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Operator: Ladies and gentlemen, welcome to Canaan Inc. Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question and answer session. Please note that this event is being recorded. Now I'd like to hand the conference over to your speaker today, Gwyn Lauber, Investor Relations for the company. Please go ahead, Gwyn. Gwyn Lauber: Thank you, operator. Hello, everyone, and welcome to our earnings conference call. Joining us today are Chairman and CEO, Nangeng Zhang, and our CFO, James Jin Cheng. Leo Wang, Vice President of Capital Markets and Corporate Development, and Shi Zhang, Senior IR Manager, will also be available during the question and answer session. Our CEO will start the call by providing an overview of the company and performance highlights for the quarter. Our CFO will then provide details on the company's operating and financial results for the period before we open up the call for your questions. Before we begin, I would like to refer you to our Safe Harbor statement in our earnings press release. Today's call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company, and statements that estimate or project future operating results and the performance of the company. These statements speak only as of today, and the company assumes no obligation to revise any forward-looking statements that may be made in today's press release call or webcast except as required by law. These statements do not guarantee future performance and are subject to risks and assumptions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 20-F for information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss both GAAP financial measures and certain non-GAAP financial measures which we believe are useful as supplemental measures of the company's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release which is posted on the company's website. With that, I will now turn the call over to our Chairman and CEO, Nangeng Zhang. Please go ahead. Nangeng Zhang: Hello, everyone. This is Nangeng Zhang, CEO of Canaan Inc. Welcome to our earnings call. Together with our CFO, James Jin Cheng, we are calling from our Singapore headquarters to discuss our Q4 2025 business results and latest updates with you. During the first quarter, it comprises experienced significant volatility. In early October, Bitcoin briefly broke above its previous all-time high, reaching approximately $126,000. It then fell below $100,000 in mid-November and dropped to below $90,000 by December. At the same time, the wave of new hash rate that entered the pipeline during the price surge in the first quarter came online, pushing total network hash rate to a record high. This puts strong pressure on miners' profit margins. Facing this highly volatile market, we managed our sales pace well at the '4. We secured a large order from a major customer in North America, and efficiently mobilized resources to support production and smooth delivery. At the same time, we steadily expanded our self-mining operations and explored diversified mining partnerships, starting several pilot projects. As a result, our total revenue for the quarter reached $196 million, up 30.4% quarter over quarter and 121.1% year over year. This was our highest quarterly revenue in the past three years and exceeded the midpoint of our guidance range of $175 million to $205 million. We achieved a major breakthrough in mining machine sales in this quarter, benefiting from our continued focus on the North American market. We secured a large-scale order of more than 50,000 A15 Pro models from a leading mining company. This milestone collaboration drove our strong sales performance and underscores the market's growing recognition of our product performance and delivery capability. To ensure high-quality delivery, our supply chain, production, and operation teams worked closely together to ensure smooth and high-quality execution. This resulted in an all-time high of 14.6 exahash per second in computing power sold during the quarter, up 45.7% quarter over quarter and 60.9% year over year. While average selling price declined slightly due to volume discounts for large-scale orders, the surge in sales volume drove product revenue to $165 million, up 39.1% quarter over quarter and 124.5% year over year. This marks our highest single-quarter revenue in the past thirteen quarters. We will continue creating value for customers through product upgrades and customized services to deepen our partnerships with global customers. Although the company focused most of its resources on rig sales in Q4, our self-mining operations continued to progress steadily under the principle of resource alignment and efficiency first. In Q4, we steadily expanded and optimized global development. At the end of the fourth quarter, total installed hash rate increased 8.6% quarter over quarter to 9.91 exahash per second, of which 7.7 exahash per second was energized. We mined approximately 300 bitcoins during the quarter, further contributing to our cryptocurrency reserves. At the end of 2025, our crypto assets holdings were 1,750 bitcoins and 3,951 Ethereum. This holding reflects the combined contribution from our mining and ongoing debt management strategies. In the current market environment, this capital portfolio not only provides liquidity but also offers potential upsides if crypto prices recover. We continue to explore innovative mining applications and promote deeper integration between computing and energy. In October, we partnered with a local energy infrastructure provider in Canada to convert flare natural gas at wellheads into computing power. This project marks our initial step from utilizing stranded energy towards broader participation in energy infrastructure. It demonstrates the value of high-performance computing within emerging energy systems and opens up more space and long-term sustainability for the expansion of our mining business. In R&D and supply chain management, we maintained our focus on product performance, driving technological upgrades in tandem with capacity optimization. Last October, we officially launched the A16 XP, our flagship next-generation air-cooled model. It achieved breakthroughs across multiple performance metrics by delivering over 300 terahash per second per unit with an industry-leading power efficiency of 12.8 joules per terahash. This showcases our deep technical and R&D expertise in the design of high-performance ASIC chips. As we continue to advance our product generation upgrades, we work closely with our wafer foundry partners to optimize manufacturing processes. These efforts have led to higher yields and lower costs for our A15 series, allowing us to deliver more computing power from the same amount of wafers. On the supply chain front, our production footprint across Malaysia, the US, and Mainland China allows us to remain compliant with flexibility, adapting to an increasingly complex global trade environment. During the mass delivery of the large-scale order this quarter, our teams across manufacturing, quality control, and logistics worked in close coordination, successfully withstanding the dual pressure of shipment volume and tight timelines. By early January 2026, the entire order had been fully delivered, demonstrating the resilience and execution strength of our supply chain. In summary, 2025 was a challenging year. We navigated a complex international trade environment while continuing to expand our business across multiple dimensions. For the full year, total revenue was $530 million, up 139.6% year over year. We strengthened our presence in North America, partnered with leading customers, and increased total computing power sold by 40.7% year over year to a record 36.5 exahash per second. In terms of products, we achieved mass production of the upgraded A15 series, launched the next-generation A16 series, and expanded our Avalon series into a multifunctional product lineup, significantly improving revenue growth and brand influence. Our mining business reached a key milestone in 2025, with its full-year revenue exceeding $100 million for the first time. Global installed hash rate rose 82% and energized hash rate grew 61% year over year. We now operate nine mining projects globally, with total power capacity exceeding 250 megawatts. We also expanded into innovative energy scenarios by exploring wind power, stranded gas, and computing-generated heat reuse, driving deeper integration of computing and energy. We completed the deployment of assembly and production capabilities across Malaysia, the US, and Mainland China, building a flexible and resilient global delivery system. We also established our digital assets treasury management framework, keeping our crypto reserve competitive and providing capital allocation flexibility to support our long-term development. As we enter 2026, the external environment remains highly volatile. Shifts in macro liquidity and risk appetite are making digital asset prices and industry demand more cyclical and phase-driven. We do not base our operations on short-term views of price movements. Instead, we focus on navigating cycles through controllable factors, including product competitiveness, delivery and operational capabilities, inventory and cash flow discipline, compliance, as well as lower-cost and more scalable energy and infrastructure capabilities. This approach has enabled us to remain resilient and achieve growth in the complex environment of 2025. More importantly, we do not see Canaan's next stage as being defined merely as an equipment provider or a single-node computing player. We have a clear long-term vision. Computing and energy infrastructure are becoming increasingly integrated. Bitcoin mining and AI HPC colocation may appear to be two different businesses on the surface, but they are highly complementary at the infrastructure level. They share electricity, facilities, power distribution, cooling systems, and human and technical resources for operations and maintenance. By leveraging different workload characteristics, we can improve power utilization efficiency and overall project economics. At the same time, these applications can interact with the power grid more constructively. They can absorb energy when the power supply is abundant and reduce the load when the grid is constrained, ultimately contributing to a more resilient and dispatchable computing infrastructure. So in 2026, our strategy centers on two core pillars, with execution as our top priority: scaling proven models, streamlining non-repeatable pilots, and laying the groundwork early for long-term capabilities. Our first track focuses on power and computing infrastructure. We are shifting our strategy from securing power resources from an opportunistic asset-light approach to a more systematic upstream development path. To secure reliable and economic power resources and leverage our North American resource base built since 2022, we will prioritize applying for power directly rather than bidding for capacity with existing third-party projects. We have made significant progress on a robust pipeline to secure direct power capacity in the US. We are confident of securing substantial load by the year-end of 2026, potentially reaching the gigawatt scale. At the same time, we are exploring ways to integrate Bitcoin mining with AI HPC colocation. This approach can improve returns on invested capital while supporting dynamic load management for the power grid and strengthening our existing positive relationships with grid operators. Development of power and infrastructure is not a sprint but a long journey with steady gains. The process spans multiple stages, including site selection, grid interconnection assessments, negotiation with power partners, contract structuring, engineering, construction, and commissioning. Each step requires careful and disciplined execution. Accordingly, our primary objective for 2026 is to establish a pipeline of executable projects and clear development pathways. We do not intend to pursue one-off large-scale capital outlays. Instead, we will move forward within a framework of capital discipline. We will leverage partnerships and project financing as tools, relying on asset-level cash flows and project-level financing to support expansion. This approach limits unnecessary volatility in our overall financial position. This also means we will prioritize securing high-quality power resources that are well-suited for AI HPC colocation. Second, in the consumer and small to medium-sized business segments, we will take a more systematic approach to building our 2C SMB business in 2026. Last year, we saw strong potential on both the demand side and the gross margin structure for these products. But we also understand that success in the consumer market is hard. Users expect excellent product experience, stability, and attention to detail and service, and we must treat this market with complete respect. That's why in 2026, we will continue to improve our product line and launch new models. At the same time, we will raise our standards and take a more cautious approach. Long-term product reputation matters. We will focus on stability, ease of use, noise control, and user experience as our top priorities. Also, we will continue to strengthen our product capabilities while we will also focus heavily on building out our channels. A key priority of growing our 2C and SMB business, our product experience has shown that in the consumer market, the core competitiveness comes not only from the product itself but also from the strength of our channels and service system. In 2026, we will make systematic investments in this area. This includes partnerships with online platforms, expanding our offline distributor network, improving after-sales services and content operations, and building more efficient user engagement and conversion methods. Our message is clear. Even in areas where we are still catching up, we are committed to putting in real efforts and resources. And for areas that are key to long-term success, we will go in to make sure the business line becomes a more stable and cycle-resistant revenue contributor. Lastly, I will share our view on the operating pace for 2026 and our preparations. From an operational standpoint, we expect 2026 to show clear stage-by-stage characteristics. Industry demand and pricing may remain under pressure during the first half of this year. Our focus will be on maintaining strong discipline in cash flow and inventory, strengthening product and delivery capabilities, and advancing key practices in power and infrastructure early on. At the same time, we are preparing our supply chain and execution teams for potential demand recovery later in the year. If the industry presents a clear structural opportunity, we will be ready to act quickly with strong execution and a healthy cost structure to capture market share and grow efficiently. We believe that this strategy centered on execution and long-term capability building will allow Canaan to remain competitive within the Bitcoin mining value chain and gradually become a trusted infrastructure participant within the computing power and energy ecosystem. Our goal is to create more sustainable long-term value for our customers, partners, and shareholders. Before concluding, I would like to note that the outlook above contains forward-looking statements. Actual results may vary due to challenges in macroeconomic conditions, industry cycles, regulations, and market demand dynamics. We will continue to communicate with transparency and respond to market expansions through clear, verifiable execution progress. Given recent global macroeconomic uncertainties, including ongoing monetary tightening, evolving geopolitical developments, and heightened volatility in the digital asset market, we maintain a relatively cautious view about the market environment in 2026. After global miners have adopted a wait-and-see approach in response to the recent decline in Bitcoin prices, the sale of mining rigs is facing considerable challenges. We expect total revenue for 2026 to be in the range of $60 million to $70 million. This outlook is based on current market conditions and operating assumptions. However, actual results may differ due to policy uncertainty and market volatility. This concludes my prepared remarks. Thank you, everyone. Now I will hand it over to our CFO, James Jin Cheng. James Jin Cheng: Thank you, Nangeng, and good day, everyone. This is James Jin Cheng, CFO of Canaan Inc. I'm pleased to share our Q4 financial performance with you. To begin my part, I would like to echo Nangeng's perspective on the fourth quarter industry environment. It was a very volatile quarter for the Bitcoin price. Bitcoin reached a new high in October, hitting $126,000 before dropping below $100,000 in November and below $90,000 in December. During the quarter, network hash rate also reached historical highs, significantly impacting the profitability of miners. Fortunately, our operation was robust in Q4. We successfully secured large-scale orders from key clients in the North American market and globally, and our strong supply chain relationships ensured timely production and delivery. In our mining operation, we continued our deployment and seized opportunities for new pilot agreements. Overall, we delivered solid quarterly results in Q4 despite the market dynamics. Let's take a closer look at the details. First, I will highlight our strong top-line results in the fourth quarter and for the full year of 2025. In Q4, we delivered $196 million in total revenue, up 13.4% sequentially and 121.1% year over year. Our total computing power sold also reached a record 14.6 exahash per second. This growth was primarily driven by the massive delivery of our A15 series. Our revenue increased consistently throughout every quarter in 2025. This trajectory peaked at a new quarterly high for Q4. Consequently, our full-year revenue reached $530 million, nearly doubling 2024 results. Within product revenue, our Avalon home series also delivered exceptional growth in 2025, contributing approximately $25 million in revenue. Notably, our Q4 revenue mainly came from the North American market. Revenue from North American customers reached $125 million, accounting for over 75% of our total product sales. This demonstrates that top-tier institutional miners in North America continue to recognize Canaan as a primary long-term partner. Regarding our mining operations and trade risk strategy, we continued to scale our infrastructure while maintaining a robust asset base. By the end of Q4, our installed computing power reached nearly 10 exahash per second, up 7% from Q3. Our digital asset treasury also remains a core pillar of our financial strategy. As of December 31, 2025, we held 1,750 Bitcoins and 3,951 Ethereum. At year-end prices, these holdings were valued at approximately $166 million. While we manage through market fluctuations, this robust reserve provides a solid foundation for our balance sheet and long-term liquidity. Mining revenue in the full year of 2025 was $113.2 million compared to $44 million in the full year of 2024. The increase was mainly due to the increased computing power energized for mining, especially the expansion in the United States. On the operational front, we achieved notable gains in efficiency and supported our liquidity through disciplined capital management. Despite our business scaling up, our operating expenses in Q4 were $38 million, decreasing 6% quarter over quarter. This improvement reflects our efforts to streamline our organization and focus on core strategic projects. Our strong sales and financing activities have also strengthened our cash position. In Q4, we generated approximately $75 million in cash inflow from sales and received approximately $80 million from strategic equity financing and the brief utilization of our renewed ATM. This healthy liquidity funded our Q4 payments of $100 million to secure our wafer supply and $89 million for production and operation. These investments ensure our goal of a flexible manufacturing footprint across Malaysia, the United States, and Mainland China. Consequently, we ended the quarter with a cash balance of $81 million. This aligns with our commitment to strict cash flow discipline, allowing us to navigate market cycles without compromising our strategic roadmap. Reflecting our strong confidence in the company's financial position and long-term shareholder value, we have already repurchased approximately 2.8 million ADSs for $2 million under our $30 million stock repurchase program announced in December. We intend to continue executing this plan optimistically as market conditions allow, underscoring our firm belief in the company's prospects. Turning to our margins, we have taken a proactive approach to address market pressures and de-risk our balance sheet. In Q4, our gross margin was $14.6 million compared to $16.6 million in Q3. This compression was primarily due to three factors. First, we delivered several large-scale institutional orders. These orders are strategically essential for securing our long-term market share in North America. Second, Bitcoin price softened in the latter half of the quarter. This trend weakened the market demand. These headwinds lowered our average selling price. Last but not least, we prioritized the delivery of industrial machines to strategic customers instead of the Avalon Home series in Q4. Additionally, considering the severe Bitcoin price volatility early in 2026, we recorded inventory write-downs of $13.9 million in Q4. These impairments are based on management's latest estimates and reflect our cautious expectations under current conditions. Below gross profit, the year-end dip in Bitcoin prices resulted in a $44 million non-cash fair value loss. Another $15 million non-cash fair value loss was recorded for the conversion of the final batches of preferred shares. There will not be any fair value loss regarding preferred shares conversions for the next quarter. These non-cash items led to an adjusted EBITDA loss of $40.5 million. It is important to note that our cash position remains stable, providing us with sufficient liquidity to fund our operations and R&D plans. Furthermore, our ongoing expansion into the consumer and small and medium-sized business segments is expected to contribute to a more balanced and resilient margin profile over the long term. Finally, I want to outline our cautious yet resilient outlook. We are monitoring the very volatile Bitcoin price in the first two months of 2026. On February 5, the Bitcoin price dropped to $60,000. Low Bitcoin prices triggered machine shutdowns and operations closures for higher-cost miners. Profitability of existing miners is also under pressure recently, including our own mining operations. Given the headwinds and uncertainties, we are taking a very prudent approach to provide our Q1 guidance. We estimate our revenue will be in the range of $60 million to $70 million. In Q1, our priority is to maintain a healthy cash position and de-risk our balance sheet. We will allocate our capital carefully between power source investments and wafer supply for computing hash rate, and we will prepare to capture the next market recovery. This concludes our prepared remarks. Now we are open for questions. Operator: Thank you. We will now begin the question and answer session. As a courtesy to other investors and analysts, please limit yourself to one question and one follow-up. If you have any additional questions after the Q&A session, the Investor Relations team will be available after the call. For the benefit of all participants on today's call, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 1. 1 again. We will take our first question. The first question comes from Ben Summers from BTIG. Please go ahead. Ben Summers: So it's good to hear about strong progress in the supply chain efficiency. Kind of curious how the A16 mass production is progressing and kind of any updates around the timeline there? Nangeng Zhang: I think you're asking about our generation rigs. Right? Ben Summers: Yeah. Nangeng Zhang: Right now, we are sending the A16 SIP machines to our customers. And I think they're doing the testing phase. We are moving ahead with mass production preparations right now. And I think the mass production will start after the Lunar New Year holiday. And we expect it to begin volume ramp-up by the end of the first quarter. Currently, we don't have any issues or anything to broadcast. On the chip side, the chips are already in mass production. And on the production side, our main focus now is refining the product at a system level. And, also, you know, besides the air-cooled version, we will have the liquid-cooled and immersion-cooled models. So now we are working on these different models so we can better match different customer deployment needs and site conditions. I hope this answers your question. Thank you. Ben Summers: No. Awesome. That was super helpful. And then just kind of I know you touched on it briefly, but just curious for a little bit more color on the difference in the margin profile between the home series, the A15, and kind of how you think this can potentially, you know, help keep margins strong moving forward? James Jin Cheng: I will take this question, Ben. I think currently we observed market price has some influence from the Bitcoin price. So it seems like the industrial machines' profitability seems to be under pressure. But it looks like the home series continued without serious competition in the market. So we can still maintain good profitability. But in Q4, on the delivery side, we prioritized the industrial orders because it's from the strategically important customers from North America. Looking forward, I think we will continue to see the home series play a more important role in our category to generate profit. I don't know if I answered your questions, Ben. Ben Summers: No. That was super helpful, and thank you guys for the update. James Jin Cheng: Thank you, Ben. Thank you. Operator: Thank you. We will take our next question. The question comes from Nick Giles from B. Riley Securities. Please go ahead. William Chan: Good morning. This is William Chan speaking on behalf of Nick Giles. Thank you for taking my question, and congratulations on the quarter. It was good to see your heat recovery proof of concept announcement in Canada in early January. So I wonder, can you speak to the size of the TAM for this opportunity, ideally in megawatt terms? And as a follow-up, how scalable is this specific solution? And what are some other ways that you can expand your energy efficiency initiatives going forward? Nangeng Zhang: Thank you. Hello. Morning. I fully understand the market's interest in the new energy and ESG-related computing products. I think the core value for these objectives is transforming wasted and concentrated energy into measurable, tradable computing power, and even for cash flow. However, I'd like to be more candid. These opportunities are highly dependent on specific scenarios, such as resource availability, grid connection conditions, and even compliance pathways. And also the operational capacity. I think, you know, we have been working on this for more than one year. So the scale of each individual project typically ranges from a few megawatts to several tens of megawatts. The true total addressable market largely comes from the number of these points. But we want to caution against overly optimistic calculations like, okay, we have a few megawatts for each site, and there's thousands of points there, and so there's a multi-gigawatt business. We believe that is too optimistic because the business model is still relatively fragmented, and the pace of progress must be steady. So over the past year, we have started systematically screening potential sites for several POC projects, and we have already implemented some of them, collecting initial operational data. Not only the Canada one, there are many others. But moving forward, our focus will be on three key areas. First is the data and methodology standardization. The second is productization and the model. We aim to change the POCs into replaceable modular solutions. And third is replication and expansion. This is a service. I think once we have reached the surface, then we'll continue to expand similar projects faster. I hope I answered your question. Thank you. William Chan: Yep. That's very helpful. Thank you, and continue best of luck. James Jin Cheng: Thank you. Operator: We will take our next question. Your next question comes from the line of Mark Palmer from Benchmark. Please go ahead. Mark Palmer: Yes. Good morning. As you think about Canaan's manufacturing footprint, from a long-term standpoint, what would that look like, and where would the company's US manufacturing place, you know, to adjust for the tariff environment, fit into that? Nangeng Zhang: Yeah. I think over the last year, the external environment has been very dynamic. Tariffs move back and forth. Compliance requirements become tighter in many markets, and it's very volatile. In this context, computation is not only about the price and the efficiency. It's also about the compliance, capability, display, and how fast you can adjust. So now the supply chain issue is combined with compliance. But we treat compliance as a baseline. So we keep high standards across sales, delivery, and regional operations. Despite multiple policy changes last year, we did not take any meaningful surprise loss from policy swings. This is not always the case in this industry. More particularly, some peers have a heavier fixed asset exposure in certain regions. And so when the policy or the market trends quickly, their adjustment cost is higher. We do not have, you know, firstly, our self-mining is 100% outside China. And also, we build multiple region production and assembly setups across Mainland China, South Asia, Malaysia, and even in California, North America. So this really gives us resilience and continuity as regions become less predictable. So, you know, I think for your question, North America is our most important market. And last year, we built thousands of machines from our US manufacturing facilities. So this year, we will carefully review the whole supply chain and make it safer for US customers and expand our US manufacturing. Yeah. Thank you. Mark Palmer: That's helpful color. Thank you. Thank you. Operator: We will take our next question. Your question comes from Kevin Cassidy from Rosenblatt Securities. Kevin Cassidy: Hi. Yeah. Thanks for taking my questions. I wonder at what point price do your customers break even for Bitcoin mining? I think it had been $90,000. Has that changed? James Jin Cheng: Thank you, Kevin. I think we have two lines for this breakeven point. One, including the price of the machines, we say it's the all-in payback level. I think it's almost like a $100,000 to $110,000 range for Bitcoin price to stay there. And, you know, the hash price should be like $55 per PH per day. Something between that, that's the all-in payback level. Another interesting metric to measure this is the marginal shutdown level because we only consider the energy cost, the variable cost when we start the operation because the CapEx is already a sunk cost. So in this kind of scenario, it's quite lower compared to the previous all-in payback level. For various miners, of course, it's different. If we use our competitor's machine as a comparison, if the electricity cost is like 6¢ and we use our competitor's S21+, we see the shutdown price is like $50,000. And if it's S19 XP, it's $66,000. And then look back to ourselves or our mining operation. Our average cost is like 4.3¢ globally. So our shutdown price for the A15 Pro version is like $37,000. When Bitcoin price hits like $37,000, we have to shut down the machine. But, of course, in our mining sites, we do have some older generation machines. So it varies from, you know, like $40,000 to $50,000 to $60,000 in certain cases. So I think that's the part. If we change that to the A16 series, it's 12.8 joules power efficiency, and the shutdown price is about $30,000, you know, for Bitcoin price. I think this calculation is based on the latest hash price. It always changes because of the network, the total network hash rate changes, and also the Bitcoin price changes. So I think in the current stage, we have already observed in December, early January, and early February, some of the operations in the network have been shut down, and the total hash rate moves back to like 900 exahash from previously 1,100 exahash. So we do see a lot of needs in the short term have not been released to the manufacturers. But in the longer term, when the electricity has already been prepared for mining, they will come back asking for better machines, for the latest generation machines. That's something that happened in the past cycles, no matter bear market or bull market. Kevin, I think this answers your question. Kevin Cassidy: That was a great answer. Thank you. Yeah. Very good. Thank you. As you get more orders for the leading edge, then what is your foundry availability on the A16, and what's the cost difference for a wafer versus A15? Nangeng Zhang: Yeah. I'll do this one. Since last year, with our assessment of market cycles, we have maintained a fixed price interest strategy with low stock levels. And we secured, but we still secured critical foundry capacity and supply chain resources in anticipation of market recovery this year. Currently, global foundry capacity is indeed very tight, particularly for advanced nodes, which are seeing surging demand for AI-related sectors. But we secured our position earlier and maintained it because we have long-term partnerships. We're utilizing rolling forecast prepayments and collaborative ramp-up mechanisms. So our access to wafers and key components remains stronger than the industry average. What I can say is, yeah, industry average. So regarding the cost, we cannot disclose specific product unit costs for A16 faces upwards pressure in wafers, packaging, and certain system components compared to A15. I think it's for sure. You know, even the metal is rising in price. So our plan is to offset these costs through yield improvements, testing optimizations, and designing more efficient systems. So, overall, what I can say is we expect the unit cost increase for A16 to remain within a manageable range. Ultimately, we measure competitiveness by our customers' life cycle economics, including power efficiency, returns stability, and delivery certainty. So I think if the market recovers, our cost and our performance can give you an opportunity to have good ASP at that time. Yeah. Thank you. Kevin Cassidy: Great. Okay. Thank you. Operator: Thank you. We will take our next question. Your next question comes from the line of Kevin Dede from H. C. Wainwright. Please go ahead. Kevin Dede: Hi, Nangeng and James. Thanks for having me on the call. A couple of things for you. One is just I know you spoke to strategic priorities, but I just like to understand the one-gigawatt facility objective and what that pipeline looks like. Maybe you could add some color there, please. Nangeng Zhang: Yeah. Okay. Hello. Good morning. Yeah. We will share more details when the time comes. But currently, we are quite confident in the gigawatt-level power opportunities, which is based on our results from work at this stage. We have already worked on this for maybe close to one year, I think. Yeah. Second, yes, we believe our goal is to co-locate AI HPC and Bitcoin mining much better. So we are talking about high-quality power resources. Kevin Dede: Okay. Thanks, Nangeng. James, you mentioned, I think, a cash outlay of $100 million for wafers and $80 million in operating costs, I think, in the fourth quarter. Can you offer more detail on the wafers you secured? And of the 14 exahash sold, you usually give us sort of an average price per terahash, and I was wondering if you could offer some color on that and whether or not that figure would include the home series. James Jin Cheng: Yeah. Thank you, Kevin. I think we start from the average selling price. I think the Q4 average selling price is $11.3, slightly lower than Q3, but I have explained a little bit on the margin side just because our average selling price for the institutional miners in a big order is usually lower than the small orders for the retail miners. I think that's the case. And, also, we prioritized the industrial miners in Q4 instead of the home series. Even the margin side, the home series is better. But we have to make sure our strategic partner, the client, feels satisfied to get our delivery on time. So we tried our best in Q4. And, you know, still a few batches were delayed to early January. But we completed most of the deliveries in Q4. I think that's very helpful to the client. But not helping our financials. It looks like the profitability part is not as good as we expected for Q4. Just like I mentioned, the $38 million is the total expense for Q4. We did some work, which is slightly lower than Q3, in streamlining the organization. And I think the wafer supply side, the $100 million secured is most likely the wafer delivered to the customers and also some of the inventories carried to Q1. It's ongoing. We still, but with a smaller volume of payment, continue that trajectory in Q1 to our wafer partner. I think that's some color I added to this question, Kevin. Kevin Dede: Thank you very much, James and Nangeng. Appreciate being on the call. James Jin Cheng: Thank you, Kevin. Thank you. Operator: Thank you. Once again, if you wish to ask a question, we will take the next question. The question comes from Kevin Dede from H. C. Wainwright. Please go ahead. Kevin Dede: Hi again, gentlemen. I figured I'd hop on again given the opportunity to do that. Nangeng, can you talk a little bit about your product development? I understand the 12 joules per terahash target for the A16, but you also mentioned chip development that could push you down to maybe five or six joules per terahash. Can you talk about that and whether or not you see a product cycle shortening and when you might think that latest generation chip might be in the market? Nangeng Zhang: Yeah. I think it's a very open question. I think for the A16 series, currently, we achieved 12.8 joules for the ASIC XP with manageable cost rise. So our target is to, when the market recovers, you know, currently because of the deep dive for the Bitcoin price, so the whole market is some kind of freezing for a few weeks maybe. And after the market recovers, the competition comes back, we can have very competitive cost and performance to our competitors and give benefits to our customers. And for the next generation, yes, we have already moved to the next generation development for the chips. But, you know, because we are already at sub-nano process nodes, I think the benefits from the process itself are very tightened now. And, also, the cost for the manufacture of the chips is rising a lot. We are trying different methods to further improve the energy efficiency. But it looks like after, I mean, after the 12 joules stage, when we come to the sub-10 joules product, it's very, very hard to say that the manufacturing cost is still manageable if we are using today's standards. We already observed that our competitors' products have to be priced very high because we know the rough cost for the system. You cannot sell at a loss forever. Right? So, currently, in many different internal meetings, we are continuing to discuss if our target is the best power efficiency, then we may have to pay for, like, twice or triple the cost. How can we avoid this kind of situation? Because the most important part is to let the TCO for our customers. Yeah. So also, we, you know, we also started the big-scale infrastructure in the US. So I think on the operational side, we are not only the equipment provider, we also got involved in operations. Any pains our customers have previously, we will react to ourselves. So we are thinking about this more and more carefully. Yeah. So, currently, I think in conclusion, I think the development for the new system, we will not accelerate, but also it will not delay. It will just go at a very natural progress. We are sure we will have new products this year. And, yeah, and also, you know, we hope at that time, you know, the AI HPC will not relocate 100% of the semiconductor capacity. Yeah. And also, we don't have, like, the DRAM and HBM kind of memories. So sometimes we are in a very good position. Still, we can use the rapid or, you know, sometimes the peak capacity is released from the foundries. We can use this kind of capacity to get one-time deals to fill our inventory. So this is good. We are waiting for this kind of opportunities. Yeah. So, basically, I think the industry is not coming to the end. It's still going at a normal speed. Yeah. This is my personal view. Yeah. Thank you. Kevin Dede: Okay. Okay, Nangeng. Yeah. Thank you for the detail there. Does Canaan have a self-mining target for 2026? Congratulations for reaching 10 exahash. I know that was a target in '25. I was wondering if you thought about and are willing to communicate where you hope to be at the end of this year. Nangeng Zhang: Yeah. I think our priority is R&D and delivery to our customers first. And because of the current market situation, so we moved the priority to allocate energy resources instead of just putting more rigs on the shelf. So, yeah, the infrastructure will give us the ability to scale it up when the right window opens. Yeah. So, currently, I don't have a fixed number for this year. We have internal goals for electricity infrastructure. Yeah. So, yeah. And after that, if the window opens, we will rapidly ramp up the hash rate. I think controllable energy resources and facilities will give us more opportunities to try different business models and to provide different kinds of products to our customers. Yeah. I hope, you know, the hash rate sales can come through to our mainstream maybe next year. Yeah. Operator: Thank you. As there are no further questions now, I'd like to turn the call back over to the company for any closing remarks. Gwyn Lauber: Thank you for joining the call today, and we look forward to speaking with everyone throughout the quarter. Thanks. Operator: Thank you. That concludes the call today. Thank you, everyone, for attending. You may now disconnect.
