interaction in the near future. The change in gross margin this quarter reflects our strategic participation of partnerships with small offline distributor channels. we are committed to providing more interactive and cocktail experience through will diversified offline channels to our consumers. This deepens IP connections and strengthen user loyalty through physical engagements. We firmly believe that the strategic investment will lay a solid foundation for the company's long-term healthy development. Our international strategy continues to gain momentum. On one hand, as our supply chain capability improved, we are working with domestic distribution partners to promote overseas export sales. On the other hand, we are actively seeking local overseas partners for IP and product sales collaborations. As we continue to refine our approach, the appeal of various international markets is steadily increasing. This quarter, we continue to optimize our organic base organizational structure and the core operating platform. We refined our cost structure. We now have a leaner and more focused team and cost structure compared to the first fiscal quarter. We are building an integrated operational systems that will be a crucial competitive advantage. On the supply chain brands, we -- our production capability -- capacity is now approximately at 50x what it was at the beginning of 2025. This progress further step from last quarter was a solid foundation for creating [indiscernible] product this year. Operational excellence provides a solid foundation for our capital allocation. We will continue to invest in high potential IP development, strategic metric expansion and our live content initiatives. We will continue to systematically build cultural assets based on IP. As a dedicated IP-trained company. we are committed to continuously improving our operational efficiency and financial health. The journey of building an enduring company requires patients and discipline, and we are fully committed to both. I will now turn it over to Tim for a detailed review of our financial results. Thank you, everyone. Dong Xie: Thank you. Before I go into the details of our financial results, please note that all amounts are in RMB terms, that the reporting period in the second quarter of fiscal year 2026, ending on December 31, 2025. And then in addition to GAAP measures, we'll also be discussing non-GAAP measures to provide greater clarity on the trends in our actual operations. We are pleased to report another quarter of solid financial performance, marked by continued revenue growth and further improvement in our profitability metrics. This demonstrates the sustained successful execution of our strategy as an IP-based product-driven pop toy company. Total revenue reached RMB 177.3 million, representing a 39.4% increase from the previous quarter. Gross profit reached RMB 55 million with a gross margin of 31% compared with total revenue of RMB 127.1 million and a gross margin of 41% in the previous quarter. Adjusted net loss from continuing operations continued to narrow to RMB 161.1 million, down from RMB 17.1 million in the previous quarter. These results reflect the growing traction of our pop toy products and operating leverage, we are beginning to realize in our focused business model. Revenues for the quarter were RMB 177.3 million entirely generated from the sales of pop toys and other related activities compared to RMB 127.1 million in the previous quarter. This sequential growth is primarily driven by our off-line channel sales. Gross profit for the quarter was RMB 55 million compared to RMB 52.4 million in the previous quarter. Our gross margin decreased to 31% this quarter from 41% in the previous quarter. The margin decline reflects our strategic expansion of off-line channels which generated lower per unit margins than direct online sales. This channel diversification strategy is designed to enhance IP engagement and strengthen customer loyalty through physical retail experiences, aligning with the company's long-term vision as a leading IP chain company. On the operational front, total operating expenses were RMB 93.2 million for this quarter. To break this down, sales and marketing expenses were RMB 52.8 million. These expenses nearly included advertising and promotion expenses and staff compensation to support brand building and customer acquisition efforts across multiple platforms. As a percentage of total revenue, non-GAAP sales and marketing expenses, which include share-based compensation changed to 29.6% this quarter from 21.7% in the previous quarter. Research and development expenses were RMB 9.1 million. These expenses were mainly consisting of IP design and product development expenses. As a percentage of total revenue, non-GAAP research and development expenses, which exclude share-based compensation, changed to 5.1% this quarter compared to 12.5% in the previous quarter. General and administrative expenses was RMB 31.3 million. These expenses reflected our operational functions, including employee compensation, professional service fees and other operational expenditures. As a percentage of total revenue, non-GAAP general and administrative expenses which excludes share-based composition changed to 12.7% this quarter from 23.2% in the previous quarter. Our net loss from continued operations was RMB 25.4 million compared to RMB 25.8 million in the previous quarter. Our adjusted net loss from continuing operations was RMB 16.1 million compared with RMB 17.1 million in the previous quarter. Basic and diluted net loss from continuing operations per share were RMB 0.16 during this quarter. Basic and diluted adjusted net loss from continuing operations per share was RMB 0.1 during this quarter. Regarding our balance sheet position, our accounts receivable amounted to RMB 32.6 million as of December 31, 2025, primarily attributable to revenue from our off-line channel sales. It's worth noting that despite significant revenue growth from off-line channels during this quarter, our accounts receivable balance actually decreased markedly compared to September 30, 2025. This improvement reflects our intensified efforts to enhance customer engagement management capabilities and strengthen collections discipline. Our inventories were RMB 111.8 million as of December 31, 2025, representing a significant increase from the prior quarter. This was primarily driven by enhanced supply chain capacity and efficiency as well as inventory build proactively in anticipation of the Chinese New Year factory closures and new product launches in the upcoming quarter. We view this as a strategic move to ensure we are well positioned to meet upcoming demand. Looking ahead, we remain excited about the growth prospects for our pop toy business. Based on currently available information, including our pipeline for the upcoming IP releases and seasonal demand, we expect revenue from our pop toy business to be in the range of RMB 140 million to RMB 150 million for the third quarter of fiscal year 2026 and in the range of RMB 750 million to RMB million for the full fiscal year of 2026. This forecast reflect our confidence in the total market opportunity and our ability to scale our IP portfolio and expand internationally. That concludes my prepared remarks. Operator, let's open up the call for questions. Thank you. Operator: [Operator Instructions] The first question today comes from Alice Cai with Citibank. Yijing Cai: Just one quick question. The revenue guidance for third quarter suggests a quarter-over-quarter decline of about 15% to 20%. Is it primarily due to seasonality? Or are there any specific adjustment due to your IP launch schedule for the upcoming quarter? Dong Xie: Thank you, Alice, for the question. Indeed, those factors have contributed. But the core message is that we are actively building momentum for subsequent growth. Firstly, regarding seasonality, given that our current business primarily operate through a distributor model. Distributors naturally slow down their operations and inventory stocking during the spring festival holiday. This is within our expectations and represents a common seasonal fluctuation in this industry. And secondly, regarding the recent and pace of our product launches. This is not an adjustment, but rather a proactive arrangement based on our annual planning. Our products are typically planned 3 to 6 months in advance with dynamic optimization made based on market feedback. Currently, we are fully prepared for our product pipeline in the coming quarter and beyond, with major new products expected to launch successively starting from this end of March. Therefore, what we are seeing in the short term is the normal seasonal dip from a medium- to long-term perspective, this is proactive management on our part to welcome a new product cycle and optimize inventory and channel pace. Operator: The next question comes from Liping Zhao with CICC. Liping Zhao: [Foreign Language] I'll transfer it myself. So my question is about the cooperation of other companies in the future. We noticed that the Shenzhen Yiqi has recently established a joint venture with Enlight Media that this partnership means we will be working closely with Enlight Media in areas such as content creation and IP development? Dong Xie: I think Mr. Li will answer this question. [Foreign Language] Peng Li: I will answer the question in Chinese and Tina will translate for me. Okay. [Foreign Language] Tina Tang: Thank you for your interest. Regarding our cooperation with Enlight Media, it is a key part of our efforts to deepen our IP strategy. Peng Li: [Foreign Language] Tina Tang: First, over the past year, we have successfully taxed and confirmed the commercial path from IP images to pop toys by focusing on our core IP to create key products. We have built a solid foundation centered on the product gens. Peng Li: [Foreign Language] Tina Tang: Second, we have always trusted the talent of IP comes from continuous contact support. And both the [ third column ] is very important to this. We focus not only to sell in the physical products like the blend boxes and the plush toys, but also on the long term, develop our IP. So we are now enhancing our IPs through the suitable content forms. We're doing this by bringing in excellent contact tailwinds like the Enlight Media and cooperating with the top industry partners. Our goal is to add a cultural meaning to our IPs and strengthening emotional connection between users and IP. Peng Li: [Foreign Language] Tina Tang: Finally, the joint venture within Enlight Media, you mentioned it's exactly one of the specific projects to carry out our product and content stewardship strategy. We hope to explore more possibilities for our IPs in areas like the film and the television contact and derivative development through such cooperation. As for specific future plans, we will disclose them to the market when there is a substantial progress. Operator: The next question comes from Yichen Zhang with CITIC Securities. Yichen Zhang: My question is about our operations strategy. The company was very successful in IP operations last year. So are there any new strategies for IP operation and marketing in this year? Dong Xie: Okay. Thank you for questions. I'll take this. This year, the core keyword for our IP operations and marketing strategy is a comprehensive upgrade from -- maybe we can call that opportunistic creativity to a systematic IP factory. This is reflected in 3 key areas. The first one is on the product front. We have built a replicable assembly line for IPs. Extreme product excellence is the foundation of everything. Through our product committee mechanism, we rigorously select IPs based on 3 dimensions: the visual distinctiveness, story potential, storytelling potential and audience resonance, ensuring that every category launch has a generic makeup to become more classic. Concurrently, we have established a complete process from discovery and incubation to development and launch and then to fulfill the full-size life cycle management, making it possible to replicate and sustain at products. A great product in itself is the best nourishment for IP. We continuously strengthen our in-house teams and integrate outstanding external resources, injecting vitality into our IPs with product excellence. And secondly, on the operations front, we have developed an iterable omnichannel marketing methodology. Over the past year, we have continuously summarized and optimized our operational experience, forming a replicable playbook that we constantly refine and iterate. This year, we will flexibly deploy differentiated marketing strategies based on the unique characteristics of different IPs and products, whether it's celebrating collaborations, branding, crossovers with major sports events or integrated online to off-line user engagement activities. Our goal is to leverage precise operational support to ensure great products are sent and loved by more people. And third, on the content front, as just discussed by Mr. Li and the CICC analyst. We are opening a new chapter of light content empowerment for IPs. And this is a crucial step in our journey from purely physical space to narrative space, and from product moments to sustain store retiring. Through appropriate content, we infused our IP with culture substance and emotional depth, transforming them from mere trendy toys into cultural symbols, with stories and vitality. This multidimensional empowerment across products, content, operations and branding has one ultimate goal, to build truly enduring evergreen IPs. So that's our training strategy so far. Operator: The next question comes from [indiscernible] with [indiscernible] Securities. Unknown Analyst: My question is about our channel expansion. I wonder how is the performance of the -- our recent offline stores have reached our expectation and what's the channel expansion plan in year 2026? Dong Xie: Okay. I've answered your question. I thank you for your interest in our store operations. Regarding our offline stores, I will address this from three dimensions: the short-term performance, strategic positioning and future plans. Firstly, regarding short-term performance, our newly opened stores have generally met or even slightly exceeded our internal expectations. Since late last December, in last year 2025, we have opened 5 D2C stores in Beijing, Shenzhen and Chongqing. Although they have been operating for just over one month, the overall performance has been solid, and we have broadly achieved nearly breakeven or commendable result for newly opened stores in their initial phase. Of course, due to differences in customer profiles across various shopping districts, we are continuously fine-tuning the operational strategies for individual stores. And second, regarding strategic positioning, we value these stores not only for their sales contribution, but also and more importantly, for their role as brand landmarks and user touch points. Our offline direct to sale stores are core scenarios for fostering deep interaction between our IPs and users. To this end, we recently established a user operation center the organization in our company aimed at integrating online and offline data and user and planning more cohesive interactive activities with our IP platform and the product launch pace as a crucial component of this strategy, the value of our stores for brand showcasing and user connection far exceeds near sales figures. Operator: As there are no further questions, I'd like to hand the conference back to management for closing remarks. Tina Tang: Thank you again for joining our call today. If you have any further questions, please feel free to contact us or submit a request through our IR website. We look forward to speaking with everyone in our next call. Have a nice day. Operator: Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the HighPeak Energy, Inc. 2025 fourth quarter earnings conference call. At this time, participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the Q&A session, please press *11 on your telephone. You will then hear an automated message indicating your hand is raised. To withdraw your question, please press *11 again. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Steven W. Tholen, Chief Financial Officer. Please go ahead. Steven W. Tholen: Good morning, everyone, and welcome to HighPeak Energy, Inc.’s earnings call. Representing HighPeak Energy, Inc. today are President and CEO, Michael L. Hollis; Executive Vice President, Ryan Hightower; Executive Vice President, Daniel Silver; Senior Vice President, Chris Monday; and I am Steven W. Tholen, the Chief Financial Officer. During today’s call, we may refer to our March investor presentation and press release which can be found on HighPeak Energy, Inc.’s website. Today’s call participants may make certain forward-looking statements relating to the company’s financial condition, results of operations, expectations, plans, goals, assumptions, and future performance. Please refer to the cautionary information regarding forward-looking statements and related risks in the company’s SEC filings, including the fact that actual results may differ materially from our expectations due to a variety of reasons, many of which are beyond our control. We will also refer to certain non-GAAP financial measures on today’s call, so please see the reconciliations in the earnings release and in our March investor presentation. I will now turn the call over to our President and CEO, Michael L. Hollis. Michael L. Hollis: Thank you, Steve. Good morning, everyone, and thank you for joining us. I thought about kicking off things today by walking through our 2025 results and the execution of our business plan, but that feels like a whole different world today. I am far more energized by what lies ahead than by revisiting what is already behind us and implemented. For anyone interested in a deeper look at the changes that brought us to this point, our prior quarter’s investor presentation and earnings call transcript offer a comprehensive overview. So with that, let us turn the page and talk about 2026 and how we are positioning the company to move forward with purpose, confidence, and a whole lot of momentum. In today’s fast-moving geopolitical and commodity landscape, we are approaching 2026 with focus and discipline. Our focus is clear: protect profitability, maximize cash flow, and strengthen the foundation of our business, not pursue growth for its own sake. Over the past several quarters, we have taken a hard, honest look at every part of our business, and that work continues today. It has given us a firm handle grounded on financial discipline and operational excellence. This means a plan we can fully and confidently execute within cash flow, sustaining stable production with minimal capital intensity, and driving further efficiency gains to expand margins. Our top financial priority is strengthening the balance sheet. As commodity prices rise, incremental cash flow will be directed first toward debt reduction and liquidity improvement. To support that objective, we are taking several decisive steps. First, we right-sized our annual capital budget to ensure our development program stays within cash flow even in a much softer price environment. Second, we expanded our hedging program to reduce exposure to volatility and secure pricing that supports continued investment and debt reduction. Third, we suspended our dividend, which will increase annual liquidity by an estimated $20 million to $25 million. The reality is the market was not giving us credit for the dividend, and most of the investors we speak with regularly have shared that same perspective. We believe that capital is far better deployed strengthening the balance sheet and building long-term value for our shareholders. We are positioning the company to thrive not just for the next couple quarters, but for years to come. Our 2026 development plan is intentionally conservative and built for durability. It is anchored around one drilling rig and roughly one completion crew, which positions us to drill about 30 wells and bring 36 to 38 wells online over the course of the year. We designed this pace of development with three clear objectives in mind. First, to ensure we operate fully within cash flow, covering every financial obligation even if oil prices settle in the mid to upper $50s. Second, to maximize free cash flow in a stronger commodity environment so we can accelerate debt reduction. And third, to maintain strict cost discipline across the organization. Given the recent strength in oil prices, this is an opportune time for us to lean into debt reduction and continue improving our financial footing. Our 2026 program also reflects a balanced approach between investing in new wells and optimizing our existing base production. You can see that balance clearly in our capital allocation. Our capital budget is nearly 50% lower than last year, while unit lease operating expenses per BOE are modestly higher as we invest in targeted initiatives to enhance base production. The result is a development program built for capital efficiency, highlighted by an estimated 65% increase in production per dollar invested. And the early results are encouraging. Quarter-to-date, production is averaging more than 46,000 BOE per day. That is roughly 10% above the midpoint of our 2026 guidance range, even after accounting for the impacts of Winter Storm Firm. Based on today’s market environment, we believe production in the low to mid-40,000 BOE per day range represents a sustainable baseline for our 2026 budget and our plans to reduce absolute debt. Stepping back, it is important to recognize how the market is valuing companies like ours today. In the current environment, SMID-cap E&Ps are rewarded for durable free cash flow, balance sheet strength, and meaningful high-quality inventory depth. What they are not rewarded for is headline production growth. Now there are a few realities shaping our industry right now. Core Permian inventory is becoming increasingly strategic. Tier one shale inventory is finite. Future wells will naturally move down the quality curve as inventory tightens. And preserving and expanding high-quality inventory is what drives long-term value. Now with that in mind, our guiding principle is straightforward: return on capital employed matters more than production growth. Disciplined development today allows us to protect and preserve our tier one inventory for a future time when our financial capacity and a strong, sustained commodity environment align. What are we doing to support this strategy? Our disciplined approach centers on several key priorities. First, we are protecting liquidity and reinforcing our financial position by eliminating the dividend and expanding our hedge position. Second, we are moderating drilling activity so the business remains cash flow neutral even if oil prices move down into the mid to high $50s, while still positioning us to accelerate debt reduction if prices remain strong. Third, we are investing in optimizing across our base production, generating incremental volumes and cash flow without the capital intensity that comes with drilling new wells. And finally, we have continued to delineate additional high-return inventory across our acreage, expanding the long-term opportunity set for the company. Taken together, these actions position HighPeak Energy, Inc. to increase free cash flow, reduce leverage and potentially lower our cost of capital in the future, preserve premium inventory for periods of sustained stronger commodity prices, expand our strategic optionality—whether through drilling, production optimization, or potential accretive M&A—increase long-term NAV realization for shareholders, and ultimately, implementing these key priorities will strengthen the value of our equity. Let me take a moment to talk about our capital allocation philosophy, because it is the backbone of long-term shareholder value. Our approach, again, is straightforward and disciplined. We will protect the balance sheet; a strong financial position gives us the flexibility to navigate commodity cycles and act when appropriate and opportunities present themselves. We will prioritize high-return investments; every dollar we deploy must earn its place, whether it is drilling a new well, optimizing existing production, reducing debt, or pursuing strategic opportunities. We will preserve premium inventory; tier one drilling locations are finite across the industry and disciplined development today safeguards the long-term value of those assets. And finally, we will focus on generating sustainable free cash flow that strengthens the balance sheet, allows us to potentially lower our cost of capital in the future, and ultimately supports a higher long-term equity valuation. When you look at the 2026 development plan through that lens, every decision—from reducing activity levels, eliminating the dividend, expanding our hedging program—is designed to enhance the durability and long-term value of the business. Simply put, our goal is not to grow the fastest. Growth should be the outcome of a well-executed, financially solid plan. This does not happen overnight. HighPeak Energy, Inc.’s goal is to build a resilient, valuable company that delivers for shareholders over the long haul. A key part of our capital efficiency strategy in 2026 is the continued optimization of our existing production base. These efforts include targeted well workovers, artificial lift enhancements, and other operational improvements designed to increase recoveries from wells already online. Projects like these typically generate strong returns on invested capital and allow us to unlock additional value from assets we already own. It is a practical, high-return way to drive incremental volumes and cash flow without the capital intensity of new well drilling. Let me now provide a quick operational update across our core development areas. At Flat Top, our results in the North Borden area—see slide 6 of our presentation—continue to demonstrate strong performance in both the Lower Spraberry and Wolfcamp A. These wells are delivering outcomes comparable to what we see in our core Flat Top area, which reinforces the quality and consistency of this acreage. The northernmost row of wells in our North Borden area is the only part of the field that will require minimal incremental infrastructure, and we expect that work to take place in tranches beginning in late 2026 and into 2027. Now in the core of the Flat Top area, we will continue developing Lower Spraberry and Wolfcamp A locations using the infrastructure already in place, driving corporate efficiency higher. In the Northeast Flat Top area, highlighted by the small red box also on slide 6 of our March investor deck, six wells experienced anomalous water inflows. We completed remedial work on several of those wells and are seeing encouraging early results. Because of the presence of the water flows, our 2026 plan includes no new drilling in the Northeast Flat Top area. Instead, we are focused on maximizing value through the remediation and optimization of the existing producing wells. Importantly, the impact to our long-term inventory is minimal. Even if we chose not to drill any additional wells in this area, it would affect only 18 Wolfcamp A locations that we carry in inventory, as we do not carry any additional zones in inventory for this area. We are also seeing encouraging progress in delineating the Middle Spraberry across both HighPeak Energy, Inc. and our offset operators. There are now nine successful producers, and we expect that momentum to continue with roughly six additional delineation wells planned between HighPeak Energy, Inc. and our offset operators in 2026. Our long-term objective for the Middle Spraberry is clear: convert more than 200 Middle Spraberry locations at Flat Top into fully delineated sub-$50 breakeven inventory. At Signal Peak, we will continue developing our core area in the Wolfcamp A and Lower Spraberry, both of which continue to deliver strong, consistent results—see slide 7 of the presentation. Beyond those core zones, Signal Peak holds substantial upside. We have demonstrated Wolfcamp D performance across the field in two different landing zones. With results that closely track one another, the resource is clearly present across the acreage, and it is not going anywhere. We have not drilled a Wolfcamp D well in roughly three years; however, during that time, the industry has made meaningful strides in optimizing deeper wells. We will continue to evaluate the development of the Wolfcamp D to determine when the economics fully support those wells competing for capital. We also see additional long-term potential in the Middle Spraberry, Wolfcamp B, and Wolfcamp C formations, which add further depth and optionality to our inventory over time. Our drilling results and technical work continue to reinforce what we believe is one of the deepest premium inventories among SMID-cap operators. Today, HighPeak Energy, Inc. has more than 2,600 total drilling locations across the stacked Spraberry and Wolfcamp formations. At our current cadence of drilling, that includes more than 30 years of high-return inventory in the Wolfcamp A, Lower Spraberry, and Middle Spraberry alone, over 100 total rig-years of inventory across the full stack. This level of inventory depth meaningfully differentiates HighPeak Energy, Inc. from most of our peers. One point that we believe the market continues to underappreciate is the growing scarcity of tier one shale inventory across the Permian Basin. The industry has spent the last decade or so developing its best rock, and the reality is that premium locations are not infinite. As that inventory tightens across the basin, the strategic value of companies that still hold significant high-return drilling inventory will only increase. Our responsibility is to develop those locations with discipline, maximizing the long-term value for our shareholders. When we think about the value of this company, several key components stand out. First, our existing production base, a highly visible, reliable source of cash flow that underpins the business today; and at current valuation levels, HighPeak Energy, Inc. is trading close to the PV-10 proved-developed value. But the real long-term value lies with the untapped inventory. That inventory includes approximately 200 proved undeveloped locations in our core zones, more than 400 additional premium Wolfcamp A and Lower Spraberry locations, over 200 Middle Spraberry locations progressing toward the sub-$50 breakeven delineation, and further upside potential in the Wolfcamp B, C, and D zones. All of this is complemented by our continued focus on optimizing existing production, which enhances returns and strengthens the value of our asset base over time. In closing, our focus in 2026 is on returns and resilience, not headline growth. We will apply strict capital and operational discipline to protect the bottom line. We will prioritize free cash flow generation. Any incremental free cash flow will first be directed toward reducing leverage and strengthening the balance sheet, positioning us for a lower cost of capital over time. We will remain precise and selective in how we deploy capital, concentrating on high-return inventory, base production optimization, and disciplined delineation of additional premium locations. At our current development pace, our premium inventory alone represents decades of high-return drilling, even before accounting for the additional upside we can continue to delineate across our acreage. And as tier one shale inventory becomes increasingly scarce across the industry, the strategic value of remaining core drilling locations will only continue to rise. Ultimately, we are building a company designed to generate strong returns across commodity cycles, improve long-term NAV realization, and strengthen our equity value. And it all starts with reinforcing our financial foundation. Before I close, I want to recognize our employees. The progress we have discussed today is a direct result of their hard work, grit, and professionalism. Day after day, they show up, tackle challenges, and keep this company moving forward. Their commitment, both in the field and in the office, is the backbone of everything we are building. Again, I am deeply grateful for what they do. With my comments now complete, operator, please open the call up for questions. Operator: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press *11 on your telephone. If your question has been answered and you wish to remove yourself from the queue, please press *11 again. Our first question comes from Noah Hungness with Bank of America. Your line is open. Noah Hungness: Yeah. I just wanted to start off here, Mike, if you could add any more color on some of your cost reduction and production optimization efforts that you have implemented over the last six months? Michael L. Hollis: You bet, Noah. Thank you for the question. Obviously, it is what we do every day, so it is not like this was an initiative started, you know, a quarter ago. But to kind of walk through some of the cost reductions that we have seen both on the capital side and on the expense side. We have done a lot of optimization on how we are drilling and completing these wells. Obviously, we get a little faster every day—drilling, a little faster completions. We have also optimized the completion chemical program, the perforation schemes, how we are landing these wells, as well as kind of structural changes to how we complete these wells like utilizing final frac today versus what we were doing in the first part of 2025. So there is a lot on the capital side being more. On the expense side, we are doing a lot of production base production optimization. So think lowering pumps, changing the type of artificial lift that we utilize, utilizing some chemical opportunities that we have for, you hate to say, restimulation, but being able to pump some things downhole that can increase production and, what—yeah—your return from the wells, as well as remove some of what they call skin damage that allows more of the fluid to flow into the well. So we have a program ongoing doing that. And overall, we have had lower commodity prices over the last couple quarters which, you know, again, not that we do not do this every day, but we constantly rebid, reevaluate, look structurally at what we are doing with our infrastructure, how we treat the wells chemically, and go out for bids very routinely. So we are seeing some cost savings on that front. Not just how we are drilling the wells, but just the unit pieces that go into it and staying on top of that and making sure we are getting the best price for HighPeak Energy, Inc. Noah Hungness: That is helpful. And then for my second question, could you maybe help us think about the split of TILs across your development area for 2026? So what does the split for, you know, Lower Spraberry versus Wolfcamp A versus Middle Spraberry look like? And then also, the different development areas that you have helped highlight this quarter, so, you know, North Borden versus your core Flat Top versus your core Signal—if you could just give us any color there. Michael L. Hollis: You bet. So the good news is what we are drilling for the foreseeable future will look almost identical to what we have done for the last year and a half. Right? It is about 70% of the capital will be spent in Flat Top, the northern block. And, again, that happens to be about the acreage split between the blocks, Flat Top and Signal Peak. So 30% give or take of the capital in Signal Peak. Think 90+% of that capital will be Wolfcamp A/Lower Spraberry co-development. The other 5% to 8% of capital will be Middle Spraberry, and some of the Middle Spraberrys will be co-developed with the Lower Spraberrys as well, but it will be in the Middle Spraberry, not in just the A and Lower Spraberry. Now the split between, you know, again, in the Northern Borden versus Flat Top Core—almost 50/50 for the Flat Top area. That 70% will be almost 50/50 between North Borden and Flat Top Central, I guess you would call it. One point to make is, as I said in the prepared remarks, we will not drill any wells like we did in 2025 in that little red box that is on slide 6 of our presentation; there will be no drilling in that area in 2026. Noah Hungness: And so you are TILing a few more wells than you are drilling this year. Can we assume that the percentages you talked about on the drills are going to be pretty similar to the TILs this year? Michael L. Hollis: Absolutely. Because it was basically the same percentage of drills last year. So those TILs go into 2026. And you make a great point. We are completing, you know, call it roughly seven more wells than we are drilling this year. We brought into 2026 something close to 20+ wells, called, you know, operational DUCs. And then if you kind of math out where we will be at the end of the year, we should carry out into 2027 roughly 14 to 15 DUCs, again setting us up very nicely in 2027 to be able to effectuate exactly the same plan that we have in 2026, again, for further strong reduction in absolute debt. Noah Hungness: That is helpful color. Thank you. Michael L. Hollis: Yes, sir. Thank you. Operator: One moment for our next question. Our next question comes from Jeff Robertson with WaterTower Research. Your line is open. Jeff Robertson: Thank you. Good morning. Mike, on slides 10 and 11, you show the production profile and CapEx and the capital intensity. Can you talk a little bit about where the company’s corporate decline curve was at the 2026 and where you think it might be at the ’26 end, and how that plays into the notion of increasing capital efficiency over time and delevering the balance sheet in ’26 and ’27? Michael L. Hollis: You bet, Jeff, and thank you for that question. I may step back a couple of years prior to that instead of starting just on, you know, ’25 and ’26. It is really important. Again, building a company from absolute greenfield all through the drill bit, and building up to close to 50,000 BOEs a day, we had to drill a lot of new wells with several rigs. So if you go all the way back to kind of the exit of 2024, corporate decline rate was, call it, mid-40%. So, again, pretty steep because you have a lot of new wells. At the end of 2025, we were down to about 38% corporate because, if you recall, we had slowed down at the, you know, kind of midpoint of ’24 and into ’25. We slowed way down. And then even midpoint of ’25, we went down to one rig. So as you look forward into 2026, of course, you came into the year right at 38%. At our current cadence and what we will continue to do for at least the foreseeable future, you can expect about 2% decline in corporate decline rate. So the 38% we came into the year with, we should exit the year into 2027 at, you know, 36% or so. And to your point, as your corporate decline goes down, the amount of CapEx needed for maintenance CapEx to hold your production flat also comes down by that kind of relation. Jeff Robertson: Does HighPeak Energy, Inc.’s amortization on the term loan start again in the third quarter? I think it is about $120 million a year. So if you were to be—if, let’s just say, over the next four quarters beginning this year, $120 million a year is roughly $1 a share, based on 125 million shares outstanding. Are you trying to position the company where you could accelerate the amortization of the term loan? Michael L. Hollis: Absolutely. So, Jeff, and the great thing is the amortization is a set rate, right? It is $30 million a quarter. The great thing about where we sit with the term loan is that we have the ability to pay down any amount on the term loan at par. So to your point, we can take any additional free cash flow that we are generating with this capital-efficient program in 2026, in the backdrop of commodity prices being higher today. And, you know, I think it is a little—literally me. Right? We are geared very heavily to oil price. And as you mentioned, where else could you find in the public world where you have such a high gearing to the debt level that we have? To your point, in this environment, we will be able to pay down debt at a much accelerated rate, and for every $125 million we pay down, as you absolutely said correct, it should be roughly $1 per share. And in today’s price environment, that is close to a 20% increase in market value. By doing exactly the same thing in the next year, you should have similar results except you pay down more debt and there is kind of a snowball effect because we do have a high cost of capital, call it 10+% interest, and it would be reasonable to assume that later down the road, once we get the financial house in order by staying very disciplined, we will have opportunities to hopefully lower that cost of capital going into the future. Jeff Robertson: Thanks. And so, lastly, on operations, Mike, is there anything structurally with respect to, say, water handling or anything else in the field that you are working on in 2026 that might offset some of the production optimization spending that you outlined? Michael L. Hollis: So, you know, the good thing is anything we do to optimize production increases the revenue that we have in, lowers all of the per-BOE metrics that we have. Now, on the water system, the great thing is the water system is there. It is paid for. It has been there for a while. We just utilize what we already have, which makes both on the capital side for recycled water for stimulations, as well as disposal of any of the produced fluids, very, very efficient. And when you look at the capital reduction or what we like to call the intensity of capital needed to produce a certain level of volumes of hydrocarbons, it continues to go down over the last couple years. If you go all the way back to 2023, HighPeak Energy, Inc. spent $1 billion. In 2025, it was, you know, call it $500 million. 2026, half that number. Now, I do not want anyone to think 2027 is going to be half of 2026. It will be slightly lower because we do have some infrastructure that we have planned and in the budget in 2026 that is not going to happen in 2027. So think $15–20 million cheaper total CapEx in ’27 to effectuate the exact plan that we have for ’26. The company will continue to get more efficient. And as you laid out earlier with the corporate decline dropping each year, that also helps accelerate that corporate efficiency. Operator: Thank you. Michael L. Hollis: Yes, sir. Thank you. Operator: Once again, ladies and gentlemen, if you have a question or a comment at this time, please press *11 on your telephone. And I am not showing any further—actually, one moment. We have a follow-up question from Jeff Robertson with WaterTower Research. Michael L. Hollis: Perfect. You ready for one? Jeff Robertson: One question that came up on the November conference call was the distribution of shares by the HighPeak entities. Is there any update you can provide on the planned distributions in 2026 and 2027? Michael L. Hollis: Yeah. Good morning, Jeff. Good question. When we rolled into the 2026 calendar year and oil prices were kind of in the mid to upper $50s at the time, we got with the majority investors in the partnership and ended up extending for an additional year, which will allow us to get into, hopefully, a healthier market environment for fund distribution timing. We do have the flexibility to do it throughout the calendar year, or we could kind of go all the way through 2026 and start the distribution in early 2027. Operator: Okay. Thank you. Jeff Robertson: You bet. Operator: And I am not showing any further questions at this time. As such, this does conclude today’s presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Good morning, and welcome to CION Investment Corporation's Fourth Quarter and Year-End 2025 Earnings Conference Call. Our earnings press release was distributed earlier this morning before market opened. A copy of the release, along with the supplemental earnings presentation is available on the company's website at www.cionbdc.com in the Investor Resources section and should be reviewed in conjunction with the company's Form 10-K filed with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of numbers of factors, including those described in the company's filings with the SEC. Joining me on today's call will be Michael Reisner, CION Investment Corporation's Co-Chief Executive Officer; Gregg Bresner, President and Chief Investment Officer; and Keith Franz, Chief Financial Officer. With that, I would like to turn the call over to Michael Reisner. Please go ahead, Michael. Michael Reisner: Thank you, and good morning, everyone. Before I address our quarterly results, I want to step back for a moment and highlight what I believe is the most important takeaway from this quarter. We believe that our core first lien portfolio which represents approximately 81% of our investments continues to perform well. Weighted average interest coverage across our portfolio increased quarter-over-quarter from 1.94x to 2.6x. And EBITDA growth in our portfolio companies primarily continues on a positive trajectory, and our risk rated 4 and 5 names held steady at approximately 2.4% of the portfolio at fair value. We added 1 new term loan to nonaccrual status during the quarter, Healthway. And overall, nonaccruals remained essentially flat compared to the prior quarter at 1.78% of the portfolio at fair value. I would also note that our software exposure stands at approximately 1.8% of the portfolio at fair value, a reflection of our long-standing and intentional decision to avoid that sector. For investors who have expressed concern about software concentrations in BDC portfolios broadly, we believe our positioning should provide meaningful comfort and Gregg will speak further to our sector discipline. Overall, we are not seeing the material cracks in private credit that the press has been eager to report. Now turning to our NAV. Our net asset value decreased 7.4% quarter-over-quarter the $13.76 down from $14.86 at the end of September. I want to stress that this decline was driven almost entirely by unrealized mark-to-market adjustments and a handful of equity positions, specifically, 4-wall entertainment, David's Bridal and Avison. These are unrealized marks, not realized credit losses. And as we have discussed on prior calls, our equity book can introduce meaningful quarter-to-quarter volatility into our NAV. We have always been transparent with the market about this potential volatility, and this quarter, this volatility caused our NAV to decline. We believe this potential volatility should be evaluated in the context of the portfolio, this core lending book is demonstrably healthy and whose equity positions retain long-term appreciation potential. Gregg will walk through each of these names in detail. I'm also pleased with our capital markets execution during and subsequent to the quarter. We raised $172.5 million in senior unsecured notes during the fourth quarter across 2027 and 2029 maturities. And subsequent to quarter end, we raised an additional $135 million in unsecured public baby bonds due in 2031, a combined $307.5 million in unsecured borrowings that further strengthens the flexibility and duration of our balance sheet. Keith will discuss both transactions in greater detail. but we believe that continued access to the unsecured debt markets at these levels reflects the confidence institutional investors have in our credit profile. We also repurchased approximately 556,000 shares during the quarter at an average price of $9.37 per share, which we continue to view as prudent and accretive use of our capital. Looking ahead, we continue to see a resilient underlying economy. While we are mindful of the ongoing geopolitical uncertainty, the underlying domestic economy continues to show resilience, and we believe conditions remain broadly supportive for our portfolio of companies for the remainder of 2026. Our portfolio companies, the vast majority of which serve business-to-business end markets in the U.S. middle market generally continue to perform in line with or better than our expectations. Despite the volume of cautionary commentary in the financial press around private credit, we are simply not seeing broad-based deterioration in our portfolio, and we remain confident in the durability of our first lien focused strategy for the remainder of the year. With that, now I'll turn the call over to Gregg to discuss our portfolio and investment activity during the quarter. Gregg Bresner: Thank you, Michael, and good morning, everyone. Prior to covering our investment and portfolio activity for Q4, I would like to expand on Michael's comments regarding our nominal level of software exposure within the portfolio. We ended the quarter with 3 software portfolio companies totaling 1.8% of portfolio fair value or 2% on an amortized cost basis. All 3 of these software companies were underwritten on a performing positive EBITDA basis with a weighted average net tranche level of approximately 4.4x EBITDA at closing. We have no ARR loans in the portfolio. As a firm, we have historically not invested in software as we were unwilling to lend against an ARR growth methodology with negative EBITDA profile at closing. We view the ARR software profile more as a venture-oriented investment with equity-like risk that require return levels well in excess of the yields typically offered on first-lien debt investments. In terms of our Q4 investment activity, we remain highly selective with new portfolio investments, and we're focused on transactions within our portfolio of companies. We also were effectively at full investment during most of the quarter and work to balance the timing of expected investment pipeline investments versus repayment amounts while maintaining our targeted net leverage range. Overall, we had fewer exiting repayments for the quarter versus our Q3 level as certain repayments drifted into Q1 of 2026. During the quarter, we passed on a historically higher percentage of potential investments in new portfolio companies based on credit and pricing considerations. While secondary credit market conditions were choppy in Q4 due to speculation regarding tariffs and interest rate policies, the government shutdown and market concerns regarding potential cracks in private credit, there remained a significant bifurcation for the new issue market. New issue pricing continued to be driven by the hangover of record 2024 private debt fundraising, which translated into lower coupon spreads, higher leverage levels and looser credit documents in the market. We focused our Q4 activities on incremental opportunities with our portfolio companies. We believe our continued investment selectivity and proportional deployment levels help us to invest in first lien loans at higher spreads when compared to the overall private and public loan markets. The weighted average yield for our new direct first lien investments for the quarter based on our investment cost was the equivalent of SOFR plus 6.43%. As we discussed in previous quarters, the majority of our annual PIK income is strategically derived from either highly structured first lien investments where our PIK income is incremental to our cash coupon. Together, these categories represented approximately 75% of our total PIK investments in Q4. Approximately 73% of our PIK investments are on portfolio companies risk rated either 1 or 2 and 99%, risk-rated 3 or better. As a result, we believe this PIK income does not compare to restructured PIK driven by a deterioration in credit. Turning now to our Q4 investment and portfolio activity. Our Q4 investment activity consisted of a co-lead investment in 1 new portfolio company, strained dental management and incremental add-on investments and secondary purchases in existing portfolio companies, including adaptive laser, American Clinical, Averson Young, BDS Solutions, Carestream Health, Coin Mark, David's Bridal, Statin Med and Work Genius. We additionally refinanced the first lien debt of SleepCo Brooklyn Bedding and Camden with our initial club partners. During Q4, we made a total of approximately $76 million in investment commitments across 1 new and 14 existing portfolio companies, of which $66 million was funded. We also funded a total of $12 million of previously unfunded commitments. We had sales and repayments totaling $79 million for the quarter, which consisted of the full repayment of the first lien term loans for MOS Holding and NorthStar travel. As a result of all these activities, our net funded investments decreased by approximately $1 million during the quarter. As Michael referenced, our NAV decrease during the quarter was driven primarily by declines in the unrealized mark-to-market value of our equity portfolio that was concentrated within a subset of equity investments, including, 4-wall Entertainment, David's Bridal and Avison Young. The common theme among these names is what we internally refer to as the COVID elongation cycle as each of these names were significantly impacted by both COVID and the labor market inflation and interest rate shocks, which sequentially followed, which resulted in the