Operator: Good day, and welcome to the Q4 2025 Datadog Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. If your question has been answered and you would like to remove yourself from the queue, please press 11 again. As a reminder, this call may be recorded. I would now like to turn the call over to Yuka Broderick, Senior Vice President of Investor Relations. Please go ahead. Yuka Broderick: Thank you, Michelle. Good morning, and thank you for joining us to review Datadog's fourth quarter 2025 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's Co-Founder and CEO, and David Obstler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the first quarter and fiscal year 2026, and related notes and assumptions, our product capabilities, and our ability to capitalize on market opportunities. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended 09/30/2025. Additional information will be made available in our upcoming Form 10-K for the fiscal year ended 12/31/2025 and other filings with the SEC. This information is also available on the investor relations section of our website along with a replay of this call. We will discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com. With that, I would like to turn the call over to Olivier. Olivier Pomel: Thank you, Yuka, and thank you all for joining us this morning to go over what was a very strong Q4 and overall a really productive 2025. Let me begin with this quarter's business drivers. We continue to see broad-based positive trends in the demand environment. With the ongoing momentum of cloud migration, we experienced strength across our business, across our product lines, and across our diverse customer base. We saw a continued acceleration of our revenue growth. This acceleration was driven in large part by the inflection of our broad-based business outside of the AI-native group of customers we discussed in the past. And we also continue to see very high growth within these AI-native customer groups as they go into production and grow in users, tokens, and new products. Our go-to-market teams executed to a record $1.63 billion in bookings, up 37% year over year. This included some of the largest deals we have ever made. We signed 18 deals over $10 million in TCV this quarter, of which two were over $100 million, and one was an 8-figure land with a leading AI model company. Finally, churn has remained low, with gross revenue retention stable in the mid to high nineties, highlighting the mission-critical nature of our platform for our customers. Regarding our Q4 financial performance and key metrics, revenue was $953 million, an increase of 29% year over year, and above the high end of our guidance range. We ended Q4 with about 32,700 customers, up from about 30,000 a year ago. We also ended Q4 with about 4,310 customers with an ARR of $100,000 or more, up from about 3,610 a year ago. These customers generated about 90% of our ARR. And we generated free cash flow of $291 million with a free cash flow margin of 31%. Turning to product adoption, our platform strategy continues to resonate in the market. At the end of Q4, 84% of customers used two or more products, up from 83% a year ago. 55% of customers used four or more products, up from 50% a year ago. 33% of our customers use six or more products, up from 26% a year ago. 18% of our customers use eight or more products, up from 12% a year ago. As a sign of continued penetration of our platform, 9% of our customers use 10 or more products, up from 6% a year ago. During 2025, we continued to land and expand with larger customers. As of December 2025, 48% of the Fortune 500 are Datadog customers. We think many of the largest enterprises are still very early in their journey to the cloud. The median Datadog ARR for our Fortune 500 customers is still less than half a million dollars, which leaves a very large opportunity for us to grow with these customers. So we are landing more customers and giving more value, and we also see that with the ARR milestones we are reaching with our products. We continue to see strong growth dynamics with our core three pillars of observability: infrastructure monitoring, APM, and log management. As customers are adopting the cloud, AI, and modern technologies, today, infrastructure monitoring contributes over $1.6 billion in ARR. This includes innovations that deliver visibility and insights across our customers' environments, whether they are on-prem, virtualized servers, containerized hosts, serverless deployments, or parallelized GPU fleets. Meanwhile, log management is now over $1 billion in ARR. This includes continued rapid growth with FlexLogs, which is nearing $100 million in ARR. And our third pillar, the end-to-end suite of APM and DEM products, also crossed $1 billion in ARR. This includes an acceleration of our core APM product, into the mid-thirties percent year over year, currently our fastest-growing core pillar. We have now enabled our customers with the easiest onboarding and implementation in the market while delivering unified deep end-to-end visibility into the application. Now remember that even with these three pillars, we are still just getting started, as about half of our customers do not buy all three pillars from us, or at least not yet. Moving on to R&D and what we built in 2025, we released over 400 new features and capabilities this year. That's too much for us to cover today, but let's go over just some of our innovations. We are executing relentlessly on a very ambitious AI roadmap, and I will split our AI efforts into two buckets: AI for Datadog and Datadog for AI. So first, let's look at AI for Datadog. These are AI products and capabilities that make the Datadog platform better and more useful for customers. We launched the AI SRE agent for general availability in December to accelerate root cause analysis and incident response. Over 2,000 trial and paying customers have run investigations in the past month, which indicates significant interest and showed great outcomes with BCAI. Sorry. And we are well on our way with DeepAI DevAgent, which detects code-level issues, generates fixes with production context, and can even help release the monitor fix. And BigAI Security, which autonomously charges SIEM signals, conducts investigations, and delivers recommendations. The Datadog MCP server is being used by thousands of customers in preview. Our MCP server responds to AI agent and user prompts and uses real-time production data and rich data context to drive troubleshooting, root cause analysis, and automation. And we are seeing explosive growth in MCP usage. With the number of tool calls growing 11-fold in Q4 compared to Q3. Second, let's talk about Datadog for AI. This includes capabilities that deliver end-to-end observability and security across the AI stack. We are seeing an acceleration in growth. Over 1,000 customers are using the product, and the number of spans sent has increased 10 times over the last six months. In 2025, we broadened this product to better support application development and integration, adding capabilities such as experiments, LLM playground, LLM analysis, and custom as a judge. And we will soon release our AI Agents console to monitor usage and adoption of AI agents and coding assistance. We are working with design partners on GPU monitoring, and we are seeing GPU usage increase in our customer base overall. And we are building into our products the ability to secure the AI stack against prompt injection attacks, model hijacking, and data poisoning, among many other risks. Overall, we continue to see increased interest among our customers in Next Gen AI. Today, about 5,500 customers use one or more Datadog AI integrations to send us data about their machine learning, AI, and LLM usage. In 2025, our observability platform delivered deeper and broader capabilities for our customers. We reached a major milestone of more than 1,000 integrations, making it easy for our customers to bring in every type of data they need and engage with the latest technologies, from cloud to AI. In node management, we are seeing success with our consolidation motion. During 2025, we saw an increasing demand to replace a large legacy vendor with stakeout in nearly 100 deals for tens of millions of dollars of new revenue. And we improved log management with notebooks, reference tables, log patterns, calculated fields, and an improved lifestyle among many other innovations. We launched data observability for general availability. Data is becoming even more critical in the AI era. With data availability, we are enabling end-to-end visibility across the entire data life cycle. We launched storage management last month, providing granular insights into cloud storage and recommendations to reduce spend. We delivered Kubernetes auto-scaling so users can quickly identify which over-provisioned clusters and deployments and right-size their infrastructure. In the digital experience monitoring area, we launched product analytics to help product designers make better design decisions with clear data about user experience and behavior. And we delivered run without limits, giving front-end teams full visibility into user traffic and performance, and dynamically choosing the most useful sessions to retain. In security, we are seeing increasing traction in our activity displacing existing market-leading solutions with cloud SIEM in long to private. This year, our engineers shipped many new capabilities, including a tripling of the amount of content packs into the product. And most importantly, the tight integration with Bit.ai security agent, which has already shown promise as a strong differentiator in the market. We launched code security, enabling customers to detect and remediate vulnerabilities in their code and open-source libraries, from development to production. And then we continue to advance our cloud security offering, adding infrastructure as code or IAC security, which detects and resolves security issues with Terraform. And we launched our security graph to identify and evaluate attack paths. In software delivery, in January, we launched feature flags. They combine with our real-time observability to enable Canary rollouts so teams can deploy new code with confidence. And we expect them to gain importance in the future, as they serve as a foundation for automating the validation and release of applications in an AI agentic development world. We are also building out our internal developer portal, which includes software catalog and scorecards, to help developers navigate infrastructure and application complexity, provide rich context to AI development agents, and ultimately enable a faster release cadence. Cloud service management, we launched on-call, and now support over 3,000 customers with their incident response processes. And I already mentioned this AI's already agent, which pairs with on-call to accelerate our customer incident resolution. As you can tell, we have been very busy, and I want to thank our engineers for a very productive 2025. And most importantly, I am even more excited about our plan for 2026. So let's move on to sales and marketing. I want to highlight some of the great deals we closed this quarter. First, we landed an 8-figure annual deal, and our biggest new logo deal to date with one of the largest AI financial model companies. The customer had a fragmented observability stack and cumbersome monitoring workflows leading to poor productivity. This is a consolidation of more than five open-source, commercial, hyperscaler, and in-house observability tools into the unified Datadog platform. That has returned meaningful time to developers and has enabled a more cohesive approach to observability. This customer is experiencing very rapid growth, and Datadog allows them to focus on product development, supporting their users, which is critical to their business success. Next, we welcome back a customer with a European data company in a nearly 7-figure annualized deal. This customer's log-focused observability solution had poor user experience and integrations, which led to limited user adoption and gaps in coverage. By returning to Datadog and consolidating seven observability tools, they expect to reduce tooling overhead, improve engineering productivity with faster incident resolution. They would adopt nine Datadog products as a stock, including some of our newer products, such as FlexLog, observability pipeline, self-cost management, data observability, and on-call. Next, we signed an 8-figure annualized expansion with a leading e-commerce and digital payments platform. These customers' products have an enormous reach in commercial APM solutions, had scaling issues, lacked correlation across silos, and had a pricing model that was difficult to understand or predict. With this extension, they are standardizing on Datadog APM using OpenTelemetry, so their teams can correlate metrics, tracing, and logs to detect and resolve issues faster. And they have already seen meaningful impact, with a 40% reduction in resolution times by their own estimates. This customer has adopted 17 products across the Datadog platform. Next, we signed a seven-figure annualized expansion for an eight-figure annualized deal with a Fortune 500 food and beverage retailer. This long-time customer uses the Datadog platform across many products but still has over 30 other observability tools and embarked on consolidating for cost savings and better outcomes. With this expansion, Datadog log management and flex logs would replace the legacy logging product for all ops use cases, with expected annual savings in the millions of dollars. This customer is expanding to 17 Datadog products. Next, we signed a 7-figure annualized expansion with a leading healthcare technology company. This company was facing reliability issues impacting clinicians during critical workflows and putting customer trust at risk. The customer will consolidate six tools and adopt seven Datadog products, including LLM observability, to support their AI initiative, as well as Big AI SRE agents to further accelerate incident response. Next, we signed an 8-figure annualized expansion, more than quadrupling the annualized commitment, with a major Latin American financial services company. Given its successful tool consolidation projects and rapid adoption of Datadog products across all of its teams, the customer renewed only with us when expanding to additional products, including data observability, CI visibility, database monitoring, and observability pipelines. With Datadog, this customer showed measurable improvements in cost efficiency, customer experience, and conversion rates across multiple lines of business. That proof of value led them to broaden their commitment with us and have firmly established Datadog as their mission-critical observability partner. Last and not least, we signed a 7-figure annualized expansion for an 8-figure annualized deal with a leading fintech company. With this expansion, the customer is moving their log data onto our unified platform, so teams can correlate telemetry in one place and save between hours and weeks in time to resolution for incidents. This customer has obtained 19 Datadog products across the platform, including all three pillars, as well as visual experience, security, software delivery, and service management. And that's it for our wins. Congratulations to our entire go-to-market team for a great 2025 and a record Q4. It was inspiring to see the whole team at our last month, and really exciting to embark on a very ambitious 2026. Before I turn it over to David for the financial review, I want to say a few words on our longer-term outlook. There is no change to our overall view that digital transformation and cloud migration are long-term secular growth drivers for our business. So we continue to extend our platform to solve our customers' problems from end to end across our software development, production, data stack, user experience, and security needs. Meanwhile, we are moving fast in AI by integrating AI into the Datadog platform to improve customer value and outcome, and by building products to observe, secure, and act across our customers' AI stacks. In 2025, we executed very well and delivered for our customers against their most complex mission-critical problems. Our strong financial performance is an output of that effort. And we are even more excited about 2026 as we are starting to see an inflection in AI usage by our customers into the application, and as our customers begin to adopt AI innovation, such as Big AI SRE agent. To hear about all that in detail and much more, I welcome you all to join us at our next Investor Day this Thursday in New York between 1 and 5 PM. I'll be joined by our product and go-to-market leaders, sharing how we are serving our customers, how we innovate to broaden our platform, and how we are delivering better value with AI. For more details, refer to the press release announcing the event or head to investors.datadoghq.com. And with that, I will turn it over to our CFO, David. David Obstler: Thanks, Olivier. Our Q4 revenue was $953 million, up 29% year over year, and up 8% quarter over quarter. Now to dive into some of the drivers of our Q4 revenue growth. First, overall, we saw robust sequential usage growth from existing customers in Q4. Revenue growth accelerated with our broad base of customers, excluding the AI natives, to 23% year over year, up from 20% in Q3. We saw strong growth across our customer base with broad-based strength across customer size, spending bands, and industries. And we have seen this trend of accelerated revenue growth continue in January. Meanwhile, we are seeing continued strong adoption amongst AI-native customers with growth that significantly outpaces the rest. We see more AI-native customers using Datadog, with about 650 customers in this group. And we are seeing these customers grow with us, including 19 customers spending $1 million or more annually with Datadog. Among our AI customers are the largest companies in this space. As of today, 14 of the top 20 AI-native companies are Datadog customers. Next, we also saw continued strength from new customer contributions. Our new logo bookings were very strong again this quarter, and our go-to-market teams converted a record number of new logos. And average new logo land sizes continue to grow strongly. Regarding retention metrics, our trailing twelve-month net retention revenue retention percentage was about 120%, similar to last quarter. And our trailing twelve-month gross revenue retention percentage remains in the mid to high nineties. And now moving on to our financial results. First, billings were $1.21 billion, up 34% year over year. Remaining performance obligations or RPO was $3.46 billion, up 52% year over year. And current RPO growth was about 40% year over year. RPO duration increased year over year as the mix of multiyear deals increased in Q4. We continue to believe revenue is a better indication of our business trends than billing and RPO. Now let's review some of the key income statement results. Unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. First, our Q4 gross profit was $776 million with a gross margin percentage of 81.4%. This compares to a gross margin of 81.2% last quarter and 81.7% in the year-ago quarter. Q4 OpEx grew 29% year over year, versus 32% last quarter and 30% in the year-ago quarter. And we continue to grow our investments to pursue our long-term growth opportunities, and this OpEx growth is an indication of our successful execution on our hiring plans. Our Q4 operating income was $230 million or a 24% operating margin compared to 23% last quarter and 24% in the year-ago quarter. Now turning to the balance sheet and cash flow statements. We ended the quarter with $4.47 billion in cash, cash equivalents, and marketable securities. Cash flow from operations was $327 million in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $291 million for a free cash flow margin of 31%. And now for our outlook for the first quarter and the full fiscal year 2026. Our guidance philosophy overall remains unchanged. As a reminder, we base our guidance on trends observed in recent months and apply conservatism on these growth trends. For the first quarter, we expect revenues to be in the range of $951 to $961 million, which represents a 25% to 26% year-over-year growth. Non-GAAP operating income is expected to be in the range of $195 to $205 million, which implies an operating margin of 21%. Non-GAAP net income per share is expected to be in the $0.49 to $0.51 per share range, based on approximately 367 million weighted average diluted shares outstanding. And for the full fiscal year 2026, we expect revenues to be in the range of $4.06 to $4.1 billion, which represents 18% to 20% year-over-year growth. This includes modeling within our guidance that our business, excluding our largest customer, grows at least 20% during the year. Non-GAAP operating income is expected to be in the range of $840 million to $880 million, which implies an operating margin of 21%. And non-GAAP net income per share is expected to be in the range of $2.08 to $2.16 per share, based on approximately 372 million weighted average diluted shares. Finally, some additional notes on our guidance. First, we expect net interest and other income for the fiscal year 2026 to be approximately $140 million. Next, we expect cash taxes in 2026 to be about $30 million to $40 million, and we continue to apply a 21% non-GAAP tax rate for 2026 and beyond. Finally, we expect capital expenditures and capitalized software together to be in the 4% to 5% of revenue range in fiscal year 2026. To summarize, we are pleased with our strong execution in 2025. Thank you to the Datadog teams worldwide for a great 2025. And I am very excited about our plans for 2026. And finally, we look forward to seeing many of you on Thursday for our Investor Day. And now with that, we will open up our call for questions. Operator, let's begin the Q&A. Operator: Thank you. Our first question comes from Sanjit Singh with Morgan Stanley. Your line is open. Sanjit Singh: Thank you for taking the questions and congrats on a strong close to the year and a successful 2025. Olivier, I wanted to get your updated views in terms of where observability is headed in the context of a lot of advancements when it comes to agentic frameworks, agentic deployments, the stuff that we have seen from Anthropic and new frontier models from OpenAI. Just in terms of, like, what this means for observability as a category, the visibility of it, in terms of, can customers use these tools to build, you know, homegrown solutions for observability. Just get your latest comments on the defensibility of the category and how Datadog may potentially have to evolve in this new sort of agentic era. Olivier Pomel: Yeah. I mean, look. There are a few different ways to look at it. You know? One is there's going to be many more applications than there were before. Like, people are building much more, and they're building much faster. You know, we have covered that in previous calls, but, you know, we think that this is nothing but an acceleration of the increase of productivity for developers in general, so you can build a lot faster. As a result, you create a lot more complexity because you build more than you can understand at any point in time. And you move a lot of the value from the act of writing the code, which now you actually do not own anymore, to validating, testing, making sure it works in production, making sure it's safe, making sure it interacts well with the rest of the world, with the end users, making sure it does what it's supposed to do for the business, you know, which is what we do with observability. So we see a lot more volume there, and we see that as, you know, what we do basically where observability can help. The other part that's interesting is that a lot more happens within these agents and these applications. And a lot of what we do as humans now starts to look like observability. You know? Basically, we're here to understand, we try to understand what the machine does. We try to make sure it's aligned with us. We try to make sure, you know, the output is what we expected when we started. And that, you know, we did not break anything. And so we think it's going to bring observability more widely in domains that it did not necessarily cover before. So we think that these are accelerants, and we, I mean, obviously, we have a horse in this race, but, you know, we think that observability and the contact between the code, the applications, and the real world, and the environment, and the real user, and the real business, is the most interesting, the most important part of the whole AI development life cycle today. Sanjit Singh: And maybe just one follow-up on that line of thinking. In a world where there's a greater mix between human SREs and agentic SREs, is there any sort of evolution that we need to think about in terms of whether it's UI or how workflows work in observability and how, maybe Datadog sort of tries to align with that evolution that's likely to come in the next couple of years? Olivier Pomel: Yeah. Because there's going to be an evolution, that's certain. There's going to be a lot more automation, we see today. Like, we see all the signs we see point to everything moving faster. I mean, more data, but more interactions, more systems, more releases, more breakages, more resolutions of those breakages, more bugs, more vulnerabilities. Everything. Yeah. So we see an acceleration there. At the end of the day, the humans will still have some form of UI to interact with all that. And a lot of the interaction will be automated by agents. So we're building the product to satisfy both conditions. So we have a lot of UIs, and we are able to present the human with UIs that represent how the world works, what the options are, give them some of your ways to go through problems and to model the world. And we also are exposing a lot of our functionality to agents directly. You know, we mentioned on the call we have an MCP server that is currently in preview and that is really seeing explosive growth of usage from our customers. And so it's a very likely future that part of our functionality is delivered to agents through MCP servers or the like. Part of our functionality is directly implemented by our own agents. And part of our functionality is delivered to humans with UIs. Sanjit Singh: Understood. Thank you, Olivier. Operator: Our next question comes from Raimo Lenschow with Barclays. Your line is open. Raimo Lenschow: Congrats from me as well. Staying on a little bit on that AI theme. Olivier, the 8-figure deal for a model company is really exciting. I assume they tried to do it with some open-source tooling, etcetera. But and actually went from, like, you know, almost paying not a lot of money to paying you more money. What drove that thinking? What do you think they saw that kind of convinced them to do that? And it's now the second one, you know, after the other very big model provider. So clearly, that whole debate in the market between oh, you can do that on the cheap somewhere, is not kind of valid. Could you speak to that, please? Thank you. Olivier Pomel: I mean, the situation is just very similar to where every single customer will land. Every customer we land has had some homegrown. They have some open source. They might still run some open source. Like, that's typically what we see everywhere. The idea that it's cheaper to do it yourself is usually not the case. You know? So your engineers are typically very well compensated in the big part of the spend in these companies. Their velocity is what gates just about anything else in the business. And so, you know, usually, when we come in, when customers start engaging with us, we can very quickly show value that way. So it's not any different from what we see with any other customer. And, also, within the AI cohort, it's not, you know, original at all. Like, you know, the AI cohorts in general are a who's who of the companies that are throwing guys and that are shaping the world in AI. And they're all adopting our product for the same reasons. Sometimes with different volumes because those companies have different scales, but the logic is the same. Raimo Lenschow: Perfect. Thank you. Operator: Thank you. Our next question comes from Gabriela Borges with Goldman Sachs. Gabriela Borges: Hi, good morning. Congratulations on the quarter and thank you for taking my question. Olivier, I wanted to follow up on Sanjit's question on how to think about where the line is between what an LLM can do longer term and the domain experience that you have in observability. If I think about some of Anthropic's recent announcements, they're talking about LLMs as a broader anomaly detection type tool, for example, on the security vulnerability management side, how do you think about the limiting factor to using LLM as an anomaly detection tool that could potentially take share over from the severity of the time and the category? And how do you think about the moat that Datadog has that offers customers a better solution relative to where the roadmap and LLMs can go long term? Thank you. Olivier Pomel: Yeah. So that's a very good question. You know, we definitely see that LLMs are getting better and better, and we will bet on them getting significantly better, you know, every few months as we've seen over the past couple of years. And as a result, they are very, very good at looking at broad sets of data, you know, for analysis. So if you see a lot of data, ask for an analysis, you're very likely to get something that is very good, and that is going to get, you know, even better. So when you think of, you know, what we have that is here, there's two parts. One is how we are able to assemble that context so we can feed it into those intelligence engines. You know? And that's how we aggregate all the data we get, you know, we parse out the dependencies, we understand where we can fit together, and we can fit that into the LLM. That's in part what we do. For example, today, we expose the kinds of functionality behind our MCP server. And so customers can recombine that in different ways using different intelligence tools. But the other part that's we think where the world is going is going for observability is that, you know, right now, we are, you know, GSDLP is accelerating a lot but it's still somewhat slow. And so it's okay to have incidents and run post hoc analysis on those incidents and maybe use some outside tooling for that. Where the world is going is you're going to have many more changes, many more things. You cannot actually afford to have incidents to look at for, you know, everything that's happening in your system. So you'll need to be proactive. You'll need to run analysis in stream as all the data flows through. You'll need to run detection and resolution before you have outages materialize. And for that, you'll need to be embedded into the data plane, which is what we run. And we also need to be able to run specialized models that can act on that data, you know, as opposed to just taking everything and summarizing everything after the fact in fifteen minutes later. And that's, you know, what we're uniquely positioned to do. We're building that. We know we're not quite there yet, but we think that, you know, a few years from now, that's where the world's going to run, and that's what makes us significantly different in terms of how we can apply under detection intelligence and preemptive resolution into our systems. Gabriela Borges: That makes a lot of sense. Thank you. My follow-up, by the way, the data planes we're talking about are very real-time. And there are many orders of magnitude larger in terms of data flows, data volumes than what you typically feed into an LLM. So it's a bit of a different problem to solve. Gabriela Borges: Yeah. Super interesting. Thank you. My follow-up for you, Olivier and David, you've mentioned a couple of times now some of the conversations you have with customers about value creation within the Datadog platform. Tell us a little bit about how some of those conversations evolve when the customer sees that in order to do observability for more AI usage, perhaps that Datadog bill is going up. What are some of the steps that you can take to make sure that the customer still feels like they're getting a ton of value out of the Datadog platform? Thank you. Olivier Pomel: Well, there's a few things. I mean, first, you know, again, the rule of software always applies. You know, there's only two reasons that people buy your product. It's to make more money or to save money. So whatever you do, when customers use a new product, they need to see a cost saving somewhere, or they need to see that they are going to get customers they wouldn't get to otherwise. So we have to prove that. We always prove that anytime a customer buys a product, you know, that's what is happening behind the scenes. In general, when customers add to our platform as opposed to bringing another vendor in or another product team, they also spend less by doing it in our platform. Gabriela Borges: I appreciate the color. Thank you very much. Operator: Our next question comes from Ittai Kidron with Oppenheimer and Company. Your line is open. Ittai Kidron: Thanks and congrats on quite an impressive finish for the year. David, I wanted to dig in a little bit into your '26 guide. Just want to make sure I understand some of your assumptions. So maybe you could talk about the level of conservatism that you've built into the guide for the year and also you've talked about at least 20% growth for the core, excluding the largest customer. But what is it that we should assume for the large customer? And now when you look at the AI cohort excluding this large customer, are there any concentrations evolving over there given your strong success there? David Obstler: Yeah. There are questions in there. The first is overall on guidance, except what we're going to speak about next. We took the same approach as we looked at the organic growth rates and the attach rates and the new logo accumulation rates and discounted that. So for the overall business, which is quite diversified, we talked about diversification by industry, by geography, by SMB, mid-market, and enterprise. We took the same approach. We noted that with the guidance being 18% to 20%, and the non-AI or heavily diversified business being 20% plus, that would imply that the growth rate of that core business assumed in the guidance is higher than the growth rate of the large customer. That doesn't mean the large customer is growing any which way. It's just that in our consumption model, we essentially don't control that. And so we took a very conservative assumption there. And the last point I think you mentioned is the highly diversified. We said 650 names in the AI. It's quite diversified. You know? Essentially, it would be very similar to our overall business, which we have a range of customers, but not the concentration level. And what we're seeing there is significant growth. But like our overall distributed customer base, you know, a growth and then, you know, potentially some working on how the product's being used. But nothing, you know, out of the ordinary relative to the overall customer base. In the very diversified AI set of customers outside the largest customer. Ittai Kidron: Okay. That's great. Yeah. And can you give us the percent of revenue of the AI cohort this quarter? David Obstler: We definitely haven't put it in there. Ittai Kidron: Thank you. Operator: Our next question comes from Todd Coupland with CIBC. Todd Coupland: Thank you and good morning. I wanted to ask you about competition. And how the LLM rise is impacting share shifts. Just talk about that and how Datadog will be impacted. Thanks a lot. Olivier Pomel: Yeah. I mean, there hasn't been, you know, in the market with customers, there hasn't been any particular change in competition, you know, in that we see the same kind of folks, and the positions are relatively similar. And we are pulling away. We're taking share from anybody who has scale. And I know there's been noise. There were a couple of M&A deals that came up, and we got some questions about that. The companies in there were not particularly winning companies, not companies that we saw in deals. That can be they had a large market impact. And so we don't see that as changing the competitive dynamics for us in the near future. We also know that competing in observability is a very, very full-time job. It's a very innovative market. And we know exactly what it is we have to do and have to do to keep pulling away the way we are. And so we're very confident in our approach and what we're going to do in the future there. With the rise of LLM, there's clearly more functionality to build, and there's new ways to serve customers. You know, we have mentioned our product. There are a few other products on the market for that. I think it's still very early for that part of the market, and that market is still relatively undifferentiated in terms of the kinds of products they are. But we expect that to shake out more into the future. We think in the end, there's no reason to have observability for your LLM that is different from the rest of your system. In great part because your LLMs don't work in isolation. The way they implement their sparks is by using tools, the tools on your applications and your existing applications. Or new applications you build for that purpose. And so you need everything to be integrated in production, and we think we stand on a very strong footing there. Todd Coupland: Thank you. Operator: Thank you. Our next question comes from Mark Murphy with JPMorgan. Your line is open. Mark Murphy: Thank you. Olivier, Amazon is targeting $200 billion in CapEx this year. If you include Microsoft and Google, that CapEx is going to exceed $500 billion this year for the big three hyperscalers. It's growing 40% to 60%. I'm wondering if you've collected enough signal from the last couple of years of CapEx that trend to estimate how much of that is training-related and when it might convert to inference where Datadog might be required. In other words, you know, are you looking at this wave of CapEx and able to say it's going to create a predictable ramp in your LLM observability revenue, maybe what inning of that are we in? And then I have a follow-up. Olivier Pomel: I think it's more I think it's probably too reductive to peg that on LLM's availability. I think it points to way more applications, way more intelligence, way more of everything into the future. Now it's kind of hard to directly map the CapEx on those companies into what part of the infrastructure is actually going to be used to deliver value, you know, two or three or four years from now. So I think we'll have to see on what the conversion rate is on that. But, look, it definitely points to very, very, very large increases in the complexity of the systems, the number of systems, and the reach of the systems in the economy. And so we think it's going to be like, it's going to be of great help to our business. Let's put it this way. Mark Murphy: Yeah. Great help. Okay. And then as a quick follow-up, there is an expectation developing that OpenAI is going to have a very strong competitor, which is Anthropic. Kind of closing the gap, producing nearly as much revenue as OpenAI in the next one to two years. You mentioned that 8-figure land with an AI model company. I'm wondering if we step back, do you see an opportunity to diversify that AI customer concentration, whether, you know, sometimes it might be a direct customer relationship there. Or, you know, it could be some of the products like Claude Code, being adopted globally, just kind of creating more surface area to drive business to Datadog. Can you comment on maybe what is happening there among the larger AI providers or whether you can diversify that out? Olivier Pomel: Yeah. I mean, look. We've never been a like, we're not built as a business to be concentrating on a couple of customers. That's not how we become successful. That's probably not how we'll be successful in the long term. So, yes, I mean, we at the end of the day, it should be irrational for customers for all customers in the AI cohort not to use our product. So we see have some great successes with the customers currently in that cohort. We see more. By the way, we have more that are, more inbound there and more customers that are talking to us. From the largest, you know, even hyperscaler level AI lab. And we expect to drive more business there in the future. I think there's no question about that. And you're seeing that in some of the metrics we've been giving in terms of the number of AI-native customers. The size of some of these customers. So, you know, to echo what Olivier said, we are essentially selling to many of the largest players, which results in greater size of the cohort and more diversification. Mark Murphy: Thank you. Operator: Thank you. Our next question comes from Matt Hedberg with RBC. Your line is open. Matt Hedberg: Congrats from me as well. David, question for you. Your prior investments clearly paying off with another quarter of acceleration. And it seems like you're going to continue to invest in front of the future opportunity. I think margins are down maybe 100 basis points on your initial guide. I'm curious if you can comment on gross margin expectations this year and how you also might realize incremental OpEx synergies by using even more AI internally. David Obstler: Yeah. On the gross margin, I think what we said is, you know, plus or minus the 80% mark. We, you know, we try to engineer when we see opportunities for efficiency, we've been quite good at being able to harvest them. At the same time, we want to make sure we're investing in the platform. So I think, you know, what we're essentially where we are today is very much sort of in line with what we said we're targeting. There may be opportunity longer term, but we also are trying to balance those opportunities with investment in the platform. And in terms of AI, to date, we are using it in our internal operations. So far, it's well, the first signs of what we're seeing is productivity and adoption. We will continue to update everybody as we see opportunities in terms of the cost structure. Olivier, anything else you want to go over? Olivier Pomel: Yeah. I mean, look. The expectation in the short to midterm anyway should be that we keep investing heavily in R&D. You know, we're getting a lot we see great productivity gains, you know, with AI there. But at this point of detail, it helps us build more faster, get to solve more problems for our customers. And but we're very busy adopting AI for the organization. Matt Hedberg: Got it. Thanks, guys. Operator: Our next question comes from Koji Ikeda with Bank of America. Koji Ikeda: Yeah. Hey, guys. Thanks so much for taking the question. Olivier, maybe a question for you. A year ago, you talked about how some while some customers do want to take observability in-house, it's really a cultural choice. It may not be rational unless you have tremendous scale, access to talent, growth is not limited by innovation bandwidth. Which most companies do not. And so it is a year later, and it does seem like the industry and the ecosystem and everything has changed quite a bit. So I was hoping to get your updated views on these thoughts if it has changed at all over the past year and why. Thank you. Olivier Pomel: No. I mean, look. It's something that happens sometimes, but it's a small part of the cases. Like, the general motion is customers start with some homegrown or attempts to do things themselves. Then they move to a product, then they'll care with our product. Sometimes they optimize a little bit along the way. But the general motion is they do more and more with us. They rely on us for more of their problems. And they outsource the problem. And increasingly the outcomes to us. So I don't think that's changing. Look. We'll still see customers here and there that choose to resource it and do it themselves. Again, usually for cultural reasons. I would say economically, or from a focus perspective, it doesn't make sense for the very vast majority of companies. And, you know, we even see teams at, you know, hyperscalers that have all the tooling in the world, all the money in the world, and that still choose to use our products. Because it gives them a more direct path to solving their problems. Koji Ikeda: Thank you. Operator: Thank you. And our next question comes from Peter Weed with Bernstein Research. Your line is open. Peter, if your telephone is muted, please unmute. Our next question comes from Brad Reback with Stifel. Your line is open. Brad Reback: Great. Thanks very much. Olivier, the sustained acceleration in the core business is pretty impressive. Obviously, you all have invested very aggressively in go-to-market over the last kind of eighteen to twenty-four months. Can you give us a sense of where you are in that productivity curve? And if there's additional meaningful gains you think? Or is it incremental? And maybe where you see additional investments in the next twelve to eighteen months? Thanks. Olivier Pomel: Yeah. I mean, we feel good about the productivity. I think the main drivers for us in the future are we still need to scale, and we're still scaling the go-to-market team. We're not at the scale we need to be in every single marketing segment we need to be in in the world right now. And so we keep scaling there. Their focus now is not necessarily to improve productivity. It's to scale while maintaining productivity. And, of course, there's too many, many things we can do. Actually, we love our performance, there's always a bunch of things that could be better, your territory that could be better, productivity that could be better, things like that. So we have tons of work, tons of things we want to do, tons of things on the fix, some things we want to improve. Overall, we feel good about what happened. We feel good about scaling, and you should expect more scaling from us on the go-to-market side in the year to come. Brad Reback: Great. Thank you. Operator: Thank you. Our next question comes from Howard Ma with Guggenheim. Howard Ma: Great. Thanks for taking the question. I have one for Olivier. The core APM product growing in the 30% growth, that is pretty impressive and I think better than maybe a lot of us expected. Is the question is, is that a reacceleration, and is the growth driven by AI-native companies that are using Datadog's real user monitoring and other DEM features as compared to or as opposed to rather core enterprise customers that are building more applications? Olivier Pomel: Yeah. I think, I mean, look. APM in general, I think, has always been a bit of a steady Eddie in terms of the growth. Like, it's a product that takes a little bit longer to deploy another, which is further into the applications. And so it's, you know, it takes a bit longer to penetrate within the customer environment. That being said, we did a lot of different things we did that help with the growth there. One is we invested a lot in actually making that onboarding deployment a lot simpler and faster. You know? So we think we have the best in the market for that. And it shows. Second, we invested a lot in the digital experience side of it. And it's very differentiated. It's something our customers love, and it's driving a lot of adoption of the broader APM suite. And we'll expect to see more of that in the future. And third, you know, we make investments and go to market to cover the market better. And so we're getting into more looks at more deals in more parts of the world. And so all of that combined, you know, helps that product reaccelerate growth, you know, quite a bit. And so we feel actually very, very good about it, which is why we, you know, we keep investing. Overall, we still only have a small part of the pure APM market. Like, that product is scaled at about $10 billion, including DEM. The market is larger. And so we think there's a lot more we can do. David Obstler: Yeah. I want to add, you know, we talked about because I just mentioned that we're not penetrated across our customer base. And, therefore, we're continuing to consolidate onto our platform. So we have quite a number of wins where we already have other products. We already have Infrared logs, and we're consolidating APM. Howard Ma: Thank you, guys. David, as a follow-up for you, on margin, are the large AI-native customers significantly diluted to gross margin? And when you think about the initial 2026 margin guide, how much of that reflects potentially lower gross margin type of those customers versus incremental investments? David Obstler: On a weighted average, they're not. We, as we always said, for larger customers, it isn't about the AI natives or non-AI natives. It has to do with the size of the customer. We have a highly differentiated diversified customer base. So I would say, you know, we're essentially expecting a similar type of discount structure in terms of size of customer as we have going forward. And, you know, there are consistent ongoing investments in our gross margin, including data centers, and development of platforms. So I think it's more or less what we've seen over the past couple of years not really affected by AI or not AI in AI native. Howard Ma: Okay. Thank you. Great quarter. Operator: Thank you. Our next question comes from Peter Weed with Bernstein Research. Your line is open. Peter Weed: Hello. Can you hear me this time? Operator: Yes, John. Peter Weed: Okay. Thank you. You're on. Yep. Apologies for the last time. Great quarter. You know, looking forward, I think one of your most interesting opportunities really is around Bits AI and I'd love to hear kind of, like, how you think that opportunity shapes up. Like, how do you get paid the fair value for the productivity you're bringing to the SRE and broader operations team? And really how you see competition playing out in that space because, obviously, we've seen startups coming in. You know, there's questions about Anthropic and, you know, where they want to go. You know, how does Datadog really capture this value, and protect it for the business? Olivier Pomel: Yeah. I mean, look, the way we currently sell a lot of these products is you show, like, the difference in time spent. And when the alternative is you try and solve the problem yourself and, you know, you have an outage and you start a bridge and you have 20 people on the bridge, and they look for three hours for the root cause, you know, and ask the people for that. Now it's very expensive. It takes a long time. There's a lot of customer impact because the outages are long. And if the alternative is, you know, in five minutes, you have the answer and you only get three people looking that are the right folks. And, you know, you have a fix within ten minutes. You know, you have shorter impact on the customer, many, many, many fewer folks internally involved, lower cost. So it's fairly easy to make that case. And so that's how we saw the value there. The longer term, as I was saying earlier, I think you have an incident and you look into it. And you diagnose it, and then you resolve it. You know? So maybe you cut the customer impact from one hour to, you know, fifteen minutes. You know? But you still have an issue. You still have impact. You still distract the team. You still, you know, have humans working on that. I think longer term, what's going to happen is the systems will get in front of issues. They will auto-diagnose issues. They will help preemptively get or pre-remediate, you know, potential issues. And for that, the analysis will have to be run in-stream, which is a very different thing. You know? You can message data and give it to an LLM for post hoc analysis, and a lot of the value is going to be in the gathering the data, but you also have quite a bit of value in the smarts that are done in the back end, you know, by the LLM for that. And that's something that is done by the end for the OpenAIs of the world today. I think as you look at the in-stream, looking at, you know, three, four, five orders of magnitude more data, looking at this data in real-time, and passing judgment in real-time on what's normal, what is abnormal, and what might be going wrong, during that. You know? Hundreds, thousands, millions of times per second. I think that's what it's going to be our advantage, and where it's going to be much harder for others to compete, especially general-purpose AI platforms. Operator: Thank you. Our next question comes from Brent Thill with Jefferies. Your line is open. Brent Thill: Thanks. David, I think many gravitate back to that mid-20% margin you put up a couple of years ago and I know the last couple of years, including the guidance, are looking at low 20%. Can you talk to maybe your true north, how you're thinking about that, obviously, growth being number one, but how you're thinking about the framework on the bottom line? Thanks. David Obstler: Yep. The framework is we try to plan with more conservative revenues. Understanding that if revenues exceed above the targets that we give, it's, you know, difficult in the short term to invest incrementally. So what we're trying to do is invest first in the revenue growth and then layer in additional investment as we see if we see excess of target. So generally, it reflects, one, the continued investment, which we think is paying off, both in terms of the platform R&D as well as in, and including AI as in go-to-market. And then, you know, as we've seen, you know, over the years, in our beat and raise, we've tended to have some of that flow through into the margin line and then re-up again for the next phase of growth. Brent Thill: And any big changes in the go-to-market or big you need to make, David, this year to address what's happened in the AI cohort or not? David Obstler: We're continuing. It's very similar to what we're doing, which is to try to work with clients to prove value over time that reflects, you know, that manifests itself in our account management and our CS, as well as our enterprise. So no, I think for this year, we are looking at capacity growth, including geographic, you know, deepening the ways we interact with customers, expanding channels, very much similar to what we've done in the previous years. Brent Thill: Thanks. Olivier Pomel: Alright. And then that's going to be it for today. So on that, I'd like to thank all of you for listening to this call, and I think meet many of you on Thursday or on Investor Day. So thank you all. Bye. David Obstler: Thank you. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good day, everyone, and welcome to Xylem's Fourth Quarter 2025 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypads. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Keith Buettner, Vice President, Investor Relations and FP&A. Please go ahead. Keith Buettner: Thank you, operator. Good morning, everyone, and welcome to Xylem's fourth quarter 2025 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's fourth quarter and full year 2025 results and discuss the first quarter and full year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investor section of our website. A replay of today's call will be available until midnight, February 24, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will, or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-Ks and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances. And actual events or results could differ materially from those anticipated. Please turn to slide three. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, unless otherwise indicated, all references will be on an organic and/or adjusted basis. And non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now, please turn to slide four, and I will turn the call over to our CEO, Matthew Pine. Matthew Pine: Thank you, Keith. Good morning, everyone, and thank you for joining us. The team delivered an outstanding fourth quarter to close a record year for Xylem. We delivered strong Q4 performance across all major metrics. The team executed with discipline across the portfolio both in the quarter and full year. The record results demonstrate the impact of our operating model transformation, which represents phase one of our plan to deliver Xylem's long-term framework. That first phase has been about transforming Xylem's operating model, our high-impact culture, a simpler, scalable structure, and improvements in our business processes and cornerstone systems. We simplified Xylem, increasing speed and accountability. The numbers we posted this morning reflect the ground we've already taken. And there's more to come in 2026. In parallel, we're entering phase two, strengthening our growth engine by leveraging improvements in our operating model. Focusing on Salesforce effectiveness, product management, and innovation. Phase three will invest further in long-term competitiveness, building on our core franchises, expanding breakthrough innovation, and deepening exposure to the most attractive future water markets. We're tracking to the framework we laid out almost two years ago, and we have plenty of runway ahead. As we sharpen our customer focus and simplify our product offerings, 2026 will be the peak of purposeful walkaways from lower quality revenue. That creates a short-term top-line headwind, as we've communicated previously. But it drives higher quality earnings. Looking ahead to 2026, we see resilient demand in our largest end markets. Strong backlog conversion, and continued traction from our transformation efforts. I'll leave the detailed guidance to Bill, but at a high level, we will build on our commercial and operational momentum. Growing the top line and expanding margins again in 2026. With that, Bill will take you through the quarter and full year and also our 2026 outlook in more detail. Bill? Bill Grogan: Matthew. Please turn to slide five. We are very pleased with the strong finish to 2025. The team stayed focused and delivered consistently throughout the year. Delivering record revenue, EBITDA, and earnings per share for the fourth quarter and the full year. Demand remains positive. With our backlog finishing at $4.6 billion. Our book to bill was near one, both in the quarter and for the full year. Orders were healthy, up 7% in the quarter. Driven by over 20% growth in MCS. And for the year, orders were up 2%. Revenue grew 4% in the quarter, despite a challenging comparison of 7% growth in the same period last year. Full year revenue growth was solid at 5%. Full year EBITDA margin expanded 160 basis points to 22.2% driven by the same factors. The team's operational discipline delivered quarterly EBITDA margin of 23.2%. Up 220 basis points versus the prior year. The improvement was driven by productivity and price, more than offsetting inflation. Full year EBITDA margin expanded 160 basis points to 22.2% driven by the same factors. We also achieved a record quarterly EPS of $1.42, a 20% increase over the prior year. Our balance sheet remains in great shape. With net debt to adjusted EBITDA of 0.2 times. Year-to-date free cash flow decreased by 2% from the prior year, in line with expectations driven by outsourced water projects, system investments, and restructuring costs offset by higher net income. Let's turn to slide six. In measurement and control solutions, we can to convert the backlog with MCS' backlog finishing the year roughly $1.4 billion. Orders were up a robust 22% driven by smart metering demand across water and energy. However, this was below our expectations with several projects pushing out into 2026. Revenue was up 10%. Driven by energy metering demand, but supported by high single-digit gains in water as well. Which offset softness in analytics, related to timing effects caused by the government shutdown. EBITDA margin of 20.2% was 310 basis points higher than prior year. Driven by productivity, price, and volume more than offsetting mix and inflation. In water infrastructure, orders were down 1% in the quarter, with softness in treatment primarily in China mostly offset by strong demand in transport. Revenue was flat, with strong double-digit growth in The US, offset by an almost 30% decline in China. EBITDA margin for water infrastructure was up a remarkable 510 basis points driven by productivity, price, and mix, offset by inflation, volume, and investments. In applied water, orders were up 5% and book to bill was roughly one. Lifted by large projects and data center wins in The US. Revenues were up 3% versus the prior year. Primarily driven by strength in US commercial buildings. Segment EBITDA margin increased 60 basis points year over year. Driven by productivity and price, offset by inflation, volume, and mix. With some of these items being nonrecurring in nature, we expect Applied Water to be back in the 20% EBITDA range in the first quarter. Finally, water solutions and services saw robust demand orders increasing 7% driven by strength in services. Revenue growth was strong, up 4% against a tough comp. With strength in capital and services. Segment EBITDA margin was 23.9%, up 110 basis points versus the prior year driven by price, volume, and productivity, offset by inflation and mix. Now let's turn to slide seven for our 2026 segment outlook. Heading into 2026, our markets remain positive, and our teams are delivering on our commitment to simplify Xylem. Focus on our customers, and drive profitable growth. We are providing full year organic revenue outlook for the segments. And want to highlight that we are accelerating our 8020 efforts around product and customer simplification. As a result, we will have an outsized headwind to our top line for the year of roughly 2% doubling the impact we experienced in 2025. We expect this as a one-year elevation we are still committed to delivering on our long-term framework. In MCS, we expect growth in the mid-single digits. Overall demand is positive, and our pipeline remains strong. But project timing has been more variable and less predictable than we have experienced over the last few years. Our expectation is energy meters will drive a majority of the growth in 2026. And water meters will grow low single digits as expected orders from the fourth quarter pushed out into the '26. We will also have an impact from our eighty twenty actions. Primarily in analytics, impacting overall segment growth for the year. The first quarter will be challenged, down low single digits. We expect to see sequential revenue improvement throughout the year. As project kickoffs accelerate in the back half of the year. Also, as a reminder, we expect to close on the divestiture of the international metering business at the end of the first quarter. In water infrastructure, we expect low single-digit growth. We anticipate resilient OpEx and CapEx demand due to the mission-critical nature of our applications. With healthy utility end markets across most regions. However, will see headwinds from eighty twenty actions as we accelerate the simplification of our offerings and expect continued weakness in China's utility market. Primarily impacting the first half of the year. In applied water, we expect growth in the low single digits. We see growth across developed markets, particularly in The US, with large projects coming online and strong growth in data centers. Similar to the story in water infrastructure, growth will be offset in applied water by eighty twenty actions, exiting unprofitable business, and a weak China market impacting the first half of the year. WSS will deliver mid-single-digit growth driven by strength in outsourced water project, and solid demand in dewatering. Though we expect this will continue to be a more variable segment quarter to quarter, due to the project nature of our capital offerings. The segment is supported by a $1.4 billion backlog in strong funnel across all businesses. Now let's turn to slide eight for our full year and Q1 guidance for 2026. The growth outlook by segment translates into 2026 full year revenue of $9.1 billion to $9.2 billion resulting in revenue growth of one to 3% organic revenue growth of two to 4%. Again, this is on the low end of our long-term framework, through the eighty twenty actions we are taking across our segments. By continuing to increase the quality of our earnings and simplifying our business, to outperform our markets for the long term. 23.3%. EBITDA margin is expected to be 22.9 to This represents 70 to 110 basis points of expansion versus the prior year driven by productivity, volume, and price offsetting inflation. With productivity continuing to benefit from our simplification efforts, This yields an EPS range of $5.35 to $5.60. Up 8% at the midpoint over the prior year. As a reminder, we are committed to low double-digit free cash flow margin in our long-term financial framework. And we'll make additional progress in 2026. Drilling down on the first quarter, we anticipate reported revenue growth will be in the 1% to 2% range on a reported basis and flat organically. We expect first quarter EBITDA margin to be approximately 20.5% to 21%. Up 25 basis points at the midpoint. Driven by productivity gains and impacts from our simplification efforts offset by mix. This yields first quarter EPS of $1.06 to $1.11. We are entering the year with momentum and in a position of strength. Our balanced outlook reflects strong commercial positioning, the durability of our portfolio, and further benefits from simplification. Though we are monitoring broader market conditions and volatility, including tariffs, Overall, our expectations for the year remain positive as we build on our strong results. With that, please turn to slide nine, and I'll turn the call back over to Matthew for closing comments. Matthew Pine: Thanks, Bill. Before we open for questions, let me close with a broader lens. Xylem participated in the World Economic Forum annual meeting at Davos for the first time this year. The headlines were all about AI and geopolitics. But water emerged as a significant underlying theme. More than a dozen sessions frame water is foundational to economic growth, energy systems, and geopolitical stability. That aligns directly with the research we released last month watering the new economy. Which makes a simple point. As AI accelerates growth in power generation, data centers, and microelectronics, water strategy becomes business strategy. These sectors are wrestling with availability, reliability, and efficiency. They need reuse at scale, dramatic reductions in network leaks, and adaptive infrastructure that automatically optimizes performance. And that's where Xylem is uniquely positioned, covering the full water value chain with practical solutions. That breadth differentiates us at a time when customers are looking for credible, scalable partners. As we pivot further into growth, we'll keep building capability where we have structural advantage. Mission-critical utility and industrial applications where reliability, compliance, and life cycle costs matter most. Digital platforms that help customers optimize network performance, and make resilience affordable. Advance treatment and reuse that support economic growth without increasing freshwater withdrawals or compromising communities. In services that turn our technology and installed base into dependable high-value outcomes for customers and durable revenues for Xylem. We're already doing this work at scale. Helping cities and industries recover water they already have reuse what they once discarded, and run their assets more efficiently. We're helping Los Angeles produce 508 million gallons of recycled water per day with plans to deliver 260 million gallons more. Smaller communities like Hot Springs, Arkansas are reducing water losses by 50% or more with far less digging costs. On the industrial side, Silphex, a man a microelectronics manufacturer, is reusing 80% of its processed water with a Xylem Ultrapure water system. One of our aerospace customers is now avoiding more than $30 million in wastewater disposal costs with zero liquid discharge technology. We're using more than 66 million gallons of water annually. All of these examples are responses to intensifying water trends. Driving sustained demand for the solutions we provide across the water value chain. We are confident in the strength of our team, and our platform to capitalize on that demand. And to deliver sustainable high-quality growth over the long term. With that, open the call for your questions. Operator: Ladies and gentlemen, we'll now begin that If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Deane Dray from RBC Capital Markets. Please go ahead with your question. Deane Dray: Thank you. Good morning, everyone. Matthew Pine: Hey. Good morning, Dean. Deane Dray: Hey, Matthew. As we do the calendar flip and as you start the phase two, maybe you can give us a two-year progress report if you could Just kinda reflect on the initiatives regarding margin improvement, portfolio optimization and how you are also trying to keep your eye on growth opportunities too? Matthew Pine: Yeah. So first, we've got a lot of work to do in front of us, so I'll start there. But if we look back over the past few years, the results have really exceeded expectations from my perspective. Maybe just even start starting firstly with not long ago, we were talking about the integration of Evoqua and Xylem. And we built a great deal of muscle in terms of M&A and integration, and we really enhanced our combined culture along the way. And we delivered synergies eighteen months early. So I give the team a lot credit there starting with that integration. And, you know, at the same time, we've made significant progress in our operational model transformation, which is really about you know, really our culture, our high-impact culture, improving our processes and systems and our structure. And maybe I'll just maybe point to a few proof points on the progress that we've made. You know, the first in in significant amount of change that we've been going through the past couple of years, I looked at our engagement rating the other day. In an essence, an engagement rating in your in your employee survey is would you recommend Xylem as a great place to work? Almost 90% of our top one fifty leaders said they would, and overall company was 74. When you're going through a significant transformation, I think that's a really good outstanding result. And the industrial sector average is around 37%. And so if they could just speaks to the resilience of our team and the culture that we're creating. You know, another good measure that I talk about a lot is on-time performance in terms of how we're you know, really moving our operating model forward. We've gained 500 basis points of on-time performance you know, delivering products to customers more effectively over the past couple of years. And structurally, we've really improved moving from a highly matrix structure a more four segments, 16 divisions, a single axis. Reducing our spans and layers. And we reduced our we had several micro teams. I think 1,500 micro teams We reduced that by 40%. So that's folks that have four or less direct reports. So we've really improved our our structure our culture, processes, and our systems along the way. You know, maybe I would just you know, like I said in the prepared remarks, we've taken a lot of ground on what I would call phase one. It's not over. We have more work to do, but we're we're starting to transition into what I would call phase two, which is really about leveraging that simplicity that we've created, the focus, the speed, and accountability to really build a growth engine in the company. And that's you know, focused on a few areas I would highlight at a high level. One is our Salesforce effectiveness. We need our sales teams, you know, 75, 80% of the time facing the customer versus 40 or 50 or 60 doing back office work. We need to improve our our product life cycle management and innovation, really speed to customer value. So those are areas that we're, as we pivot, we're gonna be keenly focused on this year in building capability. We can leverage the simplicity and get back to growth. But I'm just I'm very proud of the team. I appreciate the question, and really the resilience they've shown, not only with all the change that we had to deal with, but also, you know, the change that's been external to the company as we've we've dealt with over the past couple of years. So maybe I'll end it there. Thanks for the question. Deane Dray: That's really helpful. And then as a follow-up for Bill, maybe you can have expand on the point of increasing the $80.20 walk away revenues in the second year Maybe it's a surprise to me, I think, because I would have thought in the first year, there'd be more opportunities for less identifying less profitable businesses. Not having it accelerate into the second year. So maybe just kind of help Yes. Put that into context. Appreciate it. Bill Grogan: Yep. No. Sure. But let me let me step back first and just talk about you know, how 8020 is really taking hold in the organization two years into the transformation that Matthew highlighted. Each quarter, we take another step in simplifying Xylem. You know, shifting from just leveraging 8020 as a tool set being a critical piece of how we run the company. With a a real focus on resource allocation, putting our best people investments around our largest value-creating opportunities. We've got about 80% of the business in some phase of implementation right now with the capital and services piece of WSS. The only part of the company not fully launched, and and they'll start at the end of this year after they get through their ERP upgrade. And the team continues to make solid progress leveraging the tool set. Right? We started this year, with redesigning the organization and putting P&L leaders in charge of the divisions. They could have a good perspective and drive a lot of this change. They looked at the cost that they needed to support the business and optimize that overhead. To get our foundation as lean as possible. To make sure that we're focused on on simplifying this that organizational construct. You know, as for the 2% headwind, right, a lot of that comes with you know, an evaluation of the the product and customer portfolio. Really understanding, you know, the geographies where you might be underperforming, putting in a commercial filter, getting a sales and engineer engineering teams developed and and and leveraging that filter to make sure that we're not taking business that we shouldn't We're looking at parts of the business where we have significant pass-through revenue that doesn't have significant margin. And all of those decisions take take a little bit of time because wanna make sure you bleed the inventory so you don't have an excess issue. You wanna partner with your customers to make sure they're supported through the transition. So there's know, the cultural and adoption part of it that extends it. And then there's just the customer coordination, which really pushes it into into 2026. So excited about the teams taking, these actions and ultimately, I think it's going to free up our organizational and economical capacity to better, support and facilitate our longer-term growth trajectory. Deane Dray: Thank you. Operator: Our next question comes from Scott Davis from Melius Research. Please go ahead with your question. Scott Davis: Hi. Good morning, guys. Matthew and Bill. Matthew Pine: Hey. Good morning, Scott. Scott Davis: Wanted to follow-up on that question because there's a there's a certain point where eighty-twenty goes from being a headwind to a tailwind, meaning that you're doing better with the customers that matter the most and perhaps gaining share and and such. But when is that point? You know, it it do you start to see some impacts? Like, 2027, 2028? Is it is it is it or is it just too hard to say at this point now that you're kind of in the middle of it? Matthew Pine: I would say that really 2026 is kind of inflection point Scott for us. You know, the operational transformation never ends, as you know. But we've taken enough ground where we started in the back half of 2025, and it will coming into '26 with a bit more momentum around, I would say, building the growth engine and focusing on eight customers what we call raving fans, and actually building out our enterprise selling organization. So all that is in flight. I think the big thing this year is about building Salesforce effectiveness and helping our sales organization get more oriented toward the customer majority of the time, meaning, you know, today, a lot of our sales teams are doing a lot of admin work, and they don't get in front the customer maybe 30, 40% of the time. And the goal over the first half of this year is to change that to, say, 75, 80%. So I think we're building momentum, and I'd say we exit 2026 with a lot of, again, momentum around building the growth engine and starting to move towards growth and leveraging this simplicity that we've created. Scott Davis: Okay. Yeah. That that makes sense. And guys, I I have to ask. Your balance sheet is starting to look a little bit too good. And, you know, it looks like your stock might open up a little bit light today. I mean, what are you guys thinking as far as this buyback and you know or or or do we wanna keep the dry powder for for for M and A? Matthew Pine: Yeah. Maybe just, you know, just to highlight that our priorities continue to be investing in our core business, followed by M and A, dividends and then lastly share buybacks. So I've said this on some other calls that our acquisition process that we put in place a couple of years ago is really maturing nicely. It's much more bottoms up. We've got a a very strong actionable funnel you know, as an outcome of this process. And we deployed about $250 million of capital last year towards M and A in the second half of the year, and we have much more than that that's already in process for the '26. So seeing good momentum there. And we'll continue to target around $1 billion a year of capital deployment towards M and A You know, we won't not entertain a transformational deal, but it's not something we're we're focused on right now. It's more medium small to medium bolt ons. You know, with regard to your your thoughts on share buybacks, you know, we'll continue to be opportunistic, but you know, again, we're gonna be more forward leaning towards investing in the core and M and A. However, you know, at low leverage levels, know, like we're seeing now, we're gonna be much more active in buying back shares. Scott Davis: Gotcha. Thank you, guys. Best of luck. I'll I'll pass it on. Matthew Pine: Thank you. Operator: Our next question comes from Mike Halloran from Baird. Please go ahead with your question. Mike Halloran: Hey. Morning, everyone. Matthew Pine: Morning. Mike Halloran: So can you put the backlog exiting the year in context, what it means for this year? And and and and the phasing for the year. Is where the backlog exit rate was? Is that part of the 1Q softness? How do those sequentials work to the year? And then related, maybe just a little bit about the hesitancy on the project side. And and and compare that to what the customers are saying, the pipeline, you know, verbal orders, however you wanna put it. Bill Grogan: Yeah. May maybe I'll touch first just on on the the the backlog positioning. And Matt, you can comment on the project side. So first off, right, obviously, we've led backlog as we've progressed through this year and the lower backlog directly impacts the 2026 cadence and revenue guide. First on MCS, we talked about them working down their backlog throughout the year. Getting to a more normalized level. You know, we highlighted really strong orders in the fourth quarter, we actually had anticipated a few larger projects to book to book that pushed out in the first half. Which puts a little bit pressure on ending backlog and then pressure on kind of our first and second quarter revenue. And we've talked China has been really weak, especially in treatment, which is a bigger backlog business for us. That probably put us at a a lower backlog position. Then we talked about the the walk away, revenue. Obviously, that's impacted orders, you know, first before it impacts revenue. So we've seen just a lower backlog associated with some of those actions. You know, as as we progress to the back half of the last year. So I think we're we're in good shape to start the year. Know, we've talked about healthy commercial funnels for both MCS and and WSS our largest backlog businesses, You know, what we have line of sight to relative to commercial funnel, I think reasonable confidence in line of sight to the improve progression as we go through the year. Mike Halloran: And then maybe some thoughts on China. You know, I know you've done a lot of work already because of the environment. But what are the steps you're taking from here given the softness and and and how do you see that shaking out over the next couple years in terms of the commitment to the market, ability to manage that