restructuring or recapitalization of balance sheet to rebuild the platforms. The reduction in the equity mark of Juice Plus was driven by a reduction in trailing quarterly revenue performance against its fixed cost base as the company worked to complete its restructuring in the third quarter. With its recapitalized balance sheet in Q4, the company immediately pivoted to operational initiatives and investments to transform its product offerings and sales infrastructure to optimize its go-to-market strategy that is more in line with consumer health and wellness trends and spend. The company has been executing on product development, sales management and information technology initiatives to reposition for growth and profit improvement over the medium term. The market value of our equity investment in Entertainment was negatively impacted by reduced trailing EBITDA performance driven primarily by industry factors, including reduced live event activities from cancellations and lower TV and film production as the sector rebuilds pipelines from the writer strut that delayed the release queue of new scripts and production content. The company successfully restructured its balance sheet in the summer of 2025 and repositioned its sales, business development and CapEx to focus on an expected rebound in both event and production activities. The company is expecting significant EBITDA improvement in 2026 and has already secured a number of high-profile event wins for 2026. As we have mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the marks of David's Bridal equity due to the larger overall relative size of our investment as well as the highly seasonal nature of the company's operations and working capital profile. The decline in the Q4 marked primarily reflects the typical seasonal increase in debt as the company builds inventory ahead of the critical bridal season, which historically begins in mid-January. In addition, we invested incremental capital to accelerate the company's growth of its Pearl segment which is a high-growth, higher-margin digital marketplace platform that expands the company's market participation beyond the $5 billion wedding dress segment in the broader $65-plus billion wedding services industry. The Q4 equity marks in Avison Young were negatively impacted by incremental debt raised in Q4 at the top of the capital structure to support the company's investments in sales and other infrastructure in advance of the expected increase in commercial real estate activity in 2026 and 2027. This incremental increase in the quantum of debt negatively impacted the value of Averson equity tranches. CION participated in the latest debt round, it continues to believe this company is well positioned for the expected rebound in commercial real estate. Our investments in Juice Plus, David's Bridal and Avison Young are representative of our opportunistic first lien investment strategy where we acquire either restructured or lightly syndicated first lien loan tranches in quality companies at a discount to par due to technical reasons where we expect to have active roles in the processes that drive the recovery and realization of the investments. Historically, we have been able to realize healthy earnings on our first lien restructured or recapitalized transactions. Illustrative examples include our investments in Longview Power, YacMat, Heritage Power and Dayton Superior. We also had a number of portfolio companies where the equity marks increased for the quarter due to strong financial performance and our projected outlook, including Longview Power, Palmetto Solar and play boeing. From a portfolio credit perspective, our nonaccruals increased slightly from 1.75% of fair value in Q3 to 1.78% in the fourth quarter. This increase was from the addition of 1 new name to nonaccrual, our term loan investment in HW acquisition or Healthway. Healthway initiated a primary revolver raise in the fourth quarter that ultimately funded in early 2026 and contained a substantial lower component that effectively shifted value from the term loan to the revolver tranche. While CION participated in the revolver upsize and ultimately benefit on a total position value basis, from the incremental accretion in the revolver tranche versus our pro rata ownership of the term loan, the shift in value resulted in nonaccrual status for our term loan holding. On an absolute basis, nonaccruals continue to be in line with historical experience, and we are pleased with the continued credit performance of our portfolio, particularly in the current environment. Overall, our portfolio remains defensive in nature with approximately 81% in first lien investments. Approximately 98% of our portfolio remains risk rated 3 or better. Our risk-weighted 3 investments, which are investments where we expect full repayment, but are either spending more engagement time and/or I've seen increased risk to the initial asset purchase increased from approximately 10.4% in the third quarter to 11.5% in Q4. I'll now turn the call over to Keith. Keith Franz: Okay. Thank you, Gregg, and good morning, everyone. During the fourth quarter, net investment income was $18.3 million or $0.35 per share compared to $38.6 million or $0.74 per share reported in the third quarter. Total investment income was $53.8 million during the fourth quarter as compared to $78.7 million reported during the third quarter. The decrease in total investment income was driven primarily by lower interest income earned on our investments, as a result of certain investments being restructured in the prior quarter and other yield-enhancing prepayment fees and accelerated OID that did not reoccur this quarter. We also had lower transaction fees earned from origination and restructuring activities when compared to the prior quarter, which was slightly offset by an increase in dividend income received from 1 of our investments during the fourth quarter. On the expense side, total operating expenses were $35.5 million compared to $40.1 million reported in the third quarter. The decrease in operating expenses was primarily driven by lower advisory fees due to lower investment income earned during the quarter. At December 31, we had total assets of approximately $1.9 billion and total equity or net assets of $708 million with total debt outstanding of $1.1 billion and 51.4 million shares outstanding. Our portfolio at fair value ended the quarter at $1.7 billion, and the weighted average yield on our debt and other income-producing investments at amortized cost was 10.7%, which is slightly down from 10.9% in the third quarter. At December 31, our NAV was $13.76 per share as compared to $14.86 per share at the end of September. The decrease of $1.10 per share or 7.4% was primarily due to unrealized mark-to-market price decreases in our portfolio, mostly from price declines in our equity book, which was slightly offset by the creative nature of our share repurchase program during the quarter. We ended the fourth quarter with a strong and flexible balance sheet with over $1 billion in unencumbered assets, a strong debt servicing capacity with an interest coverage ratio of over 2x and solid liquidity. We had over $120 million in cash and short-term investments and another $100 million available under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies. In terms of our debt capital. At December 31, we continue to have a healthy debt mix with about 65% in unsecured and 35% in senior secured. About 70% of our debt is in floating rate, which aligns well and creates a natural hedge with our mostly floating rate investment portfolio. A well-diversified debt structure is focused on unsecured debt in order to maximize our balance sheet flexibility and at the same time, creates a strong buffer for our financial covenants. At the end of the quarter, our net debt-to-equity ratio increased to 1.44x from 1.28x at the end of September, and the weighted average cost of our debt capital was about 7.35%, which is slightly down from the third quarter due to lower SOFA base rates quarter-over-quarter. The increase in the net leverage ratio was impacted primarily by the quarterly decrease in NAV and an increase in the average debt outstanding during the quarter. During the quarter, total debt increased by $48 million due to the timing of paying down our senior secured debt with a portion of the net proceeds raised from the unsecured debt offering in December. During the quarter, we issued $172.5 million of senior unsecured notes from certain institutional investors, consisting of $125 million in senior unsecured notes with a fixed interest rate of 7.7% due 2029 and $47.5 million in senior unsecured notes with a fixed interest rate of 7.41% due 2027. Subsequent to year-end, on February 9, we completed a public baby bond offering, issuing $135 million of new senior unsecured notes with a fixed interest rate of 7.5% due 2031, which listed and commenced trading on the New York Stock Exchange on its ticket symbol, CICC on February 12. The net proceeds from these offerings were used to fully repay our $125 million in senior unsecured notes due 2026 that matured in February, and the remaining net proceeds will be used to further reduce our outstanding senior secured bank debt. Now turning to distributions. During the fourth quarter, we paid a base distribution to our shareholders of $0.36 per share, which is the same as the third quarter base distribution. For the full year in 2025 we declared and paid total distributions of $1.44 per share, all of which was from our quarterly base distributions. As a result, the trailing 12-month distribution yield through the fourth quarter based on the average NAV was about 9.9% and the trailing 12-month distribution yield based on the quarter end market price was 14.9%. As previously announced, we changed the timing of paying base distributions to our shareholders from quarterly to monthly beginning in January 2026 to better align with our shareholder expectations. And as announced this morning, we declared our second quarter base distribution of $0.30 per share, which is the same as the first quarter. The second quarter base distribution will be paid monthly in April, May and June at $0.10 per share per month. Okay. With that, I will now turn the call back to the operator, who will open the line for questions. Operator: [Operator Instructions] And the first question comes from the line of Erik Zwick with Lucid Capital Markets. Erik Zwick: I wanted to start with a question on leverage. And you noted that, that was up in the quarter, and some of that was driven by the fair value marks in the equity portfolio, but it's run fairly above kind of where you've run in the past. So just curious on your thoughts for the appropriate level of leverage today and how you plan to kind of manage that over the next year or so? Keith Franz: Eric, it's Keith. Yes. So in terms of the elevated leverage, I think the way that we're looking at it is over the next few quarters, some organic growth in the NAV positions may help -- but ultimately, we expect to use some of the scheduled on scheduled repayment activity we typically receive to delever. . Erik Zwick: That's helpful. And -- next question, just on PIK income. I think you've previously indicated the desire to reduce the contribution from income. Looking at the results in 2025 that was up on both absolute dollar terms as well as a percentage of total investment income. So First, just wondering, could you provide a split of kind of tick by design versus restructured PIK? And do you still have plans to kind of aim to reduce that overall contribution? . Gregg Bresner: Eric, it's Gregg. From your characterization, we -- as we do this about 75% of our PIK is by design where it's either incremental cash interest or we structured it intentionally that way on a deal basis. So it's about 75% based on those classifications. With respect to going forward, our PIK is concentrated in a few names that we do expect to refinance over the next 12 to 18 months. So we do expect that number organically to come down significantly as those deals repay. . Erik Zwick: I appreciate the update there. Last one for me. In the press release, you noted that the weighted average interest coverage for the portfolio increased quarter-over-quarter from 1.9 to if I round, which is nice to see. I'm curious if that was primarily a reflection of just lower interest rates flowing through the portfolio or if you're also seeing some improvement in EBITDA as well. Gregg Bresner: It's a combination of both. It's a combination of increased EBITDA as well as the reduction in base rates. So it's -- the base rate is obviously more about, but we did see EBITDA growth over the quarter. . Operator: This concludes the Q&A session. I'd like to turn the call back over to Michael Reisner for closing remarks. . Michael Reisner: Great. Well, I want to thank everybody for tuning in today, and we'll be back to you in a couple of months with our Q1 results. Take care, everybody. . Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Greetings, and welcome to the ProFrac Holding Corp. Fourth Quarter and Full Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Messina, SVP of Finance. Thank you. You may begin. Michael Messina: Thank you, operator. Good morning, everyone. We appreciate you joining us for ProFrac Holding Corp. conference call and webcast to review our results of the fourth quarter and year ended 12/31/2025. With me today are Matt Wilks, Executive Chairman, Ladd Wilks, Chief Executive Officer, and Austin Harbour, Chief Financial Officer. Following my remarks, management will provide high-level commentary on the operational and financial highlights of the fourth quarter and full year 2025 before opening up the call to your questions. A replay of today's call will be made available via webcast on the company's website at pfholdingscorp.com. You want to know more information on how to access the replay is included in the company's earnings release. Please note that the information reported on this call speaks only as of today, Thursday, March. You are advised that any time-sensitive information may no longer be accurate as of the time on any replay listening or transcript reading. Also, comments on this call may contain forward-looking statements within the meaning of the United States Federal Securities Laws, including management's expectations of future financial and business performance. These forward-looking statements reflect the current views of ProFrac Holding Corp. management and are not guarantees of future performance. Various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in management's forward-looking statements. The listener or reader is encouraged to read ProFrac Holding Corp.'s Form 10-K and other filings with the Securities and Exchange Commission which can be found at sec.gov or on the company's investor relations website section under the SEC filings tab to better understand those risks, uncertainties, and contingencies. The comments today also include certain non-GAAP financial measures, as well as other adjusted figures to exclude the contribution of Flotek. Additional details and reconciliations to the most directly comparable consolidated and GAAP financial measures are included in the earnings press release which can be found on the company's website. I will now turn the call over to Matthew D. Wilks. Matthew D. Wilks: Thank you, Michael. I will kick off with some high-level remarks about our recent performance, market outlook, and strategic initiatives. Ladd will expand on the performance of our businesses, and finally, Austin will discuss our financial performance. Our results in the fourth quarter improved from Q3 with total adjusted EBITDA increasing 49% on an improvement across our two largest segments: stimulation services and proppant production. This performance was driven by better-than-anticipated activity levels, strong operational execution with optimized uptime, and the early benefits of our cost and capital management initiatives. Notably, our proppant production segment delivered exceptional results, benefiting from increased volumes and improved logistics efficiency that helped us maintain strong margins. Ladd will elaborate on this in a few minutes. Looking at 2025 as a whole, the year presented a challenging backdrop for the completions industry. Tariff-driven economic uncertainty and OPEC's decision to increase supply in early April rattled commodity prices and prompted widespread operator deferrals of near-term activity. Throughout the summer and early fall, operators remained cautious as they balanced hedge books, return commitments, and commodity exposure against continued commodity volatility and broader economic and geopolitical uncertainty. Against this backdrop, the market ebbed and flowed at relatively subdued activity levels. What enabled us to navigate 2025 effectively and emerge well-positioned for 2026 was the fundamental strength of our business model. Throughout the year, our vertical integration and asset management platform were instrumental, providing the operational flexibility and cost advantages that differentiate our performance during difficult market conditions. However, this is not just about weathering downturns; it is about having the structural advantages that allow us to compete more effectively across cycles. The recent conflict in the Middle East resulting in disruptions to tanker flows through the Strait of Hormuz, in addition to the damage to Gulf energy infrastructure, are likely to continue to have a meaningful impact not only on near term, but also potentially on medium term physical supply and demand balances. The severity and duration of these factors remains fluid; however, if disruptions prove lasting, the path to sustainably higher oil prices may crystallize. The conflict in the Middle East is playing out against the backdrop where the setup in North America for onshore activity remains compelling. As we have noted for several quarters, activity has been running below levels needed to sustain flat shale production, and we expect that gap to close as operators accelerate activity to combat natural decline. On the gas side, expanding LNG capacity and rising power demand continue to support a favorable outlook. Layered on top of that, we believe capital discipline across the hydraulic fracturing industry combined with ongoing equipment attrition and restrained new additions sets the stage for supply-demand tightening as activity picks up. Any sustained disruption to Arabian Gulf supply could be the catalyst that pulls the timeline forward. When that acceleration comes, we believe ProFrac Holding Corp. is well positioned to benefit. Some of the same attributes mentioned earlier, including vertical integration and how we manage our asset base, as well as our position in dual fuel and electric technologies, are what keep us squarely where operator demand is highest and position us to move decisively as the cycle turns. Turning to the first quarter for a few moments, we experienced a significant weather impact in January that created near-term operational challenges. Winter storms affected our operating regions during a period when operators were also taking a measured approach to activity amid broader macro uncertainty. However, momentum has been building as we moved through the quarter, which has been encouraging. Our calendar has tightened, activity levels have improved, and with oil prices recovering since the start of the year, operators' sentiment has strengthened. Key to being well positioned for the dynamics we have seen this for several quarters is the work we have done internally to strengthen our cost structure. On our November call, we introduced a business optimization plan targeting annualized savings of $100,000,000 at the midpoint by the end of 2026. This consists of $35,000,000 to $45,000,000 in labor-related COGS and SG&A reductions, $30,000,000 to $40,000,000 in non-labor operating expenses, and $20,000,000 to $30,000,000 in capital expenditure efficiency. We are pleased to report strong progress across all three components of this program. On capital expenditure efficiency, we have already achieved at a minimum the midpoint of our targeted range and expect to be at the higher end of the $20,000,000 to $30,000,000 target. The early benefits of these capital savings were visible in our fourth quarter results, where we delivered a significant beat on net capital expenditures in frac. Austin will provide more detail on what this progress means for our 2026 capital expenditure outlook in a few moments. On labor-related savings, we have fully implemented the cost reduction measures such that we are currently running at an annualized savings rate that positions us at or above the midpoint of our $35,000,000 to $45,000,000 target range. For non-labor operating expenses, we have achieved approximately one-third of the targeted savings on an annualized basis, primarily from fully implemented SG&A reductions. The larger component of this category related to repair and maintenance and asset-level operating expenses remains in earlier stages of implementation and should accelerate as we move through the year. We continue to expect to achieve the full $30,000,000 to $40,000,000 range as these initiatives mature through the second quarter. Taken together, we believe these actions meaningfully improve our cost structure and position ProFrac Holding Corp. to generate stronger returns as market conditions improve. Alongside those efforts, technology differentiation remains a key focus. Let me take a few minutes to walk through our latest technology initiatives, which I believe represent a meaningful and underappreciated part of the ProFrac Holding Corp. value proposition. When we announced our strategic partnership with Seismos back in August, we talked about bringing closed-loop fracturing to the industry, combining ProPilot surface automation with Seismos’ subsurface intelligence to enable real-time optimization during active pumping. The partnership has been performing as we envisioned, and we believe recent field trials have validated the approach. But as we deployed this technology and collaborated with our customers, it became clear the closed-loop control was just one piece of a larger opportunity. Today, I want to discuss Makena, our complete well optimization suite, that we believe takes everything we built with Seismos and ProPilot and extends it into a unified platform that spans the entire completion life cycle. Makena integrates treatment design, real-time measurement, mid-stage intervention, frac hit detection, live pad-level tracking, historical analytics, supply chain optimization, and water quality analysis into a single continuous architecture. Central to Makena’s architecture is a new generation of AI engineering agents that we think of as digital employees embedded directly into the workflow. These agents monitor, interpret, and act continuously across the completion life cycle. Challenges that historically required physical intervention, mechanical testing, or brute force diagnostic runs can now be identified and resolved through a software update. What makes Makena particularly powerful is how it builds on ProPilot 2.0’s foundation. ProPilot served as both a cost optimization tool and an execution precision enabler designed to reduce labor requirements and maintenance expenses while delivering the coordinated pump control and millisecond-level response time that makes closed-loop fracturing possible. Without ProPilot’s execution stability and predictive maintenance capabilities, we could not achieve the rapid, repeatable actuation that Makena requires to translate subsurface intelligence into immediate operational adjustments. Design assumptions now flow directly into execution monitoring. Intervention decisions, designed by our customer, are interpreted algorithmically and executed immediately through ProPilot. Subsurface response is validated in real time, and all of that learning feeds back into future design optimization. What we believe is that this is not only about making one stage better; it is about creating a continuous improvement engine that potentially improves perforations in every stage, every pad, and every program. Ladd will walk through how this works operationally and what we have experienced to date. In summary, we closed 2025 with momentum. Q4 EBITDA was up 49% sequentially, demonstrating the strengths of the business model and cost initiatives, and positioning us to capitalize when the market inflects. Weather headwinds early in the quarter have given way to strengthening fundamentals. While Q1 began with operational challenges, our calendar has tightened with activity accelerating. Our $100,000,000 cost optimization program is ahead of schedule. Labor savings have been fully implemented, CapEx efficiency is tracking to the high end of target, and non-labor reductions are progressing. Makena represents the next evolution in completion technology. By unifying ProPilot’s surface automation with subsurface intelligence into a complete optimization platform, we are not just improving individual stages; we are building a continuous improvement engine. With that, I will turn it over to Ladd, who will provide more detail on our segment performance. Ladd Wilks: Thanks, Matt, and good morning, all. Building on what Matt covered, let us start with stimulation services. As we mentioned on our November call, we were encouraged by signs of stability in the first several weeks of Q4. As noted, deferred September activity returned to the calendar in October, and we successfully kicked off a multi-fleet contract with a large operator early in the quarter. Activity was much more consistent in Q4 relative to our expectations. On fleet utilization and pricing, we maintained a consistent fleet count in the low 20s throughout the fourth quarter into Q1. More importantly, we saw improved utilization and operational efficiency across our active fleets, and pricing remained relatively stable quarter over quarter. What I would emphasize is the meaningful impact our cost and capital savings initiatives had on our margin performance in the fourth quarter. We began to see the early benefits of these programs flow through our results, which was a key driver of our strong adjusted EBITDA performance and contributed significantly to our ability to deliver improved margins. In that reference, January presented weather-related headwinds that impacted operations across both our stimulation and proppant businesses. The winter conditions created operational disruptions that we estimate have resulted in approximately $8,000,000 to $12,000,000 of adjusted EBITDA impact in the quarter, more heavily weighted towards stimulation services. That said, since weather conditions improved, our calendar has tightened and activity has picked up. While we expect Q1 results will be softer than our strong fourth quarter performance, primarily due to the January disruption, the operational momentum we are experiencing positions us well heading into the second quarter. Now turning to proppant services. Matt referenced the strength of Alpine Silica's performance in the fourth quarter. After some challenges in Q3, revenues in the segment stepped up approximately 50% and segment adjusted EBITDA doubled in Q4. We delivered strong operational execution throughout the period with volumes reaching over 2,000,000 tons. Q4 benefited from solid demand across our key markets. Coupled with exceptional operational performance and high uptime, we were able to maximize our production efficiency and cost absorption. From a geographic perspective, West Texas remained a significant contributor to our overall mix, along with continued gains in South Texas. Our cost control initiatives, especially on the logistics side, were a key driver of our ability to maintain strong margins and drive improved profitability in the quarter. In Q1, we expect volumes to be down quarter over quarter. Weather disruptions in January, combined with some operational challenges that impacted production levels, created headwinds after the strong execution we saw in Q4. Customer demand remains solid and as conditions normalize, we are focused on returning to the operational performance that drove our fourth quarter results. Looking ahead, we continue to see momentum building in the Haynesville, where we secured significant customer wins on both the frac and sand side. We expect activity in this basin to continue increasing as we move through 2026, further diversifying our revenue base. Now let me circle back to the technology discussion Matt introduced and get specific about what Makena does on location. The closed-loop module remains our core real-time optimization capability, using acoustic friction analysis to detect perforation efficiency issues and prescribe immediate interventions that ProPilot executes with millisecond-level response. Makena is designed to extend this by integrating a broad operational context into a unified decision engine. Treatment design flows directly into execution monitoring. Intervention decisions are made algorithmically and executed immediately through ProPilot’s precision control. Subsurface response is validated in real time, and all of that learning feeds back into future design optimization. This integration of frac hit indicators, water quality data, supply chain optimization, and fleet health monitoring can create a continuous improvement engine. We believe field results demonstrate the impact. Closed-loop intervention reduced cumulative perforation efficiency degradation by 33% compared to untreated stages. More importantly, every stage adds to our historical database, potentially improving design refinement across entire programs. With that overview of our operational performance and technology progress, I will turn it over to Austin to walk through our financial results in detail. Austin Harbour: Thanks, Ladd. In the fourth quarter, revenues were $437,000,000 compared with $403,000,000 in the third quarter. We generated $61,000,000 of adjusted EBITDA with an adjusted EBITDA margin of 14% compared with $41,000,000 in the third quarter, or 10% of revenue. For the full year 2025, revenues were $1,940,000,000 with adjusted EBITDA of $310,000,000 and an adjusted EBITDA margin of 16%. Free cash flow was $14,000,000 in the fourth quarter, negative $29,000,000 in the third quarter. For the full year 2025, free cash flow was $25,000,000. As Matt outlined, we have been executing on our business optimization targeting $85,000,000 to $115,000,000 of annualized savings and have made strong progress. Within the fourth quarter specifically, we estimate the combined cash impact of labor, non-labor, and capital expenditure savings was approximately $45,000,000, with labor savings accounting for roughly $10,000,000, non-labor approximately $10,000,000, and the remaining $25,000,000 from CapEx savings. Of note, labor and non-labor savings were executed throughout the quarter. As a result, our progress on these initiatives does not reflect the full potential quarterly impact. Turning to our segments, stimulation services revenues were $384,000,000 in the fourth quarter and improved from $343,000,000 in the third quarter. Adjusted EBITDA in Q4 was $33,000,000 above the $20,000,000 we reported in Q3, with margins increasing to 8.7% versus 5.7% in Q3. The improvement was driven by our more consistent activity levels, better fleet utilization, and early benefits from our cost savings initiatives. For the full year 2025, stimulation services revenues were $1,680,000,000 with adjusted EBITDA of $209,000,000 and an adjusted EBITDA margin of 12.4%. Our proppant production segment generated $115,000,000 of revenue in the fourth quarter, materially higher than the $76,000,000 of revenue we reported in the third quarter. Approximately 43% of volumes were sold to third-party customers during the fourth quarter, versus 39% in Q3. Adjusted EBITDA for the proppant production segment was $16,000,000 for the fourth quarter, which was two times the $8,000,000 we delivered in Q3. On a margin basis, EBITDA margins increased to 14% in the fourth quarter versus 10.5% in Q3. Strong segment performance reflected approximately 2,000,000 tons of volume, high equipment uptime, and effective logistics optimization, particularly in West Texas and South Texas markets. As Ladd touched on, for full year 2025, proppant production revenues were $336,000,000 with adjusted EBITDA of $57,000,000 and an adjusted EBITDA margin of 17%. Our manufacturing segment generated fourth quarter revenues of $43,000,000 versus $48,000,000 in the third quarter. Approximately 18% of segment revenues were generated from third-party sales, consistent with Q3. Adjusted EBITDA for the manufacturing segment was $4,000,000 in line with Q3. For full year 2025, manufacturing segment revenues were $212,000,000 with adjusted EBITDA of $19,000,000 and an adjusted EBITDA margin of 8.7%. Selling, general and administrative expenses were $43,000,000 in the fourth quarter, in line with the third quarter. We expect to see continued improvement in SG&A as we execute on our cost savings initiatives. Turning to the cash flow statement. Cash capital expenditures were $37,000,000 in the fourth quarter, down slightly from $38,000,000 in the third quarter. For the full year 2025, CapEx totaled $170,000,000, a material improvement from 2024’s $255,000,000 in CapEx. As Matt discussed earlier, the progress we have made on capital expenditure efficiency has been one of the most encouraging outcomes of our business optimization program. The discipline and execution our teams demonstrated in 2025 gives us confidence in our ability to continue to execute as we move through 2026. To that end, we expect total capital expenditures in 2026, including Flotek spend, to be in the range of $155,000,000 to $185,000,000. Excluding Flotek, we expect our CapEx to be in the range of $145,000,000 to $175,000,000, split between maintenance-related and growth-oriented investments. This guidance reflects our continued commitment to capital discipline while ensuring we maintain our competitive positioning, equipment reliability standards, and the flexibility to capitalize on market opportunities as conditions improve. Turning to cash. Total cash and cash equivalents as of 12/31/2025 were approximately $23,000,000, including approximately $6,000,000 attributable to Flotek. Total liquidity at year-end 2025 was approximately $152,000,000, including $135,000,000 available under the ABL. Borrowings under the ABL credit facility ended the year at $69,000,000, a $91,000,000 reduction from September 30. At year-end, we had approximately $1,050,000,000 of principal debt outstanding, with the majority not due until 2029. We repaid approximately $136,000,000 of long-term debt in 2025. As background, recall that in June, we executed a series of transactions to provide incremental liquidity through 2025, including an initial $20,000,000 issuance of additional 2029 senior notes and commitments for additional tranches at our discretion. We completed the remaining $40,000,000 of that program in December. As discussed on our November earnings call, we also monetized the $40,000,000 Flotek seller note early in the quarter, selling it to a Wilks affiliate at par. Lastly, in Q4, we amended the Alpine term loan to reduce quarterly amortization payments from $15,000,000 to $7,500,000 for 2026 and deferred leverage ratio testing by one year to March 2028. Subsequent to year-end, we closed on an additional $25,000,000 issuance of 2029 senior notes to B. Riley in January, building on the senior notes program we completed in December and further strengthening our liquidity heading into 2026. In addition, earlier this month, we extended the maturity of our senior unsecured revolving credit facility by six months to September 2027, providing further flexibility in our capital structure. The facility now has a capacity of $275,000,000. As we look ahead, we remain disciplined and opportunistic in how we manage our balance sheet, and we will continue to evaluate ways to further strengthen our liquidity and flexibility as market conditions evolve. That concludes our prepared comments. Michael Messina: Operator, let us open up to Q&A. Operator: Thank you. And at this time, we will conduct the question and answer session. Your first question comes from John Daniel with Daniel Energy Partners. Please state your question. John Daniel: Matt, Ladd, I was hoping you could provide a little bit more color on the new technology. Is it software that gets installed in the data van? How does it get rolled out? And what will be the sales cycle in terms of educating customers on what it can do? And how long is your expectation for that education process? Matthew D. Wilks: Definitely. So it is installed on every fleet and ProPilot is our frac automation. It is on every single fleet; it is in the data van. And then Makena is the customer-facing software for well optimization. It allows the customer to pull in real-time data from offsetting wells as well as data from the same well, same stage, and to write rules on how the equipment should respond to that data. So we are extremely excited about this. A great way to think about it is what we are seeing across the entire industry is that operators are only getting about two-thirds of the perfs open on each well. So if there are 15,000 perfs, they are only getting about 10,000 of them actually open. And so our technology allows us to go in, recognize that in real time, respond to it, and initiate what we call interventions to increase the number of open perfs. We cannot improve the resource. We cannot change the rock. But we can open more perfs. We have been able to see where we can open as much as 1,500 extra perfs on a well. Where your D&C cost is $12,000,000 and you are only getting 10,000 perfs open, you are spending $1,200 per open perf. So if we can open an extra 1,500 or 2,000 perfs, that is creating anywhere from $1,800,000 to $2,400,000 of D&C costs that would otherwise have been left behind on each well. John Daniel: Okay. I am curious, and if you said this in the release, I apologize for missing it, but when you have tested this with your customers, did they share with you what the production uplift might have been through the technology? Matthew D. Wilks: You know, it is too early to tell, and it is a slippery slope for us to get into promising well results or an increase in production. Ultimately, it comes to whether or not these perfs are open or closed. If that perf is closed, we are not getting hydrocarbons out of it. But if I can open these additional perfs, that is a better way for us to measure our success and it also has a quicker time cycle. For us to see enough production and work with an operator to get enough data, we would be looking at just one well anywhere from six to nine months before we really get the appropriate feedback. But then we get into the complicated process of trying to establish how much of that production, what were the changes, what other items were going on at the same time, and what is directly attributable to our technology. But just keeping it simple and focusing on whether or not these perfs are open is the best unit of measure and way to establish progress. John Daniel: Okay. And then, I guess, one final one. Not looking for a specific number here, Matt. Q1 down relative to Q4, but just given the cost that you are pulling out, sort of the run rate right now in March, I am assuming Q2 is probably better than Q4? Is that the would be that big gut feel? Matthew D. Wilks: That is a fair assumption. John Daniel: Okay. Thank you. Thank you. Operator: Your next question comes from Saurabh Pant with Bank of America. Please state your question. Saurabh Pant: Hey, good morning, Matt, Ladd, and Austin. Matthew D. Wilks: Morning. Morning. Saurabh Pant: Matt, I know you alluded to some of this in your prepared remarks. What is going on in the Middle East on the margin, I am assuming it does help the U.S. land market a little bit, and I know you were talking about improving operator sentiment. Are you getting more phone calls? Are there more conversations? I know it is too early for anything to show up on the ground, but are you having more discussions? And just along those lines, theoretically, if there is a call on equipment, I know you said you have low-20 frac fleets out there. How easily can you bring more fleets out? And how should we think about any potential CapEx that you would need to spend on bringing fleets out? Matthew D. Wilks: Yes. It is an exercise that we continue to run through. I think things are happening pretty fast over in the Middle East, and what we are looking at is how much of this disruption is temporary from just the strait being closed compared to structural supply and demand imbalances on a go-forward basis from these attacks on infrastructure. Then there is also the possibility of artificial demand as national security interest for each state is reassessed, and we are likely to see some increased reserves on a go-forward basis that should be very constructive for the supply and demand balance. As far as the onshore market here, we are fielding a lot of calls. There are a lot of conversations going on. So far, most of it is centered around DUCs being pulled forward, as well as more robust dense calendars associated with existing activity. It is too early to tell whether this is going to result in a material increase in rig count, but we are watching it very closely and it is interesting to see how our customers are responding and behaving in real time. Hopefully, we will have more to talk about in the near future. Probably the biggest impact regardless of a call on more horsepower and activity is diesel prices have shot through the roof. In some instances, the daily quote has essentially doubled from where it was just a few weeks ago. That is creating a lot of opportunity for us to be better partners with our customers. Where we see customers that typically run all-diesel fleets, the fuel bill is now more expensive than horsepower, and it creates a premium for fuel-efficient fleets. When you look at dual fuel where you can eliminate as much as 70% of your diesel cost or an electric fleet where you can eliminate 100% of it, it is more important now than ever. We can see margin expansion while also saving our customer money and insulating or hedging, giving them a physical hedge against an unanticipated or expected rise in fuel costs. Saurabh Pant: Right. That makes a ton of sense, Matt. That is super interesting. And then, Austin, I have one for you. You talked about this in the prepared remarks about how you strengthened your balance sheet and liquidity, including we saw earlier this week some of the amendments you made to your credit facility. But as we look forward, in terms of just opportunities to deleverage outside of just organic free cash flow, maybe just talk a little bit on what you are thinking, how you are evaluating the balance sheet deleveraging opportunity, and what you may want to do from this point onwards? Austin Harbour: Yes, thanks, Saurabh. With respect to our balance sheet, I think you can tell that we actively manage that, right, and we are constantly looking at a number of opportunities and strategies to optimize what the leverage profile looks like, what the liquidity profile looks like, and then balance that against capital allocation opportunities that we have internally. So as we look forward, I think we will continue to actively manage it and we will continue to focus on making sure that we have liquidity not only to run the base business, but also as opportunistic investments come around. And as we think about the flexibility to be able to respond to this market and also to be able to make investments in some of our other subsidiaries. Saurabh Pant: Okay. Makes sense. Thank you. Thanks a lot, Austin, for that answer. And Matt as well. Thank you. I will turn it back. Operator: Your next question comes from Dan Kutz with Morgan Stanley. Please state your question. Dan Kutz: Hey, thanks. Good morning, and congrats on the quarter. Operator: Dan, could you please go ahead with your question? Dan Kutz: I am sorry. Can you repeat that question? Operator: Dan Kutz, your line is open. All right. Okay. We will move on to the next question. Dan, could you press star-1 again to queue up? Your next question comes from Patrick Woollet with Stifel. Please state your question. Patrick Woollet: Hey, it is Pat Olin on for Stephen Gengaro. Thanks for taking the questions. You highlighted the Q1 2026 results to soften sequentially in the pressure pumping segment, and I know the weather in January plays into that. But you also talked about the frac calendar tightening since then, so I was just wondering if you could give some color on maybe a run-rate basis on how you see the segment exiting Q1 compared to Q4. Matthew D. Wilks: Yes. I think our exit in Q1 is going to be in line to slightly better than what we saw in Q4. It is just that disruption early in the quarter; you do not get those hours back, you do not get those days back. But it did compress the balance of Q1 and has given us a really tight schedule to run and benefit from higher utilization. Patrick Woollet: Okay. Thanks. And you talked about the $8,000,000 to $12,000,000 impact to EBITDA from the weather disruptions. Is this sort of like lost EBITDA or just pushed out to the right and recoverable? Austin Harbour: I would view it as pushed out to the right and recoverable. Certainly, it will be lost in Q1, right? To Matt’s point, we cannot get those days back, right? But as we think about the calendar tightening even further as we move through the quarter and also into Q2, I think ultimately we will be able to earn that back. It is just not all going to come back in February and March. Patrick Woollet: Alright. Thanks. And then if I could just squeeze in one more, if you could just talk a little bit about the guide for the proppant segment. It seems like demand is relatively flat quarter over quarter into Q1. Could you maybe touch on the operational challenges you highlighted? Are those sort of weather-related? And then, you sort of talked about maybe some strength into Q2. Is this driven by maybe better operational efficiency? Or is that demand-driven? Matthew D. Wilks: It is a little bit of both. The disruption early in the quarter impacts your sand mines disproportionately because your wash plants, your working inventory, those freezing temps—these facilities are in areas where you are not used to dealing with this kind of a weather impact. So it is pretty disruptive whenever you get a weather event like this, and it impacts your sand mines a little bit more than it does your frac fleet. With that being said, the operational efficiencies and the quality of our backlog—we have got everything that we can make sold. So now it is just an exercise in execution, and we are starting to see the best performance out of these assets and believe that there is a lot more opportunity in continuing to see that best demonstrated performance climb. Patrick Woollet: All right. Thanks for the color. I will turn it back. Operator: Next question comes from Dan Kutz with Morgan Stanley. Please state your question. Dan Kutz: Hey, good morning, and congrats on the quarter. Sorry about that. I think my headset cut out. So you guys had flagged that you think we are running below production maintenance activity levels in the U.S. currently. Just wondering if you have any guess or any sense for how much higher completions activity would have to be at more of a maintenance-level run rate? Thanks. Matthew D. Wilks: Yes. I think it is easier to look at it from completed lateral feet per month, and depending on the quality of the inventory, you are looking at anywhere from half a million feet to a million feet a month that is below sustainable levels. Dan Kutz: Great. Thanks. That is helpful. And then it sounds like you guys had flagged recently that, in tandem with the cost-out initiatives, you are kind of managing the deployed fleet count to a more range-bound level that leaves some spare capacity on the side. Just wondering if you could talk through what that horsepower, what the plans are for that. Is it going towards bigger fleets, towards continuous fracs? Maybe used to minimize maintenance costs, or maybe some of that just gets stripped and gets retired. But, yeah, just wondering how the spare capacity that you guys have is being utilized or what the plans for that are? Thanks. Matthew D. Wilks: Definitely, that is a great question. The way that we are looking at things right now—tempting and interesting in the environment that we have—is we are going to remain disciplined and keep our fleet count where it is at unless we see a true call on assets and that activity. I think things are too up in the air right now. We are seeing the calendars fill up, seeing DUCs being pulled forward. But once we see this inflection point where there is a true call on activity—of increasing rigs and a demand for frac fleets commissioning full dedicated spreads rather than a few wells here and there pulling DUCs forward—once we see a motivated push to deploy CapEx from operators, we will respond appropriately at that time. And we do have spare capacity. It is just a question of where we are going to put our priorities and focus our capital allocation. At this time, we are going to stick to our plan, stay disciplined, and look for opportunities to create value for our customers. I will highlight, without a call on activity, just the shakeup in the fuel markets is a huge risk for our customers. With the number of fuel-efficient assets that we have, I think we are in a great position to be a great partner with them to help them save money, de-risk their capital allocation, and also to do it while seeing margin expansion on our side. We can help them save a lot of money on fuel and we have been in a low diesel price environment that has really muted the value of these fuel-efficient fleets. But now that you are seeing diesel rise up as quickly and abruptly as it has, it has created a really interesting environment for us to improve our relationship with our customers and get paid handsomely for it. Saurabh Pant: All makes sense. Thanks a lot. I will turn it back. Matthew D. Wilks: Definitely. Thank you. Operator: Thank you. And ladies and gentlemen, no further questions at this time. I will now turn the call back over to Matthew D. Wilks for closing remarks. Matthew D. Wilks: It is good to wrap up 2025. We are excited about 2026. We are managing our business in a very disciplined and thoughtful way. We appreciate everybody's time and look forward to connecting on our Q1 call. Thank you. Operator: Thank you. This concludes today's call. All parties may disconnect. Have a good day.