market given the local headwinds, both, you know, by local as well as softer end markets. And and kinda what changes are you making? Bill Grogan: Yeah. No. I so so I think consistent with the commentary provided for the last couple quarters, China remains a challenging market for us, both on the orders and revenue side. It did accelerate that decline as we progress through the back half. Q4 orders were down almost 70%. Sales declined almost 30%. Part of that's just the reflecting of the economic headwinds impacting utility and commercial building and industrial end markets and primarily impacting us within water infrastructure and applied water. My local competition continues to drive intense price competition. Due to the capacity that they've built. But our teams are applying an eighty twenty lens to focus on higher quality more profitable opportunities, which is creating some of the top line pressure. Right? I mean, we're we're calling that within the China bucket, but you could probably put a little bit of that in in the walk away just as we're deliberately exiting some of that low margin, negative margin, business within China. As we talked about last quarter, China restructured its operations. You know, we reduced our headcount by over 40%. Just to better align with that volume contraction. But, right, we're looking to reallocate the resources that are on the ground just around targeted opportunities where we think we have a technological advantage, and we could price some differentiation in certain applications where we can win and deliver stronger margin performance. Because of that differentiation. Ultimately, right, China is a very large economy. You know? We don't think there's be a material improvement here over the next year or two. But, longer term, it's a place that we think that that Xylem will be able to grow get back to growth at a at a much higher margin profile. Mike Halloran: Thanks. Appreciate it. Operator: Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead with your question. Andy Kaplowitz: Good morning, everyone. Matthew Pine: Hey. Good morning, Andy. Andy Kaplowitz: Bill. So just maybe a little more color on going on in smart meters. You did have solid orders, but, Bill, you mentioned orders were still below what you expect, and I think peers have had even a harder time than you in water smart meters. So what are you seeing in the market between water and energy Is your mid-single-digit revenue growth forecast for '26 contingent on converting some of these delayed projects to backlog in the first half? And does availability of memory chips impact the outlook at all? Matthew Pine: Yes. Maybe I'll just maybe start at a high level, Andy, then I'll let Bill get into a little bit of color. But I just wanted to tell everyone on the call, we remain very confident in M MNCS to achieve high single digits long term. As segment. The near-term outlook really reflects project timing and some of the backlog normalization coming out COVID and walk away revenue. So it's not a change so much in underlying demand. The biggest area of walk away in this segment is in analytics. It's the one of the last divisions to go into the 8020 tool. And, they're in the process of of shedding you know, organic business right now. Although we do have a little bit of walk away in smart metering as well, in 2026, and we've exited mechanical meters. And we've made a decision to be a bit more selective when we do the meter installation A lot of times that comes at low margin or no margin pass through. And is a drag on on on earnings and margin. So we've been a bit you know, forward leaning into that. You know, bidding remains strong, and customers are still, you know, ordering and and our win rate's higher than it has been in the past. So I think in general, things are healthy, but you know, maybe one other comment I would make is, again, going back to this post COVID, the backlog helped to smooth and some of the unevenness that we typically get in this segment. And that can have. So I do I think, you know, we do expect a bit more variability in quarter to quarter going forward. So maybe they'll maybe one other point I would make is, you know, I would highlight that Xylem the Xylem View business which doubled in in 2025, we're expecting that digital business grow 30 plus in 2026. So we exit this year, that'll continue momentum. And help drive the top line of this segment as well. Bill Grogan: Yeah. And then, Andy, I I think your your question on on the memory piece, we don't see that as a material impact either from an availability or significant increase in inflation for us to have to pass on the customers. Andy Kaplowitz: Helpful, guys. And then, Bill, maybe a follow-up for you. You're you're to 70 to 110 basis points of margin improvement in twenty six. As you know, it basically takes you past your 23% and change adjusted EBITDA margin goal for 27% in 26%. So where do you go from here? Are you gonna have an investor day? Maybe just set new targets, and maybe the entitlement of the business from when you started here. Is it mid-twenties or higher? How do you think about that? Matthew Pine: Yeah. I'll I'll take it, Andy. I think from my perspective, we're already outlining an Investor Day for 2027. We'll update strategy and targets at that point. It's probably sometime in the spring of of next year. You know, we have some work ahead of us to deliver this year. And we don't wanna get too far out over our skis. But you know, as a reminder, we laid out, you know, the LR the long-range plan at our last Day in May '24. That we to to your point that we would move from 20%, which is the forecast of 2024 margins to 23 by the '27. So we're guiding you know, this year, just over 23% at the midpoint So we're tracking ahead and there's likely upside to our long-term targets as we exit '27. You know, we've we've made a lot of great progress and, you know, give the team a tremendous amount of credit. As I said, with Dean's question at the beginning, a lot of a lot of change, and we've been able to execute. So I think you know, Andy, about just over a year from now, we'll be in a better position to to update the framework and and talk about margins. Andy Kaplowitz: Appreciate that. Thank you. Operator: Our next question comes from Nathan Jones from Stifel. Please go ahead with your question. Nathan Jones: Good morning, everyone. Matthew Pine: Hey. Good morning, Nathan. Nathan Jones: I'll I'll start with, a follow-up on the the MTS orders. And the smart smart native projects that are pushed out. Maybe a little bit more color on what the cause of those pushing out are, if you have any insights there. Degree of confidence that those things kind of come through in the first half in order to support the outlook for improved growth in the second half? Bill Grogan: Yeah. And I think there's there's several projects, and all of it they're have a little bit different reasons for pushing out. There's not a common thread around it. Some of them are just relative to where they're at with several other projects going on. So I wanna push out a couple months. Some of them have reshaped the scope of the project relative to just increased, inflation they've seen from tariffs and another inflation creeping up over time. So it's it's you know, for us, it's a handful of things that we're intimately involved with the customers. We understand kind of their project plans and some of the the hesitancy, and we're working with them to shape an implementation that works with them economically and then still you know, has an ability for us to, drive kind of incremental revenue this year. So I think we have reasonable visibility. You know, again, this isn't 50 different projects. It's you know, kind of five to 10 that we're working with the end customer. That we have confidence in based upon our our guide and our revenue progression for MCS through the year, that we'll be able to deliver on. Nathan Jones: Okay. Thanks for that. I guess, about next question on divestitures. You guys have talked you know, up to 10% of revenue being you know, a candidate potential candidate for divestiture. Anything we should you know, expect action on that in 2026? And if you could provide the EPS impact from the divestiture of, the automated business, that would be helpful as well. Thanks. Bill Grogan: Yep. Yeah. I think we talked about, Nate, we were evaluating about 10% of the pull portfolio Last year, we exited a business in the first quarter that was about 1%. You know, international metrology is about about another, percent. There's probably two or three assets that, you know, maybe another couple percent. So don't think we're gonna hit the the 10% number. You know, that that we we were looking at. But, obviously, portfolio evaluation, you know, something that we do on a recurring basis. You know, as businesses shift strategy or they wanna double down in certain parts, of the business, maybe an area becomes less important. So I think it's an ongoing activity with I don't think anything significant outside of metrology for this year And then the EPS impact for international metrology is is is fairly small. For for the year. We talked about, you know, it's a $250 million business that less than 10% EBITDA margin. We'll close it at the end of the third quarter. Or, excuse me, at the end of the first quarter, so you kinda get three quarters. So it's you know, $2.03 pennies. Nathan Jones: Thanks for that taking the questions. Matthew Pine: Thank you. Operator: Our next question comes from Joseph Giordano from TD Cowen. Please go ahead with your question. Michael Halloran: Good morning, guys. This is Michael on for Joe. Matthew Pine: Hey, Michael. Michael Halloran: So yeah, on the last call, you mentioned there was a path to higher margins for the energy meter side. At MC and S. And since it's mixed negative versus water meters, can you just unpack that glide path higher And, you know, what's the status of the transformation? Thank you. Bill Grogan: And and your your question is specifically was around just the improvement on the energy meter margin? Michael Halloran: Yes. I believe on the last call, you mentioned there was a path higher for energy meters on the margin side. So we just love to better understand where we are in that cycle. Thank you. Bill Grogan: Oh, yes. I think there's a couple of things. One, there's some structural changes on the energy side from an engineering and a technology perspective that are gonna level up, you know, value add value engineering projects that will lift the margin profile. And we did highlight there's a couple projects that are legacy within energy that they're working through their backlog that you know, put pressure, on margins in in 2025. That'll continue into the 2026. So you'll see a margin progression with MCS, you know, down slightly overall in the in the first quarter and then sequentially build. It's a pretty robust margin as it exits the fourth quarter with water balance, the the water meter balance being back to more legacy rates and then some of the progress on the energy margin improvement taking hold. Michael Halloran: Great. Thanks for that color. And then orders for the year ended pretty strongly The organic kind of implies a ramp to the back half. Can you just unpack organic expectations mean, you kind of mentioned this a little bit in the beginning of the call, but by segment for Q1, just want to understand it came in a little bit lighter probably most were expecting. Yep. Would appreciate the color. Thank you. Bill Grogan: Yeah. I I I think the the biggest variable is probably MCS They'll be down kind of a point or two in the first quarter relative to probably the external expectations. WSS, we talked about just the lumpiness of that business. They'll be, kind of flattish, with water infrastructure and applied water a a little bit below their full full year guide. Just with some of the first half pressure that they have from China. Michael Halloran: Thanks, guys. Matthew Pine: Thank you. Operator: And our next question comes from William Griffin from Barclays. Please go ahead with your question. William Griffin: Good morning. Thanks very much. Just the first one here, I did want to ask about the four operating margin step down across Applied Water, MCS and WSS. Is there seasonality inherent in this business? And then maybe how should we think about that, I guess, in relation to, you know, the ongoing tailwinds of of eighty twenty execution? Bill Grogan: Yes. And I would say, really, WSS, it's more of mix of business between quarters. So nothing structural there. Within applied water, obviously, Q4 was a bit of a blip relative to the performance that they experienced through the first half of the year. It really reflected just some negative project mix, a little bit of execution timing, and some onetime items. Yeah. These are our transitional factors, and we expect EBITDA margins to be back up in the 20% range in the first quarter and then sequentially improve. Throughout the year with volume increases and their their productivity initiatives. Ramping up. So yeah, that that it's more of a short term than anything structural. Applied water, I think. Gets back to some pretty robust margin expansion in 2026. William Griffin: Got it. And then wanted to ask also about the recent report you folks published in partnership with GWI on water demand management for data centers. I would just be curious to hear of your thoughts on what surprised you from that report and perhaps where you think the biggest opportunities for Xylem are to accelerate its growth might come from? Matthew Pine: Yes. Thanks for the question. When I was at Davos, '26 was deemed kind of the year of artificial intelligence. There were a lot of talk of pilot projects now scaling into productivity solutions and you know, that's why a lot of the AI, build out is racing ahead Actually, Gartner had a a recent prediction that 2026 hyperscalers would invest over $2 trillion in new data centers. But, you know, I think one big, thing from the report that point was pointed out that there's two big constraints to that $2 trillion of investment, and that's energy and water. Up until now, energy's gotten the the majority of the of the attention, and I think water's starting to finally be brought up in the discussion. So know, the reason we commissioned the report is we have a pretty good view of the whole value chain, and we were trying to figure it out ourselves. What is the impact of this new economy and the broader AI ecosystem on the water sector? So we couldn't really find any good data, so we partnered with Global Water Intelligence and commissioned a report, and we we kicked it off at Davos. But maybe the first eye-opening stat I would point to is the demand is soaring, and it's really not so much that that, this new economy is more water incentives just to say some of the first or second industrial revolutions around textiles or steel mills or pulp and paper. It's really more about where where the data centers and and chip fabs are located is the is the biggest issue. But the AI ecosystem, which is data centers, it it excludes mining, but data centers power and semiconductors. Will need about 30 trillion liters of water each year by 2050. That's a 130% increase in water demand. And kind of frame it for everybody on the call, that's one late need a year. In the Western Part Of The US, so it's 12,000,000 Olympic swimming pools. So it's a significant amount of water The interesting finding was the data centers, the the actual direct use is not really the culprit. It's only 4% of the water that's needed. The other 96% is power and chip fabrication, which is probably actually power driven. But chip fab is set to grow by, you know, roughly 600%. So that was probably one of the biggest takeaways. I think the second and I I don't like to be chicken little. I wanna the second point is we can solve the problem. And we have the technology and solutions to to manage the demand today in quite frankly offset the 30 trillion extra liters that we need and that's largely through water reuse, And I talked about in my opening remarks what we're doing in Los Angeles. With reuse water there to help char recharge their aquifers And, also, leak mitigation. These are not hard things to do. I mean, they're hard to implement. They're not hard things to do, though. And, you know, over almost 30% of water that's generated today freshwater to send out to businesses, industry, and residences, what gets leaked into the ground. And we have, you know, solutions to solve those problems like the project we talked about in the last call with Amazon. But maybe one example I'll leave you with as I wrap this up is in Arizona, we were out there a few years ago, Intel in the city of Chandler have have partnered together. So we need much more private public private partnerships. 90% of the reject water that they generate so when you when you have to provide ultra pure water in chip fabric, your reject water is very high to get to that purity. So all that reject water Intel invested capital and OpEx to build a recycling plant that they handed over to the city to run and manage, and 96% of that water is being reused So we need more of that. At scale. To solve the problem. So, again, the solution's there. It's just about getting the stakeholders at the table early in the data center planning where we talk mostly about energy. We've gotta talk about So thanks for the question. And maybe I think the second part of your question I'll answer, For us, it really inside the four walls of the data center, yes, we do some business, but it's really outside the four walls and it's largely in our WSS segment around mining, around power generation, and around chip fabrication is where you're gonna see the growth within Xylem. William Griffin: Appreciate it. Thanks very much. Matthew Pine: Thank you. Operator: And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Matthew Pine for any closing remarks. Matthew Pine: Thanks for your questions. We'll wrap it up there. And thank everyone who joined today. And as always, we appreciate your interest in Xylem. All the very best. Operator: And with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now 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 DuPont de Nemours, Inc.'s 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 followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, star one. Thank you. I would now like to turn the conference over to Ann Giancristoforo, Vice President, Investor Relations. Please go ahead. Ann Giancristoforo: Good morning, and thank you for joining us for DuPont de Nemours, Inc.'s fourth quarter and full year 2025 financial results conference call. Joining me today are Lori Koch, Chief Executive Officer, and Antonella Franzen, Chief Financial Officer. We have prepared slides to supplement our remarks which are posted on DuPont de Nemours, Inc.'s website under the Investor Relations tab and through the webcast link. Please read the forward-looking disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-Ks, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials and has been posted to DuPont de Nemours, Inc.'s Investor Relations website. As a quick reminder, on the basis of presentation, for our fourth quarter and full year financial results, our total company net sales, operating EBITDA, and adjusted EPS reflect the separation of Cunity and the previously announced divestiture of the Aramis business reported as discontinued operations. I'll now turn the call over to Lori, who will begin on Slide three. Lori Koch: Good morning, and thanks, everyone, for joining our fourth quarter call. Earlier today, we reported our fourth quarter and full year financial results which were ahead of our previously communicated guidance. We finished the year strong, delivering full year organic sales growth of 2%, operating EBITDA growth of 6%, and 100 basis points of margin expansion. Operational discipline and a focus on productivity were key to our earnings growth and margin improvement. These results led to an adjusted EPS of $1.68 per share, up 16% year over year. Free cash flow generation was strong in the year. While delivering on our financial metrics, we also executed significant operational and portfolio transformation during the year. We successfully completed the separation of Community Electronics, standing up a premier pure play technology solutions partner. The semiconductor value chain. We also completed the build-out of my executive leadership team, adding external talent from well-run companies as well as promoting within the organization. We set the strategic direction of New DuPont starting with enhancing our core values to drive a culture focused on growth and continuous improvement. This includes building a robust business system and continuing the progress on both our commercial and operational excellence frameworks. Finally, we set clear and robust medium-term financial targets aligned with our performance-based culture. I want to thank our employees for remaining focused on delivering these results and driving the transformation during the year. The momentum and progress we made in 2025 is carrying forward to our 2026 strategic priorities, which I will cover on Slide four. Consistent with what we outlined at Investor Day, our strategic priorities for 2026 are clear: drive above-market organic growth, continue to build out a robust business system, deploy a balanced capital allocation model, all while consistently delivering financial results. We have successfully repositioned ourselves and have a streamlined portfolio of leading businesses. The majority of which are aligned to secular end markets which will enable strong organic growth. We saw a 2% organic growth for full year 2025 and expect that to accelerate to about 3% in 2026. We are well positioned in secular end markets, and our top-line growth will continue to be bolstered by our innovation engine, which launched more than 125 new products in 2025. Our new products generated greater than $2 billion in sales this past year, and our vitality index remained strong at about 30%. We are advancing the build-out of our business system and made significant progress last year. We introduced a core set of enhanced KPIs, focused on driving improvement for our shareholders, customers, and employees. These KPIs are embedded in our refreshed set of management standards which has added more visibility, rigor, and structure to our business processes. In addition, we will continue to expand the use of Kaizen events across the businesses and functions to identify areas to drive productivity, improve end-to-end processes, and accelerate commercial development. On commercial excellence, we continue to advance the framework across commercial enablement, sales effectiveness, and strategic marketing. We have completed a maturity assessment resulting in the identification of key initiatives in 2026 centered primarily on demand generation and pipeline discipline. Operational excellence enhancements will continue in 2026. Last year, we rolled out an updated set of KPIs aligned with our focus on safety, quality, delivery, and cost and refreshed our excellence toolkit with a stronger focus on lean methodology. In addition, we invested in people and process capabilities across our supply chain and quality function in order to enhance the customer experience. These improvements and investments will drive overall productivity in 2026. Across these disciplines, we are also actively deploying digital capabilities and AI to accelerate our progress. Within innovation, we are making investments in our labs to enable streamlined workflows and accelerate our product development cycle times. Within operations, we are utilizing tools in the reliability and maintenance space to improve uptime and reduce cost. And on the commercial side, we are focusing on investments in workflow and process automation to improve the customer experience. On capital allocation, we have a proven model that enables both consistent investments in high-return organic opportunities as well as bolting on to existing businesses with M&A to enable even greater returns. A strong balance sheet is a priority for us. We will continue to return cash to shareholders through a quarterly dividend in line with our targeted payout ratio as well as utilizing share repurchases. We previously announced a $2 billion share repurchase authorization and we executed a $500 million ASR in 2025. With these priorities, let's move to our 2026 outlook on Slide five. Our financial guidance for 2026 is in line with the medium-term targets that we outlined at our September Investor Day. On a reported basis, we expect organic sales to grow about 3% year over year, operating margins to expand 60 to 80 basis points, and adjusted EPS of $2.25 to $2.30 per share. On a pro forma basis, our EPS will grow 10% to 12% year over year. Free cash flow generation will be solid with an expected conversion of greater than 90%. Underpinning our organic growth is a mixed macro environment. Market indicators for healthcare and water technology continue to expect mid-single-digit growth in both spaces on increasing medical procedures to support an aging and growing population and strong global wire demand. Overall automotive demand is about flat in 2026 with weakness in the US and Europe. However, we continue to expect EV builds to significantly outpace overall builds. In construction, after years of decline, market stabilization is expected with flattish demand year over year. We are off to a good start to the year. Our January sales were in line with expectations, and overall, we are seeing improving order trends in our industrial technologies business, which we view as an indication that these markets, which were down last year, are beginning to stabilize and recover. Overall, our teams are executing with a focus on driving growth and operational discipline, and our strategic priorities position us well for long-term value creation. With that, I'll now turn the call over to Antonella to cover the financials and outlook in more detail. Antonella Franzen: Thanks, Lori, and good morning, everyone. The fourth quarter marked a strong operational finish to the year. We exceeded our financial guidance on better-than-expected top-line mix and productivity, resulting in strong EBITDA and margin improvement in the quarter. Beginning with fourth quarter financial highlights on Slide six. Net sales of $1.7 billion were about flat versus the year-ago period, as a 1% organic sales decline was offset by a 1% benefit from currency. Organic sales consisted of a 1% decrease in volume which included a $30 million or 2% headwind from order timing shifts into the third quarter from the fourth quarter due to system cutover activities in advance of the electronic separation. Adjusting for the timing shift, organic sales would have grown 1% in the quarter. Looking at the second half, organic sales increased 2% versus the year-ago period. From a segment view, during the quarter, organic sales grew 3% in Healthcare and Water Technologies, offset by a 4% decline in diversified industrials. From a second-half perspective, healthcare and water technologies grew 5% on an organic basis partially offset by a 1% decline in diversified industrials. From a regional perspective, in the quarter, we saw organic growth in Europe, up 2% year over year, with Asia Pacific down 2%. North America was about flat year over year. Fourth quarter operating EBITDA of $409 million increased 4% versus the year-ago period on favorable mix and cost productivity. Operating EBITDA margin during the quarter of 24.2% increased 80 basis points year over year. Turning to Slide seven. Adjusted EPS for the quarter of $0.46 was up 18% versus the year-ago period. The increase was driven by higher segment earnings of $0.02, lower interest expense of $0.04, and a $0.02 benefit from exchange gains and losses. This was partially offset by a $0.01 headwind from a higher tax rate. Turning to Slide eight. Healthcare and Water Technologies fourth quarter net sales of $821 million were up 4% versus the year-ago period. On a 3% organic growth, and a 1% benefit from currency. Organic growth included a headwind of approximately $15 million or 2% in order timing shifts into the third quarter. Adjusting for this headwind, organic sales growth was 5% in the quarter. For the fourth quarter, Healthcare sales were up mid-single digits on an organic basis versus the year-ago period. Organic growth was broad-based led by continued strength in medical packaging and medical devices. Water sales were up low single digits on an organic basis primarily due to strength in industrial water markets. A majority of the headwinds from the order timing shift was within water. Operating EBITDA for the segment during the quarter of $255 million was up 4% versus the year-ago period on organic growth and productivity gains, partially offset by growth investments. Operating EBITDA margin during the quarter was 31.1%, flat with the prior year. Turning to Diversified Industrials on Slide nine. Fourth quarter net sales of $872 million decreased 3% versus the year-ago period on a 4% organic decline partially offset by a 1% benefit from currency. The organic decline included a headwind of approximately $15 million in order timing shifts into the third quarter. Adjusting for this headwind, organic sales declined 2% in the quarter. At the line of business level, organic sales for Building Technologies were down high single digits on continued weakness in construction markets. Industrial Technologies organic sales were down low single digits as strength in aerospace was more than offset by weakness in printing and packaging markets. A majority of the headwind from the order timing shift was within Industrial Technologies. Operating EBITDA for Diversified Industrials of $197 million was up 2% versus the year-ago period, on favorable mix and cost productivity. Operating EBITDA margin during the quarter was 22.6%, up 110 basis points versus the year-ago period. Turning to Slide 10, which outlines our first quarter and full year 2026 financial guidance. For the first quarter, we estimate net sales of about $1.67 billion, operating EBITDA of about $395 million, and adjusted EPS of $0.48 per share. Our first quarter net sales guidance assumes about 2% organic growth and about a 2% benefit from currency. Our operating EBITDA assumes a 10% increase year over year and margin expansion driven by business improvement and lower corporate costs. For the full year 2026, as Lori noted, our guidance is in line with our medium-term targets. We expect net sales of about $7.1 billion, operating EBITDA of about $1.74 billion, and adjusted EPS of $2.25 to $2.30 per share. Our full year net sales guidance assumes about 3% organic growth and a currency benefit of about 1%. Our operating EBITDA assumes a 6% to 8% increase year over year with 60 to 80 basis points of margin expansion. Our adjusted EPS guidance at the midpoint assumes about a 35% increase on a reported basis and an 11% increase on a pro forma basis. For the healthcare and water segment, we expect full year 2026 organic sales growth in the mid-single digits percent range. This assumed growth is expected to be driven by broad-based strength within healthcare, primarily due to demand in medical packaging applications and medical devices. In water, we expect continued growth primarily driven by demand for reverse osmosis and ion exchange within industrial and municipal water markets. For the diversified industrial segment, we expect full year 2026 organic sales growth in the low single digits percent range. Within building technologies, after a year of market declines, we are expecting 2026 to be about flat, primarily driven by stabilization within US construction markets. Industrial Technologies, we expect low single-digit growth year over year driven by strength in aerospace and demand recovery within markets served by our industrial-based product lines. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A. Operator: Thank you. We will now begin the question and answer session. We also ask that you limit yourself to one question and one follow-up. Any additional questions, please re-queue. And your first question comes from the line of Jeffrey Sprague with Vertical Research Partners. Please go ahead. Jeffrey Sprague: Hey. Thank you. Good morning, everyone. Nice to see a solid, clean quarter. And, also, Lori, your opening remarks there all focus on internal KPIs and growth, and you were working on that along the way, but a shift from portfolio moves is welcome on my behalf anyhow. Lori Koch: Thank you. Thank you. Jeffrey Sprague: Yeah. Good luck with all that. I wanted to shift, though, a little bit to the external, if I could. Can you just put a little bit finer point on the industrial side of the equation, sort of the soft U.S. industrial production in your guide that you mentioned but then seems a little bit countered by your comments about industrial orders picking up? So maybe just a little bit more color on what you're seeing really in the core industrial parts of the portfolio. How orders are trending? And what do you think is going on with channel inventories? Lori Koch: Yeah. Thanks, Jeff. So on the industrial side, so, like, talking ex the shelter business, which we had mentioned, we think will be about flat this year, so moderating from down mid-single digits in 2025 and the flat on the shelter side is general kind of low single-digit growth expectations for the full year. On non-res and repair and remodel and then down low to mid-single digit from the on the resi side. But on the industrial side, it's primarily coming from the advanced mobility businesses which comprise automotive and aerospace, and on the consumer packaged goods side of some of our packaging goods in Spiral. So we've seen nice order pickup as we exited the year and went into Q1. A lot of it is being driven by aerospace. We're seeing nice low double-digit improvement in order in aerospace. It's about 3% or 4% of our revenue. So it's in that range. But all the businesses kind of in that industrial technology space are doing nicely and seeing kind of the short cycle recovery that other means have been bringing to. Jeffrey Sprague: Great. And then just on price cost, obviously, a lot of attention on metals cost, is maybe less of an issue for you than some of the metal vendors I cover. But what's going on on the inflation side of the equation? What sort of kind of price is embedded in the outlook? 2026? Lori Koch: So, Jeff, when it comes to our organic growth of 3%, it is predominantly related to volume for 2026. I would tell you, we're not really expecting any significant headwinds from, you know, any of the roles, logistics, and kind of utilities going into next year. We expect that to be relatively flat. And given our productivity initiatives, expect to see a nice improvement in our gross margins on a year-over-year basis. Jeffrey Sprague: Got it. Great. Thank you. Lori Koch: Yep. Yep. Operator: Your next question comes from the line of Scott Davis with Melius Research. Please go ahead. Scott Davis: Hey, good morning. Lori and Antonella. Good morning, Scott. I echo what Jeff said. Nice to see a more normalized quarter here. Wanted to follow-up a little bit on Jeff's question, but on the shelter side, we are going from kind of a negative high single digits to something that's more flattish. How do we cadence that into 2026? Is it more back-end loaded, or do you see real green shoots here early in the year that you've already seen to be able to call a recovery? Lori Koch: Yes. So let me start on that one. So when you look at our overall shelter business, we mentioned that it was down around mid-single digits in 2025. So when we start off 2026, I would tell you that we expect it to be slightly down as we start the year. So part of it's going to be the comps. On a year-over-year basis. So just keep in mind that in 2025, we were down around 6% in that business. So on a year-over-year basis, when you look at the two-year stack, it's not really changing significantly. From kind of the second half of the year of where we're exiting, kind of going into the beginning of the year. So we do expect slight improvement as we go through the course of the year. If we start out slightly negative, getting a little bit better, that gets you to the overall flat for the year. Scott Davis: Okay. That's helpful. And I don't recall hearing vitality index on these calls in the past. Maybe you and I just haven't heard it. But 30% seems like a pretty robust number, but I don't really have any context to what that's been historically. And, perhaps just some color on how helpful is this as it relates to mix or price or volume? Are these iterative slight improvements, or are there real meaningful product changes? Just some color would be helpful, I think. Thanks. Lori Koch: Sure. Yeah. We had first talked about it at Investor Day where we mentioned that the 2024 number was about 30%. We expect that same performance in 2025. So it is helpful on both the top-line side as well as the margin side. So there's work that goes into not only releasing new products where we can get enhanced pricing and get some incremental share. There's also work that goes on on the kind of the value engineering side to take cost out and deliver margin improvement. So if we look at the margin profile of those products that comprise any product sales, it is higher than the overall margin of the company. And so we're seeing nice lift from both sides. Our efforts internally, you know, we did 125 new products last year. We'll expect to continue to do nicely this year. And we'll focus on making sure that shift is happening from renew versus grow. So you had mentioned the impact to the top line. There is a portion of that 30% vitality index that is replacement. And making sure that we stay competitive and differentiated. And we want to continue to do that, but also shift the mix towards growth. So that we can get incremental top-line growth out of the innovation engine. Scott Davis: Okay. Lori. Best of luck. Appreciate it. Pass it on. Thank you. Operator: Your next question comes from the line of Steve Tusa with JPMorgan. Please go ahead. Shagusa Cotopo: Hi, this is Shagusa Cotopo on for Steve. Thanks for taking my question. So my first question is on, so you're making great progress on the margin front, and I just wanted to go back to the margin bridge that you provided at Analyst Day. And you provided, like, zero to 50 bps of productivity here. Was wondering given the execution, is there potential upside here or you are tracking ahead of plan? Lori Koch: Yes. Well, I'll say let's take it one year at a time as we progress through the year three-year plan. But I would say, you know, we're clearly starting out of the gates in a nice good spot. And when you look at our guidance for 2026, we have at least 20 basis points of margin expansion coming from productivity. Clearly, the teams are doing a great job. Lori outlined a lot of activities. That we have ongoing in the organization. I think you saw some of the benefit of that in our Q4 results. You'll see that continue as we go into 2026 and we'll continue to drive that as we move through the three-year period. Shagusa Cotopo: Okay. That's great. Thanks. And then on the Aramis divestiture, I think, is expected to close at the end of the first quarter, which is gonna bring in about $1.2 billion of pretax proceeds, if I remember correctly. But any initial thoughts on what you're thinking about capital deployment? Thanks. Lori Koch: Yeah. So we're still in that range of closing around the end of the first quarter, and it will be about $1 billion on a net tax basis. Keep in mind, we've already deployed about half of that with the $500 million ASR that we announced last quarter and have completed already which is enabling about 2.5% EPS growth for us this year. So we'll continue to be shareholder-friendly with the deployment of the proceeds. We have mentioned that we would like to continue to add to the top line through M&A. So we've got some opportunities that we're looking at primarily in the healthcare side right now within similar aspects to what we did with Spectrum and Donatelle. We'll continue to be mindful, obviously, about ensuring a really strong return. So we'll look to get up to, you know, higher than our cost of capital by year five with respect to the IRR on the deal. So we'll continue to be shareholder-friendly. We've proven that we've done it in the past significantly, and we'll look to deploy them efficiently. Shagusa Cotopo: Okay. Great. Thank you. Operator: Your next question comes from the line of John McNulty with BMO. Please go ahead. John McNulty: Good morning. Thanks for taking my question. Maybe wanted to dig into the diversified margin lift. It was a pretty chunky lift. I guess, how much of that is around the mix with the benefit of aerospace kind of hanging in as a really strong driver versus much of it is tied to some of that 80/20 kind of work that I know Beth is working on really kind of accelerating as we push over the next twelve to eighteen months. Can you help us to think about that? Lori Koch: Yes. So a couple of things that I would mention there. I would say, you know, you're not really yet seeing the benefits of 80/20. It's a little too early. You know? As you know, Beth recently arrived. So, yes, she's working on that, but the benefits of that, I would say, are to come. As we move forward. When you kind of look at the activity in the fourth quarter, I would point more towards what drove the margin expansion to be a bit of mix related to, you know, the businesses that we're growing when you look at the line of business level as well as a strong push relative to productivity. Is what really drove the nice margin expansion in the fourth quarter on a year-over-year basis. John McNulty: Got it. Okay. No, thanks for the color. And then in terms of innovation, you mentioned the vitality index. You kind of spoke to, I think it was $2 billion of growth that you saw from some of the new products. I guess, can you help us to think about some of the more exciting innovations, the ones that are starting to move the needle maybe more than others that we should be looking for as we kind of look through '26 and '27? Lori Koch: Yeah. So the $2 billion is the total new product sales that are within the, you know, roundly $7 billion of sales that we reported. So it's a portion of replacement and a portion of growth. So we'll continue to try to shift that mix towards more growth replacement in the future. But as far as exciting innovations that are on to come, I think one for this year, we highlighted on the last call, and I'll highlight again just because it was such a sizable improvement, were the enhanced Tyvek garments. So we announced at a trade show late last year that we came out with a new model that has the best breathability and the best protection in the industry, and we've seen really, really nice customer reaction to that. We announced it first in Europe, and we'll continue to roll it out across the globe. On the water side, we continue to advance the latest technology within the reverse osmosis side. So this year, we're expanding capacity at our Edina site to be able to produce the gen four, which would be the highest-end technology that would enable a significant total cost of ownership to our customers. So we're continuing to advance that, and we'll look to commercialize that in 2027. So those are just two of the highlights. But, obviously, with 125 new products last year, it's happening kind of all across the portfolio. John McNulty: Got it. Thanks very much for the color. Operator: Your next question comes from the line of John Roberts with Mizuho. Please go ahead. John Roberts: Good. Thank you, and congrats on a good start here. Could you provide some margin on the four subsegments, water, health, building, and industrial? I'm not sure. How much detail you want to provide there. Lori Koch: Yes. We typically give color on the revenue side of our segments. But when you do look from a margin perspective, I mean, what I would add is you will see margin improvement, I would say, in both of our reportable segments. As we move forward, and we'll also obviously get some margin expansion from lower corporate costs as well. And that's certainly what's gonna drive the 60 to 80 basis points of margin expansion in 2026. John Roberts: And then your Asia Pacific sales were down 2% organic. Was that water supply chain contraction again, or is something else going on there? Lori Koch: No. It wasn't water. It was primarily within the diversified side. We had a supply chain change in our shelter business that was the single largest item. So it was really just a change in the distributor joint venture relationship. So nothing permanently. We'll push it into 2026. So nothing material. We expect to return to growth across all the regions, both in the quarter and the full year for 2026. John Roberts: Great. Thank you. Operator: Your next question comes from the line of Joshua Spector with UBS. Please go ahead. Joshua Spector: Hi. Good morning. I had two questions on water. Maybe one slightly related to the comment earlier on Asia is that when your forecast or talking about mid-single-digit growth in water for '26 China is lower than that. You go into some of the details on why and what you're seeing there? I mean, you and some other peers are seeing slower growth in China in general. And then secondly, does that help or hurt your mix in the overall segment? Lori Koch: Yeah. So we are seeing a slower start in China with respect to overall growth within the water, and it's primarily stemming from just the reduced industrial production in the region. So, we'll start in the low single digits in China, water, and then we'll ramp into the back half to get overall to that mid-single-digit. I think we're, as you had mentioned, our peers are seeing a similar dynamic. So it's really just a reflection of the industrial production malaise in China. About half of our water is used in the industrial wastewater treatment or industrial utility water space. And so when industrial production is down, obviously, it would have an impact on that. As far as the mix, no material change in mix depending on where the regional growth is. Or margin. Joshua Spector: Okay. Thank you. I'll leave it there. Operator: Your next question comes from the line of Aleksey Yefremov with KeyBanc. Please go ahead. Paul: Hi. This is Paul on for Aleksey. Can you discuss what you're currently seeing in auto trends right now and maybe the cadence for your outlook for 2026? Thanks so much. Lori Koch: Yeah. Overall, the expectation for auto builds from IHS is to be about flat. We would expect to slightly outperform that just based on our EV growth. And so we did see nice EV growth in 2025, and we'll continue to see nice EV growth in 2026. It'll vary by quarter. But overall, the full year is about flat and will be slightly up. Operator: Your next question comes from the line of Matthew DeYoe with Bank of America. Please go ahead. Matthew DeYoe: Yeah. Morning, everyone. So clearly, the portfolio is shaking out a lot. But, you know, as we settle here, is there any hope to establish annual pricing initiatives in any of the businesses that could be enough to actually drive, you know, structural pricing gains across consolidated DuPont, whether that's 50 bps or 100 bps? Do we have a framework there? Lori Koch: We do. I mean, we've had, obviously, the past two years have been the unwind of the sizable price that we took through the inflationary environment coming out of COVID. But going forward, would expect to see structural price lift. As Antonella mentioned at the beginning, in 2026, our 3% organic is primarily volume, but underneath that, there is some price in some of the businesses. We continue to expect to have to give back a little bit on the shelter side primarily. Is that sizable price raise that we drove in the 2022, 2023 time frame starts to unwind. But, yes, there is an opportunity to drive structural price in most of the businesses in our portfolio. Matthew DeYoe: Thanks, Ed. And have you commented on something like Tyvek with the new advanced garments? Right? How much margin uplift would something like that give versus a legacy product? And I guess maybe I don't know if you want to comment specifically on that, but it's a different one maybe. Like, what is the average margin uplift? If you were to look at the vitality index, and you're thinking about replacement, is this, you know, through the index of 30 basis points or 100 basis points or is it flat? You know, what's the uplift look like? Lori Koch: As we think about last year? Rather not comment on the margin lift at kind of the product line level. But overall, in the vitality index, in the 30%, we have about 145 basis points of margin lift from those products that are introduced in the past five years. Matthew DeYoe: That's great. Thank you. Operator: Your next question comes from the line of Christopher Parkinson with Wolfe Research. Please go ahead. Christopher Parkinson: Great. Thanks so much for taking my question. We just take a step back and look at your healthcare portfolio? I know this is a focus of your CMD. But, Lori, what are you the most enthusiastic about as you go through '26 and perhaps even the longer-term growth algo? Is it on the biopharma side? Is it pharma solutions, med device? Like, if you could just comment on your enthusiasm in terms of your product portfolio, that would be particularly helpful, and then I'll have a follow-up. Lori Koch: Yeah. It's really across all three. So, you know, both med packaging, med device, and bio all are nicely contributing to the kind of mid to high single-digit range in 2026. They all participate nicely in the higher-end aspects of the med device universe. So if you think about the majority of our applications, they're more in the cardiovascular space, which has an overall higher growth rate with respect to overall surgical procedures. So all three of them are gonna contribute nicely. We'll continue to differentially invest in those businesses to ensure that we can continue to grow. Christopher Parkinson: Got it. And just a similar question for the Water business, now that all the dust has settled post the split. When you take a look at your water portfolio filtration, particularly across, like, NFRO, US, you know, is there it's clearly a great business, but do you feel as though you're missing any scale? Do you feel as though there's an easier portfolio? Obviously, you've added other things. Like, ion exchange over the years. Like, what else do you think you need to do, if anything, quite frankly, to further garner investor appreciation for that specific business? Lori Koch: Yeah. But I think from a technology perspective, we've the leading technology across all the main components within water filtration. So leading in RO, leading in ion exchange, leading in US and nanofiltration. So we're nicely positioned there. We've mentioned the desire to start to build around water. So potentially going into spaces beyond filtration just given filtration would be difficult from a regulatory perspective for us given that we've got the leading position. So we continue to scout and look for opportunities to expand in the water space. Obviously, we'll be highly in tune to the valuations there. They can be quite pricey. We've seen a few assets with some of our competitors trade in the last few quarters that had a high valuation that would make it difficult for us. But we'll continue to see. We recently added just to continue to shore up our supply chain in the water space and asset in China. RO has huge growth in China. We didn't have an established footprint. We bought an asset outside of Shanghai. They gave us established membrane capacity in the region for us to continue to be competitive and local to our customers there. Christopher Parkinson: Helpful, Lori. Thank you so much. Lori Koch: You're welcome. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Please go ahead. Vincent Andrews: Thank you very much. I wanted to ask on healthcare. You called out in the deck that surgical procedures you're expecting to be up mid-single digits this year. Just give us a sense, is that sort of the normal growth rate? And is that favorable or about the same versus 2025? And then is your portfolio sort of well represented across that entire cohort? Or how should we think about it? Lori Koch: Yeah. I would say it's a similar growth rate to what we saw in '25 minus the destock that happened in the first quarter that kind of drove up the overall healthcare growth for the year. So we're nicely positioned. As I mentioned, the areas that are driving kind of above the average surgical procedure rate, so if you say general surgeries, it's about 4%. Where we play, we expect that overall average to be more market-weighted to about 5%. So we're nicely positioned on both the healthcare side with the Tyvek packaging as well as on the Spectrum and Donatelle side on the device. Our single largest end market there is also within the cardiovascular and vascular space. Vincent Andrews: Okay. And then just to follow-up on the balance sheet and capital allocation. You ended the year with, I think, $715 million in cash. You've got the $1 billion coming in. Earlier, you spoke to, well, we've kind of spent some of that $1 billion already with the $500 million ASR. So can you just refresh us on sort of what the minimum level of cash is that you want to carry? And then as you move forward through the year, and generate more cash, obviously, you're expecting another very strong year of cash conversion. Understanding sort of the dual track of pursuing M&A as well as share repurchases. We think about that sort of remaining proceeds from the divestiture to be sort of earmarked for M&A, but the sort of free cash flow generation from this year to sort of be ratably allocated to CapEx, to dividends, and to repurchases? Or is that not the right way to think about it? Lori Koch: Yes. So let me start with your first question. So typically, on the balance sheet, we would carry around $1 billion in cash. We were a little bit below that at the end of the year given the cash that we spent on the ASR of $500 million. So as you mentioned, we will have, you know, a nice cash flow generation year in 2026. We do expect our free cash flow conversion in '26 to be greater than 90%. In addition to that, we do have the proceeds that are coming in the door related to the Aramis transaction. As Lori kind of mentioned earlier, I would say, you know, in terms of capital allocation, we view that in the eyes of a shareholder in terms of what creates the most amount of value. So I wouldn't say there's a specific amount earmarked towards an M&A deal or a specific amount earmarked towards share repurchases. We'll continue to look at both. We do have a pipeline of some M&A that we are looking at. You know, ultimately, you'll see if they come to fruition or not, but clearly, we will continue to deploy capital in the best interest of our shareholders as we move forward. Vincent Andrews: Thank you very much. Operator: Your next question comes from the line of Patrick Cunningham with Citi. Please go ahead. Rachel Li: Hi. This is Rachel Li on for Patrick. So I think in an earlier response, you mentioned all regions should be up organic sales-wise. It's year and in one Q. So with recent PMIs trending more favorably, can you just provide more color on that response and maybe what you're seeing in terms of organic sales growth versus GDP? Lori Koch: You kind of dropped off at the end, I couldn't hear which quarter you were referencing. But to the earlier comment, we do expect to see organic growth across all regions, both in the first quarter and in the full year. The improvement, kind of the first quarter being at 2% organic and the full year being at 3%, most of that improvement is going to be in North America just based on the improvement that we expect to see on the shelter side. So with shelter starting, you know, kind of slightly negative and then trending to even on the full year, you'll see that lift given the majority of the end markets in shelter are North America. Rachel Li: Got it. Thank you. And can I just ask what sort of level of visibility you have for order books across the healthcare portfolio in general? Lori Koch: Yeah. I'll answer the question broadly for the company, because it's a bit about we don't have a long lead time. It that way. So we start each month with about 80% of the orders on the books, and we start each quarter with about 50% of the orders on the books, and then we build from there. Shelter is definitely the shortest cycle. On the longest cycle, I would say, would be our aerospace businesses and our water business. Would be on the longer end, and everyone else would kind of fall in between. Rachel Li: Great. Thank you so much for the color. Operator: Your next question comes from the line of Michael Sison with Wells Fargo. Please go ahead. Michael Sison: Hey, good morning. Nice quarter in Outlook. Just a quick one on US construction. Your outlook is flat. Any differences between nonres, res, and repair and model? In that Outlook? Lori Koch: Yes. So as we look into 2026, our expectations would be that nonres would be up in the low single-digit range as well as repair remodel, and that would be off by a low to mid-single-digit decline on the resi side of the business. Michael Sison: Got it. And then quick follow-up. You know, your outlook and your results, particularly the organic growth continues to, you know, look a lot better than the chemical folks. Are you still looking to, you know, is it still possible to change your industry designation? And how does that work given, you know, I think your results have been much more steady than my group. Lori Koch: Yeah. So when you take a look clearly at the portfolio, our portfolio is not a chemical company portfolio. And to your point, when you look at our performance, our performance is not mirroring that of a specialty chemical company either. So I would tell you we continue to make some progress. In terms of the GICS classification. But what I would tell you is our first priority is just to continue to execute, but we will continue to move forward in terms of trying to get the GICS code changed to more appropriately reflect the portfolio that we have today. Michael Sison: Thank you. Operator: Our last question comes from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead. Arun Viswanathan: Great. Thanks for taking my question. I just wanted to, I guess, clarify on both healthcare and water. So did you see any destocking there? We did see, you know, maybe one of your competitors within healthcare packaging, reference some of that. And then similarly on water, you know, maybe some of the downstream players are also, you know, speaking about that in different regions. So I guess you're not seeing that given your robust outlook for healthcare. Is that correct? Lori Koch: Correct. Yeah. The destock was behind us in 2025, so we've continued to see normalized inventory levels across both those businesses. Arun Viswanathan: Just given that being the case, sorry if I missed this, did you also mention maybe M&A across both of those businesses, if there are opportunities and where you are kind of in that trajectory? Lori Koch: Yeah. Sure. No. We continue to scout opportunities in both spaces. I would say that pipeline is more robust on the healthcare side just given the fragmentation that exists as well as evaluations are a little lower in that area. So we continue to look hard at both. We've been busy looking on the med device side similar to the acquisitions that we made with Spectrum and Donatelle as we continue to build out a total suite of offerings to our customers. Really building our relationships with them and then viewing us as a solutions partner and an application development partner. But we continue to look. Arun Viswanathan: Thanks a lot. Operator: Ladies and gentlemen, I will now turn the conference back over to Ann Giancristoforo for closing comments. Ann Giancristoforo: Great. Thank you, everyone, for joining our call. For your reference, a copy of our transcript will be posted on DuPont de Nemours, Inc.'s investor website. This concludes today's call. Ladies and gentlemen, thank you for your participation, and you may now disconnect.
Operator: Thank you for standing by. And welcome to the Harley-Davidson, Inc. 2025 Fourth Quarter Investor and Analyst Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Shawn Collins. Thank you. Please go ahead. Shawn Collins: Thank you. Good morning. This is Shawn Collins, the director of investor relations at Harley-Davidson, Inc. You can access the slides supporting today's call on the Internet at the Harley-Davidson, Inc. Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are Harley-Davidson, Inc. Chief Executive Officer, Arthur Starrs, and Chief Financial and Commercial Officer, Jonathan Root. With that, let me turn it over to Harley-Davidson, Inc. CEO, Arthur Starrs. Arthur Starrs: Good morning, everyone, and thank you for joining us today for our Q4 and full year 2025 results. Before we get into it, I'd like to thank our Harley-Davidson, Inc. employees, the HD dealer network, and our riders that are listening in this morning. Thank you for all you do every day for the company, living and leading our brand and culture. This marks my first full quarter as CEO. I've spent this time focused on understanding the core of our business, our people, our dealers, our riders, and the realities of the marketplace. Through extensive time on the ground, I've confirmed many of the early observations I shared last quarter. I'm confident there's a clear path to put Harley-Davidson, Inc. back on the right trajectory. And I now have a sharper view of what it will take to reset the business and get to a more stable operating and financial future in '26 and beyond. This morning, we will provide more detail on the themes you heard from us on our last call, as we work towards our expected strategic plan announcement in May. Turning to our fourth quarter results, which we do not believe reflect the full potential of this company. 2025 was a challenging year. And while some of the pressures we are facing are macro-driven, others are firmly within our control. And we are moving with urgency, focus, and discipline to address them. Wholesale shipments and associated margins were negatively impacted by intentional actions to address elevated dealer inventory, particularly touring inventory in North America. Through interventions on both the supply and demand sides, during the quarter, we reduced wholesale shipments and implemented targeted promotions to accelerate the return to balanced retail inventory levels. These actions are beginning to deliver results. Rider response has been positive, with North American retail sales growth in the quarter accelerating into December, yielding early indications of improving dealer profitability. We plan to continue these interventions with discipline, as we work to optimize retail inventory, positioning the business and our dealer network for more sustainable performance going forward. That said, we're encouraged by the early green shoots we're seeing. Our immediate priorities are both straightforward and deliberate. First, we believe we are stabilizing the business by restoring dealer confidence and aligning wholesale activity with retail demand. Second, we are finalizing a strategy that we believe builds a durable platform that leans into our core and positions Harley-Davidson, Inc. to return to sustainable growth. Early in my tenure, I committed to three immediate priorities: improving dealer profitability, reigniting brand momentum, and reducing costs. These commitments have not changed. Today, I'll walk you through the immediate actions already underway to advance these priorities. These actions are in the following areas: restoring our relationship with dealers, improving inventory management, sharpening our customer focus with the right portfolio, leaning further into the strengths of our branded community, and enhancing financial flexibility. Let me start with our dealer network. Harley-Davidson, Inc.'s dealer network is best in class, distinguished by unmatched enthusiasm, reach, and strength. While the network remains a competitive advantage, dealer health today is uneven, with some dealers facing challenges. Dealer health is not optional. It is a critical foundation for our long-term growth and earnings power. We're resetting the relationship between the motor company and our dealers. That relationship must be built on mutual trust and respect, shared objectives, shared accountability, and shared success. Healthy inventory levels and a healthy dealer network are nonnegotiable. Over the last couple of months, I continued a series of roundtable discussions with our North American and European dealers. Most recently, I spent time at our European markets, including attending the Verona Bike Expo and a Hog Chapter morning meeting. The insights from these engagements were consistent with my US visits: extraordinary passion for the Harley-Davidson, Inc. brand and strong commitment to the business. Importantly, there's broad alignment around the changes required to drive sustainable growth going forward. These include healthier inventory levels, improved product mix, simpler and more effective rider engagement programs, and greater flexibility to reflect local market conditions. Drawing on my experience in franchise-based models, I know that sustained success depends on alignment, transparency, and disciplined execution. We're committed to reestablishing that foundation, beginning with immediate interventions that we expect to improve our dealers' retail performance and financial trajectory while accelerating trust across the network. As we mentioned in Q3, we've begun to act with two quick and meaningful changes to support our dealers. First, we reviewed our fuel facility model guidelines, adjusting the scope to better balance global brand identity with celebrating local communities. Second, we made a commitment to reevaluate e-commerce. The company's e-commerce strategy has not historically delivered the intended results. It has created customer confusion and driven excessive discounting, placing unnecessary pressure on dealer economics. We've taken corrective action in North America by shifting to a model that is intended to drive incremental dealership traffic to support motorcycle sales. In the near term, our focus is clear: support our dealers, drive traffic to dealerships, and execute against our core business of selling motorcycles. While retail sales are still meaningfully below what we would consider a healthy run rate, the early progress is encouraging. We believe these actions are improving predictability and positioning the business for more consistent execution. Turning to inventory, on our Q3 earnings call, I was clear that inventory discipline and adapting to the realities of the current retail environment would be central to our focus. As we've dug deeper than initially anticipated, it's become evident that the challenges are more significant, and we're addressing them head-on. We are aggressively addressing inventory through targeted promotional support for touring models and disciplined quarterly planning by model, region, and dealership. We believe this approach allows us to align inventory with sales trajectories, account for regional needs, and proactively manage production and shipments, accounting for seasonality. The touring overhang remains pronounced and is being actively worked down through disciplined interventions designed to move the product efficiently without undermining long-term brand value. In North America, dealer inventory declined 16% relative to year-end 2024 levels. Globally, dealer inventory was down 17% over the same period, meaningfully exceeding our 10% global reduction target. This represents solid progress against our priorities, and I'm pleased with the team's execution and delivery. Overall, retail performance through the quarter was broadly in line with internal expectations. North American retail was up year over year, while international retail, particularly in EMEA, was softer than we expected. We expect the actions we are taking to assist dealers in moving through inventory to restore dealer health to have a near-term impact on our financial results. With that in mind, we view 2026 as a transition year as we reset the business and finalize our new strategy. I see a path to return to long-term earnings and free cash flow power of the business to the levels we know are possible. I can tell you we expect margins to be under pressure in the near term as production runs below wholesale, creating operating deleverage. These are deliberate actions that we believe are necessary to support both dealer and company profitability and ultimately rebuild the long-term earnings power of the business. As I've discussed, we are in the early stages of a reset. We've made decisive changes, and the work underway across the organization is designed to rebuild momentum in the right way and for the long term. Turning to the brand and our customer, our leadership team is reorienting the organization around a clear priority: our dealers are customer number one. When we enable our dealers to sell, customize, and service the motorcycles our riders want, everyone wins. I continue to spend significant time with dealers and riders, including attending a Hog Chapter gathering in Milan as part of my visit to Europe. The pride those members took in showing me their Harley-Davidson, Inc. motorcycles was contagious. It's clear our riders view their Harley as their individual motorcycle. Individual expression matters, and customization is central to that experience. We have been too lax on our parts and accessories business in recent years, and that will change. This is what our riders want. It's a critical business for our dealers. It creates more opportunities for our world-class service technicians. And it is core to what Harley-Davidson, Inc. has always stood for. Going forward, our focus in this area will have two parts: designing and building motorcycles that invite Harley-Davidson, Inc. customization, and ensuring our supply chain can support that demand quickly and reliably. Brand storytelling has always been essential to what makes Harley-Davidson, Inc. Harley-Davidson, Inc. At its core, our brand celebrates riders and the communities they create. In recent years, our work has been too serious and at times too dark. That's not who our riders are. When they ride and gather, our riders are joyful, passionate, and community creators. I saw this firsthand at an 80th Anniversary Celebration for a dealership outside Paris, France just a few weeks ago. Riders shared stories of journeys they'd taken together, including one who proudly told me he had ridden all the way to our factory in York, Pennsylvania, and was wearing his York PA Harley-Davidson, Inc. gear while standing in Paris. You'll soon see more optimistic, joyful brand work from us. Advertising that celebrates our community in a uniquely Harley-Davidson, Inc. way. Turning to product, to better align aspiration with accessibility, we are actioning more breadth and flexibility in our portfolio. That means being honest about where pricing and portfolio choices have limited our reach and making deliberate choices to widen the funnel in our core. My own interactions with dealers and riders over the past four months, in addition to customer research and recent retail trends, validate what our riders want: the look, sound, and feel of a Harley-Davidson, Inc. motorcycle coupled with the ability to customize their Harley to make it their own. The used market continues to reinforce the power of the brand and a strong desire for customers to purchase our products, but at a price that is more aligned with today's economic realities. In fact, as we look at used auction activity, we feel enthused about recent demand trends and the positive impact they're having on used values, especially in Harley-Davidson, Inc. core Softail models. What's clear is that the portfolio actions taken over recent years have put the brand out of reach for some existing and potential riders. To win, it's clear we need to sharpen our product focus, not only creating the highest quality motorcycles that our riders want to ride, but doing so with a price in mind. We need to ensure that these are products that our dealers are excited about and able to sell at a profit level that works for them and for us. Onto the team and our org structure. Execution requires the right team and structure. We've made targeted leadership team and organizational changes to strengthen our capabilities across product, supply chain, marketing, technology, and brand. We've added back new perspectives and welcomed back proven leaders with deep knowledge of Harley-Davidson, Inc.'s rider culture and community. Importantly, Harley-Davidson, Inc. should be a great place to work as well as a great business. Strong corporate culture isn't just good for employee morale. It's good for business. Rebuilding our culture and identity as a Milwaukee icon truly matters. My direct reports are all working from Milwaukee at our Juneau Avenue headquarters, and we will be formally reopening the office later this quarter. By going back to the bricks at our Juneau Avenue headquarters, we are not only reigniting the cultural beat that has defined this company for over a hundred and twenty years, but with these changes, are improving decision-making speed, cross-functional collaboration, and, critically, accountability. I'm particularly pleased with how much more agile, nimble, and speedy our leadership team is becoming working shoulder to shoulder in Milwaukee. It's an inspiring place to work. I'm excited to get our teams back to Juneau in the coming months. Lastly, I'll touch on the financial actions we are taking to reposition the business for success. We are conducting a rigorous end-to-end review of our cost base and operating expenses supported by third-party specialists. Our current corporate overhead, manufacturing capacity, and overall operating expenses are built for materially higher volumes than today's demand. And we will be addressing this mismatch head-on. We'll share more details in May. However, on top of previously announced targets, we anticipate at least $150 million of annual run rate savings that will impact 2027 and beyond. In Q4 2025, we renegotiated and funded the term loan with LiveWire, reducing the principal to $75 million. LiveWire is now working diligently to attract its own sources of capital to continue to finance its operations and future plans. We remain excited about LiveWire's newest motorcycle, the Honcho, soon to be in market later this year. Well aligned with the evolution of the EV motorcycle category toward smaller mini motors. Turning to HDFS, the recent transaction has delivered meaningful capital benefits. We now expect to be able to run the HDFS business with less capital than has been tied to this business historically. With these changes, we plan to take HDFS class-leading returns and deliver an even higher ROE than we did historically. And as HDFS' asset base rebuilds over the coming years, we expect to get back to earnings levels that run below historical levels. Going forward, HDFS will operate with significantly lower capital commitments and with funding support from two trusted partners. HDFS continues to be a strategic asset for Harley-Davidson, Inc. and a critical enabler for our dealer network. And we will talk more about HDFS strategically during our Q1 earnings call in May. While a key priority remains returning excess capital to shareholders, we are currently evaluating the timing of our share buyback initiatives. In the near term, we expect to be measured in our approach to share repurchases while we finalize our strategic plan that we expect to announce in May. Before I hand it over to Jonathan, I want to reiterate that Harley-Davidson, Inc. has an iconic brand, a loyal community, a dealer network unlike any other. We're taking the hard necessary steps to stabilize the business and rebuild trust, which we believe will restore our long-term earnings power. The work is underway, execution is improving, and we are committed to delivering results. Thank you. And now I'll hand it over to Jonathan. Jonathan Root: Thank you, Arthur, and good morning to all. I plan to start on page four and five of the presentation where I will briefly summarize the financial results for the fourth quarter and full year of 2025. Subsequently, I will go into further detail on each business segment. As a reminder, we closed what we call the HDFS transaction in Q4 at the October. The HDFS transaction is a strategic partnership with KKR and PIMCO, that we expect will transform Harley-Davidson Financial Services into a capital-light derisked business model. It also changes the financial profile of HDFS starting in '25 and affords a high degree of optionality in how we fund and run that business. As already cited earlier, the financial results in 2025 have come under pressure in the current challenging operating environment. We have moved immediately to make inventory management and discipline a central focus to resetting the business. This is evident in Q4 results and will continue to be a central priority as we move forward. Let me start with consolidated financial results for 2025. Consolidated revenue in the fourth quarter was down 28% driven by both HDMC revenue being down 10% and by HDFS revenue being down 59%. Consolidated operating income in the fourth quarter came in at a loss of $361 million compared to an operating loss of $193 million in 2024. This was driven by an operating loss of $260 million at HDMC and an operating loss of $82 million at HDFS. The loss at HDFS was driven by costs associated with liability management activities related to the HDFS transaction where we retired a significant portion of HDFS debt in Q4 2025. The operating loss at LiveWire was $18 million, which was in line with our expectations and $8 million favorable to a year ago. In Q4, earnings per share was a loss of $2.44, which compares to a loss of $0.93 in 2024. Turning to full year 2025, consolidated financial results on page five. Consolidated revenue of $4.5 billion was 14% lower compared to last year, while consolidated operating income of $387 million compares to $417 million in full year 2024. For the full year 2025, earnings per share were $2.78, and compares to $3.44 in full year 2024. Now turning to page six and HDMC retail performance. As Arthur already mentioned, in Q4, North American retail sales of new motorcycles were up 5% with 15,847 motorcycles versus prior year. In Q4, international retail sales of new motorcycles were down 10%, with 9,440 motorcycles versus prior year, resulting in Q4 global retail sales of new motorcycles being down 1% at 25,287 motorcycles versus the prior year. The choppiness and volatility in global retail results is a continuation of what we have observed since mid-2024 with a difficult global backdrop in big-ticket discretionary sectors. Pricing continues to be on the top of customers' minds given the current global setup that includes inflationary pressures and interest rates that continue to run above recent historical lows. In North America, Q4 retail sales were up 5%, where US retail sales were up 6% and Canada retail sales down 7%. For the full year 2025, North America retail sales were down 13%. In the quarter, we experienced strength in our Grand American touring product, up 6%, driven by the promotional support in the marketplace. We also saw strength in lower-priced sport motorcycle models, up 33%, as the updated pricing and marketing resonated with our dealers and customers. Within Grand American Touring, Trike was down 24% on very tight inventory availability in advance of the January 2026 new Trike launch. In EMEA, Q4 retail sales declined by 24% driven by weakness across the region and different bike families. EMEA continued to be adversely impacted by overall macroeconomic conditions. For the full year 2025, EMEA retail sales were down 11%. In the quarter, we experienced the most weakness in the touring and Softail categories. In Asia Pacific, Q4 retail sales declined by 1%, which was a significant improvement from the 2025 and mostly attributed to a continued challenging environment in China, which was down meaningfully. The Q4 retail sales included positive results in Japan and the Asia Emerging Markets. For the full year 2025, Asia Pacific retail sales were down 15%, and the softness was most acute in China for the full year and Japan for 2025. In the quarter, we saw retail strength across all families except for sport and lightweight motorcycles, which still had a combined inventory down nearly 30%. In Latin America, Q4 retail sales increased by 10% where both Brazil, our largest Latin American market, and Mexico were up, while other Latin American countries were down modestly year over year. For the full year 2025, Latin American retail sales were up 2% where both Brazil and Mexico were up. For the full year 2025, global retail sales of new motorcycles were down 12% versus the prior year where both North America and international markets turned in a similar performance. As already mentioned earlier, dealer inventory at the end of Q4 was down 17% versus the end of Q4 in the prior year. This compares to our stated goal at the beginning of 2025 of reducing dealer inventory by 10%. North America dealer inventory ended down 16% and international dealer inventory ended down 20%, with the regions coming in between down 19% to down 23%. This allows Harley-Davidson, Inc. dealers to start the 2026 riding season much cleaner and with an appropriate setup as we look at the coming quarters. As discussed, we specifically focused on assisting dealers to reduce touring motorcycle inventory in North America as the market displayed its price and value sensitivity. Let me briefly touch on incentive and promotional spend within the current environment. In Q4, we selectively provided incentive and promotional support to Harley-Davidson, Inc. dealers in the form of interest rate assistance, low APR, customer cash, and dealer cash credit. As I covered last quarter and Arthur mentioned