Operator: Greetings, and welcome to the Algoma Steel Group Inc. Fourth Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, as a reminder, this conference is being recorded. It is now my pleasure to introduce Laura Devoni, vice president of human resources and corporate affairs. Please go ahead. Laura Devoni: Good morning, everyone, and welcome to Algoma Steel Group Inc. Fourth Quarter 2025 Earnings Conference Call. My name is Laura Devoni, vice president of human resources and corporate affairs, and I will be moderating today's call. The prepared remarks are Rajat Marwah, chief executive officer, and Mike Moraca, our chief financial officer. As a reminder, this call is being recorded and will be made available for replay later today in the Investors section of Algoma Steel Group Inc.'s corporate website at www.algoma.com. I would like to remind you that comments made on today's call may contain forward-looking statements within the meaning of applicable securities laws, which involve assumptions and inherent risks and uncertainties. Actual results may differ materially from statements made today. In addition, our financial statements are prepared in accordance with IFRS, which differs from US GAAP, and our discussion today includes references to certain non-IFRS financial measures. Last evening, we posted an earnings presentation to accompany today's prepared remarks. The slides for today's call can be found in the Investors section of our corporate website. With that in mind, I would ask everyone on today's call to read the legal disclaimers on slide two of the accompanying earnings presentation and to also refer to the risks and assumptions outlined in Algoma Steel Group Inc.'s fourth quarter 2025 management's discussion and analysis. Please note that our financial statements are prepared using the US dollar as our functional currency and the Canadian dollar as our presentation currency. As a reminder, the company changed its fiscal year end from March 31 to December 31, resulting in a nine-month fiscal reporting period ending 12/31/2024. For ease of comparison, we will focus our comments today on the three- and twelve-month periods ending 12/31/2025 and 2024. Please also note that amounts referred to on today's call are in Canadian dollars unless otherwise noted. Following our prepared remarks, we will conduct a question and answer session. I will now turn the call over to our chief executive officer. Rajat? Rajat Marwah: Thank you, Laura. And good morning, everyone. Thank you for joining us to discuss our fourth quarter and full year 2025 performance. Before I get into our results, I want to acknowledge this is Mike's and my first earnings call as CFO and CEO, respectively, roles we formally assumed on January 1. I also want to recognize Michael Garcia, who led this company through one of its most consequential transformations and who left Algoma Steel Group Inc. in a fundamentally strong position. Employee safety remains our top priority and a core value. The scale of activity on our site today with the end of blast furnace operations and our EAF running around the clock demands an unwavering focus on safe execution, and I am proud of the discipline our teams have demonstrated throughout this transition. Every milestone we achieved in our transformation must be earned with the same commitment to sending every employee home safely, every day. Before I get into the details of the quarter, I want to highlight three key themes. First, the 50% US Section 232 tariff has permanently altered the landscape for Canadian steel producers. With the American market effectively closed to us, we have responded accordingly, exiting our primary blast furnace and coke oven operations, pivoting our entire commercial strategy towards the Canadian market, restructuring our cost base, and accelerating our transformation that positions Algoma Steel Group Inc. for the realities of this new trade environment. Second, we have the financial foundation to execute. The Canadian $500,000,000 in government-backed liquidity support combined with our ABL facility provides the runway we need to advance our transformation, reduce cash burn, and pursue new opportunities to diversify the business. Third, our operational pivot is not a plan. It is underway. Blast furnace and coke oven operations have been wound down. Our first EAF unit is running on a full 24-hour schedule, and our second unit remains on schedule. Our strategic focus is now squarely on delivering high-value products for the Canadian market. Let me expand on each of these. The extreme tariff environment on steel imports and derivative products from Canada remains the defining challenge for our industry. The unprecedented 50% tariff implemented in June fundamentally broke the cost structure and broader business model that Canadian producers, including Algoma Steel Group Inc., had built over decades. The consequences extended well beyond the US border, creating an oversupply of coil in Canada and driving domestic transactional price as much as 40% below comparable US levels across many categories. For the full year, besides the impact of lower pricing, we absorbed $225,000,000 in direct tariff cost. These are not cyclical headwinds. They represent an unprecedented structural shift that required a structural response. Our fourth quarter financial results reflect that reality: lower shipments, elevated costs, and continued pressure on realized pricing as the Canadian market absorbed excess supply. Shipments to the US were approximately 30% lower than the average US sales over the previous three quarters as we began our exit from the US market. Against that backdrop, our plate mill stands out as a genuine competitive advantage. As Canada's only producer of discrete plate, we are not subject to the same oversupply dynamics that are compressing coil pricing. Demand for plate products across infrastructure, construction, and defense remains healthy, and we expect plate production to increase sequentially as our year ramps through 2026. This is exactly the market position we are leaning into. Next, let me talk about our EAF, the heart of our transformation and the foundation of Algoma Steel Group Inc.'s future. Ramp-up activities are progressing in line with expectations. The furnace and melt shop assets are performing as designed, with stable metallurgical quality and process control demonstrated across a broad range of plate and hot-rolled coil grades. The Q1 power system and other critical process components are operating reliably on a full 24-hour-per-day schedule, a significant milestone from where we were just one quarter ago. As of 12/31/2025, cumulative investment in the project stood at $920,000,000, and we continue to expect a final aggregate cost of approximately $987,000,000. Alongside this operational progress, we have taken deliberate steps to strengthen our strategic and financial position. Mike will walk you through the details of our liquidity actions later in the call. But I do want to highlight one development that speaks directly to where this company is headed. In January 2026, we announced a binding MOU with Hanwha Ocean Company Limited, a long-term strategic arrangement with an aggregate potential value of $250,000,000 US dollars, including a $200,000,000 US dollar contribution towards the potential development of a structural steel beam mill and up to $50,000,000 US dollars in anticipated product purchases connected to the Canadian Patrol Submarine Program. This is a meaningful signal of Algoma Steel Group Inc.'s emerging role as a critical partner in Canada's defense and industrial supply chain. Taken together, these actions reflect a deliberate strategic repositioning. We are moving away from our historical model as a cross-border commodity producer and towards something more focused, more resilient, and more aligned with Canada's long-term industrial priorities. By concentrating on as-rolled and heat-treat plate products, along with selected coil products for the domestic market, we are optimizing for margin quality rather than volume, deepening customer partnerships, and reducing our exposure to tariff-distorted global markets. Repositioning achieves three things. We supply Canadian industry with the high-quality plate products needed for infrastructure, manufacturing, and defense. We create operational stability that supports continued investment in our transformation. And we reinforce Algoma Steel Group Inc.'s role as a critical supplier in Canada's industrial future. In short, we are evolving from a cross-border commodity producer to a Canadian-focused steel supplier with lower cost, lower emissions, and greater long-term resilience. The work is not finished, but the direction is clear, and the foundation is in place. Thank you. I will now turn the call over to Mike for a deeper dive into our financials. Mike? Mike Moraca: Thanks, Rajat. Good morning, and thank you all for joining the call. Before I get into the details, I want to remind listeners that our functional currency is the US dollar; we present our results in Canadian dollars. The Canadian dollar strengthened approximately 5% over the course of 2025, moving from roughly C$1.44 per US dollar at year-end 2024 to approximately C$1.37 at 12/31/2025. I would encourage you to keep that currency backdrop in mind as we go through the numbers. Our fourth quarter results included adjusted EBITDA that was a loss of $95,200,000, which reflects an adjusted EBITDA margin of minus 20.9%, and cash used in operating activities of $3,000,000. We finished the quarter with a strong balance sheet including $77,000,000 of cash, availability of $195,000,000 under our revolving credit facility, and $417,000,000 available under the large enterprise tariff loan facility. Now let me dive into key drivers of our performance. We shipped 378,000 net tons in the quarter, down 31% versus the prior-year quarter. The decrease in shipments was largely attributable to the impact of US tariffs, which, as Rajat said, effectively closed that market to our products. Net sales realizations averaged $1,077 per ton compared to $976 per ton in the prior-year period. The increase versus prior-year level reflects improvements in value-add product mix as a proportion of sales, partially offset by weaker market conditions. Plate pricing continued to enjoy a significant premium relative to hot-rolled coil during the quarter, driven by resilient demand. That resulted in steel revenue of $408,000,000, down 23.9% versus the prior-year period as the lower shipment volumes more than offset higher realized prices. On the cost side, Algoma Steel Group Inc.'s cost per ton of steel products sold averaged $1,332 per ton in the quarter compared to $1,032 per ton in the prior-year period, which was primarily due to tariff costs and worse fixed cost absorption due to lower steel production volumes. It is important to note that during the quarter, accelerated depreciation of blast furnace and basic oxygen steelmaking assets and stranded inventory related to the accelerated closing of the blast furnace was captured in cost of steel revenue. Cash used in operations totaled $3,000,000 in the quarter compared to a use of $77,000,000 in the prior-year period. The significant improvement was driven in large part by a meaningful release of working capital. Inventories at fiscal year end were $569,000,000 compared to $790,000,000 at the end of the third quarter, a reduction of approximately $221,000,000 in the quarter. That reduction reflects the deliberate wind-down of blast furnace raw material inventories as we exited that steelmaking route, as well as continued shipments of finished goods. We also saw a decrease in accounts receivable consistent with lower revenue levels. Taken together, working capital was a significant source of cash in the quarter, largely offsetting the operating losses, and we expect to see further working capital benefits in 2026 as work-in-process inventories are normalized and we recover significant income taxes receivable. Now let me run through the full year comparisons. We shipped 1,700,000 net tonnes for the full year 2025 compared to 2,000,000 net tons in calendar 2024. Net sales realizations averaged $1,080 per tonne compared to $1,107 per ton in the prior year, reflective of softer market conditions on average across the year, partially offset by improvements in value-added product mix as a portion of steel sales. This resulted in steel revenue of $1,900,000,000 compared to $2,200,000,000 in the prior year. On the cost side, Algoma Steel Group Inc.'s cost of steel products sold averaged $1,216 per ton for the year, compared to $1,054 in the prior year, primarily due to tariff costs and worse fixed cost absorption due to lower steel production volumes. Adjusted EBITDA for the full year was a loss of $261,400,000, representing an adjusted EBITDA margin of minus 12.5%, compared to an adjusted EBITDA gain of $22,400,000 and an adjusted EBITDA margin of 0.9% in calendar 2024. The decrease was primarily attributable to lower shipments. Cash flow used in operating activities for 2025 was $66,000,000 compared to cash generated of $82,000,000 in calendar 2024. The decrease year over year was primarily due to factors previously discussed. As mentioned earlier, inventories at fiscal year end were $569,000,000. That compares to $879,000,000 in 2024, a reduction of $310,000,000 over the year. Before I turn it back to Rajat, let me make a few comments on our calendar first quarter 2026 results so far. Due to persistently weak market demand, we expect shipments this quarter to be sequentially lower than the fourth quarter. We expect to see better pricing and cost performance, which should result in adjusted EBITDA that is directionally better as compared to calendar fourth quarter 2025. I also want to briefly note that we are aware of the pending litigation with US Steel in Ontario and arbitration in the USA regarding an iron ore supply agreement. As that matter is now in litigation, we are not in a position to comment further on it today. I would like to now turn the call back over to our CEO, Rajat Marwah, for closing comments. Rajat? Rajat Marwah: Thanks, Mike. Let me close with this. 2025 was the most challenging year in recent memory for Canadian steel producers. The 50% US Section 232 tariff dismantled the cross-border business model that had defined this industry for decades, flooded the Canadian market with excess supply, and forced every producer to fundamentally adjust how they operate. We were not immune to those pressures, and our financial results this year reflect that reality. But what I am most proud of is how this organization responded. We did not wait for conditions to improve. We were compelled to make difficult decisions, accelerating the wind-down of our blast furnace and coke oven operations ahead of our original timeline, pivoting our commercial strategy towards the Canadian market, and securing the financial resources to execute our transformation without compromising our future. Those were not easy calls, and they required conviction, speed, and coordination across every part of this business. None of this came without real human cost. The accelerated transition required us to wind down our blast furnace and coke oven operations earlier than planned, and that had meant issuing layoff notices to approximately a thousand of our colleagues, effective later this month. I want to be direct about this. Those are not just numbers. They are people who helped build this company. We have worked with our unions and government resources to put mitigation programs in place, and I am committed to the view that this is not the end of the story for Algoma Steel Group Inc.'s workforce. We are actively exploring product diversification initiatives to expand our footprint and support Canadian industrial policy, and we applaud the Canadian and Ontario governments for the measures they have taken to support the Canadian steel industry. The result is a fundamentally different Algoma Steel Group Inc. Our EAF is running around the clock, performing as designed, and producing FalTer, our sustainable low-carbon steel brand, at scale. This is the sustainable steel this company has invested years and nearly $1,000,000,000 to bring to life. We are Canada's only producer of discrete plate, with a modernized plate mill, a purpose-built low-carbon steelmaking platform, Canadian $500,000,000 in government-backed liquidity to support our next phase of growth. Defense and shipbuilding demand for our plate product is real and growing. We are already shipping Davie Shipbuilding for the PolarMax program, and the Hanwha Ocean MOU opens a further compelling path into Canada's defense and industrial supply chain. We enter 2026 not defined by the headwinds we faced, but by the ground we gained while facing them. The foundation for long-term value creation is in place, and I am extremely confident in the direction of this company. To our employees, what you accomplished in 2025 was extraordinary. You navigated a period of profound uncertainty and change with professionalism, dedication, and resilience, and you did so while keeping safety at the forefront every single day. I look forward to building on what we have started together. Thank you very much for your continued interest in Algoma Steel Group Inc. At this point, we would be happy to take your questions. Rajat Marwah: Operator, please give the instructions for the question and answer session. Operator: We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Our first question is from Katja Jancic with BMO Capital Markets. Katja Jancic: Hi, thank you for taking my questions. Maybe starting on the shipment side, you mentioned first quarter shipments sequentially are going to be lower. But can you remind us how you are thinking about full-year shipments? And then also how this is going to be split between plate and sheet? Mike Moraca: Hey, Katja. Good morning. It is Mike. I think that over the course of the year, we expect to have total shipments between 1,000,000 and 1,200,000 tons. There will be a little bit of a ramp as we are building up our capacity at the EAF, and we will see slightly lower shipments in the first quarter, but ramping up to a run rate in that 1,000,000 to 1,200,000 tons as the year progresses. So slightly lower in Q1, but growing over the course of the year. Katja Jancic: And then on the mix? Mike Moraca: The mix will be roughly 50/50, I would say, on the plate and sheet based on what we see today. Katja Jancic: Okay. And maybe just shifting gears to your cost side. Can you talk about how much of your energy cost are exposed to the current spot market? Mike Moraca: Sure. I think that we are generating power from our own natural-gas-fired power plant, so there is commodity price exposure to the natural gas price. And we do consume power directly from the grid, which is subject to Ontario's spot rate pricing. So, it is a nice mix to have because we do have the ability to generate our own power. So if the Ontario pricing does swing up to a higher price, we are generating our own as a safeguard. Further to that, as you know, we have the Northern Electricity Advantage Program, which is specific to Northern Ontario-based producers and does give us a C$20 per megawatt advantage on our power pricing. Katja Jancic: And just on the natural gas, are you hedged at all, or are you fully on spot for your own power supply? Mike Moraca: We generally would have fixed price for the most volatile months of the year, which is traditionally the winter months where we have fixed pricing. And then the other months where there is less volatility, we would take it on spot. Katja Jancic: Okay. Thank you. Operator: Our next question is from Ian Gillies with Stifel. Good morning, everyone. Mike Moraca: Morning, Ian. Ian Gillies: Can you provide an update on what you are seeing as it pertains to plate pricing in Canada? Obviously, over the last number of months, there have been some new government initiatives to try and keep imports out of the country, and I am just curious on how that is progressing and whether you are seeing that flow through into your price book. Rajat Marwah: Sure. So the pricing on the plate side is holding up. It is much better than the sheet pricing. On the sheet side, we are seeing a 40% lower pricing from the index. On the plate side, it is less than that. It is ranging anywhere between 15% to 20%. The pricing is definitely better. The measures that the government is taking definitely are helping. It is slow coming in right now, but we see a lot of inbounds coming from customers and some new customers for steel, and that is encouraging. Ian Gillies: As it pertains to the HRC side, and pricing being 40% lower, can you just help reconcile that pricing discount versus what we might be seeing in the Fastmarkets Canadian price quote that is now out that is saying Canadian steel prices are around $800 a ton right now? Rajat Marwah: I do not know how those pricing are calculated by Fastmarkets, but the pricing in the market is roughly 40% lower. And it makes a lot of sense as well when you see what the tariffs are and what is happening in Canada. Over time, what we have seen is that pricing started strengthening a little bit in Canada where it was better. But overall, it is hovering around a 40% discount to the index. Ian Gillies: As it pertains to the beam mill, can you maybe outline how or critical milestones that you think may be achieved or may be announced over the next, call it, twelve to eighteen months? Because it feels like bidding is moving along reasonably quickly, but formal contracts will not be announced until 2028. So just curious there. Rajat Marwah: So from our perspective, we are working on the beam project. It is a big project. So we are doing engineering, cost estimates, and timelines. We are also working on the market side. There is not much that I can share right now, but what I can say is that the beam market is one where the supply is less than the demand in Canada, and we are very well suited to support that market with our EAF. Now from Hanwha’s perspective, that is one of the components of, let us say, the whole project. Their application has been in, and I think the government is really moving pretty fast to decide which one will get it. I think the government will do the right job in finding the right partner for Canada. But from our perspective, we are moving fast on our assessment of this project, and once we have more details around it, we will definitely come out and disclose on the key milestones. Ian Gillies: And last one for me. As you think about how the business progresses through the remainder of this year, where do you think CapEx ends up for the full year? And is there really much left on the EAF at this point? Mike Moraca: Ian, I think that we have said we are at $920,000,000-ish or so. We do not expect any change in the total project budget. So we will incur those capital costs over the first half of this year as we ramp up the second EAF. As for sustaining CapEx, I think we are seeing a step-change lower as we have taken blast furnace and coke-making facilities out of the mix. So you should expect to see significantly lower sustaining CapEx in line with what we had mentioned in the past of being close to around $80,000,000 a year. Ian Gillies: And one last one, actually. On the scrap side, can you just provide an update on how that has gone so far as it pertains to the EAF? And how your JV is working as well on the sourcing side? Rajat Marwah: It is going pretty well. The scrap availability and supply and the use is going pretty well. The JV is working fine, and we are ramping up pretty fast from that. So we are pretty happy with the way things are moving on the scrap side and also the availability. Ian Gillies: Okay. Thank you very much. I will turn it back over. Operator: Thanks, Ian. Thank you. There are no further questions at this time. I would like to hand the floor back over to Laura Devoni for any closing comments. Laura Devoni: Thank you again for your interest in our fourth quarter 2025 earnings conference call and for your continued interest in Algoma Steel Group Inc. We look forward to updating you on our results and progress when we report our first quarter results in the spring. Operator: This concludes today's conference. Thank you again for your participation. You may disconnect your lines at this time. Thanks, Paul.
Paul Johnson: Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's conference call to report financial results for its fourth fiscal quarter ended 12/31/2025. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, this conference is being recorded today, 03/12/2026. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference. Okay. Thank you. Robert Ladd: Thank you, Paul. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter and year ended 12/31/2025. This morning's call will be longer and more in-depth than previous calls. We have five topics to cover. First, the financial results for the fourth quarter and year ended 12/31/2025, asset quality, including commentary regarding software exposure, outlook for 2026, our share buyback program recently announced, and our investment advisor joining forces with Ridge Post Capital. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements as well as an overview of our financial information. Paul Johnson: Thank you, Rob. I would like to remind everyone that today's call is being recorded. Please note that this call is the property of Stellus Capital Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Todd Huskinson: Audio replay of the call will be available by using the telephone numbers and PIN provided in our press release announcing this call. I would also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections; we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections. We will not update any forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link or call us at (713) 292-5400. Now I will cover our operating results for the fourth quarter and year. I would like to start with our life-to-date activity. Since our IPO in November 2012, we have invested approximately $2.8 billion in over 220 companies and received approximately $1.8 billion of repayments, while maintaining stable asset quality. We have paid $333 million in dividends to our investors, which represents $18.27 per share to an investor in our IPO in November 2012, which was offered at $15 per share. In the fourth quarter, we generated $0.29 per share of GAAP net investment income, and core net investment income was $0.29 per share also, which excludes excise taxes. During the quarter, we also realized gains of $5.5 million on five equity positions, which resulted in total realized income for the quarter of $0.48 per share. Net asset value per share decreased $0.23 during the quarter from two components: The first was $0.11 per share of dividend payments that exceeded earnings, which was necessary to continue to pay out spillover income balance from 2024. The second was net realized losses of $0.12 per share related primarily to two debt investments. On the capital front, on December 31, we repaid the remaining $50 million of the $100 million of 2026 notes prior to their March 2026 maturity. Turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $1.01 billion across 115 portfolio companies, unchanged from $1.01 billion across 115 portfolio companies as of 09/30/2025. During the fourth quarter, we invested $34.1 million in four new portfolio companies and had $18 million in other investment activity at par. We also received four full repayments totaling $37.9 million, five equity realizations totaling $7 million, which resulted in a realized gain of $5.5 million, and received $9.1 million of other repayments, both at par. At December 31, 99% of our loans were secured, and 92% were priced at floating rates. Average loan per company is $8.8 million, and the largest overall investment is $19.2 million, both at fair value. Substantially all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a one or two, or on or ahead of plan, and 19% of the portfolio is marked in an investment category of three or below, meaning not meeting plan or expectations. We added one new loan to our nonaccrual list and removed another from the nonaccrual list during the quarter. Currently, we have loans to five portfolio companies on nonaccrual, which comprise 7.5% of the total cost and 4.1% of the fair value of the total investment portfolio, respectively, which represents a slight increase from the prior quarter. We are always focused on diversification, including by industry sector. We have investments in 24 separate industry sectors, and we have approximately 10% in high-tech industries. Over the last months, there has been a lot of press about the impact of artificial intelligence on large-scale SaaS software industry, which has resulted in concern around investment firms’ exposure, both private equity and private credit, to the sector. Let me first say, Stellus does not have exposure to the large-scale SaaS software sector. Rather, we have a small number of loans to software companies that are related to the SaaS space but are better characterized as industry-specific, tech-enabled solutions. This group consists of five companies out of 100 portfolio companies with debt investments and comprises 6.8% of the loan portfolio, the largest position is 1.8%, both at fair value. Each one of these companies provides integral products and services that are embedded in the businesses that they serve. They are using AI to enhance the software and information they provide and, in many cases, are dealing with proprietary data. A common theme for these software businesses is that they are using AI to enhance their value proposition rather than the customer being able to do this all internally with AI. In summary, we believe AI will enable these and many of our portfolio companies across a variety of industry sectors to improve the speed and quality of information, and we do not believe that AI will supplant the need for what our portfolio companies provide. Let me add, each of these companies is owned by a substantial private equity sponsor, is well-capitalized with material equity below us, has modest leverage, and EBITDA that is stable to increasing. The risk rate of these companies is either a one or a two, meaning on or ahead of plan. We will continue to monitor these companies closely as we do with all of our portfolio companies. Importantly, looking forward, we would be surprised if AI had a material negative impact on the recovery of our loans to these companies. And now I would like to turn the call back over to Rob to cover the outlook and a few additional topics. Robert Ladd: Okay. Thank you, Todd. As we look ahead to 2026, I will cover four topics. First, the outlook for Q1 and Q2; the recent announcement concerning our advisor’s plans to join Ridge Post Capital’s platform; a $20 million share buyback program; and our view on the private credit sector overall. So outlook for Q1 and Q2. Today, our portfolio is approximately $996 million across 115 portfolio companies. With the turbulence that we have all been observing, M&A activity has slowed some after a very robust fourth quarter for us. Therefore, we expect in 2026 a portfolio at the current level or slightly less. We expect continued equity realizations in Q1 of approximately $2 million, resulting in a $1 million realized gain. Regarding dividends, in January we declared the dividends for 2026 of $0.34 per share in the aggregate, payable monthly. We expect to keep the dividend at this level of $0.34 for the second quarter, which will be declared in early April, of course subject to Board approval. Just looking at our stock price today that is a little under $9 a share, the second quarter dividend is a 15% annualized yield. Now turning to Ridge Post. On February 5, we announced that our external manager, Stellus Capital Management, agreed to be purchased by Ridge Post Capital, formerly known as PTEN. Ridge Post is a leading private capital solutions provider that similarly serves the lower middle market. Stellus will continue to be managed by its current partners, who will retain control of its day-to-day operations, including investment decisions and investment committee processes. We like to say there will be no changes in how we operate. Todd Huskinson will continue to be Stellus Capital Investment Corporation’s CFO, and I will continue to serve as the company’s Chairman and CEO. Now turning back to Ridge Post. Ridge Post Capital, which has more than $43 billion in assets under management, invests across private equity, private credit, and venture capital and access-constrained strategies, with a focus on the middle and lower middle market. We believe that our advisor joining Ridge Post Capital is a very positive development for a number of reasons, the most important of which is the anticipated investment opportunities that Ridge Post Capital will open up for Stellus Capital Investment Corporation and our affiliates. Ridge Post’s largest strategy is a lower middle market private equity firm specializing in North American small buyouts through primary, secondary, and co-investment vehicles known as RCP Advisors, which is based in Chicago. RCP Advisors has invested with more than 200 lower middle market private equity firms and is typically the largest or one of the largest LPs in the PE funds in which they invest. As you will recall, all of our lending is to companies owned by lower middle market private equity firms. As part of Ridge Post Capital, we expect to see a material increase in investment opportunities coming from those PE relationships, many of which we do not currently have. Given the nearly identical size profile of the RCP sponsor relationships and our sponsor relationships, we think we have a meaningful opportunity to increase the top of our funnel for new origination opportunities. We are excited by this new growth opportunity and we believe it will benefit all shareholders. The transaction with Ridge Post Capital is expected to close in mid-2026, subject to BDC board and BDC shareholder approvals, and other customary closing conditions. Let me add, some of our shareholders have asked, are you selling Stellus Capital Investment Corporation, our public company, or Stellus Capital Management, to Ridge Post Capital? We are not. Stellus Capital Investment Corporation will remain publicly traded. Our leadership will remain the same, as I mentioned earlier, and our independent board members will also remain in place. Our shareholders will continue to own Stellus Capital Investment Corporation stock. Now turning to share repurchase. Our Board of Directors recently approved a stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are at approximately a 30% discount to recently reported net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a compelling opportunity to generate meaningful value for our shareholders. This authorization will remain in place for at least one year. And finally, I am going to turn to private credit today. Given the significant press coverage of perceived stress in private credit, we thought this would be a good time to share our view of private credit overall. I will first cover our strategy versus larger managers; second, a reminder of our history in private credit; and finally, the importance of private credit for the U.S. economy. Stellus Capital focuses on direct-originated senior secured loans to lower middle market, private equity-backed companies rather than participating in large, broadly shared loans or nationally syndicated credits. This represents a fundamental difference between the Stellus platform, including Stellus Capital Investment Corporation, and many of the larger private credit managers and larger BDCs. Larger managers are lending to all types of companies, many without deep-pocketed private equity owners, and some with complex capital structures or off-balance-sheet vehicles. And now a reminder of our history. First, we are one of the longest-tenured active private credit managers, with a history of investing that is 22 years across 400 companies and $10 billion of deployment. The Stellus management team has an investing history that has been resilient across multiple macroeconomic cycles, including the Global Financial Crisis of 2008–2009, COVID-19, the global pandemic, and periods of other market volatility such as the international tariff disruption of 2025. Second, our asset quality across the portfolio has remained stable over time, with a weighted average risk rate of approximately two, which corresponds to investments performing on plan. All of our loans have financial covenants. All but one of our portfolio companies are backed by a private equity sponsor, and all have substantial equity below us at the time the loans are made. Third. All of our investment vehicles, with our public company, have the same investment mandate. All lend to the same businesses. We have no competing strategies or distractions. All of our work is focused on doing well for our shareholders and investors. And lastly, fourth, we have a long history of equity co-investments alongside our debt investments. This is where we buy a small piece of equity in the companies we lend money to, usually 5% of the total portfolio at cost. The equity co-investments have resulted in substantial equity gains. For Stellus Capital Investment Corporation, this has generated approximately $98 million of net realized gains life-to-date, with a historical return on equity co-investments of greater than 2.5x. And now I will turn to private credit, the private credit sector more broadly. We believe there is a lot of opportunity for growth in the private credit space, especially in our market, the lower middle market. In our market, there is a tremendous amount of dry powder in lower middle market private equity firms, who are our client base, if you will. When they buy private businesses, we are there to finance the purchases. The best data we have would indicate there is approximately 10x the dry powder to invest by lower middle market private equity versus the amount of dry powder in lower middle market private credit providers. We will be there to provide the financing. Finally, for private credit overall, the need for this capital is very large. Why? Private credit in our country fills the large gap that commercial banks cannot provide. The reason for this is commercial banks are typically levered 10 to 11 times and are mostly lending out retail and commercial deposits. As a result, their risk profile is very tight, and they are highly regulated to safeguard these deposits. Private credit providers are not highly levered (typically 1 to 2 times), and we are not investing bank deposits. We are investing equity capital coupled with modest institutional leverage. I will say both banks and private credit providers are focused on protecting their capital bases. Private credit, though, has the flexibility to provide more leverage, earn higher returns, and can participate in the equity upside of our portfolio companies. Together, private credit and commercial banks are the growth engine of our U.S. economy. So the takeaway for our shareholders is we have a long history of investing in private credit. We think there is a lot of opportunity to invest going forward in the lower middle market, where we have always been, and also to provide strong returns for our shareholders. And with that, I recognize today’s call was longer than normal. We hope that it was helpful to better understand our business and the industry we operate in. And with that, Paul, please open up the line for Q&A. Paul Johnson: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And one moment please while we poll for questions. The first question today is coming from Christopher Nolan from Ladenburg Thalmann. Christopher, your line is live. Christopher Nolan: Hey, guys. Good morning. Thank you for all the detail, Rob. Given the change in the ownership of the external manager and the share repurchase initiative, will there be a change in the leverage targets for Stellus Capital Investment Corporation? Robert Ladd: Thank you. Good morning, Chris. And no. Good question. There will not be a change in our targeted leverage for Stellus Capital Investment Corporation, which, as you will recall, is approximately 1:1 on the regulatory test and approximately 2:1 including SBIC debentures. Christopher Nolan: Okay. And then, turning to SBA for a second, what is the remaining capacity in the SBA, and should we be looking at that to be a growth engine for you guys in the first half of the year? Robert Ladd: Yes. So ultimately, we have quite a bit of new capacity that we will have in the SBA. We, as you may have noted in Todd’s remarks and in our press release, paid down $39 million of debentures on March 1 under our first license, which brings a total of $65 million. So that would be one example. We have $65 million of new debentures that we will be able to take out, plus more when we obtain our third license. So it is a good question. A lot of growth from here, given that we have repaid $65 million of debentures so far. Christopher Nolan: Great. And final question. I noticed that you have done some subsequent investments to Venbrook and Real Estate Services, both of which are nonaccrual. Can you give a little detail of what is going on with those guys? Robert Ladd: Yes. So, of course, we do not talk much about the detailed companies, but these are companies where we have been working with others to provide additional capital to see them through a rough spot. The Partners is a realtor business based in the Midwest, and Venbrook is an insurance agency. These are small advances to further the companies’ operations during a little bit of a slow period. Christopher Nolan: Great. That is it for me. Thank you, Rob. Robert Ladd: Thank you, Chris. Paul Johnson: Thank you. The next question will be from Brian McKenna from Citizens. Brian, your line is live. Brian McKenna: Okay, great. Thanks. Good morning, everyone. So just a bigger-picture fundraising question for you guys as it relates to the broader Stellus platform. What are you hearing from some of your institutional investors in terms of having some incremental exposure to the lower middle markets and moving some capital away from the large-cap managers in the upper middle markets? And I am curious—we will see how the environment plays out from here—but given maybe the dynamic there, could we actually see a scenario where fundraising at Stellus starts to accelerate over the next year or so? Robert Ladd: Yes. Good morning, Brian, and thank you for the question. We have definitely seen, for the overall Stellus platform, an increasing interest in the lower middle market where we operate. This is coming from large institutional investors that have noticed in some of their larger managers some overlap in different credits and found our type of investing interesting. We have definitely seen an uptick in that area, and this would be, of course, across the Stellus platform. Brian McKenna: Yep. Okay. Got it. That is helpful. And then, Rob, you have clearly done a great job managing the business throughout a number of cycles and operating environments over the past 20 years or so. I think you have a great perspective as well. And so, while each cycle and period of dislocation is always a little bit different, history always rhymes. So what past experiences can you lean on today to make sure you are prudently managing your business in the current environment? Robert Ladd: Yes. I would say, historically, it is important in times like this to not be over-levered, which we are not, and I would add that the private credit industry is not. So modest leverage is helpful in these times. Certainly, we are very focused on strong underwriting throughout periods, and you may have heard us say before that when we look at a new company, we are thinking we are going to have a recession within the first 18 to 24 months. Whether we are is another matter, but we underwrite to that. So we will continue that diligent underwriting, expecting if this company got into trouble or there was an economic cycle down, how would it behave or how does the sector behave? So I think strong underwriting will continue for us. And then I would say, we will be very selective about opportunities. My guess is, too, that you may see some improved pricing in our sector. In other words, spreads may widen a little bit to the benefit of our shareholders. But I would say throughout our investing period, this goes back 20-plus years, what we have found in our part of the market, again the lower middle market, is that we have always had large equity checks below us, we have always had financial covenants, and therefore well-capitalized businesses from the start. So, again, I think it is the same that we have been doing historically. But we will be very focused and cautious if we think things are turning. We think there is a lot of noise in the system today that is less about the quality of the portfolios in private credit. Brian McKenna: Alright. Thanks so much. I will leave it there. Robert Ladd: And thanks so much, Brian, for joining. Paul Johnson: Thank you. The next question will be from Justin Marchandt from Capital. Justin, your line is live. Justin Marchandt: Hey, guys. Good morning. On for Eric today. I just want to talk a little bit more about the Ridge Post transaction. Sounds like a good fit for your investment strategy. When do you expect to see the full benefits of increased deal flow and opportunities, should the deal go through in mid-2026? Robert Ladd: Justin, thank you for joining. So, again, as you pointed out, subject to the various approvals, this transaction would close in the summer of this year. We have had initial conversations with the RCP subsidiary, if you will, Ridge Post, and we think there is a great opportunity there. So our hope and plan would be that as we get to this summer, we will hit the ground running. And I think that collectively, we think there is lots of opportunity to open up. So I would say that, not to be overly optimistic, but I would imagine this will kick in in 2026. Justin Marchandt: Okay. Alright. That is great. And then looking at PIK income, it has been a significant increase year-over-year. Are these portfolio companies prioritizing growth, or are there operational issues? And what kind of strategies can you implement to get borrowers back to cash pay? Robert Ladd: Yes. So, although our PIK income has increased, we are still at the low end of our competitor set. We do not go into a new loan with PIK income, and by the way, we understand in the upper market lenders will go into a new credit with some PIK income; we do not. At the outset, all the loans are cash pay. So if you see PIK income with us, it would mean that the company needs some relief from a cash flow perspective. And typically, when we have some PIK aspect to the income, it means that the private equity owner is contributing new capital. So this, we think, is a good trade for both parties. For that PIK to come down, it will be that those companies that needed relief have improved their performance, or we have exited the investment—in other words, the company has been sold or refinanced. So that is the nature of our PIK income, not something that is planned on the front end. Justin Marchandt: And then last one for me. Just on the new base distribution still kind of above the 4Q NII run rate, what sort of levers can you guys pull to get earnings back to or above the new distribution? Or is there a potential to right-size the distribution rate later on this year? Robert Ladd: Yes. We are striving to improve the NII. I would say that if SOFR stays where it is, which perhaps it will for a while, this will be helpful to us. The new leverage that we would receive under a third license from the SBA will get the portfolio back up. Again, as I mentioned, quite a bit of increased portfolio that was resolved from our third license getting recapitalized. So this would be helpful as well. And again, we always strive to receive the best returns on the loans we are making, and so we will continue to work on that. But it would be a combination of things. In any event, we do have a fair amount of spillover from last year, and so as a result, we will have this level of dividend, at least, through the second quarter. And we will reevaluate it. We will have more to talk about this summer as we hopefully get into our third license with the SBA. Justin Marchandt: Okay. Thanks for taking my questions today. Robert Ladd: Thank you, Justin. Paul Johnson: And the next question will be from Robert Dodd from Raymond James. Robert, your line is live. Robert Dodd: Hi, guys. A lot of my questions have been answered, and I appreciate the color you gave at the beginning on how much exposure you have to software or AI risk assets. That kind of feels like last month at this point. On something else, what would you say your exposure is in the portfolio to higher energy prices? Obviously, oil is up, could go meaningfully higher potentially. We do not have a lot of direct oil and gas production, obviously, but there is feed-through to other areas in the economy if oil prices do continue to rise or spike again. Could you give us any color on what the exposure is in the portfolio to that kind of issue? Robert Ladd: Yes, Robert. Good morning. First, as you indicated, we have no direct exposure to the oil and gas industry. I would say that we also, as a matter of underwriting, have a handful of principal tenets, one of which is to not have commodity price risk exposure. So this would transcend direct oil and gas exposure. I think that the larger impact would be just the impact on the consumer if this started to cause consumer stress. We do have some businesses that are exposed to the consumer spending, but I would say not a material amount. So do not expect any material impact, certainly directly with companies. It would end up being more of whether it causes some change in the overall economy, which, my personal opinion, I would not expect. Not to get into the war and to run, but I would expect this will probably moderate over time. But again, I would not expect it to have a material impact on the portfolio. Robert Dodd: Got it. Thank you. On the more stressed assets in the nonaccruals you have, do you have right now a kind of expectation—guess, but about the timeframe for resolution of some of those? Because obviously, to that point right now, there is a decent slug of the portfolio that is not income-producing and maybe could be again at some point in the future. What is the kind of timeline there? Robert Ladd: Yes, sir, Robert. This would certainly range by individual company, so I will not get into that specifically. But I would say that we are having some that are coming off nonaccrual, and we did one in the fourth quarter that came off nonaccrual. I think you will see a gradual change over the next 12 to 18 months with regard to the portfolio. I would say that if something is nonaccrual, it is being or has been restructured, and that we as a lender group and typically the owner, because they are not able to pay interest, are looking for exits to monetize the position, reinvest that capital, and then have earnings on it again. But I think, naturally, it is typically a year to 18-month process as you go. Some may take longer, some may take shorter. So I cannot cover specifics, but a gradual resolution, I would say, throughout 2026 and into 2027. Robert Dodd: Got it. Thank you for that. If I can, one more, just a general question. You mentioned you might see improved pricing. Obviously, the marketplace has been extremely competitive over the last 24 months, with spreads coming down, and there are some early signs maybe that is going to move. What is your confidence that spreads will in fact widen sustainably over the next year or two versus near-term indications being just a short-term phenomenon? I realize that is a really tough question, but any thoughts there would be appreciated. Robert Ladd: Sure. First, the public loan indices have widened materially over the last 60 days, but we have not seen that in the private market that we operate in yet. This will be driven by more than one factor. One would be capital flows—it appears to be less capital coming to the industry, the sector currently. The next would be perceived risk and discipline by the underwriters. Unfortunately, I cannot predict whether it will occur, but we certainly have the ingredients of what we are observing to cause spreads certainly not to get tighter and potentially to widen. Public markets are reflecting it; we have not seen it yet in the private area where we operate, but certainly the ingredients for it are there. Robert Dodd: Got it. Thank you. Robert Ladd: Thank you, Robert. Paul Johnson: Thank you. There were no other questions at this time. I would now like to hand the call back to Robert Ladd for closing remarks. Robert Ladd: Thank you, Paul, very much, and thanks, everyone, for joining the call. Thank you for your support, and we look forward to speaking with you again in early May as we report the first quarter. Paul Johnson: Thank you. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the 2025 Financial Results Conference Call and Webcast. As a reminder, all participants are on a listen-only mode, and this conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1. You may also signal an operator by pressing star. I would now like to turn the conference over to Jennifer North, Head of Investor Relations. Ma'am, please go ahead. Jennifer North: Thank you, operator. Good morning, everyone, and welcome to Avino Silver & Gold Mines Ltd.'s Q4 and Year-End 2025 Earnings Call and Webcast. To join this webcast and conference call, there is a link in our news release of yesterday's date, which can be found on our new website under Investor Center, then News and Media. In addition, a link can be found on the home page of the Avino Silver & Gold Mines Ltd. website. The full financial statements and MD&A are now available on our website under the Investor Center tab, then Reports and Financials. In addition, the full statements are available on Avino Silver & Gold Mines Ltd.'s profile on SEDAR+ and on EDGAR. Before we get started, I remind you to view our precautionary language regarding forward-looking statements and the risk factors pertaining to these statements, and note that certain statements made today on this call by the management team may include forward-looking information within the meaning of applicable securities laws. Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause the actual results to be materially different than those expressed by or implied by such forward-looking statements. For additional information, we refer you to our detailed cautionary note in the presentation related to this call or on our press release of yesterday's date. On the call today, we have the company's President and CEO, David Wolfin; our Chief Financial Officer, Nathan Harte; our Chief Operating Officer, Carlos Rodriguez; and our VP of Technical Services, Peter Latta. I would like to remind everyone that this conference call is being recorded and will be available for replay later today. The replay information and the presentation slides from this conference call and webcast will be available on the website. Also, note that all figures stated are in U.S. dollars unless otherwise noted. Thank you. I will now hand over the call to Avino Silver & Gold Mines Ltd.'s President and CEO, David Wolfin. David? David Wolfin: Thanks, Jen. Good morning, everyone, and welcome to Avino Silver & Gold Mines Ltd.'s 2026 outlook discussion, followed by a Q&A. I will start with the discussion on operations and overall performance, and then I will turn it over to Nathan Harte, Avino Silver & Gold Mines Ltd.'s CFO, to discuss the financial performance for this period. Please turn to Slide 5. We are transforming Avino Silver & Gold Mines Ltd. from a single-mine operator into a multi-asset Mexican mid-tier producer. Avino Silver & Gold Mines Ltd. achieved a number of important milestones in 2025, underpinned by strong performance at the Avino mine and the commencement of development and material extraction at La Preciosa. The 2025 year represents a return to being a primary silver producer as silver production represented over 50% of our consolidated silver-equivalent production and puts us on our way to our long-term target. Our continued investment in infrastructure development and mine optimization reflects a disciplined approach to being a scalable multi-asset production platform. As we look forward, our focus remains on executing the next phase of our growth strategy and delivering long-term value for shareholders. The first key driver contributing to our success in 2025 was our continued disciplined approach to financial management and capital allocation. At the end of the year, Avino Silver & Gold Mines Ltd. achieved record revenues of $92,200,000 and held cash of $102,000,000 and a working capital position of $99,000,000, providing another quarter of strong financial performance. A strong balance sheet will provide the foundation to support our transformational growth plan to become a Mexican-focused mid-tier primary silver producer. Nathan will provide a detailed overview of the financials later in the call. Next, key drivers stem from increased development tonnage at La Preciosa. We commenced extraction, haulage, and processing of mineralized development material from La Osa during the quarter at an average rate of 200 tons per day. In total, 11,995 tons of material were processed at the Avino milling and processing facility, which is located 19 kilometers away from the entrance of the La Preciosa mine. The third driver reflected portfolio optimization, highlighted by the August announcement of the acquisition of outstanding royalties and contingent payments on La Preciosa. This milestone reinforces the consolidation of ownership at La Preciosa, improving project economics and operational flexibility. Removing third-party obligations reduces complexity and strengthens Avino Silver & Gold Mines Ltd.'s asset portfolio. We believe this enhances shareholder value by strengthening our portfolio and positioning Avino Silver & Gold Mines Ltd. for sustained growth. Another key driver underpinning our results is the commitment we have made to strategic exploration and drilling that further unlock additional resource potential. We reported drill results from La Preciosa in October 2025, which followed up from August 2025 drilling, and also announced further holes in January. The results exceeded our expectations. Highlights included 7.9 meters true width of 1.6 kilograms of silver and 2 grams gold, including 15 kilograms of silver and 1.55 grams gold over 0.37 meters of true width. Another significant intercept was over 5 meters of true width of 787 grams silver and 0.5 grams of gold. The full results are available in the news release, which can be found on our website. The intercepts are significantly higher than the average grades outlined in our current resource, highlighting the potential we aim to capture by using underground mining methods. In addition, larger widths encountered at both La Gloria and Abundancia were a welcomed surprise, underscoring that there is still much to learn about the deposit despite the 1,500 drill holes on the property and substantial exploration investment performed by previous operators. Since acquiring La Preciosa, we have learned that recent drilling intercepts suggest wider vein structures on Gloria. The original mine plan is evolving to reflect improved geological understanding. Optimization opportunities are being identified that could reduce mining costs. We have engaged independent engineers to deliver a strategic plan that looks beyond the original project scope. The next driver was increasing silver revenues at the right time, a return to primary silver with 54% silver revenue in Q4, and record revenues, operational cash flow, and free cash flow generation in Q4. Our final driver for Q4 and year-end included stronger metal prices alongside increasing market recognition. Higher metal prices at the end of 2025 and into early 2026 have supported our strong performance. Avino Silver & Gold Mines Ltd.'s continued growth and strength in market recognition resulted in being named fifth among the top-performing companies on the Toronto Stock Exchange 2025 TSX 30. For the three years ended 06/30/2025, Avino Silver & Gold Mines Ltd.'s share price performance increased 610% and the market capitalization increased 778%. In addition to this, Avino Silver & Gold Mines Ltd. has been added to several ETFs: MarketVector's Junior Gold Miners Index and VanEck's Junior Gold Miners ETF, the GDXJ, Global X Silver Miners, and more. ETF inclusion signals institutional recognition while improving liquidity and expanding global investor access. These achievements demonstrate the meaningful progress made in advancing Avino Silver & Gold Mines Ltd.'s transformational growth strategy while reinforcing the company's investment case. Moving to Slide 6, we turn to our Q4 and year-end 2025 production results, which were released in mid-January and reflect steady operational performance. On this slide, we show our production results compared to Q4 and year-end 2024, with production remaining consistent at approximately 2,600,000 silver-equivalent ounces while total mill feed increased 14% year over year. On Slide 7, we highlighted production by operation, showing contributions from both Avino and La Preciosa for the year. We are particularly pleased to add just under 12,000 tons of La Preciosa material to our production results. At this time, I will now hand it over to Nathan Harte, Avino Silver & Gold Mines Ltd.'s CFO, to present a record financial performance for Q4 and year-end 2025. Nathan? Nathan Harte: Thank you, David, and thank you to all of you for taking the time to join us as we recap a record year with our financial and operating results for the fourth quarter and full year 2025. Here on Slide 8, we have an overview of some key financial and operating highlights, and our improved balance sheet, with the full table on the next slide. In the fourth quarter, we generated record revenues of over $30,000,000 and a further record of $92,000,000 for the full year, despite lower ounces sold. With higher silver production, the fourth quarter marks a return to primary silver with revenues of 54% being generated from silver in the quarter, with expectations of that to continue into 2026 and beyond. Gross profit was $17,800,000, and on a cash basis, $19,000,000 after removing non-cash expenses. The gross profit margin was 58% inclusive of the non-cash items and 62% excluding these items. This is significantly improved from the 43% margin in the fourth quarter of last year, as well as the 46% in the third quarter. Avino Silver & Gold Mines Ltd. earned its highest-ever earnings for Q4 and the full year 2025 with $10,500,000 in net income, or $0.06 per share, in the fourth quarter, beating last quarter's record of $7,700,000 and $0.05 per share. For the full year 2025, net income was $26,600,000, or $0.17 per share. Fourth quarter adjusted earnings were a record $16,300,000, or $0.10 per share, compared to $10,000,000, or $0.07 per share, in Q4 of last year. The 2025 full-year adjusted earnings were a record $46,500,000, or $0.29 per share, compared to $21,000,000, or $0.15 per share, in 2024. Operating cash flows and free cash flow both improved in the fourth quarter compared to last year as well as compared to the previous quarter. We generated operating cash flows before working capital adjustments of $19,000,000, or $0.12 per share. For the full year, Avino Silver & Gold Mines Ltd. generated $35,300,000 in operating cash flows, or $0.22 per share, with figures being quarterly and annual records. Fourth quarter free cash flow generation was $15,600,000, excluding La Preciosa development cost, and the annual free cash flow generation was just over $24,000,000. Moving to liquidity and treasury, our cash position was a record $102,000,000 at the end of the year and working capital was just shy of $100,000,000. Avino Silver & Gold Mines Ltd. has no secured debt other than leases on operating equipment at both Avino and La Preciosa mining operations. And coming to Slide 9, we see all other financial metrics for the fourth quarter and full year, as well as the year-over-year changes. As everyone can see, almost all categories saw meaningful increases. Highlighting again some of the key per-share metrics for the quarter where we saw $0.06 earnings per share and $0.10 on an adjusted earnings basis. Operating cash flows before working capital changes were $0.12 per share, and free cash flow generated excluding La Preciosa was $15,600,000, translating to $0.09 per share. For the year, net income was $0.17 per share, and adjusted earnings were $0.29 per share. Operating cash flows before working capital changes were $0.22 per share, and free cash flow was $0.16 per share, or $24,300,000. Here on Slide 10, we have an overview of operating results on a per-ounce and per-ton basis, as well as margins at our operations. Cash cost per silver-equivalent payable ounce for 2025 was $16.13, a 9% increase compared to $14.84 in 2024. All-in sustaining cash costs were $23.75 for the year, a 15% increase from $20.57 in 2024. On a per-ton basis, cash costs were $53.69, which was down 3% compared to $55.43 in 2024, and all-in cost per ton were flat compared to 2024, both years being around $78 per ton, demonstrating the consistency of our operation. Our mine operating income and margins for 2025 were significantly increased from 2024, with margins at 53% on the year and $48,500,000 in mine operating income generated, once again demonstrating the leverage producers have in this price environment. In the fourth quarter, we did see some increase in costs for a few reasons, one being the addition of processing La Preciosa development material. I do want to remind everyone that this is development material running through the mill. We are in a unique position that a lot of the development at La Preciosa is in ore and has allowed us to offset some of the costs associated with development work we would have had to do regardless. These costs for La Preciosa are not indicative of long-term cost per ounce and per ton expectations. However, at current metal prices, each ton of development material mined is being done so at a profit. Another item to highlight is that the movement in silver price did have an impact on our silver-equivalent payable ounce calculation, which did have an impact on our cash cost per ounce figures and all-in sustaining cost per ounce figures. Using prices from our forecast at the end of 2025 of $30 silver, $2,700 per ounce of gold, and $9,200 per ton of copper, our cash cost per ounce for the fourth quarter and full year would have come in at $16.50 and $15.17, respectively, in line with our expectations when we set out 2025. On an all-in sustaining cash cost basis, a similar story is told with the silver price impacting figures. Using the same budget prices, our all-in sustaining cost per silver-equivalent payable ounce was $26.68 for Q4. Our full-year 2025 figure would have been $22.43, once again more in line with expectations. We look forward to further economies of scale as La Preciosa begins contributing more and more to our overall production profile in 2026 and the coming years. Going back to the revenue side, here are our expectations for production by metal moving forward. Given the recent price movement in silver, we expect that the silver portion as it relates to revenues will be higher than the estimated production-by-metal figures shown here. In the fourth quarter, Avino Silver & Gold Mines Ltd. generated 54% of its revenues from silver, marking the first quarter with over 50% in silver revenues since we were operating the San Gonzalo mine prior to 2020, and delivering on our promise of a return to primary silver for our future. At this point, I will now turn it back over to David to run through upcoming activities. David Wolfin: Thanks, Nathan. As we summarize our key goals for 2026, our focus remains on strategic exploration and drilling to unlock the full potential of our resource base. This includes the integration of AI technology to enhance data analysis, improve target generation, and increase overall exploration efficiency. We are currently integrating our historical and ongoing geological data into AI-driven models to support the resource and reserve expansion and to identify new exploration opportunities. In 2026, we have planned approximately 30,000 meters of drilling, 15,000 meters allocated to each of the Avino and La Preciosa projects. We also look forward to releasing updated mineral resource estimates and announcing our inaugural mineral reserves at the end of the first half of the year. At La Preciosa, our goal is to reach a production rate of 500 tons per day. As outlined on Slide 13, I would like to again highlight the company's growth strategy. Within a 20-kilometer footprint, we have three key assets including the operating mill complex, which currently processes material from Avino and La Preciosa. We have access to water, power, and tailings storage, critical infrastructure that supports our ability to expand production efficiently. Collectively, our assets host 277,000,000 silver-equivalent ounces in the measured and indicated mineral resources and an additional 94,000,000 silver-equivalent ounces in the inferred mineral resources, providing a strong foundation for future growth. All of our operations are in the safe jurisdiction of Durango, in an area of rolling farmland with several small communities located near both the Avino and La Preciosa projects. We are proud to be one of the largest employers in this area, supported by a 100% Mexican workforce drawn largely from the surrounding communities. Alongside our operational growth initiatives, we continue to advance our CSR programs across both Avino and La Preciosa, supporting local communities and contributing to long-term social and economic development in the region. Our investor relations team is currently preparing the company's second annual sustainability report, which will be published on our website upon completion. The report is intended to provide transparency on how responsible mining practices, strong governance, and community engagement support Avino Silver & Gold Mines Ltd.'s operational performance and long-term growth. Avino Silver & Gold Mines Ltd.'s strong operating foundation supports our long-term growth strategy. As you can see on this slide, our goal is to scale up by 2029 through contributions from our three key assets. By leveraging our existing infrastructure assets and resource base, we believe we are well positioned to execute our growth plans efficiently and effectively. We concluded the quarter and the year with more record-breaking financial metrics, which reflect the strength of our strategy and the dedication of our team, both of which drive our success as we pursue the next phase of growth. On behalf of the leadership, thank you to our entire team for your efforts and contributions. With a clear growth strategy, a strong balance sheet, and significant resource potential across our assets, we believe Avino Silver & Gold Mines Ltd. is well positioned to create lasting value for our shareholders. We will now open for questions. Operator? Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. As a reminder, if you would like to ask a question, please press star then 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is coming from Heiko Ihle with H.C. Wainwright. Your line is live. Heiko Ihle: Hello, David and team. Thanks for taking my questions. So just thinking out loud here, there is obviously a newfound fear in the market. I am just trying to see what you think this will do to M&A opportunities. I mean, we have got silver at $85 and we have got gold just below $5,200. Are the opportunities that you are seeing offset by the fear in the market, or do you see discount rates being at a place where there might be interesting things out there? Just what are you seeing? Nathan Harte: Hey, Heiko. Nathan here. I will take that one. We always say this, but everything is for sale at the right price. I do not think the markets will generally dictate fully all the M&A moves in the industry. Given current prices and the discount rate environment, there is obviously some good stuff out there. But if we are looking at specifically how it affects us, we are focused on organic growth and what we already have. Heiko Ihle: Fair enough. Speaking of the things you already have, the price environment has changed markedly over the past three, six, twelve months. What are you seeing with labor costs, and should there be anything that we should change in our model compared to where we were a year ago? Nathan Harte: I will take this one again, Heiko. On labor cost, we saw a huge jump in 2024 and 2025. Obviously, the post-COVID inflation hit everyone in the mining industry. That has stabilized a little bit based on what we are seeing, but in a rising price environment, there is generally a little bit of cost creep, so we are doing our best to manage that. We are not expecting any material changes at this time. Heiko Ihle: Okay. So once we get the Q1 numbers, we can use those and trend-line them a bit. Nathan Harte: I would say that is fair. Thanks. Heiko Ihle: I will get back in queue. Thank you, guys. Nathan Harte: Thanks, Heiko. Operator: Our next question is coming from Jacob G. Sekelsky with Alliance Global Partners. Jacob G. Sekelsky: Hey, David, Nathan, and team. Thanks for taking my questions. Just looking at the strong balance sheet, I am curious if there are any levers you feel you might be able to pull in order to accelerate some of the planned work at La Preciosa. David Wolfin: We just ordered a new jumbo, so that is going to help. Basically, it is underground development work, so we are working on that. SRK Engineering is revising and looking at a larger mine plan. These are the things that we are looking at. Anything else? That is it, Jake. Jacob G. Sekelsky: Okay. That is helpful. And on that larger mine plan scenario, when do you think we might see some news on that front? Peter Latta: Hey, Jake. Peter here. We are evaluating a few different scenarios and we want to take our time with it because it is a volatile environment. We really want to evaluate a number of different options because we do have optionality with the deposit, with the size that it is, and how we integrate those two operations now, including how that dovetails with oxide tailings, that third leg in the stool. We are taking our time with that optimization. Jacob G. Sekelsky: Got it. Okay, that is all for me. Thanks again. Peter Latta: Thanks, Jake. Operator: Thank you. Our next question is coming from Richard Larson, who is an investor. Sir, your line is live. Richard Larson: Hello? My question is about your share count and your at-the-money. I realize silver prices have kind of struggled for fifteen years or so. It is tempting to issue shares to strengthen the balance sheet. Looking out two, three, four years, you could be doing 8,000,000 production at margins of $60 over kind of mine operating income. I am wondering what is your strategy on potential capital returns or at least minimizing the amount of share dilution? And how are you thinking about that on the balance sheet going forward? Nathan Harte: It is a fair question. Nathan Harte here. Shareholder returns are prevalent in the industry and it is a big discussion point at this time. We do have a few levers we are looking at and some things that are in the works. But at this time, we are focused on delivering the organic growth, and that will require capital. Having said that, the use of the ATM has really been as we have hit 52-week or all-time highs. Now, with a bit of a market pullback, we are staying put at this time. Richard Larson: Okay. Thank you. Appreciate it. Operator: Thank you. Our next question is coming from Joseph George Reagor with ROTH Capital Partners. Your line is live. Joseph George Reagor: Hey, David, Nate, and team. Thanks for taking my questions. Jake kind of touched on this already, but thinking about the fact you have over $100,000,000 on the balance sheet, and I realize you are going through options, is it fair to say that we can start assuming there will be some form of mill expansion coming within the next year or two? David Wolfin: Absolutely. That is a safe assumption, Joe. We are doing the work right now to figure out what is the appropriate size and whether it is at just Avino or if we build a new one, potentially both. We will let the market know once we have made some ideas and decisions on that. Joseph George Reagor: Okay. That is fair. As you think about the operating cost side, inflation has been putting a lot of pressure on everybody. Are there any optimization things that you can do to bring down operating costs, or given margins are where they are, is that not a huge focus? Nathan Harte: As you mentioned, inflation has hit the industry more so in previous years, not necessarily in the last year or so. As far as operating costs go, we are seeing fairly consistent operating costs. There is some volatility with diesel and gasoline prices, but on the labor side, we are seeing fairly stable increases as we reward our employees, but fairly stable overall. David Wolfin: The tonnage cost. Nathan Harte: Our cost per ton has been steady. The evidence is in our cost per ton year over year, and it is very steady. Joseph George Reagor: Can you remind us how much exposure you have to diesel prices? What percentage of cost is fuel? Nathan Harte: It is not overly high, unlike some fairly capital-intensive operations out there. We are not talking high double digits or anything like that. I would have to give you an exact number offline if you want, but in Mexico it is fairly subsidized by the government, and so prices do not get too out of whack. Joseph George Reagor: Fair enough. I will turn it over. Thanks, guys. Nathan Harte: Thanks, Joe. Operator: Thank you. Our next question is coming from Chen Lin with Lin Asset Management. Your line is live. Chen Lin: Thank you, David and Nathan, for taking my questions. A great year. Congratulations. I am just curious, because some of my questions already got answered. Do you see any chance, with the changing Mexico to a more pro-mining environment, that La Preciosa can potentially be an open pit, or are you going to continue the underground operation? David Wolfin: Thanks, Chen. That is one of the scenarios in the four scenarios we are looking at. Coeur did a feasibility study back in 2013, so it is outdated. We are revisiting that. Chen Lin: Okay. So if potentially Mexico opens for the open pit, what kind of impact would that have for your production outlook? Or would you need to upgrade your mill much more significantly? Nathan Harte: Chen, Nathan here. It is premature to put any numbers on it, but if anyone wants to have a look, that study is still available on SEDAR+. But yes, obviously it would be a lot of growth. Chen Lin: Okay. Great. Thank you. Operator: Thank you. If you have any further questions or comments, please. Okay. As we have no further questions in the queue at this time, I would like to hand back over to management for any closing remarks. David Wolfin: Thank you. It has been a year and a final quarter of record-breaking achievements, and we remain focused on executing our organic growth plan. We look forward to building on this momentum and delivering additional milestones and sustained growth for the Avino Silver & Gold Mines Ltd. shareholders. Thank you again for participating in our conference call. Have a great day. Operator: Thank you. Ladies and gentlemen, this does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Inc. Fourth Quarter and Full Year 2025 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Sumit Kundu, Investor Relations. Please go ahead. Sumit Kundu: Thank you, operator, and good morning. Welcome to Ballard Power Systems Inc.'s fourth quarter and full year financial and operating results conference call. With us on today's call are Marty Neese, Ballard Power Systems Inc.'s CEO, and Kate Igbalode, Chief Financial Officer. We will be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our annual information form and other public filings for our complete disclaimer-related information. I will now turn the call over to Marty. Marty Neese: Thank you, Sumit, and good morning, everyone. Today, I will review fourth quarter and full year results. Additionally, I would like to walk you through the structural changes underway at Ballard Power Systems Inc. and the foundations we are laying and building towards sustained positive cash flow over the next two years. Let me begin with last year's performance. I am pleased with our results in Q4 and across the full year. In 2025, we delivered record engine shipments, approaching 800 engines and more than 75 megawatts of power. That represents 38% growth in megawatts shipped compared to 2024. The majority of these shipments were into Europe and North America, with particularly strong activity in Canada. These shipments translated into full year revenue of $99 million-plus, up 43% year over year. We also secured our largest marine order to date, a 6.4-megawatt award from ECAP Marine and Samskip, and on Tuesday, announced our largest commercial agreement with New Flyer of 50 megawatts. But the real shift in 2025 was not just growth. It was structural progress toward our goal of becoming cash flow positive within the next two years. We have made decisive changes to align our cost structure with market realities and position Ballard Power Systems Inc. for durable, sustainable performance. We reduced our cash operating costs in Q4 by 41% compared to the same period last year, fundamentally resetting our cost base. We are now seeing the financial impact of that reset. In Q4, we achieved a positive 17% gross margin and a positive 5% for the full year, both representing meaningful improvement year over year. While quarterly performance is not yet ratable due to seasonality, the margin profile of the business is strengthening and is foundational for us to achieve our profitability goals. Most notably in Q4, we generated $11 million in cash flow from operating activities, which underscores our structural actions are working, and we are making measurable progress towards our profitability targets. With significant improvements in our cost structure and operating discipline, the next phase is clear: expanding revenue and gross margins. Our plan centers on five near-term focus areas: improving commercial terms, product cost reductions, enhanced fleet service offerings, expanding product reach, and business model innovations. Let me briefly touch on each. First, commercial terms. Throughout 2025, we strengthened our commercial foundation. Our newer agreements reflect more comprehensive pricing structures and balanced commercial terms, including protections against tariff exposure, exchange rates, inflation, and precious metal volatility. These changes improve transparency with our customers, enhance margin visibility, reduce earnings variability, and support stronger long-term partnerships. Our customers have been constructive in these discussions as they are navigating similar cost pressures with their customers. In some cases, finalizing these improved structures has shifted certain order announcements into 2026. But the result is higher quality agreements that better protect long-term value for both parties. A recent example is the commercial agreement with New Flyer, their largest commitment to Ballard Power Systems Inc. to date, covering 500 FCmove-HD+ engines, or 50 megawatts. This is an exciting opportunity to support New Flyer as more and more U.S. transit agency customers adopt fuel cell buses. Increasingly, these customers are understanding the value proposition offered by fuel cells, including superior range, especially in cold weather, and lower infrastructure costs related to charging infrastructure. We also expect additional activity in stationary and rail markets in the coming months. Our second focus area is product cost reduction through a holistic approach. We are systematically cost-reducing our products using three key levers: negotiations, execution, and innovation. Our supply chain and sourcing teams are securing and adding new alternative lower-cost suppliers, while our operations team continues to increase productivity and improve manufacturing process yields. We are also innovating in areas that increase performance, simplify our products, and design in more durable components. Nothing reflects this approach better than the FCmove SC. This platform achieves a 40% reduction in total part count while simultaneously improving power density, durability, and capability. Fewer parts translate directly into lower-cost materials, simplified assembly, and enhanced maintainability and serviceability. We are also advancing Project Forge, our high-volume bipolar plate automated manufacturing line, which is on track to begin serial production midyear. This line has fewer processing steps, higher volumes and throughput, improved quality, and process yields. Further, it combines enhanced in-line metrology and state-of-the-art automation, resulting in plate cost reductions of up to 70% at full volume. Together, these systemic approaches significantly improve our cost position, strengthen gross margin, and enhance the competitiveness of our products. Third, we are focused on leveraging our installed base through enhanced fleet services offerings enabled by product-level intelligence. We now have thousands of fuel cell engines operating globally, supported by a deeply experienced service organization and nearly 300 million kilometers of real-world operating experience. Every engine is equipped with a remote data unit, which transmits engine performance data. Each product is smart and adds to the collective intelligence of our installed fleet. Today, our smart engines provide a trove of performance data, enable preventive and customer maintenance, and insights into enhanced customer uptime. In the near future, additional insights will provide the foundation for prognostic and enhanced maintenance services, both co-located with our customers and from our remote operations center in Canada. This installed footprint creates a significant opportunity to expand recurring revenue under Ballard Fleet Services, including long-term service agreements, parts supply, technical support, operational monitoring, customer technician training, and ongoing stack servicing. Ever-increasing fleet intelligence and added services will provide performance benefits to our customers while expanding our fleet services business over time. This service-led approach increases revenue visibility, strengthens customer intimacy and retention, and adds a more stable recurring component to our business mix that scales with every unit and for years after initial delivery. Our installed base is becoming a compounding asset, supporting both customer success and sustained financial performance. We believe this is a significant source of long-term competitive advantage and differentiation, and we will continue to invest in our fleet services capabilities. Our fourth focus area is expanding in near-term markets. We are leveraging our technology platforms and durability expertise to expand into mature and rapidly growing market segments. One example is materials handling. This is a market where cost and durability are critical. By applying our technical and operating experience gained in heavy-duty applications, we have developed a stack that delivers superior total cost of ownership due to its longer lifetime. Another example is stationary power. We are increasingly focused on replacing diesel gensets and powering data centers. While PEM fuel cells have traditionally been positioned as backup solutions, we believe our technology can also support peak power and, in certain applications, even primary power where hydrogen supply is available. We have deployed solutions for a wide variety of off-grid, microgrid, high-uptime, and critical infrastructure applications. These have ranged from historical telecom backup installations to peak shaving and, more recently, to powering TV and film productions and very large construction sites. Our stationary power products have generated over 100,000 hours of power, which is nearly ten years equivalent of reliable service. This scalable, flexible power generation capability is now being deployed and evaluated for multi-megawatt data center applications in select target markets. Our engines provide clean, quiet, emissions-free power with very high reliability. These highly bankable features ease permitting and are welcomed in any jurisdiction. We look forward to continuing to advance our product offerings to address the growth in these exciting markets and will provide additional updates in the coming months. Finally, our fifth focus area is unlocking broader access to the hydrogen ecosystem. In addition to advancing our technology, we are innovating in commercial and operating models that lower both the financial and technical barriers to adoption. As customers evaluate hydrogen solutions, upfront capital costs, infrastructure complexity, and long-term performance risk remain key considerations. We are addressing these through flexible commercial and financial structures, service-based offerings, and partnerships which simplify integration and reduce risk. Innovative business models will provide our customers with complete solutions, including financing models that will allow a win-win value proposition and simplified development. As part of these solutions, we are offering extended warranties based on our proven durability and comprehensive service capabilities. As adoption becomes easier and more predictable, our addressable market expands, creating a virtuous cycle of scale, cost reduction, and growth, while at the same time improving the full-solution value we deliver for our customers. These five focus areas act as a one-two punch in tackling both the revenue and margin side of our cash flow equation, offering a realistic near-term path for achievement. Finally, let me close with a few thoughts. Over the past year, we have fundamentally strengthened the foundation of the business. We improved financial performance, reinforced our commercial discipline, delivered record volumes, reduced our cost structure, and expanded margins, all while navigating a complex market environment. We have a path to improve revenue and margins to build a business designed to generate sustainable positive cash flow within the next few years. With over $500 million of cash, and lower cash utilization, we have the additional flexibility to deploy capital strategically in support of this goal. With a well-managed cost structure, improving gross margins, and a focused execution plan, Ballard Power Systems Inc. is entering its next phase with greater financial and operational clarity. We are very grateful for our long-term customer relationships and are deeply committed to continuing to deliver more and more solutions of value to serve them. Core to our progress are the people of Ballard Power Systems Inc. I want to thank them for their dedication and professionalism. The improvements we delivered in 2025 are a direct reflection of their expertise and commitment. We are confident in the path ahead, and we are committed to deliver fuel cell power for a sustainable planet. With that, I will now pass the call over to Kate to review the detailed financials. Kate Igbalode: Thank you, Marty. 2025 delivered strong financial performance across revenue, margin, and cost structure. As Marty highlighted, fourth quarter revenue was approximately $34 million, up 37% year over year. Full year revenue exceeded $99 million, up 43% from 2024, based primarily on record engine sales approaching 800 units, or over 75 megawatts of delivered power. Our Q4 gross margin improved to 17%, a 30-point increase year over year. Our full year gross margin was positive 5%, up 37 points from 2024. The improvement in gross margin in 2025 as compared to 2024 is due primarily to a decline in onerous contract provisions, product cost reduction initiatives taking hold, and lower manufacturing overhead costs as a result of the global corporate restructuring. Total operating expenses for the full year were approximately $109 million, 32% lower than the previous year due to the rightsizing of our cost structure. This was at the middle of our guidance range, which was between $100 million and $120 million. If we exclude restructuring and related expenses of $23 million, our total operating expenses in 2025 would have been approximately $86 million, below the lower end of the guidance range. In 2026, we expect total operating expenses to range between $65 million and $75 million. Our total capital expenditures in 2025 were $10.2 million, at the midrange of our revised outlook between $8 million and $12 million. In 2026, we expect capital expenditures to moderate further and be between $5 million and $10 million. As Marty highlighted, we are absolutely thrilled with the cash flow progress we have achieved in the fourth quarter. While we have cyclicality in our revenue and do not expect this type of performance to be ratable yet, this is a huge milestone for us. Even more impressive is that this was achieved with nearly all of our revenue from fuel cell product sales. Another huge highlight is that our cash usage for the full year of 2025 was down nearly 50% from 2024, underpinning the improved foundation and financial stability of the organization. We ended the year with nearly $530 million in cash, up $1.4 million from Q3, no bank debt, and no near- or mid-term financing requirements. As we have emphasized on this call and on previous calls, we remain steadfast on disciplined spending, growing our top line revenue, expanding our margins, and maintaining our financial health. With that, I will turn the call over to the operator for questions. Operator: Thank you. We will now open for questions. The first question comes from Baltic Dejo with National Bank of Canada. Please go ahead. Baltic Dejo: Good morning, and thanks for taking my questions. So just on the restructuring side, as you alluded to in the prepared remarks, 2025 OpEx would have been around $86 million, and the midpoint of your guide would imply another $16 million of reduction relative to that. So would you say that the large items have been harvested? And just as a follow-up on that, what are the key drivers of the incremental cost contraction? Kate Igbalode: Thanks for the question, Baltic. So I think that if we are looking at the year-over-year changes, we do not anticipate any additional major restructuring that we saw in 2025 or 2024 to be in the cards for 2026. So I think that the midpoint of our guidance range is a reasonable expectation for our overall cost structure in 2026. And if you could just repeat and clarify the second part of your question, that would be helpful. Baltic Dejo: Yes, just the cost drivers of the incremental contraction. And the first part was are the large items already been harvested, which I think you have touched on? Kate Igbalode: Yes, I would say that they have been, and I would say that the key pieces that we are focusing on, I think that we have really right-sized our overall cost structure at an organizational level. And now it is continuing to drive cost out of our products through additional innovation initiatives, manufacturing efficiencies, and product scaling. So I think you are going to start to see cost reduction show up more on the product side relative to the overall OpEx side. I do not know if you have any other comments on that, Marty. Marty Neese: I would just say that it is really a combination of looking for every penny structurally from the bottom up of the company. Essentially in 2025, kind of a zero-based budgeting approach and re-baseline everything we spend money on. And so that work is starting to pay off in our structural approach, specifically around some of the operating expenses that are variable in nature. Baltic Dejo: That is great color. Thank you. And just one more if I may. Just with these magnitude of reductions, there are always trade-offs in scope prioritization or the pace for it. These actions materially altered your R&D roadmap or the timing of the mission of key initiatives just as you aim to accelerate now? Value from your bus vertical as evidenced with the announcement a few days back. Marty Neese: Materially, we have taken the approach that we are leveraging our product portfolio and prior investments to get as much out of them as we can. So you think about material handling, we had a very long history of material handling and we extended our know-how in that segment to create a new product that we are getting very good feedback that that extended durability product is going to be well received. A similar approach can be taken when you think about heavy-duty applications that can be used for stationary power, if you will. Some of our prior investments in heavy-duty applications can be transferred, if you will, from, let us say, a heavy-duty trucking environment, and the core technology is extensible to a stationary power application when packaging is done differently or configurations are done differently. So that is a way to say the R&D is more focused on how to extract as much value as possible from innovations that have already been materially realized and have been reduced to practice. The longer-term innovations is a different aspect, and I would put that as more in the three- to five-year kind of range of outlook before we need to do something significantly different in our approach. We have a good runway of product portfolio and existing innovations that we can commercialize, and we are getting really, really strong feedback that these products are going to hit the market well. Baltic Dejo: Thanks. Great color. I will leave it there and turn over the line. Thank you. The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead. Robert Duncan Brown: Good morning. Just wanted to follow up on the New Flyer contract. Great news there. What is the sort of duration of that contract or potential? And how do you see that ramping? Marty Neese: The contract itself is for 500 units, and we are not discussing the duration of the contract. We are more focused on the actual megawatts and unit volumes. And then, of course, we have a long-standing partnership and relationship with New Flyer. It is not really predicated on a quarter here or a quarter there. We have flexibility to work strategically with them to realize their growth ambitions as well as our own, and that is the way we have characterized the relationship. Realize that also includes a long-term service tail that goes with everything we are doing. So that is part of the compounding set of assets. The bigger the New Flyer fleet gets, the more that service tail grows, and the deeper we get in the relationship with them, which is proving to be extraordinarily helpful and valuable for both of us. Robert Duncan Brown: Okay. Great. Okay. That is good color and helps you—I mean, that visibility helps you plan your operations, I am sure. And then second, on the stationary market, how much of a kind of new product portfolio do you need to enter that market? Or can you take what you have and really expand there? And maybe a sense of just the opportunity in the stationary market at this point for you? Marty Neese: Yes, I will just say it in general. We have an XD product, and that XD product and HD products that preceded it or are in conjunction with it—both of those products can address the stationary market, depending on how they are configured and packaged. So really the work is the configuration and packaging. When I say packaging, it is the arraying of multiple engines to do different quantums of work, if you will. Whether that is a single unit that is for a mobile diesel genset replacement or whether that is an array of units that is scaled up to 20-plus megawatts, up to 50 megawatts. The packaging and the numbering up of those core engines, that HD or XD capability, is really being well received. At the same time, we are also making additional innovations so that we can get more kilowatts out of each one of those stacks. So think of that as, if you could imagine getting from 100 kilowatts to 120 kilowatts, up to 135 or 150 kilowatts per engine, and then numbering that up. So that helps drive both performance and cost down and starts making the numbering up more and more attractive from a total cost of ownership and deployment level. Robert Duncan Brown: Okay, great. Thanks for the color. Congrats on all the progress. I will turn it over. Operator: The next question comes from Dushyant Ailani with Jefferies. Please go ahead. Dushyant Ailani: Hi. Thank you for taking my question. I just wanted to touch on one piece real quick. I wanted to dig in on stationary, if that is okay. Could you maybe talk a little bit more in terms of the opportunities, the timing that you are seeing, and also how does the XD and HD compare with other competing offerings that you are seeing or the conversations that you are having with your customers? Marty Neese: Yes. So let us see if we can unpack that a little bit. So the stationary power market—known to all on this call for sure—everyone understands the time-to-power mandate, if you will. So when you see constraints in the global landscape of where data centers are being promulgated, there is a very strong opportunity for us to have a ready-now product to address those needs for power now. So we are seeing more and more interest in that regard. And when I think of that, that is really supporting a thesis along the behind-the-meter side of things in stationary power for now. And then over time, as constraints ameliorate, you might see those transition from behind the meter to be grid-connected, but this is seven to ten years from now. So there is a very strong value proposition for our fuel cells to help solve that time to power if packaged and arrayed correctly. At the same time, our costs and the products were designed to go into largely heavy-duty trucking. So if you can compete at the engine level in heavy-duty trucking, it suggests a very strong capability on a cost-per-kilowatt basis relative to other solutions that are out there that are not PEM fuel cells, but maybe other kinds of fuel cells. And on a cost per kilowatt or a total installed cost of ownership, we feel like we have got a really good value proposition emerging, which will help significantly address the market. Dushyant Ailani: Understood. Thank you. I will turn it over. Operator: The next question comes from Jeffrey David Osborne with TD Cowen. Please go ahead. Jeffrey David Osborne: Thank you. Good morning. Kate, maybe for you. I saw that the year should be back-end loaded, but any hints on the first half versus the second half relative to the makeup of 2025, or sequentially how we should think about Q1 versus a year ago or the prior quarter? Kate Igbalode: I think, as we have discussed and we have seen historically, a 40/60 split H1/H2 is a reasonable expectation for 2026. And I think, as Marty commented in his remarks, we are also really looking into how we can further level-load and smooth out our quarter-over-quarter variability and seasonality across the board in terms of operations, our cost structure, etc. But I think a reasonable planning assumption for this year would be that 40/60 split. Jeffrey David Osborne: That is helpful. Thank you. Marty, maybe for you, just with the refined focus that you have had—you have highlighted stationary this time around, a couple of analysts have asked about that—but if you look back prior to you joining Ballard Power Systems Inc., I think FCWave, ClearGen 2, you had a test with Vertiv and others. Can you just further elaborate on what is so unique about the XD and HD combined with new packaging relative to Ballard Power Systems Inc.'s—I do not want to say failed attempts, but challenged attempts—four or five, six years ago in the stationary power market? I am just trying to understand what is new in light of, at least in many parts of the world, hydrogen availability is still challenged. Marty Neese: Yes. So if you historically rewind the clock a little bit, you have to think about the product wins that we had in 2023, 2024 that were more scaled products like the ones you referenced. Those would have been conceived in the 2020, 2021 timeframe. All of this is the pre-ChatGPT moment. So everything went vertical once the AI moment happened. So the products that we designed prior to the AI boom, if you will, were more designed for off-grid, for microgrids, for island power, things of that nature. And the customers at the time had perspectives that they were doing very similar types of products: “Hey, can we do a one-megawatt microgrid to be deployed in an island-type application?” Things have changed. That is not what the customers want today. So we have had a number of workshops—and I say multi-day workshops with large technical team engagement—with customers who are serving hyperscalers and others, and we are getting a much clearer view of what people care about today and what our product needs to enable. And I have already alluded to a significant portion of it, which is not surprising. It has got to be speed and cost. And speed and cost are front and center with what we are doing. And that is unlocking a significant amount of interest and, taken together with the bridge power requirements that are out there with some of the gap in the market, with some of the delays and constraints and bottlenecks across the AI landscape. It is power that is the problem, as everyone on the call knows, of where the stationary market is going. So we have a role to play in that. We do not know exactly what size or what quantum or what level, but we definitely have a product that meets the market and we will have a role to play in that. And then we have to fight for our share after that based on delivered performance and delivered cost and the ability to really listen deeply to what the customer cares about and package a solution that meets what they want, more capably than the examples you provided from 2021, 2022, and the pre-ChatGPT moment, if you will. Jeffrey David Osborne: Got it. Maybe just one quick follow-up on that. Would the focus be on Europe and Canada, given greater availability of hydrogen as a fuel relative to natural gas? I am just trying to understand where the commercialization efforts would be placed. Marty Neese: Yes, that stands to reason. Those are our home markets. And the number of products or projects progressing to FID—I think the Hydrogen Council referenced some $35 billion in year-over-year projects advancing to FID. All of those projects cannot just feed the refinery business or the industrial application. They are keenly looking for offtake partners such as the kinds of partners that would be associated with integrating fuel cell power or others with data centers of all stripes. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Marty for any closing remarks. Please go ahead. Marty Neese: Thank you for joining us today. It has been a pleasure speaking with all of you. Kate, Sumit, and I look forward to speaking with you next quarter, and thanks again, everyone. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Operator: Good morning, ladies and gentlemen, and welcome to the Lifetime Brands, Inc. fourth quarter 2025 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer portion of the call. If you would like to ask a question during this time, please press star and 1 on your touch-tone telephone. Please also note today's event is being recorded. At this time, I would like to introduce our host for today's conference, Jamie Kirchen. Mr. Kirchen, you may go ahead. Jamie Kirchen: Good morning, and thank you for joining Lifetime Brands, Inc. fourth quarter 2025 earnings call. With us today from management are Rob Kay, Chief Executive Officer, and Laurence Winoker, Chief Financial Officer. Before we begin the call, I would like to remind you that our remarks this morning may contain forward-looking statements that relate to the future of the company, and these statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance, and factors that could influence our results are highlighted in our earnings release. Other factors are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the date hereof, and are subject to change for future development. Except as required by law, the company does not undertake any obligation to update such statements. Our remarks this morning and in our earnings release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in such release is a reconciliation of these non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP. With that introduction, I will now turn the call over to Rob Kay. Please go ahead, Rob. Rob Kay: Thank you, and good morning. A year ago, we entered 2025 knowing it would be a challenging year. What we did not fully anticipate was just how dynamic the external environment would become. The tariff escalations, retail customer disruption, consumers' reactions, and the operational demands were all significant. And yet, when I look at where we stand today, I am proud of how our team performed and where we finished the year. Let me walk you through the key dynamics that shaped both the fourth quarter and the full year and the decisions we made, including those that carried short-term costs, and why they were right for our business. Overall, what drove Lifetime Brands, Inc.'s 2025 performance was the macro environment largely shaped by U.S. tariff actions and the market's reaction to them. The biggest impact of this was the second quarter implementation of 145% tariffs on goods sourced from China following the Liberation Day tariffs implemented on many countries throughout the globe. This resulted in wide-scale disruption and in some cases cancellation of orders for our products, both by our customers and internally by Lifetime Brands, Inc., as the immediacy of the implementation would have resulted in selling products at a loss. As the year progressed, and some stability was introduced on tariff rates, Lifetime Brands, Inc. was a first mover in implementing price increases across all our channels to offset the tariff cost. While this initially hurt our volumes, as we were selling our products at a higher price than most of our competition, the market eventually caught up and pricing parity was restored. However, Lifetime Brands, Inc. benefited from enhanced profitability due to the price increases, which led to improved performance relative to the overall market and many of our peers. In particular, we note that bottom line results showed positive year-over-year growth by 2025. Contributing to this performance was our pricing strategy, a comprehensive cost efficiency and reduction program, and improved results in our international business. First, as we told you earlier in the year, the impact of the 145% tariffs on China-sourced product was significant. It negatively impacted shipments in the second quarter and flowed into disruption in the third. We specifically called out that some of that deferred volume would come back in 2025 with a fuller normalization expected in 2026. As you can see, we benefited in the current quarter with some resumption in shipment levels from missed second quarter shipments, particularly in tabletop and kitchenware. The most visible example is Costco, our largest year-over-year decline in any single customer through September. They pulled back sharply on tabletop programs as tariff uncertainty peaked. But as conditions stabilized, a portion of those programs shipped in the fourth quarter, and we performed very well with Costco in Q4. That recovery was a meaningful contributor to our strong finish. The second major factor driving performance was Lifetime Brands, Inc.'s decision to move first on pricing to offset tariff costs. We did not wait to see what the market would do. We built a detailed plan with each of our customers, communicating the rationale clearly, and implementing the increases. As I mentioned above, there were short-term consequences. In the third quarter, we were priced higher than the market, and that created some volume headwinds. A portion of our shelf performance suffered while competitors had not yet moved. But by the fourth quarter, the market had largely caught up. Pricing parity had returned across all our categories. And because we had been selling at higher prices earlier than most, we captured better margins during that window. If you look at our results, particularly the bottom line, you can see that clearly. We had a modest outperformance on the top line, but we significantly exceeded expectations on the bottom line. Our first mover pricing decision was a key contributor to that outcome. The third element of our Q4 performance was cost discipline. Variable costs naturally flex with volume, but we also took deliberate action on our cost structure throughout the year. We streamlined infrastructure, and SG&A came in at $38 million in Q4, down 12% versus the prior year quarter. That is a meaningful reduction, and it reflects real work done on the cost base. Combined, these three factors drove a strong quarter and finish to the year. The fourth quarter came in ahead of expectations, and I think the results speak to the strategy working. Revenue was modestly below prior year, which we anticipated, but margins expanded and the bottom line was strong. Laurence will take you through the detail in a moment. While the year was challenging due to tariffs, we took the decisive actions I have discussed to mitigate their effects. Given the circumstances, we performed well, as evidenced by our results. In the fourth quarter, adjusted income from operations was up over 30% from the prior year quarter and full-year adjusted EBITDA was over $50 million despite a 5% decline in net sales. We continue to experience positives from our investment in new product development. The DALL E brand grew to approximately $18 million for the year, an increase of over 150%, a great reflection on where the strategy is gaining traction. We are encouraged by the trajectory heading into 2026. Our International segment continued to demonstrate resilience. For the full year, International sales came in at $56.7 million, up 1.7% as reported. On a constant currency basis, International was down modestly at 17%. A solid result given the backdrop, particularly as we gained share in national accounts in light of a continued decline in independent shops, which historically have been the core of the European customer base. On Project CONCORD, our international restructuring initiative, we made continued progress throughout the year and the financial benefits are flowing through. That said, I want to be transparent. The final phase of CONCORD implementation was delayed modestly due to legal and structural constraints that took longer than anticipated to work through. We expect those to be fully resolved and implemented in the first half 2026. The direction here remains clear, and we remain committed to completing CONCORD and realizing the full benefits of the program. As announced early last year, we also took deliberate action on our distribution infrastructure, announcing the relocation of our East Coast distribution center to Hagerstown, Maryland. The facility will span approximately 1,000,000 square feet, adding 327,000 square feet of incremental capacity over our current New Jersey facility, which it will replace and is expected to commence operations in 2026. This move is consistent with how we approach the business, identifying where we can drive long-term efficiency and positioning Lifetime Brands, Inc.'s operations to support our multiyear growth initiatives while significantly containing Lifetime Brands, Inc.'s future distribution expenses. As we enter 2026, we do so with momentum, a leaner cost structure, and a clearer sense of where the opportunities are. On guidance, consistent with our historical cadence, we intend to provide detailed full-year 2026 guidance in conjunction with our first quarter results in mid-May. At that point, we will have a clearer line of sight into the year and can speak to it with the specificity you deserve. What I can tell you now is that recovering sustainable top line growth is the priority. We have done the work on the cost base and proven we can protect margins. Now the focus shifts to driving volume through our existing customer relationships, through the brands and product lines that are gaining traction, and through the pipeline of strategic activity that we continue to develop. Finally, I want to acknowledge that this type of year—navigating real disruption while delivering results that exceeded where we started—does not happen without an exceptional team. I am grateful for everyone at Lifetime Brands, Inc. who stayed focused, executed under pressure, and kept our commitments to customers and shareholders alike. With that, I will turn the call over to Laurence to review the financials in more detail. Laurence Winoker: Thanks, Rob. As we reported this morning, net income for 2025 was $18.2 million, or $0.83 per diluted share, compared to $8.9 million, or $0.41 per diluted share, in 2024. Adjusted net income was $23 million for the fourth quarter, or $1.05 per diluted share, as compared to $12 million, or $0.55 per diluted share, in 2024. Income from operations was $20 million for 2025 as compared to $15.5 million in 2024. And adjusted income from operations for the fourth quarter 2025 was $26.4 million compared to $20.2 million in 2024. Adjusted EBITDA for the full year 2025 was $50.8 million. Adjusted net income, adjusted income from operations, and adjusted EBITDA are non-GAAP measures, which are reconciled to our GAAP financial measures in the earnings release. The following comments are for 2025 and 2024, unless stated otherwise. Consolidated sales decreased 5.2% to $204.1 million. U.S. segment sales decreased 5.5% to $185.3 million. Sales were favorably impacted by the increase in selling prices to mitigate the impact of higher tariffs on foreign-sourced products. However, retailers' buying disruption and consumers' dampened spending reaction to the high tariff environment dampened demand in our industry. Within this segment, product line decreases were in kitchenware and home solutions, partially offset by an increase in tableware. International segment sales decreased 2.3% to $18.8 million, and excluding the impact of foreign exchange translation, the decrease was $1.4 million, or 6.8%. The decrease came from the U.K. e-commerce. Gross margin increased to 38.6% from 37.7%. U.S. segment gross margin increased to 38.8% from 37.6%. The improvement was driven by lower ocean freight rates, some favorable product mix, and the timing of inventory cost recognized under FIFO inventory accounting. These factors more than offset the adverse effects of tariffs in the current quarter. For International, gross margin decreased to 30.8% from 38.6%, driven by higher customer support spending in the current period. U.S. segment distribution expenses as a percent of goods shipped from its warehouses was 8.3% versus 9.1%. The decrease was attributable to improved labor management efficiencies largely resulting from the fully implemented new warehouse management system in our West Coast facility and the effect of higher tariff-induced selling prices without a commensurate increase in expenses. International segment distribution expenses as a percentage of goods shipped from its warehouses was 19.8% versus 18.1%. The increase is due to higher sales to prepaid freight customers and the expansion of sales into the Asia-Pacific region. Selling, general, and administrative expenses decreased by 12% to $38 million. U.S. segment expenses decreased by $3.2 million to $29.6 million. As a percentage of net sales, the expense decreased to 16% from 16.7%. The decrease was driven by lower employee expenses, including incentive compensation. International SG&A decreased $1.5 million to $3.1 million. As a percentage of net sales, the expense decreased to 16.7% versus 24.2% due to lower advertising expenses as well as foreign currency transaction gains. Unallocated corporate expense decreased $500,000 to $5.2 million due to lower employee expenses, also including incentive compensation, partially offset by higher professional fees. Interest expense decreased by $600,000 due to lower average borrowings and lower interest rates on our variable-rate debt. For income taxes, the benefit rate is primarily driven by the release of a valuation allowance against deferred tax assets reported in the second quarter. Looking at our debt and liquidity, our balance sheet continues to be strong, notwithstanding the higher working capital needs that resulted from tariffs. At year-end, our liquidity was $76.6 million, which includes cash, plus availability under our credit facility and receivable purchase agreement. And our adjusted EBITDA to net debt ratio at year-end was 2.9 times. Lastly, as Rob discussed, the relocation of our East Coast distribution center is expected to begin operating in the second quarter, and I will add that the costs of exiting the New Jersey facility and starting up the Maryland facility, including capital expenditures, are expected to be at or below our forecast. This concludes our prepared comments. Operator, please open the line for questions. Operator: Thank you. We will now begin to conduct our question-and-answer session. If you would like to ask a question, please press star and 1. A confirmation tone will indicate that your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. It may be necessary to pick up your handset before pressing the star keys to ensure the best sound quality. One moment while we poll for questions. Our first question today comes from Matt Caranda from Roth Capital. Please go ahead with your question. Matt Caranda: Hey, guys. Good morning. I know you do not typically give full-year official guidance until the first quarter, but I would like to hear a little bit more about building blocks for growth in 2026. I know you said you intend to grow in the year. Maybe you could just talk about some of the puts and takes around the price that you took in 2025 that sort of wraps into 2026, new product launches, existing growth with some of the successful lines like Dolly. I guess some of those are maybe a little bit offset by volume declines more recently, but just how do you think about those factors qualitatively as we kind of think about the forecast for 2026? And any commentary on seasonality this year would be appreciated as well. Rob Kay: I mean, from a seasonality perspective, we are expecting more of a normal seasonality. There were disruptions in 2025 that were tariff-oriented, which put a total curve on normal seasonality. So I think we do not expect it to not normalize in 2026. Some of the things you mentioned—pricing increases, which is kind of a one-time event—happened throughout 2025. So the impact of those will be fully felt because they were fully implemented in 2025. So you get the full impact of that in 2026, which, of course, the caveat is who knows what is going to happen. From a new product introduction, I know that we have been introducing a much greater amount of new product than a lot of competition just because times are tough and a lot of people are paring back. But a couple of areas we are seeing good traction. One, we talked about the Dolly brand. That is actually expanding beyond the dollar channel where we have firm commitments. And while we had tremendous growth in 2025, we expect that trajectory to continue in 2026. So we see some good growth there. Our food service initiative—that is a business where you have to build a book of business, and then it becomes a bit of an annuity for a period of time. And particularly, Mikasa Hospitality has gained a lot of traction. So, while a small base, we expect substantial increase in those revenues in 2026. The end market in 2025 for food service establishments was very challenged. You saw new store openings decline. You saw franchises and the like, store closings throughout a lot of multiunit. Unknown where that heads in 2026. The industry thinks it will go up, but nonetheless, we have gained market share and, not end-market driven, we will see some nice growth in that area in 2026. So those are some of the key drivers. Hopefully that gives you some perspective there. Matt Caranda: Yeah, that is helpful. Thanks, Rob. We wanted to also hear a little bit about what you are hearing from your large retail customers in terms of willingness to take on inventory. What does sell-through look like or POS data that you are seeing in kind of your key SKUs versus sell-in? And how are you thinking about that for 2026? Rob Kay: We have seen a pretty large divergence from channel to channel, with certain channels performing very strong from a POS perspective, and certain ones being weaker. We saw a continuing trend in the fourth quarter that we have seen over the last couple of years, that there has been an uptick in e-commerce. So the holiday season continued the trend that we saw in 2024 where a lot of consumers waited to make their purchases from historical purchase cycles because they knew they could get delivery rather quickly, and that helped e-commerce in the fourth quarter, therefore drove full-year performance. So that trend should continue. But there is high bifurcation. From the perspective of what you see from time to time, particularly with larger retailers, and we saw some of this in 2025, they pull back on safety stock issues. So there is a divergence between sell-in and sell-through. We saw some of that in 2025. We do not expect that to be a major impact in 2026. And part of that is some of the people that have done that have pared back a lot, and if they pared back more, they would harm their sell-through, their velocity, which is obviously not in their interest to do so. So we do not expect that to be a factor in 2026. Matt Caranda: Okay. Very helpful. And then maybe just one more if I could. The net leverage at the end of the year looks good, under 4x. I wanted to just hear how you guys are thinking about cash priorities this year. Obviously, you have a lot of organic growth initiatives in place. But then you have the European restructuring that is still maybe ongoing or maybe just recently implemented. How do you balance the organic investments that you need to make versus the M&A funnel versus buying back your stock? Just wanted to hear a little bit about sort of capital allocation decision-making for 2026. Rob Kay: So there is actually a lot of internal growth initiatives that we are pursuing, but they are not capital intensive, except for the DC, which we have already—there is not too much on the come for that. And we also will get the benefit of the $13 million of the government funding, mostly from Maryland. That will offset. So not really any issue and any constraints there, and plenty of availability. We have no intention to change anything on our dividend, our dividend policy. We will look to ultimately restructure our debt arrangements because at this point, in terms of life of that, we are not in the ability to buy back stock, so we are not using cash at this point to do that because we have agreements with our lenders in place. But we will ultimately restructure that and allow us to do so when we do that. And the M&A environment is the strongest I have seen in decades for strategic because, first of all, financials are investing. So our competition for a longest time has been financials at very, very high valuations. So valuations have been down. But a lot of businesses that are institutionally owned, there is something that needs a larger company or infrastructure help. To move product from a China-based system to a distributed geography, you need a lot of infrastructure to do that, both from a supply chain and quality. It takes a lot of effort and work. And with the fluctuations of moving it all over the place, a lot of smaller, less capitalized people are having troubles, let alone the systems and everything to deal with the constant pricing fluctuations as tariffs change and evolve. So that combination has made it very attractive. So we are seeing real deal flow at real valuations that we have not seen literally in decades. So we have some large opportunities we are looking at. You do not know if they will come through, but it is one of the things that we wrote off on a couple of things that we are working—not wrote off, but expensed in the fourth quarter—related to that. And we will see some highly accretive opportunities if we can execute. Matt Caranda: Okay. Sounds great. Appreciate all the detail, and I will turn it over. Operator: Next question comes from Brian McNamara from Canaccord Genuity. Please go ahead with your question. Brian McNamara: Hey. Good morning, guys. Thanks for taking the questions. So this is your best Q4 EBITDA margin that we can recall with sales down, even better than 2020 and 2021 when sales were up. So gross margins were nicely up, presumably from the benefit of tariff pricing. But I am curious what drove SG&A lower and how sustainable that is? Rob Kay: Yes, it is a great question, Brian. So it is sustainable. It is all a function of how fast we want to grow. And if we have opportunities and there is a good return on that, we can increase investment, which would increase your infrastructure and SG&A, but with a return. So in the current state of the business, with what we have on the plate, including the growth we intend for 2026, there is not a need for investing in SG&A. We will also see the further benefits one way or the other with our international operations, which will continue to benefit those line items. Laurence Winoker: Brian, let me just—Rob's going to give me something on his U.S. gross margins, the comment I made about the FIFO inventory. We had talked about how we were increasing our sales price to offset the tariff, which should have a negative effect on the gross margin percentage, neutral to dollars. But because we still have some pre-tariff inventory, we are seeing some benefit there. But that is not going to continue. As that rolls off, it will come back a bit. Rob Kay: Right. Just wanted to—sorry to belabor—but as you know, Brian, you have seen us for a little bit. In any given, particularly quarter reporting period, you are going to get margin fluctuations based upon mix—channel mix particularly, but also product. Brian McNamara: Understood. So next I am curious, which of your brands saw sales increases in 2025? Outside of Dolly, as overall sales decline for a fourth straight year, what gives you guys confidence that the top line inflects this year? Rob Kay: The main confidence that we see there is the disruptions that we saw in 2025. And again, in the fourth quarter, we got some rebound of things that did not ship from Q2 and Q3, but we will have a much more normalization in a lot of the core business in 2026 because some of that did not come back in 2025 and will in 2026. So that is going to be a natural driver for our business. We talked about Dolly will continue to grow. We are seeing good traction there. In cutlery, we have had a tremendous run for a few years, and a lot of that is new product implementation. Our Build to Board line went from nothing; it created a whole marketplace. The growth trajectory of that piece of cutlery will not continue from the trajectory of growth, but we established a new business, and we will maintain. And there are some other things in that line that we are introducing that, hopefully, will produce some good growth. There are some things we have not disclosed that are new that get us into a new space totally, or internal investment that hopefully will hit 2026. If not, it will hit 2027. But, unfortunately, I cannot disclose that at this moment, but there are some things that are total organic internal initiatives that are completely new that hopefully will drive some nice growth for us. Brian McNamara: Great. And then just on the brand growth for the year, any brands perform better than the company average? Rob Kay: Yeah. So, I mean, Taylor had a phenomenal year. Taylor is a great business. From the retailer to our customers' perspective, it is very attractive to them because what they track generally as a key metric, which is the velocity and the margins that they make, it is very profitable for them. It is very good, and it had a very good year across the board in 2025. Again, that trajectory will not continue in 2026, but we had a banner year, and that continues to do well. Farberware, across different things, very strong, and Farberware is our growth engine. KitchenAid, we lost some share a couple of years ago at Walmart. That has run through our numbers. We sold some of that that hit us in 2025, so that is actually the opportunities, and we relaunched the kitchen tool piece of that with a new line that is getting tremendous traction. And we also introduced just recently for 2026 a KitchenAid storage product, which we think is beautiful, but is getting, more importantly, acceptance in the marketplace. So that, not in 2025, but 2026 is looking pretty good—KitchenAid. Brian McNamara: Great. And you mentioned the Dolly brand—obviously sales up really nicely, up 150% for the year. How big is that now? And what is your expectation for sales growth contribution or shipments in 2026? Rob Kay: In 2024, we started that program. It was a small base. So part of that 150% was off a small base. We shipped $18 million in 2025. We will have substantial growth in 2026 as well. Brian McNamara: Got it. Okay. And then finally, obviously, topical given the war in Iran at the moment. Can you remind us how you are positioned on freight in terms of spot versus contract, your cost exposure to oil and resin, anything else we should be mindful of there? Rob Kay: There are so many questions—it may take an hour to answer. But a couple of things on that front. What we are seeing is container rates are starting to go up, and we will probably start to experience that. We have very attractive long-term contracting for freight. But the reality of what happens in very high escalating periods is the shippers start to ignore those, to be honest. So long-term contracts are a benefit, but sometimes there is only so much that you can benefit, and you will get some of it, but not all of it, in very high inflationary ocean freight environments. We do very little business in the Mideast. We will not get much disruption there. We will get no disruption. We actually have a lot of upside that may not come on some new business, but either way, it is not material. Our European business is in jeopardy of seeing some supply disruption because the shipments are coming in a different— it is going to be longer if they have to go around Africa and the like. But we think our inventory levels are not going to impact that. And from a cost of goods sold perspective, your plastics have resins. Resins are impacted by petroleum cost. We have not seen anything. We will see how that plays out. But if you look at it as a total percentage on a bill of material basis, it is not going to have a huge impact on it. Brian McNamara: Great. Very helpful. Thanks very much. I will pass it on. Operator: Our next question comes from Anthony Lebiedzinski from Sidoti & Company. Please go ahead with your question. Anthony Lebiedzinski: Certainly nice to see the better-than-expected results here in the fourth quarter. So it sounds overall like you guys should be able to maintain your SG&A cost. As far as your distribution costs, those also came down in the fourth quarter. How should we be thinking about that line item? And I have a couple of other questions as well. Laurence Winoker: On the distribution, as I noted, our West Coast facility is running very efficiently given the new warehouse management system—that is working quite well. And as I noted, as an expense as a percentage, because we had selling price increases but there was not any meaningful cost increase, we will continue to see that expense benefit as a percentage. And we think there will be some, let us say, mild disruption expenses perhaps when we move into the Maryland facility. But we anticipate those, and we have done this—we have done it many times, these moves. We are putting that new warehouse management system in that facility, so we are anticipating it to run quite well. Rob Kay: And on SG&A—this also goes to Brian's question a little bit—the moves we have taken are sustainable. The only thing where you will see some bounce back in 2026 versus 2025 is, from a target and incentive compensation perspective, we paid out hardly any—typically nothing to management. And with improved performance in 2026, there will likely be corresponding payment of incentive compensation. But that is not the bulk of the SG&A cost reduction that was achieved. The cost reduction was achieved in 2025. Anthony Lebiedzinski: Got it. Okay. Thanks for that. And then, in terms of the International segment, Laurence, you may have said this, but perhaps I missed it. But in terms of the operating loss for the quarter, for the year, can you provide comments on that? Laurence Winoker: Yes. There was a loss. It was not as pronounced as we had in 2024. As Rob mentioned in his comments, we are not done. The CONCORD—and we will call it CONCORD 2.0—continues. And there are some other things that we had hoped to achieve, but there are legal and other roadblocks that slowed us down. We are looking to achieve those during 2026. Anthony Lebiedzinski: Okay. Got it. And then just a couple of other things here. As far as the fourth quarter, you had a tax benefit, which you addressed, Laurence. How should we think about the tax rate for 2026? Any sort of commentary there on that? Laurence Winoker: Sure. I know it is very hard with our numbers to figure out tax rate, but we should be in the high 20% range, and that is based on the thing that—I will just say we have some unusual occurrences this quarter, more unusual than others. But what distorts our provision historically has been the loss internationally where, because of a history of losses, you cannot record a tax benefit, and that would distort it. So as we get the International operations to breakeven or better, our tax rate should be in the 27%–28%, and that is a combination of the U.S. federal rate and state. Anthony Lebiedzinski: Gotcha. Got it. Okay. And then lastly, as far as the Maryland distribution center, it sounds like it is very well on track. So in terms of thinking about the CapEx for this year, do you guys have a ballpark estimate of what that could be? Laurence Winoker: We are anticipating it to be below budget, but we are very confident we can achieve the budget. I think we should beat it. For CapEx, we had originally forecasted $9 million. It may be perhaps less than that, a little less. And we spent a couple of million of it in 2025. So, let us call it around $7 million for that in 2026. But also bear in mind, there will be a little offset compared to historically, because we will not have the maintenance that we typically have in our New Jersey facility, because we are putting in new racking and other things, so in the Maryland facility there will be maybe another $1 million benefit against what we would otherwise spend for routine maintenance. Anthony Lebiedzinski: Understood. Well, thank you very much, and best of luck. Laurence Winoker: Thanks. Thanks, Anthony. Operator: Ladies and gentlemen, I am showing no additional questions at this time. I would like to turn the floor back over to management for any closing remarks. Rob Kay: Thanks, Jamie. Thank you, everyone, for listening and your interest in Lifetime Brands, Inc., and we look forward to further dialogue in the future. Have a great day. Operator: With that, everyone, we will be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines. Rory Rumore: Everyone else has left the call.
Operator: Good morning, and welcome to SNDL Inc. fourth quarter 2025 Financial Results Conference Call. This morning, SNDL Inc. issued a press release announcing their financial results for 2025 ended on 12/31/2025. This press release is available on the company's website at sndl.com and filed on EDGAR and SEDAR as well. The webcast replay of the conference call will also be available on the sndl.com site. SNDL Inc. has also posted a supplemental investor presentation, in addition to the conference call presentation we will be reviewing today, on its sndl.com website. Presenting on this morning's call, we have Zachary George, Chief Executive Officer, and Alberto Paredero-Quiros, Chief Financial Officer. Before we start, I would like to remind investors that certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's financial reports and other filings that are made available on SEDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, and then we will move on to analyst questions. I would now like to turn the call over to Zachary George. Please go ahead. Zachary George: Welcome to SNDL Inc.'s Q4 and full year 2025 Financial and Operational Results Conference Call. 2025 marked another step forward in our performance, with multiple new records achieved throughout the year, including record full year net revenue, gross profit, adjusted operating income, and free cash flow. Beginning with free cash flow, our most important KPI for assessing financial health, we are pleased to report that following our first year of positive annual free cash flow in 2024, we more than doubled this result in 2025, reaching $18,000,000. This was achieved through continued operational improvements and disciplined working capital management. Our cannabis business continued to grow, expanding revenue year over year during the last 16 consecutive quarters. While we have seen a market slowdown during 2025, both our Retail and Operations segments continued to gain market share, showcasing the strength of our vertical model. We would also like to highlight that for the first time in our history, we achieved positive full year adjusted operating income, supported by a strong contribution in the fourth quarter. This result underscores our financial discipline and continued traction in delivering operational efficiencies and productivity initiatives, including synergies from the Indiva acquisition. As a reminder, the only adjustments to operating income in 2025 relate to restructuring costs associated with the integration of Endiva and the corporate restructuring program, which is currently in its third and final phase. Delivering consistent year-on-year financial progress remains a priority alongside continuing to build a strong foundation for long-term profitable growth and shareholder returns. Few companies in our industry are positioned to leverage a balance sheet of this strength with no debt and over $250,000,000 in unrestricted cash at the end of 2025, enabling disciplined capital deployment across both organic and inorganic opportunities. In this regard, in 2025, we increased capital expenditures by nearly 50% compared to 2024, with the majority of the investment directed towards new store openings across our cannabis and liquor retail segments. As announced in January, we also completed the first stage of the acquisition of Cost Cannabis retail stores from One Centimeters, incorporating five locations in Alberta and Saskatchewan. We continue to maintain a strong pipeline of initiatives focused on simplification and strategic focus. For example, we are days away from completing a full consolidation of our ERP systems, which is expected to unlock significant opportunities to further optimize our processes and enhance our analytical capabilities. We continue to leverage the share repurchase program approved by our board, and since 2024, we have repurchased a total of 15,100,000 shares, including 4,300,000 shares acquired over the last 90 days. We are also encouraged by the continued momentum toward U.S. cannabis rescheduling as well as the progress toward completion of the restructurings of our Parallel and SkyMent investments, with only a limited number of remaining requirements outstanding. I will now turn the call over to Alberto Paredero-Quiros for more insight on our fourth quarter and full year financial performance. Thank you, Zachary. I want to remind everyone that the amounts discussed today are denominated in Canadian dollars unless otherwise stated. Certain figures referred to during this call are non-GAAP and non-IFRS measures. Alberto Paredero-Quiros: Definitions of these measures, please refer to SNDL Inc.'s Management Discussion and Analysis document. Our fourth quarter financial results demonstrate strong profitability improvements despite softness at the top line. Net revenue of $252,000,000 represents a 2% year-over-year decline, driven by market contractions in both liquor and cannabis retail, particularly liquor retail, partially offset by market share gains across both retail segments. Gross profit of $70,200,000 marked a new absolute quarterly record, increasing by $1,400,000 or 2.1% year over year despite the decline in revenue. A strong margin expansion across both retail segments translated to a 110 basis point increase in gross margin, reaching a new quarterly record of 27.8%. This strong gross margin performance, combined with efficiency improvements across retail and corporate SG&A, resulted in a record quarterly adjusted operating income of $12,800,000, and adjusted operating income of $11,800,000 also represents a new quarterly high. This performance reflects a significant improvement versus the prior year, driven not only by the absence of the $65,700,000 sunscreen adjustment recorded one year ago, but also by meaningful underlying operational margin improvements. Free cash flow of over $10,000,000 in the quarter was another solid result, although slightly lower than the prior year due to differences in the timing of working capital buildup for the holiday season, as well as increased capital expenditures and inventory investments to support new store openings. Our full year financial results demonstrate meaningful year-over-year progress and new records across all key metrics. Net revenue of $946,000,000 represents growth of 2.8%, supported by 11% growth from our combined cannabis segments, partially offset by a 2.8% decline in liquor. Importantly, all of our segments gained market share during the year. This revenue growth, combined with a 120 basis point increase in gross margin, translated to gross profit growth of 7.6% compared to the prior year. Improved promotional execution, mix management, and productivity initiatives were the key drivers of this gross margin expansion. This continuous improvement mindset also enabled us to reduce G&A spending, as in-store efficiency gains and a well-executed corporate restructuring program more than offset cost inflation and the impact of new store openings. As a result, both adjusted and unadjusted operating income reached new highs, with full year adjusted operating income achieving breakeven for the first time in our history. We are also pleased to report free cash flow of $18,000,000 for the year, more than doubling the result achieved in the prior year. Our historical quarterly performance demonstrates a clear upward trend in profitability and a strong multiyear compound annual growth rate. While quarterly operating income and free cash flow will continue to be influenced by seasonality and volatility, we remain committed to sustaining the upward trajectory with a focus on long-term value creation. We have seen market declines across both the liquor and cannabis segments. While declines in liquor have been a multiyear trend, the slowdown observed in cannabis during 2025, which ultimately resulted in a market decline in the fourth quarter, represents a newer development. We intend to address these headwinds through disciplined execution and a balanced approach to both organic and inorganic investment. In particular, as the cannabis industry matures and growth rates moderate, less efficient operators are likely to face increased pressure, creating a favorable condition for industry consolidation. We believe we are well positioned to capitalize on these opportunities. Looking more closely at segment level contributions across our key financial KPIs, we can see these dynamics clearly unfolding. Net revenue reflects the market headwinds impacting both the Liquor and Cannabis segments, particularly in the fourth quarter. On a full year basis, however, growth in the Cannabis Retail and Cannabis Operations more than offset the declines experienced in Liquor. Despite revenue pressure, our Liquor segment was able to offset declines through productivity improvements, allowing it to maintain or expand gross profit. At the same time, our Cannabis segment contributed to gross profit growth at a faster pace than net revenue, particularly over the full year. Adjusted operating income reflects solid contributions from our Cannabis Retail segment, while results from Liquor and Cannabis Operations were more muted. In the context of ongoing market declines, maintaining or expanding adjusted operating income in Liquor represents a strong performance. Cannabis Operations was impacted by costs associated with the volume ramp up at our affordable cultivation facility undertaken to support international growth. The Investment segment saw significant year-over-year improvement, primarily due to the absence of unfavorable valuation adjustments recorded in the prior year. The Corporate segment also delivered strong contributions to bottom line profitability, supported by the cost reductions from the restructuring program initiated in 2024. The $7,500,000 contribution in the fourth quarter reflects both the benefit of these cost reductions and a $3,200,000 from share-based compensation, as a decline in our share price during the fourth quarter partially offset the increase recorded in the third quarter. Once again, both our fourth quarter and full year free cash flow results stand out as key highlights. In the fourth quarter, while we did not achieve a new record, free cash flow levels remained strong. Compared to the prior year, we benefited from higher earnings, reflecting improved P&L performance. This was offset by inventory and capital expenditure investments in newer store openings, as reflected in the working capital and other components of page seven, respectively. On a full year basis, the benefits from improved earnings and strong working capital management more than offset the investments made to support new store openings. On the following page, we can see the seasonality effects in our free cash flow generation. The first part of the year is typically impacted by lower revenue levels and working capital build ups, while the second half of the year benefits from the opposite dynamic. And supported by a particularly strong second half, we more than doubled free cash flow compared to the prior year. When reviewing each commercial segment individually, starting with Liquor, we can see that both the fourth quarter and the full year were impacted by market-driven headwinds affecting net revenues. These declines, approximately 3% in both periods on a rounded basis, were primarily driven by broader market conditions. In this context, our team was able to gain market share, supported by the strong performance of our Wine and Beyond banner and continued growth in our private label offerings, both of which deliver positive results. Improvements in pricing, promotional execution, and mix management were the key drivers behind the gross margin expansion of 120 basis points in the fourth quarter and 70 basis points for the full year, reaching 26% and 25.9%, respectively. Q4 gross profit of $38,700,000 and a full year gross margin of 25.9% both represent new records for the segment. This margin expansion, together with additional efficiency improvement in in-store operations, translated to an increased $1,700,000 or 5% in full year operating income. In the fourth quarter, operating income was close to flat year over year, reflecting the absorption of ramp up costs associated with the two new Wine and Beyond stores that opened in November. Cannabis Retail delivered strong results in 2025 despite the market slowdown experienced in the second half of the year. Fourth quarter revenue was essentially flat year over year. However, supported by a 190 basis point improvement in gross margin and continued efficiency gains in the store operations, operating income reached $8,000,000, representing a 33% increase compared to the same period last year. Full year results reflect a new revenue record of $330,000,000, representing 6% growth supported by 3.9% same-store sales growth and new store openings. Gross profit of $86,100,000 was also a new record, as was the gross margin of 26.1%, which expanded 80 basis points year over year. Similar to the Liquor segment, Cannabis Retail benefited from improved promotional execution and mix management. Operating income of over $30,000,000 was driven by margin expansion and overhead optimization, more than doubling compared to 2024. Following a material step up in 2024, Cannabis Operations experienced greater volatility during 2025. As we began to lap the inclusion of the Enviva acquisition in the baseline starting in 2024, net revenue in 2025 was flat year over year. Gross profit, gross margin, and operating income declined compared to the prior year, reflecting ongoing stabilization efforts related to the volume ramp up and infrastructure improvements at our at the world cultivation facility. For the full year, the segment delivered record net revenue of $144,700,000, representing growth of 32%, supported by the Indeed acquisition and continued growth in international sales. Gross profit of $32,900,000 and a gross margin of 22.8% were also new for the year records for the segment. We continue to see opportunities to further expand margins to increase the scale and additional productivity initiatives. Adjusted operating income of $2,500,000 declined modestly year over year, primarily due to under-absorbed overhead investments. While Cannabis Operations remains the smallest and most volatile of our three commercial segments, we see significant opportunities to enhance our capabilities and footprint, positioning the segment as an increasingly important driver of long-term value creation for SNDL Inc. Over to you, Zachary, for additional comments related to our strategic priorities. Zachary George: Let's now turn to the progress we have made recently against our three strategic priorities: growth, profitability, and people. Starting with growth, each of our cannabis and liquor retail segments gained 20 basis points of market share year over year. Cannabis Retail achieved this through strong execution, new store openings, and conversions to our successful Value Buds banner. Liquor Retail also demonstrated solid execution in a challenging environment, supported by private label growth and the resilience of our Wine and Beyond banner. As previously mentioned, we increased our capital expenditures and working capital investments to support the opening of three additional cannabis stores and two new One and Beyond locations in the fourth quarter. Our Cannabis Operations segment also contributed meaningfully, delivering 32% full year revenue growth, driven primarily by our leadership in edibles following the acquisition of Endeavor as well as continued growth in international sales. Profitability is a strategic priority where we made substantial progress not only throughout full year 2025, but also in the fourth quarter, as demonstrated by nearly $13,000,000 in adjusted operating income and $10,000,000 in free cash flow delivered in Q4. The previously highlighted improvements in gross margin were a key driver of this performance. Alongside our continued focus on G&A optimization. In this regard, our Retail segments delivered full year combined efficiency improvements of $7,100,000 in G&A reductions, and our corporate restructuring program has already surpassed the committed $20,000,000 in annualized savings, even ahead of the implementation of the third and final phase of the initiative. Last but not least, under our people strategic priority, we initiated our annual performance-to-pay process in the fourth quarter, designed to reward employee performance based on both overall business results and individual contributions. We also delivered merit increases ahead of the holiday season across our facilities and retail teams, ensuring market competitiveness and reinforcing a consistent and transparent compensation approach. In addition, we completed our second annual employee engagement survey, gathering valuable insights from across the organization to further enhance our employee value proposition. Building on these insights, we expanded our employee engagement initiatives to include mental and physical well-being as well as diversity, equity, and inclusion, reinforcing our commitment to a safe, inclusive, and supportive workplace. Before concluding this presentation, we would like to share how we monitor our performance relative to our peer group, as we remain focused on delivering superior performance and shareholder returns. Looking at the most recent trailing four quarters reported by this group, and normalizing for equivalent definitions, we can see that SNDL Inc. has climbed the ranks and has positioned itself firmly within the top tier in terms of profitability on an absolute basis. We believe that this progress, combined with the many opportunities ahead of us and our best-in-class balance sheet and significant cash position, creates a compelling investment case. Once again, I would like to thank our entire team for their contributions and our shareholders for their continued trust and support. I am proud of what our team accomplished in 2025, and I am confident in our ability to unlock additional value in the years ahead. With that, I will now turn the call back to the operator for the analyst Q&A session. Alberto Paredero-Quiros: Thank you. Operator: We will now open for questions. Please press star then 11 to ask a question and wait for your name to be announced. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 11 again. One moment for questions. Our first question comes from Frederico Gomes with ATB Core Mark Capital Markets. You may proceed. Frederico Gomes: Hi. Good morning. Thanks for taking my questions. First question on the cannabis retail segment, same-store sales decline that we saw this quarter and your comment about the market slowdown in the second half. Can you talk more about what is behind that slowdown? Is it related to competitive pressures at retail, overall macro conditions, or maybe just the natural state of the Canadian market becoming more mature at this point? Thank you. Alberto Paredero-Quiros: Hi, Frederico. Good morning. Thank you for your question. Yes. So we have noticed, particularly in the last two months of the quarter, so the months of November and December, absolute declines in the market. We attribute that to multiple factors. Certainly, there is an element of saturation in retail doors across most provinces, particularly where we have the biggest footprint, like Alberta. But in Ontario as well, we are starting to see that dynamic playing out. There are different dynamics as well in terms of what we are lapping and what the industry is lapping from heavy, aggressive promotional period in the prior year. In 2024 and 2025, we are seeing pretty healthy growth rates based on more aggressive price competition. Obviously, we are lapping that, and we believe that not only ourselves, but many other retailers in the industry that are focused a little bit more on profitability and mix improvements, we see margin expansions, but we are seeing as well some reduction in traffic and top line. There is as well a certain dynamic of some doors starting to shut down. We were getting to a dynamic with a lot of independents or some independents reaching their five-year rent commitments, and they are realizing that this is a competitive task and competitive marketplace. Some of the larger operators are starting to build that scale, and it is difficult to compete against those, and as a result of that, as I said, the market in certain areas is starting to shrink, or some doors are starting to shut down. The industry is consolidating as well. So that is another element, not necessarily impacting the market, but clearly the dynamics in the industry. But in general, we think that it is, as I said, saturation in the market and price points. Frederico Gomes: Thank you very much for that. Second question, still on the cannabis retail segment, specifically on M&A. So first, when do you expect the acquisition of the One Centimeters stores in Ontario to close? And in regards to your comment about the industry consolidating, do you expect your growth in cannabis retail to be mainly driven by organic new store openings, or are you more focused on the M&A side and acquiring some of these struggling players? Thank you. Zachary George: Good morning, Frederico. It is Zachary George. Thanks for the question. And this dovetails nicely from your prior question as well. Just in terms of the One Centimeters acquisition, remaining stores in Ontario, we are just finalizing our review with the AGCO. So we expect to, at the latest, report back to shareholders in Q2 on that timing, but it should be resolved shortly. And, just in line with the deceleration of same-store sales growth that we are seeing across the space with almost every major player, if you think about this cyclically, this is exactly the time when operators start to lift their heads up and look for other ways to create value. So we do expect intense focus on consolidation in the space. And I think that would apply to performing independents that may want to monetize their positions, but would also apply to both medium and even the largest portfolios in the Canadian marketplace. If I could just in terms of organic growth, we have we have a pretty active pipeline, you know, double digit count of that are under review in multiple provinces. And we have a very attractive stand-up cost for the opening of new doors. So we are looking at this from multiple perspectives and not relying on M&A outcomes to drive future growth. Frederico Gomes: Thank you. Appreciate that. If I could just ask one final question. Could you just remind us about the status of your EU GMP certification and maybe comment about the international growth outlook for this year compared to 2025 as you expand that capacity? Thank you. Zachary George: Yes. We are waiting for the last visit to our site. It has been a long process that has required some patience, but we expect at this point to have the certification complete sometime over the summer. There has been some change in the administration in Germany that has impacted as well. And in terms of our international business, we saw decent growth off a very, very small base in terms of 2025 versus 2024. And we are in the process of developing relationships and building strong partnerships, but it is still early days. So we do expect material growth, but, again, it is a very small part of the business today. That is a top three priority in terms of future capital deployment as well. Frederico Gomes: Thank you. I will hop back in the queue. Operator: Thank you. Our next question comes from Aaron Thomas Grey with Alliance Global Partners. You may proceed. Aaron Grey: Hi. Thanks for the questions. Maybe touching on retail but in terms of liquor here. Obviously, you still have some challenges within the broader category outside of yourselves, but some highlights for you guys. You guys did have one quarter during the fiscal year of year-over-year growth, you know, return to declines made the past two, you guys are continuing to open up stores as well. So maybe just given your outlook, given you are still making investments in liquor, there are some structural challenges. As you look into 2026, how are you seeing the broader liquor retail? Do you think it is in position to start to stabilize on a year-over-year basis? Thank you. Alberto Paredero-Quiros: Thank you, Aaron, for the question. So, yes, actually, throughout the year, as you saw in the first quarter, we have reported growth in 2025 that was driven primarily by the shift of Easter compared to the prior year. So on a normalized basis, we have seen a pretty consistent roundabout 3% revenue decline and about 4% to 5% market decline in the category. It is very hard to predict where that is going to go. The first part or the first couple of months of 2026, we are seeing similar declines in the market. At the same time, there are a couple of areas within our portfolio that are showing very good strength, and this is where we are focusing our investment. Particularly, if you look at our Wine and Beyond banner, despite the market declines, mid single digits, we are seeing that banner growing healthy. It is a very different business model compared to the rest of the independent network. Just make a convenience business. Ours is a larger scale format, significantly different type of offerings, much broader portfolio base. That resonates very well with consumers, and that is why, as a result of that clear differentiation and unique offering that we have, we are seeing positive growth. It is still in the low single digits, but it is growth rates in the market, and as I said, we see a competitive advantage in that front, and that is where we are deploying the capital, both from a CapEx perspective opening the doors, but as well the inventory associated with those store openings. And then we have as well our private label. One clear dynamic that we are starting to observe as well is the loss in purchasing power. It is making consumers more price-conscious, and they are looking for products that offer very good price points with good qualities as well. We have been expanding our private label offerings that continue to gain penetration. It has been already several years of increases in market share from our private label offering, and that is an area where we are still building additional relationships with producers, and we are expecting to continue making investments and expanding our portfolio on that front because, as I said, that is what is right now resonating with the consumers, and we are seeing the stronger demand. And that part of the portfolio as well is growing in relative terms to the rest of the business, and in absolute terms as well. So that is where we are focusing. We believe that we still have opportunities to manage elements of growth within our portfolio despite the fact that the market we still anticipate to decline in the low to mid single digits for the next several quarters. Aaron Grey: Okay. Great. Appreciate that color. That is helpful. Second question for me just on some of your U.S. exposure, particularly with SunStream. Just if you could provide us an update in terms of some potential outcomes, as we hopefully come to some resolutions either with Parallel or Skymet here in 2026. I know in the past, you have talked about potential changes you might need to be made to best optimize some of the U.S. assets. So, in terms of how you are looking at SunStream, the U.S. assets, and how to best optimize those in 2026, as hopefully we come to some resolutions there. Thanks. Zachary George: Absolutely, Aaron. Thank you for the question. So, the portfolio has been simplified quite significantly. It is really three positions. In the case of cannabis, I think you have been following the liquidation of that portfolio. We have seen a return of capital recently as that position gets monetized and capital repatriated. And then the two larger positions of interest would be in Parallel and SkyMint. Parallel is going through a foreclosure process in the state of Florida, and SkyMint is in receivership in Michigan. For almost the entirety of 2025, the foreclosure process related to Parallel was delayed because of litigation that was in place. There was a key settlement to that litigation in December, and so we think there is now a path to resolve that foreclosure, and we will likely see it sometime in Q2 or just after. So we are finally heading towards a resolution here after a multiyear process. Again, the reason behind these delays and the inefficiencies really comes down to the lack of access to the federal bankruptcy courts in the United States. And so once you are relegated to these other insolvency proceedings at the state level, they are much less predictable, and the adjudication can provide unique outcomes. So we are pleased that we will actually land this plane, so to speak, in 2026. But it has been a frustrating process, and we are eager to have it wrapped up. Aaron Grey: Okay. Great. Appreciate the color then. I will go ahead and jump back to the Operator: Thank you. This concludes the question and answer session. I would now like to turn the conference back over to Zachary George for any closing remarks. Zachary George: Thank you, and thanks for joining our call today. We look forward to updating you in the near future. Have a great day. Thank you. This concludes today's conference call. Operator: You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Please be advised that today's conference is being recorded. Good morning, ladies and gentlemen. Thank you for joining us today for MindWalk Holdings Corp. third quarter fiscal year 2026 earnings call. MindWalk Holdings Corp. trades on the Nasdaq under the ticker HYFT. Today's call will be led by our Chief Executive Officer, Jennifer Lynne Bath, and our Chief Financial Officer, Richard Areglado. A copy of our financial statements and MD&A is available on our website at mindwalkai.com. A replay of today's call will be available on MindWalk Holdings Corp.'s investor relations website following the conclusion of today's call. Before we begin, please note that today's discussion includes forward-looking statements. These statements are based on current expectations and involve risks and uncertainties that may cause actual results to differ materially. For more information, please refer to our filings with the SEC and Canadian securities regulators, including our most recent Form 20-F. Unless otherwise noted, all financial figures discussed today are in Canadian dollars. I will now turn the call over to Jennifer Lynne Bath. You may begin. Jennifer Lynne Bath: Thank you very much, and good morning, everyone. This quarter, MindWalk Holdings Corp. reported its third consecutive year-over-year revenue increase and advanced three pipeline programs toward data readouts. In addition, we recently signed our first one-year enterprise Lens AI platform contract. I will walk you through each of those. On revenue, year over year, we have grown three quarters in a row in a market where pharmaceutical demand for AI-driven discovery is accelerating. On the commercial model, our largest enterprise AI client recently signed a one-year Lens AI platform contract, the first of its kind for us, shifting a part of our revenue from project-based to contracted and recurring. On our pipeline, dengue, GLP-1, and influenza each have data anticipated in the near term. Please let me take those in turn. MindWalk Holdings Corp. just reported its third consecutive quarter of year-over-year revenue growth. Revenue was $4,200,000 this quarter, a 52% increase from $2,700,000 in the same quarter last year. MindWalk Holdings Corp.'s U.S. revenue, our most important commercial market, doubled year over year. That growth reflects a deliberate strategic focus on the U.S. market. North America is where AI-driven discovery demand is concentrated and where the regulatory environment is actively pulling pharma toward domestic partners. We have invested in U.S. commercial presence, including business development and sales resources in the Boston and Cambridge area. Separately, we have also established biologics services operations in the Boston and Cambridge area. Both reflect the same strategic direction. Our clients are pharmaceutical and biotech organizations with their own R&D capabilities. They engage us when the challenge exceeds what conventional tools can address. Which brings me to the second thing I would like to highlight. Recently, our largest enterprise AI client signed a one-year Lens AI platform contract. This contract is structured as a recurring revenue model, revenues being recognized monthly. To be precise about why this matters, until now, our revenue has been primarily project-based. Clients engage us for a program, we deliver, we invoice. That model produces good revenue, but it requires continuous reselling; every quarter starts close to zero. A platform contract is structurally different. It is contracted, recurring, monthly revenue that does not require reselling. It delivers value consistently, which is exactly what Lens AI is designed to do. Lens AI is actively being rolled out across our broader client base, the one-year contract is one we are scaling. Now let's discuss specifically what Lens AI, powered by HIFT technology, demonstrated this quarter. At its foundation is HIFT, our patented biological representation system that operates on the invariant functional layer of the sequence space. Sequence-based AI tools identify patterns in surface similarity. HIFT, conversely, operates on functional architecture, the layer that governs what the molecule does, not just what it looks like. Lens AI puts that capability into practice, integrated across our laboratory operations, now connecting in silico insight directly to bench-level execution. When our scientists design experiments, they identify targets, and they interpret results. That capability runs through the process end to end. Two results this quarter illustrate what that means. First, we advanced our functional adjacency capability, the ability to identify molecules that produce the same therapeutic effect despite having very low sequence similarity. For a pharma partner, this means that Lens AI can detect competitive threats and IP collision risks that conventional sequence analysis would not find. IP protection on this capability has been initiated. Second, in our influenza program, Lens AI has now screened over 2,000 highly diverse influenza sequences spanning influenza A, influenza B, avian, and swine origin sequences. Across all sequences analyzed, HIFT identified a single conserved functional feature that is present in every single one, a conserved functional feature that represents a potential design target for a broadly protective immunogen. For MindWalk Holdings Corp., dengue is proof of concept; influenza is repeatability. Now our pipeline advancements. Dengue infects 390 million people annually. The WHO considers it a top 10 global health threat. After 60 years of research and billions of dollars of investment, the world still does not have a vaccine that reliably protects against all four serotypes without risk of making the disease worse. Two vaccines have reached the market. Neither solved the core problem. Sanofi's Dengvaxia was restricted in 2017 after it was found to increase severe dengue risk in seronegative patients through antibody-dependent enhancement, also known as ADE, and was permanently discontinued in Brazil this year. The vaccine effectively stimulated a primary infection in seronegative recipients, priming them for enhanced disease on subsequent natural exposure. Takeda's Qdenga showed a different failure mode. It demonstrated no efficacy against serotype 3 in seronegative individuals, and remained skewed toward dengue 2. Takeda withdrew its FDA application in 2023. You see, the problem is not generating an immune response. Both of those vaccines do that. The problem is generating a balanced response across multiple serotypes. An imbalanced response triggers ADE, and that makes the patient sicker. The two vaccines that have reached the market both took a tetravalent approach and hoped the immune system would respond equally, but it does not. Across all sequences analyzed, HIFT identified a single conserved functional constraint present in every single dengue sequence, a potential basis for a broadly protective immunogen design. This is a discontinuous epitope; it is invisible to conventional sequence alignment tools. HIFT found it because it operates at the level of functional biological architecture, not surface sequence similarity. Instead of asking the immune system to respond equally to multiple different things, we are training it to recognize one thing that is present in all serotypes. Balanced immunity is built into the design, not hoped for in the final outcome. Currently, rabbit immunization studies for this program are complete. Binding confirmation, which is confirming that the immunized animals generated antibodies that bound to that conserved epitope, is expected yet this week. Upon confirmation, we move to multiserotype neutralization tests with our independent collaborator. No prior program has demonstrated a single epitope immunogen generating neutralizing antibodies across all serotypes that it was immunized for. This is what neutralization data will first test. We are at this preclinical stage, but the hardest scientific questions actually get answered here. In vitro GLP-1 receptor activation was confirmed by an independent third-party assay. Results demonstrate activity relative to semaglutide, a market-leading GLP-1 therapy. We have worked with a pharma collaborator with recognized expertise in this area. They have shared what they consider important to see as this program advances. We are developing the program with that input in mind. Beyond the GLP-1 pathway itself, we have identified a dual regimen linking GLP-1 biology to a second nonoverlapping longevity pathway. We will continue to update the market as this program advances. Our influenza program is advancing on the same design logic. As of this week, we are moving toward manufacturing of the lead in silico candidate. We will update the market as that program continues to develop. U.S. revenue doubled year over year, a direct result of our deliberate strategic focus on North America. AI-driven biologics demand is concentrated in this market, and the regulatory environment is increasingly favorable to domestic partners. We have established biologic services operations in the Boston–Cambridge area, and this strategic direction guided our decision to divest our European operations in favor of North American growth. We ended Q3 with $14,200,000 in cash. The Netherlands divestiture proceeds are being deployed deliberately into commercial growth, Lens AI and its pipeline assets, and our Canadian laboratory capabilities. Our team published a peer-reviewed study in Biomacromolecules, the American Chemical Society journal, in collaboration with Eindhoven University of Technology and Radboud University Medical Center. That work was grant funded and it demonstrates what our wet lab nanobody discovery is capable of and the great importance of this innovation. I will come back to this when I describe our B Cell LAMA platform launch. This quarter, we announced results from a client-driven research engagement in which our scientists generated and validated monoclonal antibodies and intrabodies capable of selectively targeting misfolded, pathogenic TDP-43 while leaving healthy TDP-43 intact. TDP-43 is implicated in ALS, frontotemporal dementia, and some Alzheimer's cases. Last week, we announced the launch of our B Cell LAMA, a nanobody discovery platform built on single B cell isolation from immunized llamas. Let me explain why this matters. Bispecific and multispecific antibodies require two heavy chains, and when those chains need two different light chains, the result is an explosion of possible combinations, only one of which is the product that you actually want. That chain-pairing problem has been one of the central engineering bottlenecks limiting bispecific drug development, and significant capital has been invested in platforms designed to work around it. VHH nanobodies eliminate the problem by design. They carry no light chain; there is no pairing ambiguity. And because they come from a naturally matured llama immune repertoire, they capture sequence diversity that engineered platforms structurally cannot replicate. Our peer-reviewed Biomacromolecules publication demonstrates what that produces. The molecule with the strongest binding affinity in our delivered zero functional activity. A construct built from the same nanobody building blocks achieved 10 to 25 times greater potency in multivalent format. Function-based selection, not affinity, is what matters. That is what B Cell LAMA is designed to deliver. MindWalk Holdings Corp. holds commercial rights to the jointly developed intellectual property from that work. B Cell LAMA operates alongside our 15 molecules advanced to the clinic. The full detail is in last week's announcement. Across our proprietary asset portfolio—GLP-1, dengue, and influenza—and at the request of investors, we are working with legal and financial advisers to design structured asset-level financing vehicles that will allow investors to participate at the program level while preserving parent company equity. Network is active and progressing. I will now turn the call over to Richard. Richard Areglado: Thank you, Jennifer, and good morning, everyone. As a note, all figures are in Canadian dollars and relate to continuing operations unless stated otherwise. Revenue for Q3 was $4,200,000, a 52% increase from $2,700,000 in Q3 of last year. As Jennifer noted, this is our third consecutive quarter of year-over-year revenue growth. U.S. revenue doubled year over year, $2,600,000 versus $1,300,000. The U.S. is named a strategic priority. AI-driven discovery demand is concentrated here, and our commercial investments are reflected in the numbers. For the nine-month period ending January 31, 2026, our revenue was $11,400,000 as compared to $7,900,000, a 45% increase as compared to the prior year period. Gross margin for the three months ended January 31, 2026 was 59% as compared to 65% in the prior year period. For the nine-month period ended January 31, 2026, gross margin was 58% as compared to 53%, a five percentage point improvement over the same period last year. Gross margin can vary depending on our mix of business. However, as we develop and increase adoption of the tools within our Lens AI platform, we would expect margins to expand. Moving on to operating expenses. For Q3 2026, R&D expense was $1,200,000 as compared to $900,000 for the prior year period due to the investments in the dengue, GLP-1, and B Cell LAMA programs and ongoing Lens AI platform development. For the nine-month period ended January 31, 2026, R&D expense was $3,500,000 versus $3,400,000 in the prior year. Sales and marketing for the three-month period ended January 31, 2026 was $1,800,000 as compared to $1,100,000 in the same period last year, reflecting our continued commercial expansion primarily in the U.S., with programs such as our expansion in the Boston area starting to yield revenue. For the nine-month period ended January 2026, sales and marketing expense was $4,300,000 compared to $2,700,000 for the nine months ended January 2025. G&A was $3,100,000 for Q3 2026 as compared to $2,800,000 for Q3 2025. G&A expense was $9,500,000 for the nine months ended January 2026 as compared to $9,100,000 for the prior year period. We expect G&A to remain flat to modest growth as we believe we have the infrastructure to support future growth. Net loss from continuing operations for Q3 2026 was $3,900,000 versus $22,000,000 in Q3 2025. Net loss in the prior year period included an impairment charge of $21,200,000. For the nine-month period ended January 2026, net loss was $11,200,000 as compared to $29,700,000 for the nine-month period ended January 2025, which also reflected the $21,200,000 charge. We are investing ahead of revenue in commercial infrastructure, pipeline programs, and platform capabilities with the expectation that these investments will yield returns. Moving on to the balance sheet. We ended the third quarter with $14,200,000 in cash. Cash used in operations was $10.1 million year to date, consistent with our planned investments. In summary, revenue has grown year over year, and we have demonstrated the ability to execute. We have developed a platform and products that bring value to our customers, and we continue to innovate with programs such as our recent announcement of our B Cell LAMA capability and functional adjacency. We have cash runway for operations and a capital structure to support the ongoing development of our proprietary pipeline assets. We believe this will continue to drive shareholder value. I will now return the call to Jennifer. Jennifer Lynne Bath: Thank you, Richard. Before we open for questions, I would like to leave you with this. Most AI approaches in biologics today operate on full biological sequences. They tokenize, they train, they generate. Many are powerful, and they are operating on a representation of biology that includes a great deal of noise. Evolution is a tolerant process. Most positions in a biological sequence can change without consequence. That variation fills the public databases that these models train on. A much smaller set of subsequences is invariant. They cannot change because essential biological function depends on them. These are the fingerprints that actually carry the information for life. HIFT is our patented representation of that invariant layer. No other company has the rights to use these patterns. That is the foundation of a durable competitive position because every result we generate, every insight we deliver, and every asset we build rests on a biological foundation that competitors cannot replicate. And it is producing results. We identified the dengue epitope conserved across all four serotypes, a target that 60 years of vaccinology did not find. We detected functional adjacency that sequence-based platforms missed and initiated IP protection on that capability. We screened over 2,000 influenza sequences and found a single conserved biological feature present in every single one. Our GLP-1 candidate activity relative to semaglutide, the market-leading GLP-1 therapy, was confirmed by an independent third party in vitro testing. We launched B Cell LAMA, a nanobody platform anchored by peer-reviewed evidence that function-based candidate selection outperforms affinity-based selection at the molecular level. On commercial, we are scaling the enterprise platform model, additional contracted recurring platform agreements with major pharma and biotech partners building a revenue base that grows independently of any single project. On pipeline, dengue neutralization data is our nearest-term pipeline readout. Dengue is proof of concept for what HIFT can do. Influenza is repeatability. Together, they make the platform case to pharma partners better than anything else that we could say. On asset financing, legal and financial advisers are engaged and structures are being designed across the proprietary portfolio. Before we open for questions, I want to leave you with this. The science is patented. The results are peer reviewed. The first enterprise contract is signed. The pipeline has meaningful data approaching. These three consecutive quarters of year-over-year revenue growth and U.S. revenue doubling are made possible by a platform that no competitors can replicate. This is the MindWalk Holdings Corp. investment case. Thank you. We will now open the line for questions. Operator: Thank you. We will now begin the question-and-answer session. To ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question at any time, please press star 1 again. Please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Your first question comes from the line of Swayampakula Ramakanth with H.C. Wainwright. Your line is open. Swayampakula Ramakanth: Thank you. This is RK from H.C. Wainwright. Good morning, Jennifer, Richard. Good morning. This is a great quarter, a lot of good stuff, and really exciting days for you. Thank you. Jennifer or Richard, in terms of the agreement that you just signed—the enterprise client agreement that you just signed on the recurring contract—I am trying to understand what drove this group to do this. What are the primary drivers? And then the second part of that same question is, how many of your other project-based clients are willing to convert into this monthly recurring model, let us say over the next six to 12 months? Jennifer Lynne Bath: Thank you, RK, and thanks for joining, and as usual, for your thoughtful questions. So your first question—what really drove this first pharma client to go ahead and sign this contract—that is a very good question. I think I like this in particular because giving me the opportunity to explain this also gives me the opportunity to demonstrate the validation that needed to occur before a client took this type of a commitment long term with us. I do believe this is a client I have referred to anecdotally historically one or two times, and this is a client who initially came to us having tried multiple other companies that said that they could utilize artificial intelligence to help solve some of their scientific challenges. The group was relatively dismayed. They said that in reality, none of those CRO partners or companies were able to turn back results that were as good as what they could do in the wet lab, and so they were apprehensive and they were doubtful. So when we first brought this group in, it was actually for fee-for-service work, and what we said to them is, you have programs that have been extremely difficult and you have worked on for over a decade. Let us take a crack at it. Let us apply Lens AI to it, and if we are not successful, then you do not pay us. But we really want to show you what we can do. We worked on that program for them, and we were successful, and they saw the outputs coming directly from Lens AI, and even some applications that MindWalk Holdings Corp. in Belgium, also known as BioStrand, built specifically for producing these outcomes in the program. They were tremendously happy with the results, and they have now contracted us, I am not sure, somewhere between seven to 10 times in total for different programs, and Lens AI has continued to successfully solve very challenging problems for them. That is really where we earned their respect and, I think, their trust for this Lens AI program, and that is what really brought them to the table to negotiate a platform license as a SaaS model. Our intent, obviously, is to leverage that experience with them to be able to bring on additional clients, for those clients to understand, and for us also to be able to share the positive experiences this group has had. That being said, for your second question, we are not providing specific numbers or timelines for additional contracts, but one thing that I think is really important to highlight and maybe was not highlighted enough in the earnings call is that Lens AI is now actively being rolled out across our broader client base. All the programs we are working on—not just the programs we are working on in Belgium where Lens AI lives, but also in Canada with all of our wet lab clients—somewhere close to 750 active clients, dozens of programs running at any given time, those results are all now finally coming back in the Lens AI portal. These groups are receiving secure login, and when they log in, they have access to this portal, and they can see the applications that are in there that truly change the way they have done drug discovery historically. Now they can utilize these applications, and instead of going to three, four, five, six other vendors to collect information, or chugging through the process over the course of 18 months to two years, they can literally take a subscription to utilize these applications beyond the base level to harness the power and get the results that they are looking for. Being at that point in this venture is very important to our company, something we have built toward and worked toward. It took longer than we hoped it would to get this software into the hands of these clients, and it is now happening not just across our therapeutic clients but clients who have contracted us for any sort of custom antibody work. With regard to that, when we think about additional contracts and bringing these new clients in, that is where we are really focused. We feel we have an extremely unique situation where these clients are already onboarded. We are in many cases their primary vendor, but in all cases, we are a vendor that is in their system, and we have already built their trust and their respect, and so we have a very unique segue into this market with those clients. Swayampakula Ramakanth: Thanks for that detailed answer. And if I may, second question is on the asset-level financing. I do understand lawyers and investors can take a long time to come to a conclusion about anything, but how much of that are you waiting for in terms of these four different projects or platforms that you have—thinking about the dengue, the GLP-1, LAMA, and influenza as well? Do you need to get to a conclusion with these groups before you move this forward, or are these all independent of each other and they are all moving forward? Jennifer Lynne Bath: That is a great question. The short answer is they are independent of one another as they move forward. A couple of things to keep in mind. When we look at financing these particular programs, one of the things that is easy to overlook is the fact that our program costs are not what you would expect from a traditional drug development company at this stage. Much of our work is in silico, but also much of our in silico work, our in vitro work, and even our preclinical work is either AI-driven or it is conducted in-house. That keeps our cost meaningfully lower than a conventional pipeline of this breadth would require, and it is also one of the structural advantages that we have building on the HIFT platform. As a result of that—and directly in reference to your question, RK—the capital that we currently have is capital that is enough to drive us significantly forward in these engagements. As a matter of fact, as was detailed by Richard, the R&D expenses are not up significantly over last year and yet cover not only our traditional R&D and the build-out of the B Cell LAMA platform, but also cover everything we have done to date here. That gives you, I think, a specific example of that. Now, when it comes to the asset-level financing, that is something that definitely, as these programs become more advanced, one of the things that we have ensured we have in place as we move forward is a professional team that has the experience in the clinical realm and the subject matter experience, with each of these families of viruses or the particular therapeutic or disease that we are targeting, in order to help drive this process along through the preclinical portion and the IND-enabling, the IND filing, and the clinical readiness. When we get to those stages, of course, the cost then does begin to increase. As to whether or not these portions at that stage can move forward prior to the asset-level financing, to some extent, yes, most definitely, once again because we do have a team set forward here with the internal expertise. But in addition to that, the asset-level financing is meant to support once we get to that stage. We have enough runway here that the lead time that it takes to actually get these ring-fenced should be one that enables us to bring in additional capital to support those by that time. Swayampakula Ramakanth: Thank you. I will get back into the queue. Thanks. Jennifer Lynne Bath: Thanks, RK. Operator: Thank you. There are no further questions at this time. We will now turn the call back over to Jennifer Lynne Bath for closing remarks. Jennifer Lynne Bath: Great. Thank you so much. The biggest thing that I want to say is thank you all. Thank you for joining us. Thank you for supporting MindWalk Holdings Corp. We look forward to sharing pipeline results as they become available, and we will speak with all of you on our Q4 and fiscal year-end 2026 earnings call. Thank you. Operator: This concludes today's MindWalk Holdings Corp. Q3 fiscal year 2026 earnings call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Flotek Industries, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If anyone has any difficulties hearing the conference, I would now like to turn the conference call over to Mike Critelli, Director of Finance and Investor Relations. Please go ahead. Mike Critelli: Thank you, and good morning. We are thrilled to have you with us for Flotek Industries, Inc.'s fourth quarter and full year 2025 earnings conference call. Today, I am joined by Ryan Ezell, Chief Executive Officer, and Bond Clement, Chief Financial Officer. We will begin with prepared remarks on our operational and financial performance, followed by Q&A. Yesterday, we released our fourth quarter and full year 2025 results, along with an updated investor presentation, both available on the Investor Relations section of our website. This call is being webcast with a replay available shortly after. Please note that the comments made on today's call may include forward-looking statements, which include our projections or expectations for future events. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from those projected in forward-looking statements. We advise listeners to review our earnings release and most recent 10-Ks and 10-Q filings for a more complete description of risk factors that could cause actual results to materially differ from those projected in forward-looking statements. Please refer to the reconciliations provided in the earnings press release and investor presentation, as management will be discussing non-GAAP metrics on this call. I will now turn the call over to our CEO, Ryan Ezell. Ryan Ezell: Thank you, Mike. Good morning, everyone. We appreciate your interest in Flotek Industries, Inc. and your participation today as we review our Q4 and full year 2025 operational and financial results. In the fourth quarter, we saw North American operators maintain the cautious posture initiated in the second quarter as they continued to navigate the return of OPEC+ spare capacity and persistent global trade volatility. Despite the dynamic geopolitical and macroeconomic challenges that have injected uncertainty within the market, the Flotek Industries, Inc. team remains steadfast in the execution of our corporate strategy, driving transformation, and delivering our third consecutive year of significant gross profit and adjusted EBITDA improvement. Through the powerful convergence of innovative real-time data and chemistry solutions, as shown on slide 3, Flotek Industries, Inc. has laid the foundation for a data-driven growth trajectory built on diverse recurring revenue, high-margin services, and proprietary technologies that create value for our customers and improve returns for our shareholders. Transitioning to slide 4, Flotek Industries, Inc. extended its track record of transforming the company into a data-as-a-service business model as our industrial pivot continues to gain momentum while expanding the total addressable market for future growth of the company. Furthermore, we delivered standout performance throughout 2025, resulting in increased market share in both of our complementary business segments. Data Analytics grew exponentially while Chemistry outpaced the market in a challenging environment through an unwavering commitment to safety, service quality, innovation, and total value creation. With that, I would like to touch on some key highlights for the quarter referenced on slide 7 that Bond will discuss later in the call. Q4 and full year 2025 saw the highest quarterly and annual revenues since 2017. The Data Analytics segment achieved its highest ever quarterly and annual revenue in company history. Our gross profit climbed 24% versus 2024 and 52% as compared to full year 2024. The Data Analytics gross profit accounted for 48% of the total company gross profit during 2025 as compared to only 8% in the quarter a year ago. Adjusted EBITDA grew over 123% year-over-year, while 2025 net income improved 191%. Finally, we completed the onboarding of our PowerTech assets and the strategic entry into Power Services in 2025. This sets the stage for high-margin recurring revenue growth in 2026 and beyond. All of these results were achieved with zero lost time incidents in the field operations, with our Prescriptive Chemistry Management and Raceland NTI team surpassing over 10 years without a lost time incident. I want to thank all of our employees for their hard work and commitment to safety and service quality, achieving these outstanding results. Now, turning to the larger picture for the energy and infrastructure sector, we share the viewpoint that despite the near-term volatility and uncertainty created by the ongoing conflicts in the Middle East, the fundamentals for hydrocarbon demand will continue to grow from the medium to long term. A rebalance of supply and demand is expected due to the combination of steeper decline rates for large percentages of unconventionals, diminishing overall reservoir quality, and minimal exploration success, which will create potential tailwinds for energy and infrastructure services. Substantial investment will be required to maintain current production levels, while additional spending would be needed to meet the expanding power demand driven by AI data centers and industrial reshoring, combined with the reliability issues of an aging transmission infrastructure. Our legacy pressure pumping customers continue to capitalize on the portfolio diversification opportunity provided by the demand for remote power generation. Flotek Industries, Inc. is poised to support these emerging opportunities with products and services that help protect their assets while optimizing their operational performance and fuel efficiency. With multiyear waiting lists for turbines and reciprocating engines, protecting these capital-intensive investments is critical, along with enabling reliability standards that exceed greater than 99% uptime requirements. Transitioning from the macro, let us dive into the details starting with slide 11 of the earnings deck. I want to spotlight the remarkable progress in our Data Analytics segment, which saw service revenues increase 381% in 2025 versus Q4 2024, elevating gross profit to 73% in Q4 2025 versus only 39% the same quarter a year ago. This transformational growth in data-driven service revenue is empowered by three upstream technology applications: Power Services, Digital Valuation, and Flare Monitoring, all of which are fueling significant advancements for our organization while generating recurring revenue backlog. The first is our Power Services, which has evolved from a novel analytical approach into a transformative solution for the energy infrastructure sector that we call PowerTech. What began as advanced analytics has grown into a comprehensive end-to-end fuel management platform, redefining performance standards and operations within the sector. Looking at slide 13, at the heart of PowerTech is our VariX analyzer, which goes beyond data collection to deliver custody transfer-grade measurements. It provides precise BTU, methane number, and volume reporting for royalties, invoicing, and performance guarantees. Complementing this, our patented conditioning and distribution trailers actively remove liquids and contaminants, conditioning high-BTU hydrocarbon feeds to meet exact turbine or engine specifications. But PowerTech is more than just a technology. It is about control. Our cloud-based portal enables the monitoring of live BTU trends, H2S alerts, Coriolis flow meter readings, and automated CNG blend controls, combined with custom alarm thresholds to automatically isolate off-spec hydrocarbon feeds and protect high-value turbines or reciprocating engines from catastrophic damage, thus minimizing downtime and operational risk while enhancing safety. More importantly, our velocity of measurement enables direct communication to the OEM engine to automatically adjust engine operating parameters and optimize engine performance. We do not believe there is another analyzer technology capable of executing at this level of real-time automation today. Finally, our 35+ Data Analytics patents position Flotek Industries, Inc. as a leader across the natural gas value chain. When considering our capabilities, we deliver unmatched monitoring, control, and safety for field gas operations. On 03/03/2026, Flotek Industries, Inc. announced its first contract within the utilities infrastructure sector, seen on slide 14. Leveraging our proprietary PowerTech platform, Flotek Industries, Inc. will partner with leading distributed power service providers to coordinate the installation of up to 50 megawatts of state-of-the-art power generation equipment, including advanced gas distribution and smart conditioning systems, to support critical federal disaster recovery initiatives. The impacted area was struck by a destructive wind event, which caused significant damage to local power infrastructure. This deployment harnesses real-time data analytics for unparalleled efficiency, ensuring resilient power that drives the community recovery forward. Under the contract, Flotek Industries, Inc. will supply and mobilize cutting-edge smart conditioning skids and advanced gas distribution equipment alongside natural gas-powered gensets. The gas distribution skid provides independent fuel control to each genset, allowing seamless maintenance without interrupting the power flow and guaranteeing uptime even in the harshest conditions. This week, we have boots on the ground evaluating the site selection and continue to work with engineers and customers to determine the site design, exact power demand, and full deployment schedule. Now let us transition to slide 15, where we will dive into our upstream application, Digital Valuation. This groundbreaking use case sets a new standard in the oil and gas industry, delivering unprecedented transparency and minimizing enterprise risk for producing wells like never before through real-time digital twinning of the custody transfer process. By monitoring hydrocarbon quality and composition in real time, we have unlocked a new market for the industry and for Flotek Industries, Inc. On 10/29/2025, Flotek Industries, Inc. reported a historic milestone in natural gas measurement. The XBEG spectrometer became the first optical instrument to achieve the stringent reproducibility and repeatability requirements of the oil and gas industry standard for custody transfer, GPA 2172. The XBEG measurement unit is designed to enable more accurate volume and compositional data, thereby delivering greater transparency for royalty owners, operators, and midstream companies than traditional methods. We believe the XBEG speed, accuracy, durability, and qualification under the rigorous measurement standards outlined in GPA 2172 will provide a significant advantage in discussions with prospective customers as we aggressively expand this manufacturing field deployment. Since completing our XBEG pilot program in the third quarter of 2025, we exited the year with over $12.02 million per month in recurring high-margin revenue. Furthermore, 2026 is off to a great start with opportunities on the horizon, each of which can more than double our deployed active XBEG units. Let us move to our third upstream application, the Verical Flare Monitoring solution. We continued to experience strong operational demand in February 2025, with total Flare Monitoring revenue for the full year exceeding $2 million. As we proactively navigate the evolving regulatory landscape, particularly the EPA's flare monitoring and methane emission standards, we are deepening strategic partnerships with leading operators and flare technology developers. This collaborative approach not only ensures seamless compliance, but also delivers substantial operational efficiencies, meaningful methane reductions, and enhanced environmental performance for our clients. It is clear that our transformational strategy to grow the Data Analytics segment through upstream applications is gaining traction. We increased our upstream revenues from $2.1 million in 2024 to over $21 million in 2025, with gross profits expanding from $1.2 million in 2024 to $18.4 million in 2025. But what is most important is what it means for our stakeholders and investors. Our DAS-driven strategy ensures predictable recurring revenue and cash flow, delivering stability and long-term value. Our proprietary data technologies and superior measurement accuracy enable velocity and decision control and establish a high barrier to entry, secure client loyalty, and support our value-based service model. Finally, long-term high-margin subscriptions position Flotek Industries, Inc. for sustained growth and margin expansion, delivering significant shareholder value over time. Now, lastly, looking at our Chemistry Technology segment, it continues to deliver robust performance driven by the differentiation of our Prescriptive Chemistry Management services and our expanding international presence. Slide 18 highlights the resilient performance of our Chemistry segment, which delivered a 25% increase in total revenue for full year 2025 compared to 2024, excluding OSP payment, despite a 24% decline in the average North American frac fleet count over the same period, from 201 at year-end 2024 to 154 at year-end 2025, according to Primary Vision data. While we anticipate potential near-term commodity price volatility, we see encouraging indicators for cautious optimism in the back half of 2026 and beyond, and we continue to closely monitor operational and supply chain risks for international operations amid the ongoing conflicts in the Eastern Hemisphere. It is evident that our Chemistry team has executed our strategy flawlessly despite the near- to medium-term headwinds. While uncertainties around near-term activity levels persist due to macro factors that could affect the completion of the Chemistry market, we remain focused on defining these challenges and delivering differentiated chemistry and data services to provide our customers with industry-leading returns on their investment. Looking ahead, I am more confident than ever in Flotek Industries, Inc.'s momentum and our ability to drive sustained, profitable growth as we execute our transformative corporate strategy. We are firmly positioning Flotek Industries, Inc. as a high-growth technology leader in the energy and infrastructure sectors, accelerating innovation through the powerful integration of real-time data analytics and advanced chemistry solutions tailored precisely to our customers' evolving needs. I will now turn the call over to Bond Clement to provide key financial highlights. Bond Clement: Thanks, Ryan. Good morning, everybody. Our fourth quarter results cap an exceptional year in which we generated meaningful value for our shareholders. As highlighted in yesterday's presentation on slide 7, we achieved several important milestones, including our highest quarterly revenue since 2017, driven in part by the largest quarterly contribution from ProFrac in the more than four-year life of our supply agreement, and the first quarter in which our Data Analytics segment surpassed $10 million in revenue. The continued expansion of Data Analytics revenue is translating directly into enhanced product profitability. As Ryan noted, in the fourth quarter, DA accounted for 48% of total company gross profit, a significant increase from just 8% in the prior-year period. Two really impressive metrics stand out as highlighted on slide 11. One, our Data Analytics gross profit for 2025 totaled just over $18 million, which represents more than two times the growth versus last year's total Data Analytics revenues. And second, the Data Analytics revenue during the fourth quarter exceeded DA revenue for the entire year of 2024. Both of these metrics highlight the exceptional growth that we realized in 2025. Total company revenue grew 33% from the year-ago quarter and benefited from a $22 million, or approximately 80%, increase in related-party revenue as compared to the fourth quarter of last year. Approximately $15 million of the ProFrac revenue increase was Chemistry-related, while $6.7 million was associated with the PowerTech lease agreement. External customer Chemistry revenue declined 30% from the year-ago quarter due in large part to slowing activity levels in November and December. However, external Chemistry revenues were still up an outstanding 26% for the full year versus 2024, despite the numerous headwinds in the upstream completion markets that Ryan touched upon earlier. Data Analytics had another solid quarter, with product revenue and service revenue up significantly from the year ago, driving the segment's highest quarterly and annual revenue ever. Data Analytics segment revenue represented 15% of total company revenue in the fourth quarter, up from just 5% in the year-ago quarter. PowerTech revenues totaled $15.8 million during 2025, and as shown on slide 11, since closing the PowerTech acquisition in the second quarter, these assets have been a clear catalyst for margin and profitability expansion, driving improvements not only within the DA segment, but also at the corporate level. As a reminder, based on the contractual terms of the lease agreement, PowerTech revenues in 2026 are expected to be north of $27 million, or an approximate 70% increase from 2025. So we continue to expect these assets to be a significant contributor to our 2026 results. Gross profit increased 24% and 52%, respectively, as compared to the year-ago quarter and fiscal year. Fourth quarter gross profit as a percentage of revenue totaled 22.5% and was impacted by a combination of product mix, as well as the approximate $5 million sequential reduction related to the shortfall penalty, which is a byproduct of the huge quarter of revenue we achieved with ProFrac. SG&A expenses increased compared to the fourth quarter of last year, primarily reflecting higher personnel costs, including stock compensation, as well as elevated professional fees, a portion of which relate to the company's first-time integrated audit requirement. Importantly, as revenue scaled, SG&A declined to 11% of revenue from 13% in the prior-year quarter, demonstrating improving operating leverage and the efficiency of our cost structure as the business grows. Net income for the quarter totaled $3 million, or $0.08 per diluted share, compared to $4.4 million, or $0.14 per diluted share, in the