earlier, dealers have more touring inventory in the channel than is desired. And while we have made progress in Q4, we still have more work to do. Based upon discussions with our dealers in December 2025, we determined to continue with consumer promotion into 2026 in order to work through these units and, therefore, we have taken accrual in our Q4 2025 financials. Again, we expect this will help us get out of the gate stronger in 2026 to help drive retail performance. Now turning to page seven and HDMC revenue performance. In Q4, HDMC revenue decreased by 10% coming in at $379 million, where the biggest drivers of the decline included net pricing and incentive spend and decreased wholesale volume. For the full year 2025, HDMC revenue decreased by 13% coming in at $3.6 billion, where the biggest driver of the decline was decreased wholesale volumes where we shipped around 125,000 motorcycles, down 16% from the prior year while net pricing was largely flat on the year. Now turning to page eight and HDMC margin performance. In Q4, HDMC gross profit came in at a loss of $30 million, which compares to a loss of $3 million in the prior year. Q4 is typically our lowest gross margin quarter due to seasonality and model year changeover. The year-over-year decrease was driven by the negative impacts from increased tariff costs and net pricing and incentive spend, while partially offset by the positive impacts from manufacturing costs, including leverage, and favorable foreign exchange. In Q4, operating expenses totaled $230 million, which was $19 million higher compared to the prior year or 9%, due to greater marketing spend with the introduction of the North America-focused marketing development fund for our dealers. In Q4, HDMC had an operating loss of $260 million, which compares to an operating loss of $214 million in the prior year period. Turning our attention to full year 2025 margins. For the full year 2025, HDMC gross margin was 24.2%, which compares to 28% in the prior year. A decrease of 380 basis points was driven by the negative impacts from incremental tariffs in calendar year 2025, which we will cover on the next slide, negative operating leverage, and lower volumes. These impacts were partially offset by the positive performance from lower supply management and logistics costs, favorable mix, foreign exchange, and net pricing was largely flat for the full year. Lastly, for the full year of 2025, operating expenses came in at $895 million, which were higher by $18 million due primarily to the marketing development fund mentioned previously. For the full year 2025, HDMC operating income was a loss of $29 million, which compares to operating income of $278 million for the full year 2024. Turning to Slide 12. In 2025, the global tariff environment was more volatile and uncertain than we had expected at the beginning of the year. In 2025, the cost of new or increased tariffs was $22 million, and for the full year of 2025, the cost of new or increased tariffs was $67 million. This included direct tariff exposure, Harley-Davidson, Inc. importing and exporting product, as well as indirect tariff exposure from suppliers. This excluded pricing mitigation actions as well as operational costs relating to new or increased tariffs. Harley-Davidson, Inc. is a business very centered in and around the United States. Three of our four manufacturing centers are US-based, and 100% of our US core products is manufactured in the US. We also have a US-centric approach to sourcing, with approximately 75% of component purchasing coming from the US. We have a number of actions underway to mitigate the impact, and we expect this situation will remain fluid given the uncertainty that still exists. As mentioned earlier, we closed the HDFS transaction in Q4 at the October. Just to restate or recap what we talked about in greater detail on the last earnings call, the HDFS transaction includes three key components: back book sale, sale of approximately $6 billion of existing HDFS loan receivables, forward flow agreements, the sale of future HDFS loan originations, and the sale of equity interest, sale of a 9.8% common equity interest in HDFS to KKR and PIMCO. In the fourth quarter, we retired a significant portion of HDFS debt, which resulted in some discrete costs. These discrete liability management costs were $73 million in Q4. While the full year results were record high earnings for HDFS, '5 resulted in an operating loss of $82 million for HDFS. Let me provide some greater detail. At Harley-Davidson Financial Services, Q4 revenue came in at $106 million versus $257 million in the prior year. The Q4 decrease was driven by lower retail and wholesale finance receivables at lower yields. The decline in retail receivables was due to the sale of the retail back book in the HDFS transaction. Interest income decreased in Q4 from $224 million in '24 to $46 million in '5, while other income increased to $60 million due to new servicing fee streams. On the expense side, Q4 interest expense increased $130 million from $95 million a year ago. This line item included the $73 million of discrete liability management costs to retire HDFS indebtedness. The provision for credit losses decreased to $7 million in Q4 from $72 million a year ago on lower retail finance receivables. Last, operating expenses came in at $51 million in Q4 versus $43 million a year ago, primarily driven by increased hedging costs and employee costs. In Q4, HDFS operating income came in at a loss of $82 million. For the full year 2025, HDFS revenue was $809 million, down 16% from the prior year primarily due to lower retail receivables and lower wholesale receivables due to the transaction. For the full year 2025, interest income decreased from $891 million to $668 million. For the full year 2025, other income increased $148 million to $201 million in the prior year, primarily driven by a discrete gain on the sale of residual interest in securitizations, a component of the HDFS transaction, and by servicing fee income. For the full year 2025, HDFS operating income was $490 million, record high earnings for HDFS, up from $248 million in full year 2024. The increase was primarily driven by favorable provision for credit loss expense due to the HDFS transaction impact and higher other income, partially offset by lower net interest income and higher operating expenses. With the sale of $6 billion of retail finance receivables, the provision for credit loss line item became favorable rather than a cost, reflecting the release of CECL allowance associated with the sold loans. Turning to HDFS loan origination activities. Total retail loan originations in Q4 were up 2%, coming in at $487 million in Q4. Commercial receivables came in at $949 million at the end of the year, relative to the prior year level of $1 billion, down 6%, reflecting overall lower dealer inventory levels in the channel. Total gross financing receivables were $2 billion at the end of 2025, where retail receivables were $1 billion and commercial receivables were $949 million. This is a significant change relative to a year ago, resulting from the sale of around $6 billion of HDFS retail loan receivables as part of the HDFS transaction. For comparison purposes, gross financing receivables were $7.7 billion at the end of 2024, which includes both retail loans and commercial financing. Total HDFS loan assets fell 74% year over year as we shift to a capital-light business model that carried less risk. Now turning to slide 13. For the LiveWire segment, on a full-year basis, electric motorcycle units increased by 7% and Stasic units increased by 15%, while consolidated revenue decreased by 3% due to increased incentives associated with the Twist and Go promotion. LiveWire maintained its position as number one retailer in the US 50-plus horsepower on-road EV segment and had its second consecutive record-setting quarter for retail sales. Consolidated operating loss decreased by 32%, driving a 45% decrease in net cash used during the year, excluding the $75 million of proceeds from the term loan with HD. During 2025, LiveWire consolidated revenue increased by 9%, driven by a 61% increase in electric motorcycle units and a 7% increase in Stasic units. Consolidated operating loss decreased by 30%. For 2026, LiveWire's focus is on the launch of its S4 Honcho products, with production targeted to begin in 2026, continued network expansion, cost savings and improvement, and product innovation and development focused on profitable products. Now turning to slide 14. Wrapping up with consolidated Harley-Davidson, Inc. financial results. We delivered $569 million of operating cash flow in full year 2025, which was down from $1.064 billion in full year 2024. The decrease in operating cash flow was driven by lower motorcycle shipment volumes and unfavorable manufacturing and tariff costs, as well as originations of retail finance receivables classified as held for sale, which are classified as operating cash outflows. There were no originations of retail finance receivables held for sale in 2024, so the net outflows related to this activity contributed to the decrease in operating cash flows. Total cash and cash equivalents ended at $3.1 billion, which was $1.5 billion higher than a year ago. The HDFS transaction facilitated a dividend of $1 billion from HDFS to HDI in Q4, which together with a further dividend expected to be paid in Q1 results in a total dividend that will be consistent with our original expectation. In addition, HDFS debt will be further reduced by the maturity of a €700 million medium-term note in Q2. As part of our capital allocation strategy, in Q4, we entered into an accelerated share repurchase agreement with Goldman Sachs to repurchase $200 million of shares of the company's common stock. We entered into the $200 million ASR, $160 million was delivered before 12/31, with the remainder early 2026. For the full year 2025, we repurchased a total value of $347 million or 13.1 million shares in total, which represents around 11% of 12/31/2024 shares outstanding. This amount includes the aforementioned ASR agreement. Now turning to slide 16. While 2025 was a more volatile and challenging year than we had anticipated, we look to 2026 where we start the year at more appropriate dealer inventory levels and look to reset the business toward a more stable operating and financial future. As we look to our financial outlook for 2026, we remain pleased with our leading market share position in the US, new model year '26 motorcycle launch, including the all-new redesigned trike models, as well as the long-haul touring and the introduction of a more affordable lineup of motorcycles with a focus on critical price point motorcycles to help stoke demand. At HDMC, we expect retail units of 130,000 to 135,000. We expect wholesale units of 130,000 to 135,000. As you can see, we believe that global dealer inventory levels are at appropriate total levels with some need to balance by model and family. Therefore, we expect retail and wholesale to have a largely one-to-one relationship in 2026. At the same time, we expect production units at HDFC to be lower than wholesale units shipped in 2026 as we work to prudently manage overall company inventory levels. For 2026, we expect this will have a deleverage impact, which will pressure operating leverage when it comes to operating margins. In addition, we expect to face a greater overall cost for incremental tariffs in 2026, which are likely to be applied more uniformly over the entire calendar year, whereas 2025 experienced partial application during the year and was backloaded. As a reminder, in full year 2025, we incurred a cost of $67 million in new or increased tariffs. And in 2026, we forecast the cost of between $75 million to $105 million of new or increased tariffs based on current tariff levels and versus the 2024 baseline. At HDMC, we expect operating income of positive $10 million to a loss of $40 million. At HDFS, we expect operating income of $45 million to $60 million. The forecast is based on the new business model at HDFS given the HDFS transaction where Harley-Davidson Financial Services now employs a capital-light derisked business model and has significantly changed financial earnings profile relative to before the transaction was done, particularly in the near term. Additionally, both retail and wholesale asset levels are lower than we previously believed, and non-servicing fee income is also being viewed more cautiously. At LiveWire, LiveWire is forecasting an operating loss in the range of $70 million to $80 million. These guidance elements exclude impacts from our updated strategic plan, which we are looking forward to announcing in May along with Q1 earnings. And with that, we'll open it up to Q&A. Operator: Star one on your telephone keypad. Withdraw your question, press star one again. We also ask you to limit yourself to one question and return to the queue for additional questions. Thank you. Your first question comes from Craig Kennison with Baird. Craig Kennison: Hey, good morning. Thank you for taking my question on HDFS. Just, you know, based on the message that came out of the HDFS transaction last year, I think the expectation was that HDFS operating income could be maybe half of what it used to be, so at least $100 million. Granted, that was just an expectation that came out of the presentation materials, but you're looking to be about half of that. Maybe help us unpack what's going on with the math behind HDFS and what the long-term profitability of that business should look like? Jonathan Root: Alright. Craig. How are you doing? Thank you for your question today. So obviously, from an HDFS standpoint, as we take a look at what we're guiding to, as you say, for 2026, we have a guide for the HDFS business to come in between $45 and $60 million. As we flow forward and look to kind of a standard run rate for this business, which will probably take us, you know, two and a half, three years to get to that point, we would view kind of at the midpoint that HDFS would be, on a standardized basis, making approximately triple the midpoint. So that's where we think the business goes long term. As we think about some of the short-term related impacts and where is there a difference versus what we envision? We obviously have a cautious outlook relative to what we're looking at from the overall volume standpoint. And so we're being careful and considered there. And then in addition, with what you saw with our Q4 year-end results, with dealer inventory down significantly and more than what we envisioned, obviously, we have lower wholesale assets too, so that pressures earnings power of that. Hopefully, that explains what you're looking for and provides the perspective. Craig Kennison: Do you need more retail and more wholesale stock units in order to triple that income, or are there other adjustments? Jonathan Root: Yeah. No. Just time for those time for the retail assets to kind of flow their way in. So, obviously, we need multiple years of building, kind of rebuilding the balance sheet in order to drive what we need for an income statement standpoint in that business. And then as we talk wholesale, wholesale levels are lower than what we envisioned. Arthur's focus on how we really maintain tight and disciplined inventory with our dealers. Craig Kennison: That makes sense. Thank you. Operator: Your next question comes from Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Hi. Thanks for taking my question. I guess just on kind of the wholesale guidance, you know, you kind of talked about a one-for-one dynamic. Obviously, the implication is, you know, shipment growth in '26. So I guess in terms of cadence, how should we think about that building through the year? And then on inventory levels, like, I guess, is the implication that you're kind of more comfortable now with where you're sitting at the end of the year? Thanks. Jonathan Root: Sure. So why don't I start a little bit with cadence, and then maybe we'll have Arthur talk through total inventory levels and provide a little bit of commentary around that. So from a cadence standpoint, as we think about wholesale shipments and the way that will look on a year-over-year basis, again, we're being what I would define as, you know, careful and considered in what we're sending into the dealer network. So Q1 of 2026 will probably be down from a wholesale shipment perspective, down a little bit versus where we were in Q1 of the prior year. We think that we'll end up kind of popping up a little bit higher in early Q2, so making sure that we have dealers who are well-positioned for when the season is starting. So we're not asking them to carry that inventory in the January recovery time frame. But we do want them to be appropriately positioned from an inventory standpoint. So Q2 wholesale shipments will be a little bit higher than the prior year. Then as we take a look at how we walk into Q3, Q3, again, probably just a little bit lower as we work through some timing elements within the portfolio and some things that occur from that standpoint. And then as we end up, obviously, we were pretty measured in what we shipped into the ending Q4 dealer network in '25. So there's room for a pretty material change in what we're sending in in 2026. So, certainly, if you kind of take all of those different factors, a little bit more back-loaded from a shipment cadence in the second half of the year versus the first half. And even with that, sort of a little bit more towards Q4. Yeah. And then, Arthur, you can talk. Arthur Starrs: Yeah. No. Just broadly on inventory, you know, the focus is on supporting our dealers and selling through the touring inventory. We remain pleased with the progress there. There's still support there, and we'll continue to be. And we're also pleased with the '26 model year launch. A lot of enthusiasm in the market. So, you know, we'll be monitoring that closely. But you know? And in my script and in these comments, just want to be abundantly clear we're hyperfocused on healthy inventory levels, and the focus is on the model year '25 touring right now. Operator: Your next question comes from Robin Farley with UBS. Robin Farley: Great. Thank you. I wanted to ask a little bit about the expectation for retail to be flat globally. Just wondering what that counts on for U.S. retail. And then also just kind of, you know, what's behind the expectation of flat, you know, just how you're thinking that how you're coming to that expectation. Then if I could just also, by the way, just squeeze in a quick clarifying point on LiveWire. I think previously, the expectation had been that you were limiting the kind of losses you would underwrite, and is it fair to say based on the guidance you're giving for '26 that you are willing to continue to invest or see LiveWire maybe lose more than, you kind of the commentary last year? Thank you. Arthur Starrs: Hey, Robin. It's Arthur. Thank you for the question. I'll take the LiveWire one, and then Jonathan will walk through the retail forecast. Yeah. On LiveWire, we, you know, we extended the $75 million loan, which is originally $100 million. So we worked through that with them, and they're actioning, you know, other sources of capital at this point in time. Funding the operating losses or so on, we've extended our commitment on the loan, and that's it. So, Jonathan, you can walk through the retail piece. Jonathan Root: Okay. Sounds good. Thanks, Arthur. Hi, Robin. So on the, I think you asked about US specifically from a retail standpoint. So as we flow through and take a look at it, we're obviously really, really excited about what's happening with the introduction of the new limited. So as we take a look at where we are from an overall retail sales perspective, we do envision that we have a little bit of upside in terms of '26 versus '25 from a touring standpoint for a couple of reasons. You heard Arthur talk about our focus on '25 model year sell-down and how that was focused around touring. So at retail, that actually really helps us in terms of moving through the '25 touring bikes and what we have. Stacked on top of that is the new limited, and the new limited has been a hit, and we're really excited about those and the initial reception to that. So a lot of enthusiasm from our dealer network around sold orders and what they're seeing on that front. As we move along the retail side, we also have the introduction of the new trikes. Again, as we look at dealer enthusiasm, customer feedback around what those look like, we're really proud of what our engineering team has done from a suspension perspective. So if you think through handling and the way that that motorcycle performs, some real positives, I think, in terms of how customers will feel and enjoy that motorcycle. So a little bit of enthusiasm in terms of where we sit from a trike perspective. And then just a couple more pieces that I'll touch on quickly. As we take a look, we are being careful and considered in what CVO retail and CVO wholesale shipment looks like. We do want to make sure that those bikes really are put up on a pedestal and we're being thoughtful about what we're shipping in, which obviously will challenge retail a little bit within that particular family. And then overall, we have the full year of Softails. So really, really excited that we have dealers who are well-positioned. We kind of moved some price points in a way that are pretty customer-friendly. And so, overall, feeling good about where that is. So those are many of the puts and takes for 2020. Operator: Great. Your next question comes from Tristan Thomas with BMO Capital Markets. Tristan Thomas: Hey, good morning. Can you give the $150 million of annual run rate savings in 2027 and beyond that you guys called out? Is that spread among all three segments? And then also, is there any way to anything you can provide us kind of with cadence of that next year specifically would be very helpful as we build out our models? Thanks. Arthur Starrs: Yeah. Hey, Tristan. I'll take that. The $150 million would not incorporate anything at LiveWire. That would just be the motor company and HDFS. And in terms of cadence, you know, we would expect to realize some of those savings, you know, beginning in the back half of this year. We've not incorporated any restructuring charge in the guidance. So that would, you know, complement that. But we've been clear in saying we expect those savings to be realized on an annual basis starting in 2027. Tristan Thomas: Great. Thank you. Operator: Your next question comes from James Hardiman with Citi. James Hardiman: So, any help you could give us sort of bridging what I think is about 4% to 8% wholesale growth if I sort of use the wholesale guide to where you ultimately land in terms of operating income still being, you know, a modest loss on the HDMC side. Obviously, there's some tariffs in there. Sounds like there's some deleverage as we think about sort production versus wholesale. And then I guess I'm also curious on the ASP side or the mix side. I think what I'm hearing is that even though inventories for the year will be flat, touring will be down. So you're gonna be undershipping touring. Just curious what impact that might have on ASP and or mix. Jonathan Root: Thanks. Okay. Yeah. Great question. Thank you, James. Hope you're doing well. As we take a look at where we are, we certainly have a number of factors that come into play as we look at motor company operating income in '26 versus '25. So you're right. If you kind of look at where we land from a midpoint perspective, really, really close to flat. We have a number of factors that come into play. So we have a full year of tariff exposure. So that adds about a $25 million headwind year over year. Again, going back to the tariff update page that we included within the deck, you can see some of the details there. Obviously, as we complete our final year of getting disciplined back into the operating environment in terms of balancing out wholesale and production, that poses a little bit of a deleverage challenge. And then we certainly have some associated supply chain impacts that we're contemplating. As you talked about, we do have a broadly one-to-one relationship between retail and wholesale, which does have an offsetting positive. And then as we look, there's some non-motorcycle implications around P&A and A&L. So all in, as we look at where we are, if you do a midpoint comparison, just effectively sitting right on top and, obviously, an improved setup for out-year performance as we work through our final issues in '20. James Hardiman: Got it. Operator: Your next question comes from Brandon Rollé with Loop Capital. Brandon Rollé: Good morning. Thank you for taking my question. I just had a question around the used versus new pricing spread. How do you feel about where that spread is right now? And obviously, with all this promotional activity, do you see that spread tightening as you kind of pull away the promotional activity, or is this something that the spread gonna keep expanding as maybe prices go higher? And it seems like people are digging in lower and lower, you know, into the used value. So for a deal. Just any comments there on the spread? Thank you. Jonathan Root: Okay. Thanks, Brandon. I'll start with a couple of numbers, and then maybe Arthur can provide some perspective in addition. So I think from a couple of different factors that you speak about. So as we think about where we're sitting today from a Q1 standpoint, we were forthcoming in terms of the charge that we took in '25 in order to make sure that we were positioned to clear through touring in the way that Arthur has talked about. So relative to the factor on the new side, as we think about affordability, monthly payments, and impacts for consumers, we recognize that we're doing, we're putting some programs in market at the moment that are helping drive a reduction in the gap between new and used motorcycles. So we have some stimulus that we think is helping drive a really nice value equation for our customers. I think what's really exciting is that in addition to that, as we take a look at what we're seeing on used values, we have seen sort of stabilization of some nice improvement in used values and what we're seeing come through at both auction and retail on the used side. So I think that that dynamic is also helping us from an overall consumer standpoint. So a couple of nice factors that bring that together. Arthur Starrs: And I think one of the insights we're seeing is that some of the parts of our portfolio that we've walked away from in recent years, the used values have jumped. So it's informing some of our product development work. So it's encouraging to see core equities that we've been known for a long time really responding quite well in the used market. And it's informing some of the innovation that you're gonna be seeing from us. Brandon Rollé: Great. Thank you. Operator: Your next question comes from Jaime Katz with Morningstar. Jaime, your line is open. Jaime Katz: Hi. Sorry. I'm hoping that you guys can talk about maybe what you envision as the potential for the motor company operating margin beyond '26. Like, do we go back to a high single-digit rate? Do you guys see more opportunity to expand margin, if maybe we can get some volume improvement to take hold and just sort of what you see as the potential for that segment over time? Arthur Starrs: Yeah. Jaime, that's a great question and something we're gonna clearly call out in our May, you know, investor meeting and strategy discussion and earnings. So if you, you know, tune in then, I'll give you more detail. Obviously, we don't think the current results reflect the full potential of the company. So a lot of upside and look forward to updating you in May. Jaime Katz: Okay. And then do you have a target for leverage metrics at the 2026 given that you're still paying down some debt? Jonathan Root: Yeah. I think, you know, everything from an overall capital perspective, as Arthur talked about in our Q1 earnings call that we do in May, we'll make sure that we walk through strategy, overall capital allocation, our approach to the way that we're running the business on leverage for HDMC as well as HDFS, and then what we look at on a go-forward basis. We will be sure that we cover all of that then. Jaime Katz: Yes. So no target yet. But you. Arthur Starrs: No target. The one thing I'd just remind is the €700 million note that we're gonna be, you know, paying off. That's the one thing that we've called out. Jonathan Root: Thank you. Operator: There are no further questions at this time. This concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to the Hasbro, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Frederick Wightman, Vice President, Hasbro Investor Relations. Please go ahead. Frederick Wightman: Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer, and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. We will begin today's call with Chris and Gina providing commentary on the company's performance, before taking your questions. Our earnings release and the presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question and answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-Ks, our most recent 10-Q, today's press release, and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would like to turn the call over to Chris Cocks. Chris? Chris Cocks: Thanks, Fred, and good morning. Last year, we introduced Playing to Win, our strategic roadmap to guide Hasbro from turnaround into a new era of growth and profitability. At its core are two pillars: Play and Partnership. Those pillars define Hasbro. Our brands have been delighting fans since 1860 when Milton Bradley introduced his first board game. Partnership has been equally foundational. We have worked with premier partners for more than seventy years, beginning with The Walt Disney Company in 1954. Today, we work with over 1,000 partners across more than 5,000 collaborations. Play and partnership anchor everything we do. They power our mission to bring joy and community to fans of all ages through the magic of play. And our KPI for that mission is simple: Delight. So how many kids, families, and fans did we delight over the past year? When we announced Playing to Win, we used objective measures like YouTube views, Circana point of sale, box office receipts, and Sensor Tower data to estimate our annual reach. Our initial estimate was 585 million people. It turns out that was conservative. Since then, we have continued to refine our understanding of brand reach. In late 2025, we conducted a large-scale survey across eight major markets, reaching tens of thousands of consumers, and combined those results with third-party data to better understand the reach of our brands. The result was clear: Hasbro now reaches more than 1 billion people every year. From Transformers movies to families visiting Peppa Pig theme parks, to Magic played in hobby shops around the world, Hasbro has positively impacted nearly one in eight consumers globally. I'm incredibly proud of that. It puts into perspective why we do what we do and why we're pushing so hard to position this company for its next century. Our brands and partnerships create joy for an enormous audience through the simple, powerful magic of play. That delight is not abstract. It is showing up directly in our results. Inspiring a lifetime of play is what animates our teams. And in 2025, they translated that passion into outstanding performance. In the fourth quarter, Hasbro grew revenues by more than 30%. Adjusted operating profit grew nearly 180%. Our consumer products business returned to growth, up over 7%, with MONOPOLY, Peppa Pig, and Marvel all growing. Wizards of the Coast capped off a remarkable year with 86% sales growth in the quarter, driven by the combined strength of Magic and Digital. For the full year, Hasbro grew revenue 14%. Adjusted operating profit margin reached a record level above 24%. Adjusted operating profit exceeded $1.1 billion, also a record. That momentum is being reinforced by partnerships across the company. In toys, we added K-Pop Demon Hunters, the global phenomenon and Netflix's most popular film, as a co-master toy licensee. That partnership is already underway with a MONOPOLY deal crossover and many more exciting new role play, interactive plush, and games coming over the next few months. This morning, we also announced the primary toy license for the world of Harry Potter and the upcoming HBO original Harry Potter series with Warner Brothers Discovery. Joining new recently announced partnerships for Voltron with Amazon MGM Studios, and Streetfighter with Legendary Pictures. These collaborations will begin in the back half of 2026 and build into 2027. These are iconic franchises with global reach, and we are honored to partner with such world-class IP owners. Shifting to Wizards of the Coast, Magic delivered a record fourth quarter and grew sales nearly 60% for the full year. We have a powerful lineup in 2026. It includes original IP like Lorwyn Eclipse and Secrets of Strixhaven, alongside a blockbuster slate of Universes Beyond collaborations, including Teenage Mutant Ninja Turtles, Marvel Superheroes, The Hobbit, and Star Trek. Avatar the Last Airbender, which launched in late November, is now the third highest selling set in Magic's history, trailing only Lord of the Rings and Final Fantasy. At the same time, Secret Lair delivered its largest quarter ever, and backlist sales once again set a record. This balance of tentpole releases, premium offerings, and evergreen play reflects how the Magic system is designed to perform. That momentum has carried into the new year. Lorwyn Eclipse has already become the fastest selling Magic IP premier set ever, surpassing Tarkir. Player growth continues to underpin these results. Through the end of 2025, more than 1 million unique players participated in organized play, representing a 22% increase year over year. That growth is supported by a global play network. We now have more than 10,000 active Wizards Play Network stores worldwide, up over 20% year over year, with expanded reach across traditional retail partners. Taken together, this reinforces our confidence in Magic's long-term growth. We are building a system of play with multiple entry points, product types, and engagement paths. And that system is positioned to continue driving growth into 2026 and beyond. In the fourth quarter, we also shared more about our self-published video game strategy, including a new gameplay trailer for our science fiction RPG, Exodus, and the first reveal of our D&D action-adventure game, Warlock. Both titles have been in development since 2019 and are led by some of the most experienced, creative, development talent in the industry. The response has validated our confidence. Since debuting at the Game Awards, trailers for these titles have been viewed more than 100 million times across social, gaming, and owned channels. We expect both games to launch in 2027, beginning with Exodus in the first part of the year. We will share much more later this year, including extended gameplay walkthroughs that allow fans to fully step into the world Archetype Entertainment and Invoke have built. All of this reflects meaningful change. New partnerships, new distribution, new digital capabilities, and it represents only part of what we have in motion. In 2026, we expect our largest year ever with our longest-standing partner, The Walt Disney Company. We are launching products tied to four major films: Disney and Pixar's Toy Story 5, Star Wars, The Mandalorian and Grogu, Spider-Man: Brand New Day, and Marvel Studios' Avengers Doomsday. Alongside an all-new Magic collaboration with Marvel Superheroes. We also have a strong lineup of collectibles and exclusives, including standout Pulse drops later this year. We're introducing creative new ways to experience Play-Doh that age up the brand later this year. Peppa Pig's baby sister, Evie, will celebrate a year of firsts as she approaches her first birthday. And we recently announced that Peppa's younger brother George is moderately deaf, as we continue to champion stories that reflect real children and families around the world. Transformers will begin celebrating the 1986 animated film with a new product line, surprises throughout the year. D&D has major category expansions coming later this year, alongside continued growth on D&D Beyond. We also announced a partnership with HBO and Craig Mazin on a Baldur's Gate series. Coming off the success of The Last of Us, Craig demonstrated what is possible when games serve as premium source material. That success reinforces our strategy to unlock long-term value by bringing our worlds to life with top-tier creative partners across more than 60 active entertainment projects. Before I close, I want to address AI and how we're using it at Hasbro. We're taking a human-centric, creator-led approach. AI is a tool that helps our teams move faster and focus on higher-value work. But people make the decisions, and people own the creative outcomes. Teams also have choice in how they use it, including not to use it at all when it doesn't fit the work or the brand. We're beyond experimentation. We're deploying AI across financial planning, forecasting, order management, supply chain operations, training, and everyday productivity. Under enterprise controls and clear guidelines around responsible use and IP protection. Anyone who knows me knows I'm an enthusiastic AI user. And that mindset extends across the enterprise. We're partnering with best-in-class platforms, including Google Gemini, OpenAI, and Eleven Labs, to embed AI into workflows where it adds real value. The impact is tangible. Over the next year, we anticipate these workflows will free up more than one million hours of lower-value work. And we're reinvesting that capacity into innovation, creativity, and serving fans. Our portfolio of IP and the creators and talent behind it are the foundation of this strategy. Great IP plus great storytelling is durable as technology evolves. And it positions us to benefit from disruption rather than being displaced by it. In toys, AI-assisted design paired with 3D printing has fundamentally improved our process. We've reduced time from concept to physical prototype by roughly 80%, enabling faster iteration and more experimentation. With human judgment, human craft determining what ultimately gets selected and turned into a final product. We believe the winners in AI will be companies that combine deep IP, creative talent, and disciplined deployment. That's exactly where Hasbro sits. As we enter 2026, we view Playing to Win and more importantly, the execution behind it by our Hasbro, Wizards of the Coast, and digital studio teams as a clear success. Despite market volatility and a shifting consumer environment, we returned this company to growth in a meaningful way. We delighted more than 1 billion kids, families, and fans, secured partnerships that further underwrite future growth, advanced our evolution to a digital-first play and IP company, and delivered record profits for our shareholders. In 2026, we expect that momentum to continue. Hasbro is firmly back on a growth trajectory, powered by play, partnership, new digital capabilities, and most importantly, our extraordinary brands. With that, I will turn it over to Gina to walk through the financial details and our outlook for 2026. Gina? Gina Goetter: Thanks, Chris, and good morning, everyone. We closed 2025 with good momentum in the fourth quarter and clear evidence that our Playing to Win strategy is working. While the year included meaningful transformation actions and macro volatility, performance reflects the advantage of our diverse portfolio, the durability of our gaming-led growth model, and disciplined execution. We delivered double-digit revenue growth, expanded adjusted operating margins, generated substantial cash flow, and exited the year with increased financial flexibility. Looking at the fourth quarter, net revenue was $1.5 billion, up 31% year over year with growth coming from both of our main segments. Adjusted operating profit was $315 million, up 180% versus prior year, resulting in a 21.8% operating margin. Adjusted earnings per diluted share were $1.51, capping a year of accelerating momentum. For the full year, net revenue grew 14% to $4.7 billion, driven by exceptional performance in Wizards and continued progress across the rest of the portfolio. Adjusted operating profit increased 36% to $1.1 billion with an adjusted operating margin of 24.2%, up nearly 400 basis points versus last year, driven by favorable mix and cost productivity. Adjusted earnings per diluted share were $5.54. In terms of segment performance, in Q4, Wizards' revenue grew 86% to $630 million, driven by Magic, which was up 141% versus last year behind the strength of Avatar the Last Airbender and Final Fantasy's holiday release. Operating profit in the quarter was $284 million, resulting in a 45% operating margin. For the full year, Wizards' revenue increased 45% to $2.2 billion with operating profit of just over $1 billion and an operating margin of 46%. Magic revenue grew nearly 60%, reinforcing its position as one of the strongest gaming franchises in the industry. Core Magic KPIs remain healthy with growth in distribution and a record year for Secret Lair and backlist. MONOPOLY GO continued to be a steady revenue and profit stream, contributing $168 million with the monthly revenue pool remaining largely consistent as we move through the year. The overall mix of business resulted in a 420 basis point improvement in margin and a solid foundation heading into 2026. Consumer products executed well in the fourth quarter, delivering $800 million of revenue, up 7% behind the strength of Hasbro Gaming and Marvel. Adjusted operating profit was $54 million, reflecting improved product mix and promotional discipline while supply chain productivity nearly offset the cost of tariffs. For the full year, consumer products revenue declined 4% to $2.4 billion and delivered an adjusted operating profit of $113 million, demonstrating resilience and an improved cost structure even after absorbing nearly $70 million of tariff impact. Owned and retail inventory positions remain healthy, and we exited the year with owned inventory at a record low of seventy-five days. Entertainment performed in line with expectations for the quarter and the year, delivering stable revenue and adjusted margins consistent with our asset-light strategy. Our cost transformation efforts contributed over $175 million in gross savings across supply chain, product development, and operating expenses, driving margin expansion and helping to offset the impact from tariffs. Through 2025, we have delivered almost $800 million of gross cost savings and are well on our path to the $1 billion commitment. From a cash and balance sheet perspective, 2025 was a strong year. We generated $893 million of operating cash flow and ended the year with $777 million of cash on the balance sheet. We returned $393 million to shareholders through dividends while continuing to reduce debt and invest behind growth. We reached our gross leverage target, finishing the year at 2.3 times behind increased earnings and a reduced debt load. Looking ahead to 2026, we are entering the year with momentum, clarity, and a durable foundation. Wizards remains our primary growth engine, supported by a robust pipeline and sustained engagement across tabletop, digital, and licensed gaming. And we expect consumer products will benefit from a healthy entertainment pipeline, which will enable improved consistency and margin performance. Turning now to guidance. We expect Hasbro consolidated revenue to grow between 3% to 5% year over year on a constant currency basis, with growth across each of our segments. We expect operating margins to be between 24% to 25% for the year, reflecting continued operating leverage and disciplined execution. And we expect adjusted EBITDA to be in the range of $1.4 to $1.45 billion. At the segment level, Wizards is expected to deliver mid-single-digit revenue growth, supported by a healthy release cadence and continued engagement across the Magic ecosystem. Operating margins are expected to remain in the low 40% range, reflecting the underlying strength of the business while absorbing higher royalty expense and incremental costs associated with our planned 2027 video game releases, Exodus and Warlock. In consumer products, we expect revenue to grow low single digits year over year with operating profit margins in the 6% to 8% range. Revenue growth is buoyed by the strong entertainment slate from our partners at The Walt Disney Company, creating leverage through to the cost structure. Entertainment revenue is expected to be slightly positive year over year with operating margins of approximately 50%, reflecting the asset-light nature of the business and continued discipline around investment. The 2026 outlook assumes approximately $150 million of gross cost savings from initiatives across supply chain, including the manufacturing diversification efforts, as well as a continuation of our transformation in several areas impacting operating expense. In terms of phasing, we expect stronger revenue growth in the first half driven by the timing of entertainment-related releases within consumer products, normalized retail order patterns, and year-over-year shifts in the cadence of Magic set releases. The stronger revenue growth in the first half will have a negative impact on margin, as the growth in both segments carries a higher royalty expense. Margin expansion will come in the second half, driven by favorable business mix within consumer products, a step-up in productivity across supply chain, and leverage within operating expenses. Tariff costs will be relatively flat year over year in the back half, with much of the incremental costs landing in the front half of the year. Capital allocation priorities are largely unchanged from last year. We will continue to invest in the business, specifically behind our highest return growth opportunities led by Wizards and Digital Gaming. Second, we are focused on paying down debt and maintaining a healthy balance sheet, and we remain firmly committed to returning cash to shareholders through our dividend. The Board has authorized the first quarter dividend, reinforcing our confidence in the durability of our cash flows. Finally, we are restarting share repurchases, and the board has authorized a new $1 billion share repurchase program, providing additional flexibility to return excess capital to shareholders over time. While we do not provide EPS guidance, there are a few important items below the operating line to highlight for modeling purposes. First, interest expense is expected to be higher year over year, primarily related to planned refinancing activity. And second, we expect lower non-operating income driven by translational foreign exchange impacts and the absence of prior year benefits related to the Swiss deferred tax asset. Taken together, these items represent approximately $40 million year-over-year headwind to EPS even as operating income continues to grow. In summary, the 2026 outlook reflects the progress we've made as we executed the first year of our Playing to Win strategy and the durability of the business we're building. We are growing from a stronger earnings base, operating with greater discipline, and allocating capital with intention. As we move through 2026, we believe the cadence of profitability becomes increasingly favorable, keeping us on track to our medium-term financial commitments. And with that, I'll turn it back to the operator for questions. Operator: Thank you. We'll now be conducting a question and answer session. I ask you please limit yourself to one question and one follow-up so that other callers have a chance to participate. If you would like to ask a question at this time, you may press star 1 from your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, please wait for questions. Thank you. The first question comes from the line of Megan Clapp with Morgan Stanley. Please proceed with your questions. Megan Clapp: Hi. Good morning, Christina. Thanks for taking our questions. I wanted to start with Magic. Obviously, really impressive growth in the fourth quarter and the year, and really nice to hear the momentum has continued with Lorwyn into the start of the year. You know, I think a key investor focus and question we still get a lot is how do you lap what you just delivered as we look into fiscal 2026? You talked about kind of mid-single-digit top-line growth for Wizards. I think most of that's probably driven by Magic. So can you just kind of take a step back and unpack some of the assumptions that are underlying your Magic guide for the year? You've got the extra half set, the backlist, obviously, momentum remains strong there. You talked about Secret Lair record in the fourth quarter as well. And then the player growth up 20% year over year, can you talk about just how what you're seeing from some of these newer players plays into it as well? Thank you. Chris Cocks: Yeah. Good morning, Megan. I'll start, and then Gina can correct everything I say. I think it really comes down to several growth vectors. The first one is distribution growth. We're seeing meaningful growth in our Wizards Play Network. That was up 20% last year. We think it's going to be up double digits this year again. We're seeing incremental distribution as the brand expands and player base expands. So I think mass market and non-WPN based distribution growth exceeded last year WPN growth and will exceed it again this year. Player growth has been robust. I think the organized play metrics we're giving you are just kind of hardcore or core player growth, the people who play in stores. Our metrics for non-hardcore players are a little more loose. But we think that those are growing well in excess of that 20%. And importantly, as we're bringing on new kind of casual fans or new to Magic fans and collectors, they are sticking around. And you're seeing that evidence in robust backlist and higher organized play participation. So what we're seeing going on with Magic is a virtuous cycle of there's more places to buy. There's more people playing. They're engaging longer and sticking around. And, you know, that just leads to increased set over set performance like we're seeing with Lorwyn. And we see that continuing into 2026. Not to mention, we've got a stacked lineup of partners. You've got Teenage Mutant Ninja Turtles, The Hobbit, Marvel Superheroes, and Star Trek. Plus some real fan favorite sets like Lorwyn and Strixhaven on top for this year. Gina Goetter: Yeah. I guess, Megan, good morning. My add would be as we think about the phasing for the year, there's a front half and a back half. And when you split it, really, most of the growth for the business is going to come in the front half of the year. Just surely because of what we're comping in Q4. And if you look kind of quarter by quarter basis, you know, all three first three quarters are going to continue to grow. For Magic, it's really about that fourth quarter. So expect really strong performance in the front half of the year, really good performance in the back half of the year as well. It's just we have a massive comp in Q4. Megan Clapp: Right. Okay. Super helpful. And then maybe just a follow-up on partnerships. Chris, you talked a lot about Playing to Win and the growing role partnerships are playing in your prepared remarks. We've obviously seen a step of an announcement over the last week, including Harry Potter this morning. So can you just talk a little bit about what's driving the momentum in this expanded partnership slate and specifically, how the business's transformation, what you can maybe now offer the partners has changed the conversations and maybe made you more of a partner of choice and then for Gina, like, does this change how you think about the medium-term top-line growth for CP just as we you know, you'll have a strong year this year, but a lot of this will layer into '27? Chris Cocks: Yeah. So I read a lot of business books. I geek out about them. I bore the management team with them. And Jim Collins is one of my favorite. He has this kind of concept called a hedgehog concept. Which is what's the thing that you're uniquely the best at in the world as a company or could be the best at in the world. We call it our superpower. And we believe Hasbro's superpower is inspiring a lifetime of play. We are a company that uniquely can engage a consumer as young as two or three and extend that play relationship well into throughout their entire lives from two to 99 and beyond. And I think, you know, the partners that we're working with they have brands that are multi that have been around for a long time, that appeal to preschoolers, but also appeal to collectors. And I think when a partner chooses Hasbro, they choose us because we can uniquely do that among, you know, most toy and collectible companies out there. And so, you know, whether it's K-Pop Demon Hunters, which is Netflix's biggest film ever and really kind of appealing to kind of that tween and teen crowd, or 52-year-old CEOs like myself. Harry Potter, which, you know, is celebrating what it's thirtieth, twenty-fifth anniversary. Best selling book series, hundreds of millions of fans, people flocking to theme parks. Voltron, which is like a seminal kinda collector brand from, like, the nineteen seventies and eighties. I remember having my breakfast cereal watching Voltron as a kid. Or, you know, iconic video game series like the Street Fighter. It just works hand in glove with what Hasbro is great at. And so I think if you see us announce these partnerships, really gonna lean into gamified product opportunities, entertainment, and event-driven kind of brands that like, supercharge inside of our distribution system. They're multipurchase and highly collectible. And they're multigenerational. And I think that's true for the toy side of the business as well as the game side of the business. So you're seeing us execute this playbook on Magic, going to see us execute it on Dungeons and Dragons. And you're seeing us execute it across our toys and collectibles. Gina Goetter: Yeah. Megan, my add would be, you know, first, I want to give a huge shout out to Tim Kilpin and his team for securing so many valuable partnerships for us on the toy and game side. You know, we've been talking for years of the couple of things that are gonna continue to move us up the margin scale on CP, and scale is one of them. And so these licenses help to build that scale in a very productive way for Hasbro. And so as we think about our midterm outlook, and really that top-line number for CP, we see this year as the inflection point. You know, we are we're back to growth. We're guiding to growth for CP. And when we look out into '27 and '28, we see that continue. So we do think that these licenses serve a really valuable purpose in just bringing our entire kind of fleet of brands and capabilities to life. Megan Clapp: Great. Thanks so much. Operator: The next question is from the line of James Hardiman with Citigroup. Please proceed with your question. James Hardiman: Hey, good morning. Wanted to sort of follow along that path of, you know, obviously, Wizards' top line was better certainly than any of us would have expected. Even the most bullish expectations coming into the year. I wanted to unpack the margin a little bit because that also blew away expectations. Right? I think you were assuming that margins would contract this year or last year, I guess, should say. Given the mix of the business, and I think it expanded 420 basis points. Right? And so as we think about 2026, you know, clearly part of the reason we're again expecting contraction is the video games and their dilution to margin. But maybe help us unpack sort of the structural margins of Wizards versus sort of the or at least the tabletop business versus, you know, some of these other offsets that may for a period of time compress that a little bit because it feels like this isn't just sort of a temporary like, things got better in '25, and then they'll contract back to where we thought they would be. It seems like this is maybe more of a permanent benefit. Gina Goetter: Yeah. Morning, James. Good question. You know, we've always said that the Wizards segment margins are going to play and dance within that high 30s. Low forties. To your point, we ended the year '25 quite a bit more favorable than that, really driven by mix and leverage that kind of flew through the P&L. As well as we had some nice pickups in cost productivity through the fourth quarter within the supply chain that benefited us. As we look into 2026 and the overall margin profile, we do expect to give back a little bit of that, mainly because royalty expense is going to continue to increase. Plus, as we move through the back half of the year, we will be stepping into some additional expenses related to the launch of the two games in 2027. So to your point, the overall margin foundation is quite solid. You know, being in that high thirties, low forties is the right range for us. Now video games, when we get to that point in '27, you know, that will be, as we've talked about in the last call, it will take a bit away from margin in that sense. But gonna still be within that high thirties, low forties business. James Hardiman: Got it. That makes sense. And then maybe switching to CP guidance. Low single-digit revenues, operating profit six to 8%. Maybe help us unpack that. I mean, what are you assuming from a point of sale perspective? And are there any sort of tailwinds as we think about whether it's inventories being a little depleted heading into the year? Or I think you made the comment that retail ordering patterns were ultimately negative to the top line for twenty-five, just based on the tariffs and the DI to DOM shift. Does that become a tailwind at all to 2026? Or is CP revenues being up low single digits pretty consistent with how you're thinking about retail? Gina Goetter: Okay. So let's start with where we landed on the year on inventory. So coming out of the third quarter, if you go back to our comments there, our retail inventory was, call it, down mid-teens. We ended the year probably down high single digits at retail. So we probably, yeah, filled a little bit of pipeline in through the fourth quarter. And I would call that the right resting spot for retail inventory just given the macro environment and what is still happening with tariffs. So I don't expect as we move into 2026 any sort of in retail inventory as being a big positive or negative for the year. It's just kind of whole serve as we move throughout the year. The big tailwinds that I see for us in '26 really come on the back of a stronger entertainment slate. So, I mean, four movie releases from our partners at Disney usually lead to nice top-line growth for us. And we have when you look at kind of front half, back half for CP, pretty balanced. So we're expecting kind of low single-digit growth throughout the balance of the year. The one point that we call out when we think about the second quarter, just keep in mind, that was where we had all of the tariff-related noise in 2025. So our second quarter is going to be pretty big. You know, the cadence for CP will be the first quarter will be down, and that's largely driven by some one-time comps that we have within licensing. Q2 will be up pretty strong just given this comp that we have from the tariff event in '25. Then the back half of the year, I believe we've got Q3 is up, and Q4 is up slightly. So it's a really balanced delivery for the business over the course of the year. James Hardiman: That's great color. Thanks, Gina. Gina Goetter: Thank you. Operator: Our next question is from the line of Gerrick Johnson with Seaport Research. Please proceed with your questions. Gerrick Johnson: Great. Thank you. Good morning, everybody. Chris Cocks: Hey, Chris. Morning. Good to hear your voice, Eric. Gerrick Johnson: Good to hear your voice. Welcome back. Chris Cocks: Great to be back. Thank you. So I want to ask on Magic. You know, what do you think the ratio or the proportion of tabletop sales go to players or go to games being played, and what proportion go to collectors and collections? Chris Cocks: Oh, gosh. Well, hey, Gerrick. First off, welcome back. It's great to have you back on the calls. I would say Magic is overwhelmingly player-based or player-collector. And that's unique among a lot of trading card games. I think some of our competitors are much more heavily collector-based. So, you know, what's good about that is it gives us kind of this stable base of play and community that I think can last if there's any kind of wobbles in kind of collector sentiment or overall kind of, like, value pool available to collectors. You know, if you ask me to kind of pin me down to a number, I think we're probably 80 to 90% players or player-collectors, relatively small portion of collector-only. Gerrick Johnson: Okay. Fantastic. Thank you. And in toys, you know, your licensing revenue was down, and I thought that was a major plank in the strategy. So has that outlicensing program stalled, or what's going on there, and why did that not grow? Gina Goetter: Yeah. Good question. That is so, no, it has not stalled. That is really our My Little Pony trading cards comp that we had coming out of '24. So there's that one. Our partner, Caillou, had a huge year in '24, and I think it was the first part of 2025, but then we started comping that as we move through the year. But all of the other kind of underpinnings of the business are quite healthy. Chris Cocks: Yeah. Our point of sale for out-licensed toys was up mid-teens. Location-based entertainment was up, you know, like, probably 20 or 30 locations year over year off of a base of around 200. Now, like, around two twenty-five. Music and entertainment were both pretty solid. A little bit of that is also you have some MGs, and you have some revenue recognition, which moves out over time. But, really, the wobble last year was My Little Pony trading card specifically in China. Gerrick Johnson: Okay. Great. Thanks for the detail. Appreciate it. Gina Goetter: Thank you. Operator: Our next question is from the line of Stephen Laszczyk with Goldman Sachs. Please proceed with your questions. Stephen Laszczyk: Hey, good morning and thanks for taking the questions. Chris, on the theme of AI, I would be curious to get your latest views on how AI impacts the video game industry, whether that's on the cost curve, barriers to entry into the industry itself, or the type of gameplay that consumers will come to expect. Then within that, would curious if you could just detail how Hasbro is positioning itself against maybe AI as an emerging factor here as a relative newcomer to the video game industry? Chris Cocks: Well, I'll break it down short term, midterm, long term. Short term, I think AI is just a productivity boom. And that'll affect every industry. You know, whether it's finance, operations, how you think about inventory management, forecast planning, it's just a significant time saver. You know, we conservatively think it's going to save us about a million people hours worth of work this year, a lot of which we already kind of harvest that into savings and reinvest into the business. And, you know, so instead of having to, like, you know, manage touch a bunch of orders, we can spend that time and innovate or deliver for our customers or our partners. And I think that'll be true inside of video games as well. Midterm, you know, I obviously think AI kind of how you think about concepting, how you think about idea generation. Even how you think about asset creation. I think, though, that that's gonna be executed on a game by game and brand by brand basis. Based on what the consumer wants and what your partners want you to do. And I think that's gonna take a couple years to kind of play out, but you're already seeing AI embedded in creative workflows like the Adobe Creative Suite. It's just gonna be something that will make things faster. We're seeing tangible benefits from that, particularly in toys where our ability to concept and make an early kind of prototype real has, you know, 10x in terms of speed. And so we're instead of, like, instead of saving and just doing one toy concept, we do 10 toy concepts in the same amount of time at the same amount of cost. And it just allows us to be able to bring an idea to life better and choose a higher hit rate. And then long term, you know, I really think you have to not think about, hey. How can I make a current game cheaper or current toy cheaper? Or better? I think it's gonna open up all new categories of play. All new opportunities that we can barely imagine today. I think you're gonna see some of those products from Hasbro. I think they're gonna be physical as well as digital. And, you know, I think our focus is gonna be on the collector market and adults initially. I think over time that that's gonna spread, as the technology matures and as consumers kind of become more comfortable with it, and it's gonna open up all new engagement opportunities and all new revenue opportunities. Stephen Laszczyk: Great. Thanks for that. And then maybe secondly on MONOPOLY GO, it's held in much better than most of us had been expecting coming into the year. Just be curious if you'd unpack some of the key drivers there as we went into year-end and then your expectations as we look ahead into 2026 on what the top-line contributions from the game could be this year? Thank you. Gina Goetter: Yeah. Yeah. Good morning. You know, really looking into '26, we see it staying pretty stable. So call it that 12 to $14 million run rate per month is what we're planning for. We're seeing the decay rates in line with expectations and where we've been able to pick up is just the UA expense itself. Has gone down. So we see that our overall revenue pool is staying pretty consistent. I'd say Scopely has been pretty adept at value capture as well. In terms of like, ways in which people can buy product. Buy dice or by product inside of the experience. That's also helped. Stephen Laszczyk: Great. Thank you both. Operator: The next questions are from the line of Arpine Kocharyan with UBS. Please proceed with your questions. Arpine Kocharyan: Hi, good morning. Thanks for taking my questions. Great quarter. Congratulations. All the detail you provided for segment outlook was very helpful. I was wondering when I look at your overall revenue guidance of 3% to 5%, I was wondering if you could talk a little bit about overall top-line growth puts and takes and specifically what will result in the lower end of that range and what needs to happen for upper end of that range or better. I'm mostly trying to understand whether the lower end of that range is more driven by consumer product business. And then just really for my second question, you had talked about two digital game releases a year. It seems like MONOPOLY GO is still going pretty strong, which is incredible. But could you maybe talk about the pipeline of IP that you are looking at that you think sort of lend itself well into digital gaming and what those opportunities could mean for Hasbro for 2026 and 2027. Thank you. Chris Cocks: Hey, Arpine. Good morning. Couple things on the range and what dictates it. I think there are probably three factors that probably play into it the most. The first is our ability to provide supply and chase product. You know, actually, Magic was rate constrained last year based on our ability to just produce and drive reprints. And, you know, you typically have a little bit of wobble inside of supply chain in terms of availability and timing. And so I think that'll play in both in Magic as well as toys. I think we have a heck of an entertainment slate on top for this year. From Disney, from Amazon, from Legendary Pictures. And, you know, depending on how those go, that could be quite a big over under for us. And then I think the last thing, which is always kind of omnipresent, is just what's the strength of the consumer. You know, right now, we continue to see kind of a tale of two cities. You know, the top 20% of households in terms of wealth are really driving a lot of demand and are staying pretty resilient. You know, the lower quintiles of kind of wealth and income, their pennies are pinched. And so we're trying to appeal to both. If the economy proves better, if, like, some of the tax refunds that are untapped, in, like, the US market proves to be kind of shared out versus, like, going into the bank account. That could be a boon for us as well. Gina Goetter: That's super helpful. Thank you. My only add opinion would be by the middle of the year, we will have a better sense for how some of these things are shaking out. And how strong the movie releases are, how strong kind of the UV sets are. But there's you know, we feel good about the guidance range that we went out with. Chris Cocks: So I'm sorry. You had a part two, Arpine, and I want to make sure we hit it. Arpine Kocharyan: Yeah. About digital gaming and the pipeline of what that looks like. Chris Cocks: Yeah. So we continue to have a really strong digital licensing business, which continues to grow. You know, last year, we had Sorry World from GameBerry Labs that did pretty well. We have MONOPOLY GO, which continues to do really well. It's probably one of the most successful mobile game launches in history. And Scopely have been fantastic partners. From our self-published side, we feel pretty good about the early demand indicators and interest indicators for both Exodus and Warlock. You know, those will be two pretty big tests for us next year. And we continue to invest in digital games. You know, as we're thinking about the portfolio moving forward, you know, I think the good thing about digital games is we're getting past kind of, like, the start-up phase. You typically have a lot of costs associated with starting studios and building up publishing capacity. I think that will help with profitability as we get past 2027. We're also doing a lot of new partnerships. Last year, we announced a joint venture with Sabre on a game. We're gonna have several more that we're gonna announce, and that will with the risk defraumen. And then we're investing more heavily in new talent markets for games. So Montreal is about half the cost of what, you know, like, the West Coast or Texas is in the US. Leaning in there. And, likewise, we're leaning into a lot of Eastern European and offshore-based talent. Which, again, I think could even be half the cost of what even Canada is. And so that'll allow us to make better games. That'll allow us to be able to put more man-years into the games and have more content. And hopefully also allow them to be even more profitable over time as we scale the franchises. Arpine Kocharyan: Very helpful. Thank you, Chris. Operator: The next question is from the line of Eric Handler with SMKM. Please proceed with your questions. Eric Handler: Thank you very much. Good morning. I wonder if you could just discuss your thoughts on toy industry POS outlook for 2026. Chris Cocks: Sure. I might have a bit of a cheeky response to this. So, hey. I'll start, and Gina can, can let Didn't know what's so funny. Eric Handler: No. No. No. No. No. I Chris Cocks: You know, for us, I almost think it's the wrong question. You know, we segment the market in our own unique way. We call it GEM Squared. It's an acronym which stands for gamified entertainment-driven multipurchase, and multigenerational. Those categories, you know, 70, 80% of Hasbro's existing point of sale is focused on those categories. And probably 90 to 95% of our investment is going to those categories for the future. We think those categories have a mid to high single-digit CAGR and, they are just structurally advantaged. You know, peers who operate in those categories, they typically have a forward multiple of a 20x, maybe a 25x. You know, those are companies like a Pop Mart or a Lego or a Bandai Namco, and we would put Hasbro squarely inside of those that peer set. The other side of the toy market, the more traditional kind of kids-oriented one-off purchase toy market, you know, I think there's opportunities to grow there. There's certainly a lot of innovation there. But, you know, I think that's in a structural set of decline, and it's probably going to continue to decline over the next several years and has been. And, the reality there is there's just less babies being born and there's more substitution happening at earlier ages. So, you know, if you ask me kind of what the overall toy industry is gonna do, I'd probably give you an I don't know. If you ask me what the side of the industry that Hasbro is investing in is gonna do, I think it's pretty robust growth. Eric Handler: Okay. That's helpful. And I know a lot of this stuff goes hand in hand. You know, you're spending a lot of time talking about, you know, entertainment-driven properties for your consumer products. Wondered if you could talk about the outlook in 2026 for sort of like your first-party types of products? Chris Cocks: Yeah. Well, certainly, I think Magic is gonna do pretty well. I think D&D is going to do pretty well as well and Peppa Pig has some significant room to grow. I think our board games and Play-Doh also look pretty good. Some of our more entertainment-driven properties like Transformers are probably gonna have a down year, but, you know, that's held up remarkably well. You know, we grew Transformers last year despite not having any entertainment. And so, you know, I think for our first party, we see upside. We would like to grow that as a percentage of our business while still working with partners and growing them. Because, you know, obviously, it's margin accretive. And we feel pretty good about the hand that we have. I don't know. Gina, do you have anything to add? I mean, for me, it's Gina Goetter: will be down here, I'm just trying to think of another one that Furby's kinda getting near the end of its life cycle. Datahead is gonna have a good year just given the Toy Story release. So Chris Cocks: For sure. Okay. Click and talk. Thanks. Alright. Thanks. Operator: Next question is from the line of Christopher Horvers with JPMorgan. Please proceed with your questions. Christopher Horvers: Thank you, and thanks for taking my question. So maybe, Gina, if you could simplify the operating margin outlook you have a range of about 30 basis points expansion at the midpoint versus the 50 to a 100 algo. Could you bucket the headwinds that bring you down from that between royalties digital gaming costs and tariffs? Given access in D&D, digital game launch until '27, wouldn't have expected that to be a headwind because the amortization comes in '27. Thank you. Gina Goetter: Got it. Good morning. The couple of things that are well, I'll start with the good guys. First. So obviously, volume and mix and pricing, that is a good positive margin contributor for us in 2026. Royalties is gonna be a headwind, so we have increased royalties across both of our businesses now just again, the entertainment slate on CP coupled with the Universe's Beyond set. So that's call it a point, a point and a half of margin drag that we'll have coming into 2026. The other thing is tariffs. So we'll have a full year of tariff cost. In '25, we had roughly $40 million tariff cost hitting the supply chain. Right now, we're modeling that out to be about $60 million of cost. So an incremental, you know, million dollars. And even though we have, you know, cost productivity within the supply chain that's able to offset, typically, you know, our normal model is that that cost productivity is adding to our margin. This year, it's just kind of that cost productivity is just helping to offset that tariff impact that's coming at us. And then I would say the last thing that I call it as a headwind is just the investments that will have towards the end of the year. And I shouldn't say really the end of the year, but marketing step up as we move through the year, especially in advance of these video game releases. As well as just broad increases in product development as we move through 2026. Christopher Horvers: That's very helpful. And then, just to follow-up on CP margins. You know, we see the presentation, how you lay out the margin change year over year, but could you help us and narrate that because you did have strong sales growth, and margins were down year over year. So understand the tariff impact, but if you could just narrate the puts and takes between sales allowances versus cost savings versus tariffs? Gina Goetter: Yeah. So, I mean, in the fourth quarter, to your point, we had nice volume growth, and our team did a really nice job working with our retail partners getting a good mix of business in and not going way beyond on promotional spending, a really nice positive kind of volume and mix impact from the fourth quarter. The pieces that came against us were tariff. Largely speaking, fourth quarter was all about tariffs. So again, of that $40 million of cost that we had in '25, about 60%, 65% of it hit in the fourth quarter. So that's what really weighed on margin profile as we move through the year. So as we go into 2026, while volume and mix for CP is going to be a positive for us, we're continuing to have the tariff headwind, plus we'll have a step up in royalty expense as well. That kind of keeps that in that 6 to 8% range. Christopher Horvers: Thanks so much. Gina Goetter: Thank you. Thank you. Operator: Our final question is from the line of Kylie Cohu with Jefferies. Please proceed with your question. Kylie Cohu: Great. Thank you for taking my question, and congratulations on a strong quarter. Just kind of a small one from me. How would you describe sell-through or like the POS cadence throughout the quarter? Anything unusual to call out or was it kind of as usual? Chris Cocks: I would say for toys, we felt pretty good just given that the SNAP benefits were kind of taken away just given the government shutdown. Other than that wobble, we felt pretty good about the direction of toy point of sale. I think from September through end of this December, we gained share in our key categories in 16, 17, maybe even 18 out of twenty weeks. That's pretty good. And we think that momentum continues into this year and augurs well for kind of our outlook for 'twenty-six. Kylie Cohu: Great. That's all I had. Thank you. Chris Cocks: Alright. Thanks, Kylie. Operator: Thank you. At this time, this will conclude today's question and answer session and will also conclude today's conference. Thank you for your participation. You may now disconnect your lines, have a wonderful day.