prior-year quarter. It is worth pointing out that the current quarter net income and diluted earnings per share as compared to the year-ago quarter were impacted by higher depreciation and interest costs, which are primarily related to the PowerTech acquisition, as well as a higher effective tax rate driven by non-cash adjustments related to the company's valuation allowance on deferred tax assets. The effective tax rate for the fourth quarter was approximately 35% compared to 7% in the year-ago period. We do expect the effective tax rate to normalize closer to 21% going forward, and we do not expect to pay cash taxes over the next few years other than minor amounts related to state income taxes. Earnings per share for the 2025 periods as compared to the year-ago periods also included a higher share count, a result of the 6 million share warrant issued in connection with the PowerTech acquisition. Although the warrant has not been exercised, the shares have been included in both basic and diluted share counts since the acquisition closed in the second quarter. As noted in yesterday's release, as of 2025, we elected to change our calculation of adjusted EBITDA to better align with the SEC's guidance on non-GAAP financial metrics. What this means is that for external reporting purposes, we will no longer add back non-cash amortization of contract assets to our adjusted EBITDA. All adjusted EBITDA references in the earnings release reflect the revised computational methodology. To compute adjusted EBITDA consistent with our prior methodology for purposes of comparison to our original adjusted EBITDA guidance, simply add the non-cash amortization of contract assets as disclosed in the press release to the revised adjusted EBITDA balances shown. That math suggests that adjusted EBITDA for 2025 under our previous methodology was approximately $10.1 million. Using the revised calculation, adjusted EBITDA was up 40% versus the year-ago quarter and grew 123% for the full year. Using either methodology, we were near the top end of the original or revised methodology guidance range on adjusted EBITDA. Wrapping up my comments, touching briefly on the balance sheet, we ended the year with $5.7 million in cash and $3.3 million drawn on our ABL. You will note that total assets increased to just over $220 million at year end, primarily as a result of the release of the valuation allowance allowing us to reflect our deferred tax assets on the balance sheet. With that, I will turn the call back to Ryan for closing remarks. Ryan Ezell: Thanks, Bond. Our 2025 results build upon our now multiyear track record of consistently posting improved financials as we successfully transform the organization to enter a new data-driven frontier. Our Data Analytics segment continues to deliver explosive growth with triple-digit revenue increases, expanding recurring revenue streams, and a robust multiyear backlog that provides strong visibility into future cash flows and margin expansion. Combined with our resilient Prescriptive Chemistry Management services, Flotek Industries, Inc.'s ability to execute strategic wins, advance asset integrations, and differentiate on a technology and returns basis will enable further capture of market share and delivery of continued top- and bottom-line improvement. We remain fully committed to shaping the industry's digitalized, sustainable future by leveraging chemistry as the common value collision platform, unlocking higher returns for our customers, and generating compelling opportunities for shareholder value creation. With our proven execution, expanding high-margin capabilities, and clear pathway to scalable growth, Flotek Industries, Inc. is poised for an exciting next phase of value delivery to our investors. Operator, we are now ready to open the floor for questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to cancel your request, please press star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star 1 should you wish to ask a question. Your first question is from Jeffrey Scott Grampp from Northland Capital Markets. Your line is now open. Jeffrey Scott Grampp: Good morning, guys. I was curious to start on the Power Services side, and congrats on the recent contract win there. Outside of that opportunity, can you just touch on the current pipeline of opportunities that you guys are working through? Curious with the maturity level of those conversations, what stage we are at, and how you are kind of viewing other opportunities potentially going into the full year for the rest of the year? Thanks. Ryan Ezell: Yes, Jeff, I would be glad to provide a little bit of color on that, because we are pretty excited about the advancements, and I will kind of refer back to some of the comments I made on our end-of-quarter call at Q3. We set up our PowerTech advancement of our business development units around three major steps. One is proving the validation of the measurement, then moving to levels of various control and integration, and then the final thing we do is full distribution and conditioning. I am proud to say that we moved into seven new customers successfully on the measurement side, with executed POs and successful field trials, and they are moving into longer-term duration contracts and looking at placing our new advanced NGS or smart skids as well as ESD. We have right now ongoing about six different operations in the field, and it is on top of our most recent announced win on the industrialized infrastructure component for utilities. So it is going really, really well. We have also begun, we have kind of brought forward what we are looking at on capital spend at building new pieces of equipment to go out to location, and so from that standpoint, I think we are still on track to hit that run rate of doubling the size of the fleet by the end of the year, if not maybe a little bit sooner. All those opportunities, and I think that the unique capabilities of our technology in some of these harsh conditions is opening up some unique pathways for us to hit some of these really stranded disaster relief power locations. That has been an interesting opportunity for us to unlock here at Flotek Industries, Inc. Jeffrey Scott Grampp: Great. I appreciate that. And on a related question, with the business model or kind of contract approach, if you will, on the utility infrastructure deal, do you guys view that as kind of a one-off specific to this customer need, or is that something you guys view as more repeatable for some of the other opportunities that you are discussing with customers? Ryan Ezell: No, I believe it is 100% repeatable, Jeff. I think that where our wheelhouse of strength is the monitoring, conditioning, and the setting up of the power generation equipment to be not only successful but operate safely, and the fact that we can do this in some of the harshest conditions on the planet for field gas, no matter isolation or how we look at it with a field gas, is that this allows us to work with some of the larger suppliers of power to pull them through jointly with what we do and work alongside of them and provide this power. So I think there are going to be a multitude of opportunities very similar to this, and we are hoping that the development of work of some additional power providers opens up some additional opportunities for us inside the data center and some of the more established infrastructure components around AI. Right now, I would say that the horizon looks that direction. It has worked to our liking so far, and we hope to have some more exciting updates on that as it progresses throughout Q1. Jeffrey Scott Grampp: Sounds great, Ryan. I appreciate the details. I will turn it back. Operator: Thank you. Your next question is from Rob Brown from Lake Street Capital Markets. Your line is now open. Rob Brown: Good morning. Congratulations on all the progress. On the Power Services contract, or the PowerTech contract, could you kind of clarify how that contract works? I think you said an initial six-month term, and then options beyond that, and I think you quoted kind of $1 million per megawatt, but just a sense of how that revenue flows and the timing of how you expect that to flow in? Ryan Ezell: Yes. I will tell you we are going to be providing continuous updates on this. Like a lot of these remote power gen processes, we are looking at a little bit of a conservative ramp. Our team has been on location all week. We are expecting to start to see this revenue probably in the starting parts to middle part of Q2, which would be initial mobilization and setup. The power will probably be split over two locations. One is providing power to the current community and its infrastructure and some of the services there, particularly the hospitals and things. Then there is a secondary location that will be powering additional housing that will be built to recover from what was destroyed. That is going to come in, I think, two phases. For us, we expect most of that to start the mobilization pieces in Q2 and start to build throughout the year. It does appear that on our initial offsets, this will have a high probability of progressing past six months, just for the sheer fact it will take longer than that to build the temporary structures of houses. Plus, they are looking at a full installation of an additional power plant at the end. So we are expecting this to get extended and be a good contract win for us. The unique model is that we were initially approached because of our unique capability in terms of conditioning any types or variable types of gas so that they can provide safe fuel source for operational gensets, and I think that allowed us to help go out and work with, call it, these power providers to bring and pull through. So I think we will see a similar model in these disaster relief components. I do not know how much that model works when we look at data centers because those are the big megawatt-type installations, but for these remote areas, it is a favorable business model for us to help work with the power providers on doing that. The other side would just be the pure conditioning aspect. Rob Brown: Okay. Got it. And then just to clarify, I think you said the PowerTech contract that you had was $27 million in revenue. Did that include some of this new award, or would that new award be incremental to that? Ryan Ezell: Yes. The new award is incremental. That is just the original work that we have on a dry lease program for five years, $27 million annually on those, plus an extension in year six at a market rate. The new industrial, or I should say utility services, contract is completely additive on top of that. Rob Brown: Okay. Great. Thank you. I will turn it over. Operator: Your next question is from Gerard J. Sweeney from Roth Capital. Your line is now open. Gerard J. Sweeney: Good morning, Ryan, Bond, Mike. Thanks for taking my call. Ryan Ezell: Hey, Gerard. How are you? Gerard J. Sweeney: I am doing well, thanks. I wanted to touch upon an area that I think you mentioned in your prepared remarks. You are doing, your systems can communicate directly with the engine, and that offers a unique ability to improve engine flow, efficiency, life of the engine. I think you are working with some important engine and turbine manufacturers. Can you go into a little bit more detail on what is happening on that front, and how that opportunity could emerge a little bit further in 2026 and 2027? Ryan Ezell: Yes. This is a really exciting platform for us when we look at applications inside of PowerTech. Without dropping any specific names, I will say the majority of the OEMs that we are working with are the nameplate companies that you see on the majority of these power gen sites, particularly on the reciprocating engine side. Essentially, what we have is, whether you are using a VariX or an XBEG unit, because most of these engines like to see a gas quality measurement once a day or once every few days just to see that they are in an operating realm where they set setpoints for potential adjustment, our capabilities allow data to be fed directly to the OEM engine every five seconds. This allows a closing in of setpoints and operational efficiency to where they really get tuned and dialed in to the best operational parameters to not only improve fuel efficiency and emission standards, but also reduce R&M costs for the engines. For us, there is potential for one unit to feed multiple engines, or we reduce it down to a simplified version of our XBEG units per engine. These projects have been solely focused on engine optimization and improving the overall performance. We would still be able to independently run our gas conditioning upstream from that, where we condition the gas prior to coming to the engine. Technically, it is a separate revenue stream. We have projects with four different OEMs on that at various levels. The longest-standing one has been in the works and research for about 18 months and has progressed pretty far down the road in the advanced field trials. We are hoping to have a little bit more clarity on what a potential long-term relationship looks like there and what that may come back here in 2026. We referenced some of these in a recent social media post with some of the success of the testing here at Flotek Industries, Inc. We are excited about that and do believe those will start to be monetized here probably by midyear, if not the back half of the year, as a potential addition onto a lot of these reciprocating engine operations. Gerard J. Sweeney: Is this a little bit different approach? The power side, obviously you have data centers, fuel gas, or frac fleets, etcetera, but this almost sounds as though this is purely an efficiency opportunity for the engines and improves— Ryan Ezell: 100% correct. The value proposition is there is what the NGS, ESDs, and NGSD do on the broad variety of conditioning, perfect horrible gas into much better operational parameters, and then there is what these individual units do per engine, optimizing the timing, firing sequence, fuel mixture, and everything to work them at their optimum rate to minimize derating or different components there, and then also help them in terms of the potential to reduce R&M maintenance throughout the year. Gerard J. Sweeney: Got it. Switching gears, you are starting to highlight opportunities that you have in the field or deployments. At some point, would you be able to break out or tell us how many Data Analytics units you have in the field for tracking purposes, or would this ever occur, or is that asking too much? Bond Clement: It could be asking too much. Ryan Ezell: It is our intent. We are going to get, and then probably where we are at the end of Q1, we are going to come back with where we are updated on the total number of, when I look at PowerTech, I would say the number of types of skids that we have out and operating, and then also combined with where we are doing measurements to improve distribution and PRV, pressure reduction valve units, etcetera. We will start talking a little bit more about these growth numbers, but what I would say is that if you look at our initial contract we had with the original PowerTech assets, we are progressing nicely to get to that doubling of the fleet in 2025. We will probably, as we start to initiate our guidance like we traditionally do at Q1, give an update on where that stands so it will help you align the guidance. Gerard J. Sweeney: Got it. I appreciate it. Congrats on a good quarter too. Thank you. Bond Clement: Yep. Thanks. Operator: Thank you. Your next question is from Donald Crist from Johnson Rice. Your line is now open. Donald Crist: Morning, guys. Ryan, on that last point of the PowerTech units, just to be clear, I believe you bought 22 or so from ProFrac, but then they were delivering another 8, so the doubling would be off that 30 number, right? Ryan Ezell: Yes. We actually received, we had all 30 units by, I am going to say, November time frame of Q4 is when we had taken them all in. So the number we are talking about, Don, is we have 30 individual units that make up what we call 15 pairs of operating assets, and our goal is to double that number based on the 30, or 15 pairs. Donald Crist: Okay. Just to be clear, and I wanted to touch more broadly on just the construction of whether it would be custody transfer units or skids or the carts that you put out for the flares. Just how is all that going? And I guess one for Bond, in addition to that, is how do we look at CapEx for this year? I am guessing it will not be that big, but just any kind of rough parameters would be helpful. Ryan Ezell: What I would say in terms of lead times here is that the absorption of XBEG units and our newer technology that we call the 2C unit, which is a dual-channel VariX, have been well received post the GPA 2172 passing of the standard. We have seen great progress. We sold out of the 2C units by February, and so we have advanced capital builds on a multitude of those, as well as XBEG units. We have advanced capital to those to start, really, because we are seeing some strong deployments where traditionally, Don, when we first had acquired or brought the Data Analytics division in, we were selling these things one to two off at a time. We are now starting to receive POs of double-digit numbers at a time. Some unique things about the way our operating system VariX works, some of the advancements we made in the software really helps to integrate these units and show day-to-day, within-the-hour value creation of those. We are seeing significant adoption and absorption of those. I would say we are not at a supply constraint yet, but what we are doing is we are making aggressive steps to rapidly expand that ahead of what we were thinking by this time in the year, and so we are allocating capital. Bond Clement: Yes, Don. Certainly, I think 2026 is going to be the largest year of CapEx we have had in quite a long time. I think our CapEx in 2025 was somewhere around $2 million. Just rough numbers, we would expect CapEx for 2026 to be somewhere between $10 million and $15 million. Obviously, from a funding perspective, we have the OSP, and then as it relates to equipment financing, we are evaluating options there as well. Donald Crist: Right. And that OSP should— Bond Clement: And that OSP should— Donald Crist: Right. More than double cover that $10 million to $15 million that you have to put out, right? And that should all come in the first quarter. Bond Clement: It will not double. The OSP, remember, we had a $7 million offset related to the PowerTech transaction, which was effectively deferred consideration. When you look at what the net OSP is at the end of the year, it is right at $20 million. But it surely goes a long way and satisfies from a cash or equipment perspective. Donald Crist: Right. And you will have cash flow through the year as well. So not a big deal there. And Ryan, I did want to ask, there is a lot of impact in the Middle East right now from what is going on with the hostilities, but you have spent a lot of time over there, and you sell a lot of chemicals into there. Just an update on how much product you have on the ground and the options of moving shipments, rather than going through the Strait, to other ports, maybe Egypt or something like that, and then shipping them in. Any kind of thoughts around that? Ryan Ezell: What I would say is I kind of stage these in pieces. Number one, the current operations have been going very well. We have had our operation teams on the ground, and we picked up some of that unconventional work that we have been speaking of, particularly in the Kingdom. It has picked up and is running very well, probably to the upper end of our expectation, and we are seeing a solid growth there. Just as we are starting to see that, we are starting to see, as you can imagine, the supply constraints in all the traditional sailing vessel methods that we would deliver, whether coming from inside the GCC and/or us bringing other chemicals in. Some of our specialty stuff has been a bit strained as of late, particularly due to the Straits and Houthi pressure, etcetera. We are identifying alternative pathways that will probably, in the near term, have a little bit of additional cost because they have to be touched twice. But our goal is to be a solid working partner for our customers there, and we have been ahead of this by about a month or two because we were concerned that this might happen. I do think right now our supply is relatively stable at this point, but there is no doubt that we are going to be all hands on deck, and we are going to utilize the multiyears of experience that we have in global supply chain and our expertise of being on the ground there and from the past to understand how we get there and level out. I do think we are going to use an alternative delivery method than the traditional sailing routes that we were doing, which will probably include a cross-country trucking methodology. We have done this before, Don. Also, the initial move out of there, we had some issues around COVID when we first sent chemicals in. We are familiar with this alternative pathway. It is just not the best on the margin profile, but we will make it work in the near term to make sure that we stay rolling with that revenue opportunity. Donald Crist: Okay. But just to be clear, other than some excess shipping costs, activities basically are unchanged right now, right? Things will move. Ryan Ezell: We have not seen much disruption in KSA. We have seen a few things that we were doing on the Data Analytics side, some measurement installs in UAE, and a few of those get pushed back a few weeks just because of the location and different pieces. Right now, we are having calls—Leon and the team are having calls basically every morning—and we are steadily running in KSA right now because the majority of this Jafarah field is used locally for energy inside the country. It will keep running pretty steady. Our bigger customers there, I would say it is business as usual, all things considered with the instability to their neighboring countries, but they are full speed ahead right now. Bond Clement: I will just caveat that a little bit. That is based upon what we know today, Don. It could change if this thing expands or extends. Donald Crist: Right. I get it. That is what I am hearing too, it is pretty much business as usual unless you are really on the coast. That is about it. I appreciate the color, guys. I will turn it back. Operator: Thank you. Your next question is from Josh Jain from Daniel Energy Partners. Your line is now open. Josh Jain: Good morning. Thanks for taking my questions. First one is just on the Chemistry side. Obviously, commodity prices are volatile, but wherever oil settles out over the next few weeks, hopefully in the next few weeks, any thoughts on how operators are ultimately likely going to handle sort of a higher commodity price deck than they were thinking coming into this year? I know you have not given guidance yet for the rest of the year, but I think the world was thinking sort of flattish CapEx, and that is what these guys have announced. Maybe just any insight, are you seeing more demand for Chemistry heading into the back half of this year and 2026 than you might have been thinking three to six months ago? Maybe just some thoughts there. Ryan Ezell: That is a great question, and it probably is as in-depth as I could look into the hazy crystal ball. Let me talk about things that I do see in the industry. I talked about them a little bit in terms of when you look globally around, you are going to see we still see the potential for demand to increase in that medium to long term, if not a little bit sooner, and you see that supply rebalance. What we are seeing is that there is definitely a reduction in the decline curve contribution because you have such a large percentage of unconventionals contributing to that stack. You are also seeing a little bit of decline in reservoir quality, which would tell me what they are focused on is getting the most out of what work they are doing, which means leaning in towards advanced technology, creating technologies, or stuff that improves overall performance. All those things lay into the wheelhouse of what we do well by providing real-time data measurements, making choices for that in our prescriptive engineering process with our PCM business. All those things work really well with what we want to do. Not only that, when you look at product margin basis, they typically run at a little bit better margin for us throughout the cycle. The interesting part is there is no doubt when you look at the products that we sold in Q4 of this year, we saw the frac fleet get to the lowest that it was since probably Q2 2021 coming out of COVID. We saw commodity prices around the same thing, but our revenue was eight times more than it was then, and we made significantly better gross profit. We have shown that resiliency through the cycle, and what I believe is we are going to continue in this near term to see a little bit of softness in the demand for the Chemistry parts, but I think we see that upside potential maybe in the back half of the year to start to answer some of the call here, and I think that will require some of the advanced technologies that Flotek Industries, Inc. is poised to position. The level of that, it is hard to say right now, but I do see a little bit of silver lining in the back half of the year and as we look at 2027. Bond Clement: I will just add one thing, Josh. I think it is going to be interesting to see how producers react relative to the hedge market. Obviously, the curve is still pretty backwardated, but I think, generally, even looking out past the spike out to the latter months, those numbers are probably a good bit higher than what expectations were for oil coming into the year. If operators have the opportunity and go ahead and lock in those prices over a longer term, obviously that underwrites higher CapEx. Josh Jain: For sure. I appreciate the color. Thanks for taking my question. Operator: Thank you. Your next question is from Gao Xi from Singular Research. Your line is open. Gao Xi: Good morning, gentlemen. Can you all hear me? Ryan Ezell: Yes. Gao Xi: Congrats on a strong year and continued execution. On your expected Data Analytics drive to be more than half of the company profitability, if we think about that qualitatively, how sensitive is that mix target to the timing of a few large PowerTech wins, or is that 50% threshold achieved even if a couple of projects slip right to the end of the calendar? Bond Clement: If you look at the fourth quarter, we were effectively there at 48% gross profit from Data Analytics. Just thinking about how the PowerTech lease agreement, which we talked about, will be 70% higher in 2026 versus 2025 just due to longer duration for the full year versus a partial year last year, we feel extremely confident we are going to exceed 50% in 2026 on the DA side. Operator: Thank you. There are no further questions at this time. I will now hand the call back over to Mike Critelli for the closing remarks. Mike Critelli: Thanks, Jenny. Join us at some of our upcoming investor events. On March, we will be at the 38th Annual ROTH Conference at Dana Point, California, taking one-on-one meetings with investors and participating in energy industry fireside chats. On May 26 to the 28th, you can catch us at the Louisiana Energy Conference taking meetings and giving an investor presentation. For all other events and the latest info, look at the events section of our website. We would like to thank everyone for joining us today, and stay with us as we continue on our convergence of real-time data and chemistry solutions. Thank you. Operator: Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the DICK'S Sporting Goods, Inc. Fourth Quarter and full year 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star then the number one on your telephone keypad. And if you'd like to withdraw your question, again, star one. I would now like to turn the conference over to Nathaniel Gilch, Vice President of Investor Relations. Nate, the floor is yours. Good morning, everyone. Nathaniel Gilch: And thank you for joining us to discuss our fourth quarter and full year 2025 results. On today's call will be Edward Stack, our Executive Chairman; Lauren Hobart, our President and Chief Executive Officer; and Navdeep Gupta, our Chief Financial Officer. A playback of today's call will be archived on our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K, as well as cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find the reconciliation of our non-GAAP financial measures referenced in today's call. And finally, a couple of admin items. First, a quick reminder on our comparable sales reporting. Foot Locker will be included in our comp calculations beginning in Q4 2026, which will mark the start of their 14th full month of operations post acquisition. And second, for future scheduling purposes, we are tentatively planning to publish our first quarter 2026 earnings results on 05/27/2026. I will now turn the call over to Edward Stack. Edward Stack: Thanks, Nate. Morning, everyone. As we shared this morning, we closed the year with another strong quarter for the DICK'S business, delivering comps over 3% and double-digit non-GAAP EPS growth. Our team's execution and our ability to consistently deliver a differentiated, on-trend product assortment and best-in-class omnichannel athlete experience continue to produce strong results and market share gains. We believe these fundamentals position the DICK'S business for long-term profitable growth. Now I would like to turn to the transformational opportunity we have with Foot Locker, where we continue to make significant progress in strengthening the business. We have now owned Foot Locker for about six months, and I will tell you, our excitement and our conviction in the long-term opportunity here continue to grow. We have moved quickly to test and learn in North America through what we call our Fast Break initiative. This is the evolution of the 11-store pilot we discussed last quarter. While it is still early, we are very encouraged by what we are seeing. During Q4, our Fast Break stores drove very strong positive comps, actually meaningfully exceeding the DICK'S business, while also delivering strong gross margin improvement. The improvement is coming from the basics: clearer storytelling, better presentation, and a more focused assortment where we removed roughly 30% of the styles on the shoe wall that were unproductive and eliminated the run-on sentence that we have been talking about that was not showing the customer what product was important. Based on the strength of the pilot results, we have already expanded Fast Break to an additional 10 stores in LA before the NBA All-Star Game, and we are very pleased with the strong early performance. Now looking ahead, we are excited to rapidly scale Fast Break by back-to-school 2026. As discussed last quarter, our first priority was to clean out the garage, starting with addressing unproductive inventory. The team moved quickly and decisively to get this done, and we are pleased to report that the inventory cleanup is now essentially complete. That work drove the fourth quarter profitability results we told you to expect. As part of this process, we also leveraged DICK'S value chain to efficiently clear product. We are also pleased that Q4 sales came in better than expected. We believe that Foot Locker's inventory is now well positioned. With this heavy lift behind us, we are set up to play offense and deliver the inflection point we expect to see in this business starting with back-to-school. Another key part of cleaning out the garage is our review of the global Foot Locker business store fleet. We continue to assess underperforming locations, but we anticipate our closure list is now much smaller than we initially estimated. We have identified opportunities to reposition and improve profitability in a meaningful number of stores, informed in large part by the success we are seeing in our Fast Break locations. Importantly, one of the many things that gives us great confidence in the future of the Foot Locker business is what we are seeing from our brand partners. They are leaning in, aligned with our vision, and eager to support a thriving, growing Foot Locker. You can see that already in moments like our NBA All-Star activation with Nike, Jordan, Adidas, and others, where we partnered closely to bring a series of sought-after launches that drove exceptional sell-throughs. We also had NBA talent appearances and community experiences for the Foot Locker consumer throughout LA. Our team executed exceptionally well, and together with the support of our brand partners, we drove sales that meaningfully eclipsed last year's event. At DICK'S, we have built an industry-leading business by focusing on product, performance, innovation, and customer loyalty, always with a long-term view. We are applying that same proven playbook to the Foot Locker business and making the choices we believe will create the most long-term value for our shareholders. For 2026, we expect Foot Locker to deliver growth and comp sales of between 1% to 3% and operating income in the range of $100,000,000 to $150,000,000. We continue to anticipate an inflection point for both sales and profitability beginning with the back-to-school season. In closing, we remain very confident that DICK'S and Foot Locker are stronger together. This combination gives us more scale, deeper relationships with the most important brands in our industry, access to consumers we did not reach before, and a global footprint. For Foot Locker, the benefits of our combination come through in very real ways. Brands matter. Product matters. Execution matters. And people matter. When those things come together, we believe Foot Locker will be restored to its rightful place in the industry. Before I turn it over to Lauren, I want to thank our more than 100,000 teammates across the globe for their commitment and their execution every day. I will now turn the call over to Lauren Hobart. Lauren Hobart: Thank you, Ed, and good morning, everyone. I want to emphasize Ed's comments and recognize the incredible work of our teams across our entire company who contributed to our success throughout this past year. I am so proud of what we achieved together in 2025. Looking specifically at the DICK'S business, our teammates' passion, their commitment to our athletes, and a relentless focus on execution powered another strong quarter and holiday season and a terrific year overall. Their hard work continues to bring our four strategic pillars to life: a compelling omnichannel athlete experience, a differentiated on-trend product assortment, a deep engagement with the DICK'S brand, and the strength of our teammates and our culture. These pillars remain the foundation of our success and guide our strong performance. For the full year, we are very pleased to have delivered record sales of $14,100,000,000 for the DICK'S business. Our comps increased 4.5% and exceeded the high end of our expectations, driven by growth in average ticket and transactions as we continue to gain market share. We drove gross margin expansion and achieved double-digit operating margin of 11.1%. We delivered non-GAAP EPS of $14.58, also above the high end of our outlook and up from $14.50 in 2024. Our fourth quarter marked a strong finish to the year for the business. Our Q4 comps increased 3.1%, building on last year's 6.6% increase and delivering a two-year comp stack of nearly 10%. We saw more athletes purchase from us, and they spent more each trip compared to the prior year. Our Q4 gross margin expansion accelerated sequentially and we drove operating margin of 11%, and non-GAAP EPS of $4.05, both well ahead of last year. Today, the intersection of sport and culture has never been stronger, and excitement continues to build. This momentum kicked off with the expanded college football playoffs, record-breaking interest in women's sports, and a strong Team USA performance in the recent Winter Olympics. And with most of the 2026 World Cup matches on US soil this June and July, the 2028 Summer Olympics in LA on the horizon, and the Ryder Cup returning to the US in 2029, we are entering one of the most compelling multiyear periods for sport in this country's history. Our athletes are energized. They are investing in the products and experiences that fuel their passion. And DICK'S sits squarely at the center of that intersection. With this position of strength, we entered 2026 with tremendous conviction in the opportunity ahead, and our priorities for the DICK'S business are clear. We continue to drive growth across our key categories. This is fueled by the powerful relationships that we have with our national brand partners, the energy from new and emerging brands, and the continued momentum of our vertical brands. We are also continuing to reposition and elevate our real estate and store portfolio through House of Sport and Fieldhouse. Now five years into this journey, our conviction in these innovative concepts has never been stronger. House of Sport and Fieldhouse have redefined the athlete experience, strengthened our relationships with existing brand partners, opened doors to new partnerships, and delivered strong financial performance. This past year, we made tremendous progress on this front. We opened 16 new House of Sport locations, ending the year with 35 locations nationwide, and also opened 15 new Fieldhouse locations, bringing the total to 42 across the country. We are really excited to see the impact of scaling these powerful concepts. Looking ahead, landlord interest remains extremely strong, giving us access to some of the best retail locations in the country. In 2026, we plan to open approximately 14 House of Sport locations and approximately 22 Fieldhouse locations. In addition, our focus on serving athletes is very strong, and we are really accelerating our work here. Our common purpose is to make sure that athletes feel confident and excited before, during, and after they engage with our team, our products, and our experience. We are creating more consistency across channels in how we help our athletes find the right solutions. Whether they are using better search and reviews online, tapping into new digital tools in the store or in the app, or working directly with our teammates, their experience is becoming more personalized and more connected. In our stores, we are evolving our service and selling culture. We are putting a bigger emphasis on relationship building and giving teammates better training and tools. And while this is very much an ongoing journey, the feedback has been incredibly encouraging. Lastly, as part of our broader digital strategy, we are harnessing the power of our athlete data and continue to be enthusiastic about the long-term opportunities we see with GameChanger and the DICK'S Media Network. With all this in mind, for 2026, we expect to drive continued comp growth, strategic expansion of our square footage, and strong profitability for the DICK'S business. We anticipate our comp sales to be in the range of 2% to 4%, which at the midpoint represents a 7.5% two-year comp stack. We expect operating margins for the DICK'S business to be approximately 11.1% at the midpoint. At the high end of our expectations, we expect to drive approximately 10 basis points of operating margin expansion on a non-GAAP basis. At the consolidated company level, we expect full-year non-GAAP earnings per diluted share in the range of $13.50 to $14.50. In closing, we are entering 2026 with powerful momentum in the DICK'S business, and our focus here is unwavering. The opportunity ahead for DICK'S remains tremendous, and we are firmly positioned to capture it. With that, I will now turn the call over to Navdeep Gupta to share more detail on our financial results and our 2026 outlook. Navdeep, over to you. Navdeep Gupta: Thank you, Lauren, and good morning, everyone. To start, I want to echo Ed and Lauren's excitement as we enter 2026 with real strength and momentum. Now let us begin with some highlights for full year 2025 results. Consolidated net sales increased 28.1% to $17,220,000,000, driven by a $3,110,000,000 sales contribution from a partial year of owning the Foot Locker business and a 4.5% comp increase for the DICK'S business as we continue to gain market share. These strong comps were driven by a 4.2% increase in average ticket and a 0.3% increase in transactions. On a two-year and a three-year stack basis, comps for the DICK'S business increased 9.7% and 12.3%, respectively. Consolidated non-GAAP operating income was $1,520,000,000, or 8.81% of net sales, compared to $1,500,000,000, or 11.14% of net sales last year. This includes operating income of $1,570,000,000, or 11.12% of net sales for the DICK'S business, driven by strong comps and gross margin expansion, and a $52,200,000 operating loss from a partial year of owning the Foot Locker business. Consolidated non-GAAP earnings per diluted share were $13.20, which included just over 20 weeks of results for the Foot Locker business and a diluted share count of 85,100,000. Looking specifically at the DICK'S business, we delivered non-GAAP earnings per diluted share of $14.58 based on the share count of 81,200,000, which excludes the dilutive effect of the shares issued in connection to the acquisition of Foot Locker. That exceeded the high end of our guidance and is up 3.8% from our earnings per diluted share of $14.05 last year. Now moving to our results for Q4. Consolidated Q4 net sales increased 59.9% to $6,230,000,000, driven by a $2,180,000,000 sales contribution from the newly acquired Foot Locker business and a 3.1% comp increase for the DICK'S business. These strong Q4 comps were on top of last year's 6.6% comp and were driven by a 4.4% increase in average ticket, partially offset by a 1.3% decline in transactions. On a two-year and a three-year stack basis, comps for the DICK'S business increased 9.7% and 12.6%, respectively. In terms of the category performance, we saw broad-based strength across our three primary categories of footwear, apparel, and hardlines. For reference, pro forma comp sales for the Foot Locker business in Q4 decreased 3.4%. On a non-GAAP basis, consolidated gross profit for the fourth quarter was $1,990,000,000, or 31.93% of net sales, down 303 basis points from last year. For the DICK'S business, gross margin expansion accelerated sequentially, increasing 67 basis points, driven entirely by higher merchandise margin. Notably, the year-over-year decline in consolidated gross margin was driven entirely by the mix impact from the Foot Locker business. On a GAAP basis, in connection with cleaning out the garage, our actions to optimize Foot Locker's inventory that align with our go-forward vision unfavorably impacted gross profit by $218,000,000. This was in line with our expectations. On a non-GAAP basis, consolidated SG&A expenses for the fourth quarter increased 60.5%, or $579,200,000, to $1,540,000,000, and deleveraged nine basis points compared to last year's non-GAAP results. $549,500,000 of this consolidated increase was driven by the Foot Locker business. For the DICK'S business, SG&A expense dollars increased 3.1% and leveraged 22 basis points. Consolidated non-GAAP operating income for the fourth quarter was $438,600,000, or 7.04% of net sales, compared to $393,000,000, or 10.09% of net sales last year. For the DICK'S business, operating income was $444,500,000, or 10.97% of net sales. This quarter's consolidated results included a $5,900,000 operating loss from the Foot Locker business, which was in line with our expectations. Moving down the P&L, consolidated non-GAAP income tax expense was $114,800,000 at a rate of 26.8%. This was favorable to our expectations largely due to the mix of earnings across jurisdictions resulting from investments we are making in Foot Locker's EMEA business to improve its future profitability. In total, we delivered consolidated non-GAAP earnings per diluted share of $3.45 for the quarter. These results included non-GAAP earnings per diluted share of $4.05 for the DICK'S business, based on the share count of 81,200,000, which excluded the dilutive effect of the shares issued in connection with the Foot Locker acquisition. This is up 11.9% from earnings per diluted share of $3.62 for Q4 last year. At the consolidated level, the DICK'S business results were partially offset by the contribution from the Foot Locker business, which includes a $0.44 negative impact from higher share count due to the acquisition and a $0.16 negative impact from Foot Locker operations. On a GAAP basis, our earnings per diluted share were $1.41. This includes $235,500,000 of pretax Foot Locker acquisition-related costs and a $13,400,000 pretax asset write-down. For additional details, you can refer to the non-GAAP reconciliation tables from our press release that we issued this morning. Now looking to our balance sheet, we ended the year with approximately $1,350,000,000 of cash and cash equivalents and no borrowings on our $2,000,000,000 unsecured credit facility. We ended the year with approximately $4,910,000,000 of inventory, which includes the Foot Locker business, and represents a 47% increase compared to last year. For the DICK'S business, inventory levels increased 1% compared to last year. We believe our inventory is well positioned to continue to fuel our sales momentum, which we expect to carry into 2026. Turning to fourth quarter capital allocation. Net capital expenditures were $302,000,000 and we paid $108,000,000 in quarterly dividends. We also repurchased 218,000 shares of our stock for $43,000,000 at an average price of $199.51. Before I move to our outlook, I want to address a few key expectations surrounding the Foot Locker acquisition. First, as we discussed last quarter, our immediate priority has been to clean out the garage and optimize the inventory assortment and store portfolio of the Foot Locker business. As part of these actions and broader merger and integration work, we previously estimated and continue to expect total pretax charges of $507,150,000,000. During 2025, we recognized $390,000,000 of these charges. The remaining pretax charges will be incurred over 2026 and the medium term as we complete this work. Approximately $150,000,000 of these remaining charges are expected in 2026 and are excluded from today's non-GAAP EPS outlook. Second, we remain confident in achieving the previously announced $100,000,000 to $125,000,000 of cost synergies over the medium term, primarily from procurement and direct sourcing efficiencies. A portion of these synergy benefits are expected in 2026, which have been reflected in our outlook. Now moving to our outlook for full year 2026. Our guidance reflects continued strength and momentum of the DICK'S business and the turnaround efforts underway at Foot Locker, all within the context of the dynamic geopolitical and macroeconomic environment. Beginning with the DICK'S business in 2026, total sales are expected to be in the range of $14,500,000,000 to $14,700,000,000, and as Lauren mentioned, we anticipate comp sales growth of the DICK'S business in the range of 2% to 4%. From a pacing standpoint, we expect slightly higher comps in the first half, driven in large part by the timing of the World Cup. Preopening expenses are expected to be approximately $90,000,000 for the full year. We expect operating margin for the DICK'S business to be approximately 11.1% at the midpoint. And at the high end of our expectations, we expect to drive approximately 10 basis points of operating margin expansion on a non-GAAP basis. From a pacing standpoint, we expect operating margins for the DICK'S business to decline in the first half and expand in the second half due to the timing of the planned investments and synergy savings. Now turning to the Foot Locker business in 2026. As Ed discussed, we remain confident in the value creation of this business. Total sales are expected to be in the range of $7,600,000,000 to $7,700,000,000. Pro forma comp sales for the Foot Locker business are expected to be in the range of 1% to 3%. We expect operating income for the Foot Locker business to be in the range of $100,000,000 to $150,000,000. And from a pacing standpoint, we expect operating income performance to be back-half weighted as the pro forma comps and gross margins start to strengthen from back-to-school onwards. At the consolidated company level, we expect full-year non-GAAP operating income in the range of $1,680,000,000 to $1,810,000,000 and non-GAAP earnings per diluted share in the range of $13.50 to $14.50. Our earnings guidance is based on approximately 91,000,000 average diluted shares outstanding, which includes the dilutive impact of 9,600,000 shares issued in connection with the Foot Locker acquisition. We anticipate a consolidated company effective tax rate of approximately 25.5% for the full year. We expect interest expense of approximately $70,000,000 and interest income to be in the range of $20,000,000 to $25,000,000. I will now discuss our capital allocation priorities. For 2026, our capital allocation plan includes net capital expenditures of approximately $1,500,000,000. Starting with the DICK'S business, as we continue to reposition our real estate and store portfolio, our investments will be concentrated in store growth, relocations, and improvements in our existing stores, plus some ongoing investments in technology and supply chain. As Lauren noted, we are very excited to open approximately 14 House of Sport locations and approximately 22 DICK'S Fieldhouse locations in 2026. In addition, we plan to begin construction on approximately 18 House of Sport locations that are expected to open in 2027. House of Sport and DICK'S Fieldhouse remain two of our most powerful and long-term growth drivers, and we will continue expanding these formats with discipline. In 2026, we are also excited to grow the footprint of our 15 Golf Galaxy Performance Center locations. Now turning to the Foot Locker business. Capital expenditures in 2026 will be focused on reenergizing our store fleet, including the rapid expansion of our Fast Break initiative. We also remain committed to returning significant capital to our shareholders through our quarterly dividend and opportunistic share repurchases. Today, we announced a 3% increase in our quarterly dividend to an annualized payout of $5.00 per share, or $1.25 on a quarterly basis. This marks the twelfth consecutive year that our shareholders have benefited from a dividend increase. Our 2026 plan includes our expectation for share repurchases to offset normal-course dilution, the effect of which is included in our EPS guidance. In closing, we enter 2026 with powerful momentum in the DICK'S business and a clear path to improve performance at Foot Locker. We remain focused on execution, committed to creating durable value, and confident in the year ahead. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods, Inc. Operator, you may now open the line for questions. Operator: Thank you. We will now begin the question and answer session. We kindly ask that you limit yourself to one question and one follow-up. Any additional questions, please re-queue. Your first question comes from the line of Brian Nagel with Oppenheimer. Please go ahead. Brian Nagel: Hi. Good morning. Congratulations on a nice quarter. Nice progress here. Again, I want to ask you maybe a two-part question, with both parts focused on core DICK'S business. So first, if you look at the guidance you laid out for sales growth for DICK'S, it is very solid, above the current public Street forecast. I guess the question I had there is, and you talked about this a little bit, maybe elaborate further, what is giving you that confidence in the underlying momentum? And then the follow-up question also on DICK'S. When you look at the fourth quarter, not to be too nitpicky here, but obviously a very solid quarter, there was a modest deceleration within sales growth of the core DICK'S business from what we saw in the third quarter. Maybe you can discuss what was behind that. Lauren Hobart: Thanks, Brian. I appreciate the question. We had a fantastic quarter in Q4. We are really proud of the quarter we just put up. We had a 3.1% comp growth and, importantly, we were on top of the prior year 6.6% comp. So on a two-year stack basis, we actually exceeded our internal expectations. We were close to 10%. So it was a really strong quarter from a comp standpoint. We also expanded gross margin and operating margin in the business. So overall, really proud of how the team navigated through Q4. But I think why that gives me confidence as we look to the future is that the momentum in our business remains incredibly strong. And in this past Q4, we saw growth across all of our key categories: footwear, apparel, hardlines. And we are finding that consumers are doing very, very well. So we have seen growth across all income demographics. We have not seen trade down. And we are finding that when a consumer sees something that is new, or innovative, or technically impactful, it is resonating with them, and they are coming. We think that is only going to continue as we look to the year and the incredible excitement around sport and the influence it has on culture as we head into the World Cup coming up—well, March Madness and then the World Cup. So we are really, really confident. The two-year stack going forward is a 7.5% comp, so 2% to 4% on top of our 4.5%. And we are really thrilled with the momentum we have to deliver that. Brian Nagel: Thanks, Lauren. I appreciate all the color. Operator: Your next question comes from the line of Adrienne Yih with Barclays. Please go ahead. Adrienne Yih: Good morning, and I will add my congratulations. Very well done. Great way to end the year and start the new one. Thank you. It sounds like there is a lot of exciting work underway at Foot Locker to reposition the business for its turn in 2026. On top of that, the Q4 results came in better than you saw, particularly sales, and margins were in line. So my question centers around the cleaning out of the garage, which you expressed last quarter as your top priority. It sounds like inventory is nice and clean. How would you characterize where you are? Is there more work to do? And how many stores will be in this Fast Break that you can touch this year? And then I will have a follow-up. Thank you. Edward Stack: Thanks, Adrienne. I can tell you that the team across the globe did a great job to clean out the garage. There was a lot of excess inventory there, inventory that was not very productive. Like we said in the Fast Break stores, we took out roughly 30% of the SKUs and kind of fixed that run-on sentence that was the Foot Locker shoe wall. The team across the globe—North America, Europe, Asia—really got behind this whole clean out the garage objective and did that. To be honest with you, that work is done. That is behind us. We cleaned out the garage with markdowns in the stores and moved product through the Foot Locker stores and the Champs stores. We also utilized—I think this is one of the benefits of the acquisition between DICK'S and Foot Locker—we actually utilized the DICK'S value chain of Going, Going, Gone to clean out a lot of that inventory. We were able to recover a higher cash amount by putting it through the DICK'S value chain than if we sent that out through a jobber, and we are really well positioned. This inventory of Foot Locker is probably cleaner than it has ever been. And that should bode well for our margins and our sales going forward, returning this chain to growth with a comp of 1% to 3%. We should have margin expansion here. We are confident of that. So all in all, to clean out the garage, the team did a great job, and we are done. Adrienne Yih: Fantastic. Follow-up, Lauren. As you look at the innovation pipeline throughout 2026, particularly in technical running and performance basketball, are you seeing a meaningful shift back toward iconic must-have products from your biggest traditional partners, or should we expect growth still to be driven by the addition and growth of new, smaller niche brands? Thank you. Lauren Hobart: Yes. Thanks, Adrienne. We are seeing growth across the board. We are seeing great growth from our strategic partners, and we are very excited about things like running footwear, the innovation that we are seeing, the new Run Construct from Nike doing very well, and across the board running is really doing well. Signature basketball is also doing really, really well. And that is true, of course, of DICK'S and Foot Locker. With DICK'S, we are particularly excited about the excitement around women's sports, and Sabrina and A'ja have done so well, and then we look forward and Caitlin coming is going to be a lot of excitement. Team sports are also driving incredible buzz in a way that it used to be footwear launches that used to drive this kind of excitement. We are seeing that in team sports and all aspects of our business. And so between new and emerging brands, we are adding through the House of Sport partnerships with really exciting brands. We have Gymshark, where we are their first US wholesale partner, and a lot of brands who have come in through the House of Sport who are now widening into Fieldhouse locations and then even beyond to the entire DICK'S format. So I would say what is great about the growth is it is across the board in all categories, and it is also across the board between our strategic partners, our emerging partners, and our vertical brands. Edward Stack: If I could just add on to that, as Lauren said, Nike is doing very well. We are really pleased with them. Adidas, and we are leaning into the World Cup with Adidas, and we think the World Cup is going to be great. And with Fanatics, we have really partnered on the collectibles and the card side of the business, the trading card business. We will have collectible shops in all House of Sport stores going forward, bringing those into some of the Fieldhouse concepts. So this whole idea of collectibles and trading card business, which we have not been in before, will certainly be accretive to our sales number. Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead. Simeon Gutman: Hey, good morning, everyone. So the business is performing solidly. If we step back, call it three months ago, I would have suggested or thought that the core business margin might be a little stronger given some of the House of Sport penetration and the continued gross margin gains. And then Foot Locker, I would expect a little bit more EBIT to get to that accretion number. Curious how you react to all of that. Is that fair? And is that different versus the way you see it? Edward Stack: Let me jump in on the Foot Locker piece first, Simeon. We could have guided Foot Locker to be higher if we had based it on our original projections. But what has happened is we have gone through this Fast Break process. We have got the original 11 Fast Break stores. We added 10 Fast Break stores in LA around the All-Star Game. We have got a couple of Fast Break stores in Europe right now. And what we found is some of those underperforming stores that are losing money or just marginally profitable right now—based on what we are seeing we can do from a Fast Break standpoint and renovating these stores—we can make these stores very profitable. So we are closing fewer stores than we had originally anticipated. If we had decided to close those stores, Foot Locker could have been a bit more profitable in Q1 and Q2. It is going to take us a little time to get these Fast Break stores done and get to all of them that we want to get to. But we will get to probably 250 of these stores by back-to-school. It is a herculean effort, but we are really confident that we can do that. So the reason the Foot Locker outlook is where it is right now is because Fast Break, and the optimism we have for Foot Locker, is even greater than it was originally because some of these marginally profitable or money-losing stores, if we feed them the right inventory, we can make them profitable. We think that is the right thing to do on a longer-term basis. Navdeep Gupta: I will just build on quickly. The guidance that we provide always balances the optimism and the confidence that we have against the overall macroeconomic and geopolitical situation. As you can see, it is very dynamic, and so that was another thing that we factored into our guidance. Quickly touching on your gross margin expansion in Q4, we were very happy with the results we posted here. And like Lauren said, 3.1% comp on top of a 6.6% comp, in a quarter that is typically very promotional. We were very happy with the 67 basis points of margin expansion we posted here in Q4. And keep in mind, this 67 basis points of margin expansion all came from merchandising margin. So our merchants and the inventory management team did a phenomenal job to finish the year strong from a clean inventory and driving top-line momentum as well as gross margin expansion. Edward Stack: And I think, Simeon, also, it was more promotional out there than we had anticipated, and I think the team did a fabulous job managing our margin rates and the profitability of the business and the operating margins in an environment that was as promotional as it was. Simeon Gutman: That is helpful. And just to clarify, I guess when I meant the margin, I was actually looking more towards 2026, like the full year. I think the fourth quarter was quite solid. But the follow-up is first half or second half. I do not know if you would share what you have thought about for World Cup, if there is an explicit top-line impact? And then are some of the investment spending related to core? Or is there some spend even ahead of World Cup where your margin ends up ramping more in the second half than the first half? Navdeep Gupta: Yes. So, Simeon, in what we gave in my prepared comments today is that we expect the comps to be slightly higher in the DICK'S business in the first half because of the World Cup benefit. We did not explicitly guide to the exact number associated with it, but that is what was assumed in our guidance that we have shared. And then we expect the operating margins to decline in the first half due to two big reasons. One, we are making appropriate levels of investments in the business to continue to position the business for the long term. And second, the synergy benefits that we are looking at will be more back-half weighted, and so that is the other benefit that kicks in more in the second half than in the first half. Operator: Your next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead. Kate McShane: Hi. Good morning. Thanks for taking our question. We wanted to ask about GameChanger and retail media. I know you mentioned it in the prepared comments a little bit, but we wondered if there was any way you could talk about any new initiatives maybe with either business, and then just in terms of what we can expect from margin contribution from that this year. Lauren Hobart: Thanks, Kate. GameChanger and DMN are both really important, powerful new assets that we have in our portfolio. I will start with GameChanger. As you know, GameChanger is the market leader in the multibillion-dollar tech sports space, and it continues to drive really strong comps—nearly 40% CAGR—and strong profitability. It is a SaaS system, and it continues to drive strength and profit. So you can look at it that way and say GameChanger is fantastic. But then when you step out and look at the impact that GameChanger and DICK'S can have together—the fact that we can be embedded in youth sports lives at the moment when they are preparing and playing—we can be involved with parents and grandparents. We can have kids get their stats and their highlight reels. It just makes us really embedded in youth sport culture. The other thing, and it is related to your second part of your question, is that from a DICK'S Media Network standpoint, GameChanger is unique in the marketplace where it has live sports in a way that really nobody else can provide. And so it is a big asset for our DICK'S Media Network, and it is appealing to our brand partners as well as to our non-endemic partners who want to be a part of youth sports. In terms of newness, we did just unleash a bunch of features in GameChanger. For those of you who watch, the video quality is high definition—really incredible, really crisp, really clear. And we are going to continue to launch. We have coaches’ tools that we just launched. And with DMN, the tech team has done an amazing job really building automation so we can attribute sales to our partners’ investment. So all in all, really exciting parts of the business. Navdeep Gupta: And, Kate, I will just build on what Lauren said. The underlying drivers of the gross margin that we have talked about for some time now continue to remain in place in terms of the product that we have access to—not only just in 2026, but what we see in the pipeline—the work that our vertical brands team is doing as well as GameChanger and DMN. These are still the inherent drivers of the gross margin confidence that we have for 2026. We are balancing that in 2026 against the exciting opening of the sixth distribution center in 2026, so that is contemplated in our guidance expectation. Operator: Your next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead. Christopher Horvers: Thanks. Good morning. My first question for you, Ed, is what did you learn from Foot Locker and this 11-store test? Can you talk about how applicable the changes are to the rest of the chain? The 11 stores, were they more city center locations like Times Square versus suburban-based mall locations that people tend to associate with Foot Locker? What was the receptivity to running and brands like Hoka and On to that core Foot Locker customer relative to basketball? In the 200 locations that you are targeting by back-to-school, what is the commonality among these locations relative to the 11-store test that you targeted, and then the much larger chain? Edward Stack: Thanks, Chris. The 11-store test was really a broad-based test. We did some more urban stores. We did suburban stores. We pulled some high-volume stores. We obviously pulled some lower-volume stores, which is why we are not closing as many stores as we anticipated. So it was really a broad-based test on that original 11. The 10 in LA would be more urban stores that we have done. What was common to them is we put a common merchandise presentation theme across all of these banners, which really was to take out a lot of the unproductive inventory that was sitting on the wall that the consumer did not want, cleared up the wall. As I have used the phrase, the footwear wall was a run-on sentence. So we took that run-on sentence down, took roughly 30% of the choices out of the store, relaid out the wall with the key product, so the consumer can walk in and see what is important—whether it is an Air Force 1 in color, whether it is a new New Balance launch, whatever it might be. We have the ability to clearly communicate to the consumer what is new and what is the high-heat product. And when we did that, these comps have been extremely strong—strong enough that this is the game plan that we are going to roll out. Roughly 250 stores by back-to-school. Those 250 stores, again, will be a cross-section of stores. They will be urban stores. They will be suburban stores. They will be some mall stores. And we will take a look at this on a store-by-store basis, and it will be a great cross-section of the business again. We are also going to be doing this in Europe. We have a couple in Europe, and we are very pleased with the results we are seeing in Europe. We will be rolling out the Fast Break stores in Europe, and the 250 includes the US and Europe. If you think about it, we are pretty conservative. If we were not highly confident that this Fast Break concept would be highly successful, we would not be rolling out 250 of them by back-to-school. That should give everybody confidence that we have a game plan here and we have proven that it will work. Christopher Horvers: Thank you. That is very helpful. And then I guess a two-part follow-up. Traffic is always a red flag in retail, and it did turn negative in the core DICK'S business in the fourth quarter. I get the two-year stack math, but your ASP or your ticket is going to get harder as the year progresses. Presumably, there was some inflation from tariffs as well. So how should we think about looking at that traffic number going forward? As you think about running that two-year stack, how applicable are traffic headwinds earlier versus traffic rebounding later and ticket moderating? Lauren Hobart: Thanks, Chris. The transactions in Q4—again, on a two-year stack basis, if you look, they were positive. If you look at the full year, they were positive. We were up against such a strong comp from the year before that I think you have to take that into consideration. We have been driving strong basket and AUR, and that just speaks to our differentiated product assortment, really not due to inflation. It is due to the fact that we are increasingly getting access and allocation to really great products that are resonating with people. Looking ahead, our guidance projects 2% to 4% comps on top of the 4.5%. So we are not concerned about traffic or transactions. Operator: Your next question comes from the line of Paul Lejuez with Citi. Please go ahead. Paul Lejuez: Curious on synergies, if you expect that number that you shared to grow past the medium term. Also curious how you are thinking about what is the medium term. And then second, kind of related perhaps, on Foot Locker. That business used to achieve $700,000,000 of operating income if you look prior to 2020—$700 million plus. I am curious how much progress you think you can make towards that level and over what period? Navdeep Gupta: Paul, thanks for the question. Let me start with synergies. We have reiterated today that we continue to expect $100,000,000 to $125,000,000 over the medium term, and we continue to remain very confident. As you can imagine, we are six months into this transaction. We are working cross-functionally across both organizations, and the level of detail that the teams have created is fantastic. So as we learn more, we will definitely share if there are any updated expectations. As of today, we will reiterate the outlook that I had shared. In terms of what medium term means, there is a portion that is definitely in 2026 for the synergies that has been included in the guidance, and I would say the medium term would be maybe a couple of years after that. In terms of the $700,000,000 of operating income for Foot Locker, I think it is a little bit too early to be able to give a long-term outlook, but we feel really confident in what Ed talked about—the momentum that we have built, the focus that we have in returning this business to growth from the 1% to 3% comp that we have guided and returning this business back to profitability. So six months in, we are really enthusiastic about the underlying momentum as well as the team that is driving these results. We will share more in due course of time about the longer-term outlook. Operator: Your next question comes from the line of Mike Baker with D.A. Davidson. Please go ahead. Michael Baker: Great. Thanks. Just on the Fast Break and improvement in Foot Locker and the profit trends, just a little more color on the pace throughout the year. Do we expect them to be negative in the first quarter and second quarter until the back-to-school improvement kicks in? Just wondering on the expectations of how Foot Locker progresses throughout the year. Navdeep Gupta: Mike, I will say that we expect both the sales and profitability to be back-half weighted. As you can imagine, we said that the real inflection in this business will come from when we are able to source the buys effectively the way we wanted. That happens from the back-to-school timeframe. And as Ed referenced, the Fast Break stores being in position will also be during the back-to-school timeframe. So we expect comps to be back-half weighted, and we expect the profitability also to be second-half weighted. Keep in mind on profitability, we also will have the benefit of the synergies that will kick in into 2026. Michael Baker: Makes sense. Thanks. If I could completely switch gears for a follow-up—so maybe not really a follow-up—talk to us about agentic AI or how you are dealing with that. Do you think there has been any impact? Do you feel like you are well suited in that kind of environment? Just curious your view on how that works. Lauren Hobart: Thanks, Mike. We are absolutely looking into all aspects of artificial intelligence, including agentic. I think there are two opportunities in the way our teams are looking at it. There is the opportunity to make our teammates more efficient and to remove a lot of manual work. Examples of that: we have some MarTech technology that we are building that can remove a lot of the manual work that they are doing. We are using AI right now in terms of store labor forecasting. We have a new AI-enabled tool in our app, and we are able to make more custom recommendations. So across the board, inventory management and making sure regional relevancy is happening is all factored with artificial intelligence. However, if you look to the future and you look at agentic, I think the biggest unlock in terms of our athlete experience is for us to really lean into what we call our common purpose and find ways to bring the power of our expertise and all of our opinion and knowledge that we have of sports and enable that to be available to people as they are working in the new world. We are working on that. More to come, but that is a big focus—to take all of our data, all of our knowledge, our teammates’ learnings over the years and make that available for consumers. So more to come. Operator: Your next question comes from the line of Joseph Civello with Truist. Please go ahead. Joseph Civello: Hey, guys. Thanks so much for taking my questions here. I have one on the DICK'S Media Network. Can you talk about the opportunities to sort of expand that to Foot Locker and what that timeline might look like, even though I know it is probably longer dated? Lauren Hobart: It is a little premature. As you know, we are maniacally focused at the DICK'S business on the DICK'S business and the Foot Locker business maniacally focused on the Foot Locker business. Certainly, there are long-term opportunities here, but we are each executing our plays right now. Joseph Civello: Got it. And maybe just a quick sort of mechanical question. You mentioned using the DICK'S Going, Going, Gone to clean out the garage. Can you talk about how that impacts the financials for each segment? Edward Stack: It actually helps. It gets rid of older, unproductive inventory, so it brings cash into the business, and it cleans up the store. We have done this on the DICK'S side, and we will expect to do it on the Foot Locker side. Cleaning up the store gives more room and space to be able to feature those newer products, the newer styles, that we can sell at basically full price. So it is very helpful to the margins. It is helpful to the sales, and it is helpful to the cash flow of the business. Joseph Civello: Got it. And is that contemplated in the synergies? Navdeep Gupta: That is not contemplated in the synergies. Our focus on synergies, like I said in my prepared remarks, is focused around the merchandising actions—primarily negotiations—as well as non-merch synergy negotiations. Operator: We have time for one more question. And that question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please go ahead. Cristina Fernandez: Hi. Good morning. I had a couple of questions on the Foot Locker business. The negative 3.4% pro forma comp relative to the guidance for down mid- to high-single-digit—can you talk about what led to the better result? And then I also wanted to see if you could give a little bit more color on Foot Locker about the regions. I assume North America outperformed Europe. And whether the Fast Break merchandising test included work on some of the other banners like Champs or Kids Foot Locker, or those are just purely on the Foot Locker store fleet. Thanks. Edward Stack: The better performance at negative 3.4% versus what we had guided to was really a result of the Stripers and the team at Foot Locker really getting behind the whole idea of cleaning out the garage. They really wanted to clean out the garage. They wanted to get rid of that old inventory. They wanted to get the new product in. And they worked tirelessly to get rid of that product, and that helped drive better sales. We came in right in line from a margin rate standpoint. From a Foot Locker standpoint, by performance by region—North America and Europe—there was not a huge difference between how the two regions performed. I think that going forward, right now the US is a little bit ahead of Europe, but that is because we did more of the Fast Break stores in the US than we did in Europe. Europe is not very far behind. We are going to get Europe turned around also. We are pretty excited about what is going on in Europe. We brought in Matthew Barnes from Aldi to run this business. He has made some changes to his team. We have got a terrific team in Europe, and we could not be more confident in Matthew and his leadership to turn the whole international business around. Operator: I would now like to turn the conference back over to Lauren Hobart, President and CEO, for closing comments. Lauren Hobart: Thank you all for your interest in DICK'S and in Foot Locker, and we will look forward to seeing you next time. To all our teammates and Stripers and Blue Shirts listening, thank you for all of your hard work. See you next quarter. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.
Operator: Greetings, and welcome to the KLX Energy Services Holdings, Inc. Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, Ken. You may begin. Ken Dennard: Thank you, operator, and good morning, everyone. We appreciate you joining us for the KLX Energy Services Holdings, Inc. conference call and webcast to review fourth quarter and full year 2025 results. With me today are Christopher J. Baker, President and Chief Executive Officer, and Jeff Stanford, Interim Chief Financial Officer. Following my remarks, management will provide commentary on its quarterly financial results and outlook before opening the call for your questions. There will be a replay of today's call that will be available by webcast on the company's website at klx.com. There will also be a telephonic recorded replay available until 03/26/2026, and, of course, there is more information on how to access these replay features that was in yesterday's earnings release. Please note that information reported on this call speaks only as of today, 03/12/2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLX Energy Services Holdings, Inc. management; however, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the Annual Report on Form 10-Ks, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K to understand certain risks, uncertainties, and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release, which can also be found on the KLX Energy Services Holdings, Inc. website. I will now turn the call over to Christopher J. Baker. Christopher J. Baker: Thank you, Ken. And good morning, everyone. Before we discuss our results, I would like to take a moment to say our thoughts and prayers are with all of the military personnel serving in the Middle East in the midst of this significant conflict. KLX Energy Services Holdings, Inc. has very close ties to our military. There are almost 100 veterans that work for KLX Energy Services Holdings, Inc., and so many other veterans and their family members in the broader oilfield services space that we are all connected in some way. So, again, our thoughts and prayers to all of our men and women in the military for a safe return. We sincerely thank you for your service. Now for our 2025 performance. 2025 was another solid year for KLX Energy Services Holdings, Inc. despite a choppy market, and we finished the year on a high note. The fourth quarter delivered our strongest profitability of the year with adjusted EBITDA and adjusted EBITDA margin both at 2025 highs. Throughout 2025, we continued to optimize our corporate cost structure and thoughtfully invested in our product lines while leaning into gas-weighted asset allocation as we realigned certain product service lines and benefited from capacity rationalization in the industry. KLX Energy Services Holdings, Inc. continues to execute against the playbook that we have outlined on prior calls. We focus on higher-margin, technically differentiated work, lean into cost discipline, and are very intentional and diligent about where we strategically deploy capital and people. Operationally, the Northeast/Mid-Con segment was the standout in the quarter. Despite typical winter weather and year-end budget dynamics, that segment held revenue essentially flat sequentially and, again, expanded margins, driven by robust demand in our gas-directed work. Our dry gas exposure continued to grow as a share of the portfolio, and gas-levered revenue has steadily been marching back toward prior cycle peaks. In fact, dry gas revenue in this segment increased 5.3% quarter over quarter and 44% when you compare 2025 versus 2024, with broad-based gains across most of the product service lines we operate in this segment. On the other side of the ledger, the Rockies and Southwest reflected the realities of the macro environment. The Rockies were impacted by severe weather and customer budget exhaustion late in the year, and the Southwest experienced lower activity or reduced oil-directed rigs in the Permian. Even in that backdrop, Southwest margins expanded as we optimized our product and service mix, which is exactly the kind of blocking and tackling that is firmly within our control. Across the business, we continue to cut the suit to fit demand by aligning our footprint and cost structure with activity levels. We reduced headcount while protecting service quality. We maintained healthy metrics for revenue per rig and revenue per headcount, and we drove a meaningful reduction in our corporate costs year over year. Our efficiency metrics remain solid. In Q4, revenue per rig was approximately $297,000, the second-highest quarter of the year, and we delivered more than $40,000 of EBITDA per rig for the second time in 2025. Revenue per headcount also held up well, consistent with our focus on aligning staffing with activity. I would like to take this time to personally thank everyone at KLX Energy Services Holdings, Inc. for their hard work, dedication, and persistence, which allowed us to achieve the above results in an admittedly challenging macro environment. Our employees' commitment to safe, efficient, and quality work performance is what drives KLX Energy Services Holdings, Inc. and is the basis of the strong customer relationships that help us stand out from competitors. With that overview, I will now turn the call over to Jeff to review our financial results in greater detail, and I will return later in the call to discuss our outlook. Jeff? Jeff Stanford: Thanks, Chris. Good morning, everybody. Starting with the fourth quarter, we generated revenues of approximately $157 million, which was in line with our Q4 guidance. As expected, revenues decreased due to seasonality and budget exhaustion. We generated approximately $23 million of adjusted EBITDA, our highest quarterly adjusted EBITDA of the year, and an adjusted EBITDA margin of about 14%, also the high for 2025. The margin performance reflected favorable product line mix, ongoing cost reductions and normal fourth-quarter accrual unwind as well as impacts from our fleet refresh, asset rationalization, and other year-end items. By segment, Northeast/Mid-Con revenue was essentially flat sequentially at $69.6 million, up about 0.5%, while delivering another quarter of adjusted EBITDA margin expansion to 25.3% and $15.1 million of total adjusted EBITDA, driven by gas-directed activity. Within that segment, dry gas revenue increased 5.3% quarter over quarter, continuing the trend of our gas-levered revenue base growing as a share of the portfolio. In the Rockies, revenues declined to $46.3 million, roughly 9% sequentially, primarily due to weather, seasonality, and customer budget exhaustion. Adjusted EBITDA declined to $6.9 million, or 15%. In the Southwest, revenue declined about 10% to $50.9 million from the third quarter, mostly tied to budget exhaustion and softer oil-directed activity in the Permian. Adjusted EBITDA increased to $6.8 million, or 33%. On corporate costs, we made measurable progress. Corporate adjusted EBITDA loss improved to approximately $6.3 million in Q4, down from $6.6 million in Q3. For the full year, corporate adjusted EBITDA loss was around $26 million, bringing us back toward the 2021–2022 levels. This reflects structural G&A rightsizing, including approximately a 12% decline in total headcount when comparing average Q4 2025 headcount versus Q4 2024. Turning to capital allocation, net CapEx for 2025 was approximately $33 million. For 2026, we expect gross capital expenditures of approximately $40 million, down from $49 million in 2025, and net CapEx in the range of $30 million to $35 million, with the vast majority of that devoted to maintenance CapEx. Cash flow generation was strong in Q4, with cash provided by operating activities at $13 million, slightly lower than the $14 million in Q3 due to the aforementioned seasonality and budget exhaustion affecting the bottom line. Unlevered free cash flow was $15 million, a 43% increase over Q3. Total debt at year end was $258.3 million, including $222.3 million in senior notes and $36 million in ABL borrowings, down from Q3 total of $259.2 million. We ended the year with available liquidity of approximately $56 million, including availability of approximately $50 million on the December 2025 asset-based revolving credit facility borrowing base certificate and approximately $6 million in cash and cash equivalents. Of note, due to the New Year's Eve holiday timing, 12/31/2025, we drew approximately $8 million in cash to fund the first payroll of 2026. From a balance sheet perspective, our capital lease obligations grew from their low point in 2025 due to our previously discussed fleet refresh initiative but will amortize down quickly through 2026, and we expect a meaningfully lower capital lease balance at year end. In addition, our coil leases roll off at the end of 2026, which will eliminate approximately $8.2 million of annual lease payments from our cash outflows beginning in 2027 and create incremental cash flow. During the fourth quarter, the company paid senior note interest expense two-thirds in cash and one-third in PIK. We will evaluate future cash versus PIK decisions based on market conditions, and company leverage and liquidity. As of the first two months of 2026, the company paid 25% cash and 75% in PIK. We were in compliance with all covenants under our senior notes. At year end, our net leverage ratio was 4.07x versus a covenant of 4.5x, and the covenant was scheduled to step down to 4.0x at 03/31/2026. As we work through the 10-K filing, stress testing for market risk indicated a potential need for a covenant relief in future periods. We took the proactive step to amend the indenture and provide adequate cushion for the next five quarters. The amendment provides that the covenant will remain 4.5x through 03/31/2027, resuming to the original step-downs as of 06/30/2027. The amendment also excludes capital lease balances from the leverage ratio calculation during the same period, affording us incremental flexibility to fund CapEx, M&A, and other capital needs. With that, I will hand it back over to Chris for his concluding remarks. Christopher J. Baker: Thanks, Jeff. Let me start with the market backdrop and how we are thinking about 2026. We are approaching the year with a constructive but measured outlook. We expect the first quarter to be the low point for the year, reflecting the familiar seasonal combination of customer budget resets, slower restarts of completion programs, and weather-related disruptions. Beyond Q1, we see a path to a gradually improving market led by gas-directed basins, where we believe incremental rigs are more likely to show up before we see a more meaningful recovery in certain oil-directed markets. This, of course, is tenuous given the Middle East situation, and we will continue to monitor for oil-directed activity inflections. Our portfolio is increasingly aligned with that opportunity set. The Northeast/Mid-Con and other gas-focused basins have been areas of momentum for us, and we expect them to remain important contributors as potential areas of growth on a relative basis. In oil-directed basins, particularly the Permian, we are managing through what has been a slow, extended downturn by rightsizing our footprint and cost structure to current demand while maintaining the flexibility to respond when conditions improve. Finally, in terms of how we are framing 2026 revenue, our internal budget contemplates a year that is broadly flat to slightly up versus 2025, with the majority of improvement weighted toward the second half of the year, yielding results that trend toward the stronger run rate we delivered in 2025. That framework will be updated as the year progresses and we gain more visibility into customer plans and basin-level activity. From a Q1 perspective, we are forecasting revenue of $145 million to $150 million, down approximately 3% from 2025 despite rig count being down 8% over the same period. This forecast does include the impact of Winter Storm Firm, where we lost approximately four to five revenue days in many product service lines in certain districts. Looking forward to Q2 2026, we expect revenue to rebound to the $160 million to $170 million range, which is higher than Q1 2025. Industry consolidation and capacity rationalization remain important themes across the oilfield services landscape, and we believe KLX Energy Services Holdings, Inc. is well positioned to be a net beneficiary. We have seen a number of smaller competitors exit the market in the last several months, which helped remove inefficient capacity and support a more rational competitive environment. On capital and fleet readiness, our philosophy has not changed. We continue to invest at a level that maintains our asset base and keeps us ready for a market inflection. At the same time, our capital program is disciplined and predominantly maintenance-oriented, which we believe strikes the right balance between prudence and preparedness in the current environment. With that, we will now take your questions. Operator, thank you. Operator: We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Steve Ferazani with Sidoti & Company. Christopher J. Baker: Please proceed with your question. Steve Ferazani: Good morning, Chris. Morning, Jeff. Appreciate all the two positive surprises, very similar to what you reported in 3Q, in that, at least compared to our estimates, Northeast/Mid-Con was stronger and your margins were much stronger than we were modeling. Can you provide— and you covered this in the call, but I was hoping for a little bit more color, particularly on the strength in Northeast/Mid-Con, which normally would expect to see some hit late in the year because of weather. Christopher J. Baker: Good— first of all, good morning, Steve. Appreciate the question. I think if you look at the segment as a whole, when you think about Mid-Con through our ArcoTex to the Northeast, it is a pretty geographically diverse segment. But if you look at segment-level rig count aggregated, rig count increased about 6% across that entire segment quarter over quarter. Our dry gas exposure, as we referenced in the call, increased 5.3%, and furthermore, to your question, I think all of the service lines held up exceptionally well. It is a continuation of the theme, and I think you asked a similar question last quarter. We saw an early start in the Northeast last year that sustained through Q4, and we were not sure how well it would sustain through November and December post-Thanksgiving because that is a very seasonally impacted business. But we saw the Mid-Con continue with completion programs through the year end. We continue to see wins in our accommodations business, our flowback business in East Texas. And so, yes, it held up exceptionally well. Margin, of course, held up well, and, yes, look, we would forecast a slight decrease in revenue in that segment in Q1, predominantly tied to the previously discussed Winter Storm Firm, which really hit the Mid-Con pretty hard. But overall, we expect continued improvements throughout 2026. Steve Ferazani: And then the overall margin improvement, how much of that do you owe to product line mix versus efficiencies versus what clearly has been some cost reductions? Is it very much a mix, or would you weigh it more towards one or the other? Christopher J. Baker: I think— it is a great question. In the Northeast/Mid-Con specifically, I think it is both, I guess. But, yes, it is really lack of white space, really absorption of fixed costs, staying sustainably busy, and product line mix. Steve Ferazani: Helpful. Switching to the Southwest, when I look at that revenue line, was that primarily the impact on your completion product lines, and I am assuming that continues at least through the first part of Q1. Christopher J. Baker: Yes. It is a combination. We actually saw some on the drilling side of the business. Rig count stayed pretty flat. I think it was up from a segment level when you combine all of the Southwest basins by about 2%. But, yes, we did see some budget exhaustion and completion programs tailing off going into the fourth quarter. Some of our PSL and asset realignment rotations that we referenced on the call were really pulling certain assets out of the Southwest segment, pushing them into the Haynesville, so that attributes to some of the revenue decline. Steve Ferazani: That makes sense. Okay. That is helpful. In terms of how you are thinking about CapEx and cash as we go into 2026, and knowing that we have markets that can move in different directions given the uncertainty that is out there, how are you thinking about CapEx and cash flow as we enter the year, knowing it can clearly change? Christopher J. Baker: Look, the world is in turmoil, and we are not budgeting for increases, clearly. Our budget was set before the events of eleven days ago, twelve days ago really kicked off. And so we are targeting gross capital spending of $40 million. That is down from $49 million on a year-over-year basis in a year when we think revenue is flat to up. And so I think that speaks to, A, we do not have a lot of end-up need for incremental CapEx in our business. We have continued to spend to support the business, and we think that we will continue to see some asset rationalization— DBR tools, lost-in-hole, etc.— that will drive net CapEx down into the $30 million to $35 million range. That is all subject to change based on market inflections, but I think we are doing the appropriate level of spending and being prudent, so we are staged and ready to go for any market inflection. Steve Ferazani: Got it. And if I could talk just about the PIK option, how you are thinking about that, and then the covenant relief. It looks— typically you have very significant working capital seasonality, and typically 1Q is your significant cash outflow. The covenant relief, is that primarily related to what we see as typically the working capital build in Q1, which would potentially put you at a closer point to where it was going to step down to? And how do you think about the relief now in your comfort level over the next few quarters? Jeff Stanford: Hey, guys. Good morning, Steve. This is Jeff Stanford. Great question on that. The waiver— we know, closing our books out, doing our year-end budget, going through the year-end audit— we are going through all these things at year end. We do look at stress testing of that, so you look at certain ramifications if this happens or that happens. Going through that stress testing, we entered into it more as a proactive measure, give us some cushion for the future periods, goes out five quarters or fifteen months, so we feel really good about that. It gives us a lot of cushion there. But a lot of things happen as you move forward. Working capital is one piece of that, but also, as you stress test the model, what does it look like? So that provided us a good proactive measure to make sure we had cushion for future periods. That is the main reason that we entered into the waiver. As far as the PIK option, I think your first question— we PIKed 75% in January and February of this year. We did PIK 33% of it in Q4. The PIK option on the note is designed for flexibility. We utilize that flexibility as we see fit. So, in this case, we PIK some, we pay some in cash, and we look at it, kind of throttle up and down as we need to. Market dynamics, liquidity, leverage considerations are taken into account in our algorithm. That is how we want to do it. That is what we did in the past and what we are doing the first two months of this year. That is how we look at the PIK option. We do like that flexibility and use it as needed. Steve Ferazani: Got it. That is helpful. And, Chris, I know it is way too early to really have an outlook on this, but what is your take on the potential impact from the Middle East conflict if it is extended? If it is not, what do you think— and I know there are a lot of different outcomes— but just how you are looking at it on your business and what the potential outcomes could be. Christopher J. Baker: It is a great question. Just one thing I want to clarify on the PIK, to Jeff's point. Recall our leverage ratio includes capital lease balances as debt. That capital lease balance at year end is going to amortize off pretty significantly this year. And so there is an amount that you can PIK where you can stay, all else equal, basically net-debt neutral. And so that is another consideration that we factor in when we think about overall leverage profile. Returning to your question, it is a great question regarding the Middle East conflict, and as we said at the outset, thoughts and prayers to the servicemen and women that are over there. If you think on a historical basis, Steve, we have typically seen a 60- to 90-day lag in activity increases or decreases post commodity prices moving. What we saw in April was almost an immediate reaction, but we definitely saw kind of 45–60 days, a material reduction in rig count post “Liberation Day” with the tariffs and when commodity prices change. We have not seen— so I think what that speaks to is the cycles have gotten shorter, and that is for a couple of reasons. Operators do not have a lot of duration and tenor in their rig contracts today. They are going pad to pad, well to well, etc., and so they react in much shorter time frames than they have historically. We have not really seen any reaction to $100 crude yet, and we think most operators are taking a wait-and-see approach. They just set their 2026 budgets. It is hard to say. What I will say is, as of this morning, the forward strip— you can do forward swaps at $72-plus in December ’26— but the strip, and the tail of the strip, is clearly much more conducive to Lower 48 activity. The other point would be, from a KLX Energy Services Holdings, Inc. perspective, we do not actually have to see incremental rig count to see increases in our own activity. If you think about our completion, production, intervention business line, we benefit from increases in refrac activity, workovers, well intervention, stimulation of existing wells. We have talked a lot over the last year about how the refrac market, specifically in the Bakken, to a lesser extent in the Eagle Ford, slowed down through 2025. We are keeping our ear to the ground, trying to stay close to customers. We will see how protracted the situation becomes, how much energy infrastructure in the Middle East is damaged, and what happens to commodity prices, and I think specifically the tail over the next month. But, as you know, KLX Energy Services Holdings, Inc. has the right asset base. We have the right technology and people. If customers elect to ramp activity, we will absolutely be there and be prepared to participate. Steve Ferazani: That is great. Thanks, Chris. Thanks, Jeff. Christopher J. Baker: Appreciate it, Steve. Thanks, Steve. Ken Dennard: Thanks, Steve. This is Ken. John Daniel— he had to drop, but he emailed me some questions, and so I am going to read them to you so that way, he will hear them on the replay. Fair enough. John Daniel: There continues to be a push by some operators to move to simulfrac operations. Can you speak to your frac business and customer base and let us know what trends you are seeing? Christopher J. Baker: At a high level, specifically in the Mid-Con, we have not seen the huge adoption of simulfrac relative— on the same pace— that we have seen in other basins. We clearly are participating in simulfrac in the Permian and other basins in a very material way with our frac rentals business, wellhead isolation business, etc. That is not to say that the Mid-Con has not adopted simulfrac, but I think there are numerous reasons for the slower adoption rate, one being the acreage profile, operator size, in some instances pad sizes, lack of electrical infrastructure when you think about comparing to the large electric spreads in the Permian. We have seen some adoption. I would say, on a stage count basis, if you think about our forecast for this year, we are probably somewhere between 25%–30% simulfrac, and that is up year over year, but it clearly does not have the propensity that you would see in the Permian. John Daniel: So if not mistaken, that is not a basin that has seen a lot of new capacity in some years. So would it seem that attrition would be a little more pronounced, or is that too optimistic on my part? Christopher J. Baker: John is always optimistic, but tying back to the first part of the question, simulfrac definitely adds a layer of complexity— incremental horsepower needs— that some providers just are not adept at managing either from a rate or pressure perspective. A lot of providers are limited to 100 barrels a minute under 10k. As you think about attrition within the basin— and I am sure John is on the call; I am sure he is aware— the general industry said there were about 10 spreads sold last year to international locations. Most of those spreads were Tier 2 equipment. There was some horsepower that left the basin. But as you think about the basin today, it is amply supplied. I do not think we are short horsepower by any stretch, and barring any material pickup in activity— back to Steve’s prior question around the Middle East situation, commodity prices— barring any material pickup in activity, I think John is probably optimistic that attrition is going to drive overall results. I think it is a pretty balanced basin today. John Daniel: Second topic is coiled tubing. We have heard at least one coiled tubing company suspending operations in recent months, and we believe some of those assets may be reconstituted by some other folks. At the same time, there are a very small number of units being built. Thus, on one hand are those who have struggled and those who are doing well. Can you give us your thoughts on the U.S. coiled tubing market? Do you see the sector beginning to rationalize itself, or is that something you expect will occur in the next year or two, if at all? Christopher J. Baker: That is a broad question. I will jump in on the first point. We have definitely seen some attrition of units. We have seen over the last couple years— one player exited the market about two years ago and that equipment candidly vanished. I am aware of the player that John is talking about. The majority of the optimal assets were reconstituted into and absorbed by a pretty sizable player in the business today. There were some assets that landed in a startup. We are aware of another situation that is currently active with another smaller player exiting the market altogether. So, yes, I think the business is shaking out, but for different market dynamics. If you think about the Bakken, that has shrunk as a coil market. We have seen players move equipment out of the Bakken, either back to Canada or down to the Permian and other basins, Waco, and so there has been a lot of coil decline in certain regions due to the length of the wellbores surpassing capacity of the units in those regions and the growth of snubbing and stick pipe. Pivoting to the second part of his question, from a new build perspective, John is correct. There are very few new build units that are under construction, and the ones that are are solely focused on ultra-deep, extended-reach laterals. That is where the market is heading. The routine frac screen-outs, wellbore cleanouts have become fewer and fewer, and so a provider has to have the expertise, the scale, to manage all of the technologies required to complete four-mile laterals with coiled tubing. That is multiple ERTs, coil connectors, string and fluid design— they all have to be optimized. Risk and pipe costs are increased, and operators are monitoring ROP KPIs in real time, and switching costs are candidly minimal as they are trying to think about the risk-reward and efficiency gains of coil versus alternatives. Candidly, I think that is where KLX Energy Services Holdings, Inc. has an advantage with our in-house proprietary mud motors, our extended reach tools, as well as additional technologies that we are bringing to bear to extend the commercially viable life of coiled tubing and expand the addressable wellbores. Operator: Good. Okay. This concludes our Q&A session. I would now like to turn the call back over to Christopher J. Baker for final comments. Christopher J. Baker: Thank you once again for joining us on this call today and for your continued interest in KLX Energy Services Holdings, Inc. We look forward to speaking with you next quarter. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.