Operator: Welcome to the Fourth Quarter and Full Year Sequans Earnings Conference Call 2025. My name is Shannon. I'll be your operator for today's call. After the speaker's presentation, there will be a question and answer session. To ask a question on the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note that this conference is being recorded. I will now turn the call over to David Hanover, Investor Relations. David, you may begin. David Hanover: Thank you, operator, and thank you to everyone participating in today's call. Joining me on the call from Sequans Communications are Georges Karam, CEO and Chairman, and Deborah Choate, CFO. Before turning the call over to Georges, I would like to remind our participants of the following important information on behalf of Sequans. First, Sequans issued an earnings press release this morning, and you'll find a copy of the release on the company's website at www.sequans.com under the newsroom section. Second, this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and other potential financing sources. All statements other than present and historical facts and conditions contained in this release, including any statements regarding our business strategy, cost optimization plans, strategic options, the ability to enter into new strategic agreements, expectations for sales, our ability to convert our pipeline of revenue, and our objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, section 27 a, of the Securities Act of 1933 as amended, and section 21 e of the Securities Exchange Act of 1934 as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risks and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now I'd like to hand the call over to Georges Karam. Please go ahead, Georges. Georges Karam: Thank you, David, and good morning, everyone. I'd like to start with a brief update on our capital allocation framework and how we are balancing execution of our IoT semiconductor business with the management of our digital asset treasury. All in support of long-term shareholder value creation. First and foremost, we remain focused on executing our IoT strategy and advancing our 5G product roadmap in a disciplined manner. Our objective is to unlock the full strategic value of the IoT business for our shareholders, and that remains our top operational priority. At the same time, we continue to manage our Bitcoin digital asset treasury thoughtfully with the goal of extracting the full value underlying our Bitcoin holdings and our treasury structure. Since launching our Bitcoin strategy, we have been deliberate in how we assess market conditions, and the tools available to us always with a focus on actions we believe can create pressure value in an accretive way. In the current environment, where many digital asset treasury peers are trading below an MNav of one, we believe the most value accretive lever available to us has been repurchasing ADS when our share price implies a significant discount to our net cash and net digital asset value. During the fourth quarter, we repurchased approximately 9.7% of the company's outstanding ADSs. In addition, our board has approved a new ADS repurchase program authorizing the buyback of up to an additional 10% of the outstanding ADSs. Overall, we are taking a balanced and disciplined approach to capital management. This includes rightsizing our operating expenses, continuing to invest in our most important R&D program, which is our 5G eRedcap chip, and allocating capital to the treasury only when it's clearly accretive, while maintaining flexibility to evaluate our options as market conditions evolve. To provide some context around our balance sheet, with Bitcoin Holdings end of Q4, and Bitcoin currently at approximately $70,000, our Bitcoin NAV is about $150,000,000. After adding our end of Q4 cash balance, and netting out convertible debt, our net cash equivalent position exceeds $68,000,000. Importantly, beyond our Bitcoin and cash assets, the company's valuation should also reflect the significant value represented by our IoT revenue pipeline and our 5G and RF transceiver IP portfolio. We intend to remain patient and optimistic, staying disciplined, and focused on actions that we believe can drive long-term per share value. Turning now to the operational side of the business. Our IoT semiconductor business continues to build momentum. In the fourth quarter, it generated $7,000,000 in revenue, which was in line with our prior expectations. Revenue in the quarter was predominantly product-based, with more than 94% coming from product sales, and roughly 6% from services, reflecting strong incremental growth in the product shipments. For the full year 2025, total revenue was approximately $27,200,000. This figure includes a meaningful amount of nonrecurring Qualcomm-related revenue resulting from the deal we closed with them in 2024. On an adjusted basis, the underlying business was closer to $20,000,000, and our fourth quarter run rate clearly demonstrates the ramp we have been driving throughout the year. Looking ahead to 2026, our internal plan currently targets approximately $40,000,000 to $45,000,000 of total global revenue supported by improving visibility and a significant order backlog. Our outlook is further supported by the strength of our design win pipeline and the increasing percentage of projects now in production. We are exiting 2025 with the revenue funnel exceeding $550,000,000 in potential three-year product revenue, including over $300,000,000 from design win projects. Of those design wins, 44% have already reached production and are generating revenue, up from 38% end of Q3. Assuming no changes to customer forecast, this represents approximately $132,000,000 of potential three-year revenue from production stage projects alone. During the fourth quarter, we added nine new customer projects to our design win pipeline, and three existing projects transitioned into production. We expect this momentum to continue through 2026, with the target of having over 50% of our current design win projects in production by June. Our product pipeline continues to be driven primarily by our 4G Cat M and Cat 1 BIS technologies, as well as our RF transceiver product, which supports a wide range of software-defined radio applications. We are also seeing early engagements around 5G eRAD cap, which we view as the successor to 4G in IoT deployments. Smart metering, telematics, and asset tracking remain our strongest verticals, followed by security, e-health and medical, and other industrial applications. From a product family perspective, Cat M remains a meaningful growth driver in 2026, led by asset tracking and smart metering deployments, including expanded programs now entering production with customers such as Honeywell and iDrop. Cat 1 Bis is positioned for a breakout year in 2026, supported by multiple customer ramps in telematics and security. In RF transceivers, we have committed backlog in place, with additional demand expected in the second half of the year. We also expect to begin seeing meaningful revenue from our 5G licensee partner in China. Demand for 5G eRAD cap continues to strengthen. Mobile network operators in the US are accelerating the transition from 4G to 5G to reform spectrum, and IoT applications remain the final bottleneck completing that transition. This is why having a 5G eRED cap solution as early as possible is critical. We continue to make strong progress on this program and expect to receive our first test chips this quarter, with customer sampling beginning in mid-2027. Our IP licensing and services business is now fully integrated into our go-to-market strategy and represents attractive high-margin upside in 2026. We are currently engaged in discussions with multiple potential partners, with individual opportunities ranging from approximately $2,000,000 to $10,000,000 or more, depending on scope. Beyond revenue, these opportunities expand our reach into new markets and regions. On the supply chain side, we continue to operate in a dynamic environment. While not indicative of demand, these factors can influence shipment timing and costs quarter to quarter. We're addressing substrate constraints by adding suppliers to reduce single-source exposure and improve resilience. We are also seeing memory pricing and capacity pressures, which affect both our product and our customer's device. We are working to pass through these cost increases where appropriate while maintaining strong customer relationships. Also, we are coordinating closely with customers on ordering and delivery schedules. At this stage, we expect little to no impact on our business in 2026 and limited impact in the second half. Looking ahead, we are focused on reducing cash burn over the course of the year, with the objective of reaching a breakeven run rate by Q4. We are taking a disciplined approach to operating expenses, rightsizing where appropriate, while protecting the innovation that underpins our differentiated position. Working capital dynamics may create short-term cash flow variability, but these effects are tied directly to long-term growth. Overall, the fourth quarter underscores our progress in strengthening the core IoT business, improving financial discipline, and maintaining flexibility in our capital strategy as we position the company for sustained growth in 2026 and beyond. For Q1 2026, we currently expect revenue to be around $6,500,000, reflecting normal seasonality, with the risk that approximately $1,000,000 of revenue could shift into Q2 due to manufacturing and shipment timing planned for the end of Q1. Based on our backlog and design win pipeline, we expect revenue to ramp through the remainder of the year and continue to believe we can approach cash flow breakeven in Q4. We continue to evaluate strategic alternatives that could enhance profitability and unlock additional value across both the IoT business and our treasury strategy. The board is actively reviewing options, and we remain committed to unlocking shareholder value without rushing decisions, particularly at a time when the company is in its strongest position today. I will now turn the call over to Deborah to review our fourth quarter and full year 2025 financial results in greater detail. Deborah? Deborah Choate: Thank you, Georges, and hello, everyone. I'll begin by reviewing our fourth quarter financial results and then discuss our Bitcoin holdings. During the fourth quarter, we experienced several significant events that impacted our financials. These included a substantial increase in product revenues, a reduction in operating expenses, the early redemption of half of the convertible debt issued in July 2025, the launch of our ADS buyback program, and the sale of Bitcoin to finance these two non-operating initiatives. In Q4 2025, revenues increased 72.6% sequentially, driven primarily by growth in product revenue. Gross margin for the quarter was 37.7% and was impacted by provisions for slow-moving inventory. Excluding these provisions, gross margin would have been approximately 43% compared to 42.4% in the prior quarter. R&D and SG&A expenses declined to a combined total of $11,500,000 in Q4, down from $13,600,000 in the third quarter. We maintain our goal of continuing to reduce operating expenses over the course of 2026 in order to support our breakeven goals for operating results and cash burn. We recorded a noncash impairment charge of $56,900,000 related to the mark-to-market value of our Bitcoin holdings in the fourth quarter, compared to an $8,200,000 charge in Q3. We also recorded an $8,400,000 net realized loss on the sale of Bitcoin. This sale funded the redemption of half of the convertible debt and the repurchase of 9.7% of our ADS. The July issuance of convertible debt and warrants resulted in the recognition of an embedded derivative, which is remeasured at each reporting period. Changes in its value affect our P&L that are entirely noncash. Similarly, while the convertible debt carries a 0% coupon in the first year, IFRS accounting requires us to recognize significant noncash interest expense. At the October, we redeemed half of the outstanding convertible debt ahead of its normal July 2028 maturity. This resulted in a $29,100,000 loss on early redemption of debt that was primarily noncash. Reflecting these factors, we reported an IFRS net loss of $87,100,000 in Q4 compared with an IFRS net profit of $900,000 in the prior quarter. On a non-IFRS basis, excluding significant noncash items, we reported a non-IFRS net loss of $18,500,000 or $1.19 per ADS, compared with a non-IFRS net loss of $11,300,000 or $0.81 per ADS in Q3. The realized loss on the sale of Bitcoin of $8,400,000 is included in the non-IFRS net loss, so we would have been just over $10,000,000 non-IFRS net loss without this element. Normalized operating cash burn in Q4, including primary working capital movements in inventory and trade payables and receivables, was approximately $7,700,000. After completing Bitcoin purchases totaling $3,400,000 early in the quarter, we later sold Bitcoin to fund $101,000,000 of debt redemption and a $9,400,000 ADS buyback. At year-end 2025, we held 2,139 Bitcoin with a market value of $187,100,000. Of this, 1,617 Bitcoin, valued then at $141,500,000, were pledged as collateral for the remaining $94,500,000 of convertible debt due in July 2028. The remaining 522 Bitcoin, valued at year-end at $45,600,000, are unencumbered. And with that, I'll turn it back over to Georges. Georges Karam: As we close, I want to reiterate that our primary focus remains on executing the IoT business. The fourth quarter reflected continued momentum with revenue predominantly driven by product shipments. We are encouraged by the depth and quality of our design win pipeline, with more than 44% of projects now in mass production and additional ramps expected throughout the year. With solid demand across Cat M, Cat 1 Bis, RF transceivers, and early engagement around 5G eRedcap, we believe the IoT business is positioned to continue scaling while our cost discipline supports a clear path toward cash flow breakeven by 2026. At the same time, we have taken a disciplined and value-driven approach to capital allocation. During the fourth quarter, we took actions to repurchase shares where we believe our valuation does not reflect underlying asset value, and we continue to have board authorization in place to pursue additional repurchases as appropriate. These actions reflect our focus on unlocking value on a per-share basis while maintaining flexibility to evaluate additional capital allocation options as market conditions evolve. With that, let's now begin with the Q&A session. Operator? If you don't mind. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Scott Searle with Roth. Your line is now open. Scott Searle: Hey, good morning, good afternoon. Thanks for taking the questions. And thanks for all the detail on the call related to some of the product development activity ongoing. Hey, Georges. Just to quickly dive in on the guidance, I'm wondering how you're thinking about licensing in terms of that $40,000,000 to $45,000,000 figure. And I'm wondering if you could reiterate again what you expect the percentage of design wins to be in production at that point in time? I missed that number. And it looks like just at a quick first cut, $15,000,000 to $16,000,000 exiting the year is kind of what gets you to cash flow breakeven, and then I had a couple of follow-ups. Georges Karam: Yeah. Hi, Scott. Thanks. Thanks for being on the call. So just to start with one, the guidance, I believe you're reflecting about the guidance for the year. You know, we continue as you see, like Q4 was, as I said, mainly product. I believe Q1 is going to be very close as well, you know, in our guidance. We are not expecting except surprises, I will say, because we have many deals and it depends on which one will close. You know? We have really currently in the backlog, I should say maybe a couple of million dollars over the year if you want. Of secured licensing. However, we have, as I said, you know, four, five, and more, each one ranging between $2,000,000 and $10,000,000. So it's very, very hard to make a projection if you want on the numbers. So we're taking a very conservative approach. Assuming like, maybe get another $5,000,000 of all this in the year, five to six. They could be secured and bring like technically, $2,000,000 to $3,000,000 per quarter in the remainder of the year if you want. After Q1, Q2, Q3, and so. So this is a little bit our guidance. So the number I gave in terms of production for the year, this in percentage just means we will have, like, 80-85% or so, 80-85% product and only 15% services on this basis. 20% services, something like this. And then the other question was regarding the convergence of the percentage of product. So what you know, when I exit the year, you need to keep in mind, you know, we're giving those percentages. But as you know, each year, each quarter, the design win is increasing. So we're not updating the metric on a quarterly basis. Just for convenience, we will be updating this like every six months, you know, to avoid every quarter. Having, you know, sometimes to explain some variation, maybe not linear and so on. But we are very comfortable that the design win pipeline, the $300,000,000 is today above 300 and we continue growing towards the year. And on those 300, our estimation, at least 50% of them will be in production in June. In June this year. So, obviously, we project year-end, you need to add, you know, I could say maybe 75% towards the year-end. There's no guidance on this, but for mid-year, it's like more than 50 for sure. Scott Searle: Gotcha. Very helpful. And Georges, just in terms of the breakeven then in terms where you guys are reducing the OpEx, it sounds like it's in the mid to high teens. And would be the exit rate and trajectory? Okay. Georges Karam: I remain on the number, which is essentially, honestly, the mix of services and product can give you a different number. Obviously, you understand the margin. In our model, assuming, like, you know, the $15,000,000-$16,000,000 number where $3,000,000 of this is services. And the remaining your product. Scott Searle: Gotcha. And if I could follow-up on the transceiver front, this seems like it's one of the hidden gems in the business. I think in the past, you've talked about that maybe being north of $5,000,000 on an annual basis. I'm wondering what the current thoughts are, design activity, and how that momentum is looking into the back half of '26 and into '27? How big could that opportunity be? Georges Karam: You know what? We have, you know, as you know, the acquisition of ACP gives us exact directly a couple of customers to whom today, you know, they move into production. And we have genetic revenue from them every quarter. So have even a backlog in 2026 from them for the first half. So we'll see, you know, sometimes the forecast for the full year, you know, with Chinese customers could be a little bit, you know, I don't want to give guidance on this. We believe, like, we could be doing this year maybe in the other business, $7,000,000 or so. I mean, in case more in the north of five. For sure. And can be, you know, getting out if some upside, then we'll go beyond the $7,000,000. This is how we see it. And also, as you know, the RF technology, we launched this with many customers, new customers. To those new customers, we're something now are the board and something, you know, chips, and they're designing products. And we have really a few tier-one already worked on this. It's more, to be honest, us being able to support them and help them is what we're working on this. But I don't expect big revenue in '26 from them because they are all in the application like drone, defense, and it takes time to build those products and come to market. This could be meaningful, you know. This could be a business, you know, for sure, you know, maybe in the $15,000,000-$20,000,000 run rate. This is doable. If we are successful, we're keeping the Chinese customer and add those customers that you can get for defense and public safety application and other software-defined radio applications. Scott Searle: Gotcha. And lastly, if I could, Georges, you had some comments on the memory side of the business. It sounds like indirectly, you guys are managing that well and you're not seeing too much in terms of headwinds from your end customers. I'm wondering if you could provide some expanded thoughts on that. And then just the competitive landscape. You guys certainly have a strong position with Cat 1 BIS. It seems like running the table is the right expression, but you guys are certainly winning a lot of business on that front and gaining some momentum. And so I was just wondering if you could comment on the competitive landscape for Cat 1 Bis. And then as it relates to eRedcap, which will be the next big cycle in '27 and beyond, kinda what you're seeing from a competitive aspect? Thanks. Georges Karam: Okay. Well, the supply chain, just to be clear, you know, the industry is completely, you know, today, I mean, it's not like the direct memory of Sequans. It's not our technology because as you know, our technology is not an AI. But AI and geopolitics as well. Combined with geopolitics is obviously the demand on AI is eating most of the capacity and obviously the OSAT and all the, you know, the packaging material and all this increasing price or making constraints on supply, increasing lead time, and so on. Struggle on the substrate. We continue to watch this very closely. We managed to secure at least our Q3 production. We're in good shape on this. But despite this, we're working on multiple sources. But we are seeing price increase. Unfortunately. And just only that's how it is. On the memory, again, we're not using the memory that you need in AI. That's how it is. All this business is connected. Right? I mean, so if the AI, you know, big memory, their prices are getting up because there is demand. This is impacting as well smaller memory and flash. RAM and flash that we use next to our chip if you want, our module and so. So we have direct impact on this as well. In supply and pricing, unfortunately. We are working all out the price, you know, and secure the capacity with multiple partners, have double source on the memory as well. To be sure that you have the supply. But unfortunately, believe we're going to have the cost increase is happening, and we are reflecting this to our customer. We're already discussing with our customer and trying to pass those costs to them. I believe we'll see more of this impact in our number in the second half of the year. The first half, we have some backlog. And so at least Q1, we have backlog for this on all the pricing and we're not it's very hard to change the price when you are shipping at the same time. With customers. So it's something to watch. As well, you know, customers and, you know, the customer, they could be building devices where they are using the big CPU and memory. That's an old application. In some applications, they need this. And obviously, could face shortage or challenge on the memory they need to get for their own device. So there is tension in the market. I don't qualify it like in the COVID days. But it's there. You know, we're spending time on it. My team is working day and night on securing supply, talking with the customers and so on to be sure that we can pass 26-27 in good shape because it seems like this will continue until 2028. What I'm hearing. Talking about the competitive landscape and the product, indeed, you know, on Cat 1 Bis, two guys that they have Cat 1 Bis is not Chinese. It's Qualcomm and Sequans. So it's really a duopoly market. And most of our design wins are around Cat 1 Bis outside. It's not like CAT M, we're not doing anything anymore. We still have Cat M business. But I believe we have a big piece of the pipeline driven by the Cat 1 Bis because of the new product ramping and because also on the competitive landscape limitation. Obviously, you know, the customer has the choice between using Sequans technology or Sequans technology. Just only whether they buy it from us or from Qualcomm. That's how it is because it's the same technology behind it. Which is good position us, I would say, to push this technology further. And on eRAD cap, I was at CES and there is really big movement. And I will have MWC in a couple of weeks. Meeting with the carriers AT&T, Verizon, and T-Mobile, all of them, they are really eager to get the 4G frequency band and move them to the 5G. In other words, they need and they have the obligation to get those frequencies. And as you know, the existing 5G network for any category for the IoT. The IoT remains on the 4G. And the broadband and the phones are moving to 5G. So it's easy on this side. IoT is more complicated mainly because there is also commitment for ten years, business and metering and so on. So it's really becoming a very, very hot topic. A lot of discussion at CES were around this. The carrier would like to see the ecosystem moving faster because the soonest they have eRAD cap, the soonest they can transition the new devices to eRAD cap technology even if it's falling back to 4G. So you'll have 5G falling back to 4G, but at least the technology will be the product will be future-proof. And this gives the freedom to the carrier to switch off the 4G sooner or at least on time as they plan it and not to drag this longer and they can recover the frequency to put them on the 5G. And here again, you know, we are I believe we are in a leading position. From, you know, it's very early not to it's very hard to talk about it when the customer didn't announce product yet. But we started the 5G as you know, many years before. Working on the broadband. We licensed the 5G to a partner. So we have a lot of those pieces of the puzzle already in hand. When we kick off our eRAD cap chip last year, we use a lot of this. And here we go after one year of the work we have is this chip coming to the company this quarter, end of this quarter. And from there, we start the testing and continue development. And we believe we'll be ready for what we call it the IUDT testing with the infrastructure vendor at all 2027. And we'll be sampling to customers midyear or, let's say, the 2027. This is our timeline, and we're executing on this. And we're getting a lot of push to accelerate this. Carriers would like us even to do it faster if you want. I believe we are in a leading position with this family. Scott Searle: Great. Thanks so much. I'll get back in the queue. Operator: Thank you. Our next question comes from the line of Mike Grondahl with Northland. Your line is now open. Mike Grondahl: Yeah. Thank you. Georges, with 44% of those design wins in mass production, could you talk a little bit about the breadth of customers and just sort of like average order size? Georges Karam: Yeah. Hi, Mike. You know, it's essentially gross 44. You know, in other words, as I said, this is like more than $130,000,000 all three years revenue. So obviously, you divide by three, you know, it gives you a little bit where we stand above $40,000,000 in linear. It's something year one, year two, year three for the new projects. For all the projects, they are there in their second year. Like, for example, the tracking business is moving very well. We have customers there, and it's like buying again, you know, if I take in the million units, 400k unit, 300k unit, you know. The skip or the space, we are really in a good shape, you know, where we have matured the product shipping. Few metering finally entering into production. With Honeywell and Itron. And a lot in the tracking device. Tracking, we have many customers. We have some of them, you know, as I said, they do million units a year and more than million units a year. And others, they do 200k. Know? So it's really a variety of orders. But when you sum them all up, Mike, to get the order of magnitude, it's not like, first of it's many, many projects. I mean, I don't have the number in mind, but if I don't want to give you a wrong number, but it's more than 30 for sure. Project. It's diversified. On many applications, as I said, already that all the segments we are talking about. Some of them are in CAT M, some of them are in CAT 1. And we have tier-one customers and we have some small customers, but not too small. I mean, it's too small in a sense. They ship, they work well. They do 50,000 units per quarter and they are there buying every quarter. And moving. Mike Grondahl: Got it. In terms of your breakeven cash goal by April, do you expect a lot of progress on the $11,500,000 you got to for R&D and SG&A combined? Georges Karam: Yeah. I mean, we continue driving this down. You know, we put the guide, you know, see on the OpEx point of view. We'll be a little bit, you know, we believe in the second half of the year around $10,500,000. Is our target. Obviously, this includes depreciation, you know, so you need to take off the depreciation. When we're talking about, you know, cash flow, you know, breakeven, we're counting on a cash basis if you want. So we'll be somehow you have, like, in this 10.5, maybe around $1,500,000 depreciation. So the company will be, like, using, $9,000,000 if we speak in cash, I would say. Per quarter, and obviously, you add, like, $3,000,000 in service, this gives you like, you know, $6,000,000 left because service will be 100% margin. Or less, I mean, very close to a hundred. So then you will the product revenue needs to cover, like, the $6,000,000. And if you have a gross margin around on the product, 45%, you can do it with $13,000,000, it gives you a little bit the number where we are there. Obviously, this can vary because the mix can change. We can have a gross margin. Higher or a little bit lower, and obviously, the service could be higher and then we can accelerate the breakeven or the product could be higher than this number as well. Mike Grondahl: Got it. And then just lastly, it sounds like the progress on 5G the eRedcap chip is going well. Revenue, do you still sort of have that penciled in mid-2028? What any updated thoughts on there? Georges Karam: Yeah. I believe, honestly, the yeah. I mean, the revenue is mid-2028. Why? Because you need to think about how it's going to work, Mike. Ericsson and all the infrastructure vendors are building their software release to support eRAD cap and bring it to the network. Without giving too much detail. But this is targeted, I will say, to be in the network towards the end of this year, beginning of next year in testing. Then the carrier will deploy it. And then from there, you do when they are ready, we can test end to end. Right? I mean, in other words, if I have it ready today, it doesn't matter. No. I need to have the infrastructure working. So I'm synchronizing with Ericsson. To come on time doing the testing if you want soon. Once we have the testing, we have the proof that the chip is working. From there, you can have your first alpha customer engaging with us. And if you get depending on what they are doing, if it's definitely a replacement on existing product, this could be fast. Because it's not a new design. We'll give them a much which is pin to pin compatible with the previous one. And it will be running in Cat M or Cat 1 Bis plus 5G. So they can go fast and in 2028 can introduce product. If you have other customers or they are building completely new products, that takes two years or two years and a half to develop, and they start with 5G, obviously, you don't see that revenue in '28. You see it in '29. But more or less, the way we are seeing the push to have the customer adopting 5G faster, we feel good about seeing revenue in 2028. Mike Grondahl: Got it. Okay. Thank you. Operator: Thank you. Our next question comes from the line of Fedor Shabalin with B. Riley. Fedor Shabalin: Good morning, good afternoon, everyone. Georges and Deborah, thanks for the detailed review of your quarter. You already talked about near-term guidance, but I wanted to touch a little bit for maybe midterm on 2027. How should we think about the revenue cadence heading into 2027? Specifically the base at which the remaining year remaining 60% of the pipeline converts to production revenue and whether the combination of material LTE and CAT 1 Bis programs, alongside early 5G engagements position the company to meaningfully inflect beyond the cash flow breakeven milestone that is targeted for 2026? Georges Karam: Yeah. Maybe they're yeah. You're absolutely right. I mean, the pipeline is there. And when you talk about those design wins converting, they are there. Right? When they convert, they bring revenue and they stay there. They don't disappear over one year or two years. This is really long-term business when we talk about metering, tracking, I mean, there is no project in the company that doesn't live five years. If you want, then some of them, they live ten years, seven years, eight years. All those metering segments. So what we are winning will continue to be there. The pipeline continues converting and bringing revenue. So just only if we take what we have in hand, and if you talk about, you know, we have 44% that's founded, I would say, this means we still have the other half. So by definition, we can double. You know? That's how it is. The growth is big. Right? I mean, if you assume all this only converts and they will be we don't choose anything lose not the customer will go to someone else. But like you could have, I'll say some accidents, some customers planning for some big forecast and they do less and so on. But it's a diversified pipeline that gives me confidence. Our business will continue growing. Not to give guidance of saying it's going to be I mean, the doubling is not it's built in the model. Obviously, you could argue how this is can be developing every quarter and we'll continue growing. And maybe we'll be in a 60, 60% plus growth. That's at least what I in terms of seven, that will continue to 28. And in '28, where we have really I believe, really, the eRAD cap, if we execute well, you need to imagine that the eRAD cap 5G, it's over. There is no Chinese at all competing. You have only a couple of players that they can bring this to the market. And this gives us an opportunity to increase our market share as well. Because, you know, we have now an established customer base. We're not going to win a new customer with the 5G. We're going to go to the same customer and support them with a new product line and expect expand our market share with the new customer. So I'm very I believe as well that the 5G will be a great catalyst in 2028 to add another growth driver to our revenue. Year over year. Fedor Shabalin: Thank you. This is very helpful. And my follow-up is about buybacks. So we just stopped trading at where it is trading now and given the authorization to repurchase an additional 10% of outstanding ADSs. Can you provide color on the expected pace and cadence of buybacks in Q1, specifically Q1 2026? I mean, specifically, whether the current share price level has accelerated repurchase activity quarter to date and how you balance your urgency of buying back stock at these levels against preserving liquidity? Thank you. Georges Karam: You know, obviously, very I mean, we have the authorization. We are, you know, free on doing this. Obviously, we were when we are in the window, which is locked, we cannot do it. We can do it when the window's open. And, essentially, we're assessing really this versus because you need to assess two things. You need to assess what's happening as well on the Bitcoin to become price. And the value of the share versus the net cash. So the two together are going to drive our I'll say the pace. But if you want the intention there is clear. You know, we believe if our share price is not appreciated, it's good things to do but to buy back shares and I would say reduce the number of shares outstanding. So it's like giving cash, giving money to all our shareholders sticking with us. So then the decision is there. We'll be executing on it. I'm not going to tell you if in Q1 we'll buy all the 10% or only 3% or 5% because it depends really how many dynamics I'm observing now with the Bitcoin price and so on. So we need to watch this carefully and make decisions based on this as well. Fedor Shabalin: Thank you very much, Georges. Appreciate the color, and continue. Best of luck. Georges Karam: Thank you, Fedor. Thank you. Thank you. As a reminder, to ask a question at this time, please press 11 on your touch-tone telephone. Our next question comes from the line of Jacob Stephan with Lake Street Capital Markets. Your line is now open. Jacob Stephan: Hi, guys. I appreciate you taking the questions. Maybe since a lot of questions have been asked, maybe help me unpack Q1 guidance a little bit. I know you said $6,500,000. Sounds like some of that could shift, but without affecting the balance of the year. What I guess, what, you know, portion of that is subject to shifting later into the year? And maybe just help us walk through that. Georges Karam: Yeah. I mean, Jacob, hi. And essentially, you know, it happens like, you know, again, going to the condition of the market, you know, even on TSMC, even on the wafer side, there is we have the capacity. It's all fine, but it's really stretched in timing. You know? It's like you pulling in stuff, getting this, you know, accelerating even a week. It's a little bit complicated. You know, the fiber loaded. And technically, what I'm saying is that we have orders. Right? I mean, we have orders covering Q1 and Q2, and have backlog even covering Q3 and Q4, some of our backlog. And in our guidance, you know, some of those orders, we should be able to ship them Q1. But they are really on the edge of Q1. And as I'm speaking, some of those dates are not 100% confirmed. You see the work in progress. So in theory, they are there. But you're not at risk you are at risk of having slippage of a few days. You know, we're not talking about, you know, it could be really weak. And, unfortunately, I have a few orders decent order happening there. But they're not lost. It's just only And if they don't come in the quarter, they shift to Q2. You know, this will beef up if you want my guidance. I mean, you should sum Q1 and Q2 to look to the performance on the company. This is where we are. So just to be cautious on this. If I do the math today, I believe should manage it. The guidance I gave, the 6.5, but there's a little bit of risk, so I will try to respond here with the market. Jacob Stephan: Okay. Very helpful. And then maybe touch on the price increases a little bit. You know, for your customers. You know, how susceptible have or, I guess, how receptive have they been to, you know, overall price increases? Georges Karam: Well, you know, to be honest, surprisingly, I should say the customer I don't know how much no one is for the pricing fees in general. But what I like is the standard then that's relearning what happened in the COVID. And the customer are reacting positively, if you will, around what's going on. In other words, they appreciate that you go and tell them that we have we have we could have supply problem. We could have price problem. And sit down with the customers and talk about the issues and so. Everyone is taking for granted the memory. The memory is really everyone knows and clear, you know, because the memory, by the way, people always prepared of the memory. It gets up and down all the time. So when it's up, read it in the news, they read it everywhere. When you go to the material, the, you know, the cost of the gold, even if it's everything is clear. Right? I mean, when you give the number, so it's a little bit more challenging. But that's okay. You know? I mean, I don't call it like you know, we're managing this customer by customer. You know, we have sometimes obligation. We have and but it's the reception is positive. It's not like no way. Because at the end of the day, that is it's not the choice of Sequans. Right? I mean, we're not trying to abuse the system. We're trying just only to be transferred to our customer and secure supply and this force us somehow to pay a little bit more. Because that's how it is the industry in Asia today. If you take, for example, all the geopolitical push many guys outside of China. So you have less competition in the packaging from China. So everything is happening outside of China between Taiwan mainly, but you have others obviously country around Taiwan. And now, obviously, those guys, they have demand for to get more, you know, to secure all the a thing. We can take all the other fab big customer willing to give them check-in advance and so on. And then the same time, you have good reason that the material, you know, as well as the packaging material is getting up. So all this combined, is pushing the price of the packaging up, you know, the substrate and the packaging as well. TSMC is still okay. You know, TSMC they remain on they didn't change anything. They are not giving signs that will do any change for now. At least for those geometry, which is the regular one, we use the flat, I would say. $40.22 and even the high FinFET 16, 12, and so on. Jacob Stephan: Okay. And just last question for me. On the Bitcoin treasury strategy, you know, obviously, 2026, you know, the actual interest rate, goes up materially on the convertible debt. I'm just wondering how you're kind of thinking about, you know, overall the debt repurchase or redemption. Georges Karam: I'll figure what I mean. You know, obviously, we're evaluating this. Specifically as well with the price of the Bitcoin. What I could say we have, you know, good relationship with the main debt holder. And as you saw in the past, redeemed 50% of this. So we're considering all our options. Nothing yet decided. Today. We'll look into the option, but you know, if you ask me my view on this, like, in general, the way we are seeing things if Bitcoin is not rallying and going to the moon, there is no interest, I will say, keep the debt forever. And better to redeem it sooner than later if you want. Like, if I have to look to the picture today, there's not too much value creation to be done there. But we are factoring all this, obviously, and discussing with the board, you know, based on all our options and what we should do and what. Jacob Stephan: Okay. Very helpful. I appreciate it. Operator: Thank you. And I'm currently showing no further questions at this time. I would now like to hand the conference back over to Georges Karam for closing remarks. Georges Karam: Thank you very much all. Thanks for the questions and being on the call. And happy to see you next opportunity or discuss with you on next opportunity. Thank you very much. Operator: Thank you, operator. You're welcome. This concludes today's conference call. You may now disconnect, and everyone have a great day.
Operator: Please stand by. Good morning, and welcome to the PennantPark Floating Rate Capital's First Fiscal Quarter 2026 Earnings Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speakers' remarks. Press star one on your telephone keypad. If you would like to withdraw your question, press star two on your telephone keypad. It is now my pleasure to turn the call over to Mr. Arthur Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference. Arthur Penn: Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's First Fiscal Quarter 2026 Earnings Conference Call. I'm joined today by Richard Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Thank you, Art. I'd like to remind everyone that today's call is being recorded. Richard Allorto: And is the property of PennantPark Floating Rate Capital. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may also include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at (212) 905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Arthur Penn. Arthur Penn: Thanks, Rick. I'll begin with an overview of our first quarter results and recent strategic initiative. The launch of our new joint venture, PSSL2, which commenced investment activities during the quarter. I will then share our perspective on the current market environment and how PFLT is positioned for continued growth. Rick will follow-up with a detailed review of the financials and then we will open up the call for questions. For the quarter ended December 31, core net investment income for the quarter was $0.27 per share. During the quarter, we began investing in our new joint venture PSSL2. PSSL2 invested $197 million during the quarter, and an additional $133 million after quarter end. Its total portfolio is currently $326 million. PSSL2 recently closed on an additional $100 million commitment to the credit facility, bringing the total to $250 million, and the credit facility has an accordion feature to increase commitments to $350 million. Our objective is to scale PSSL2 to over $1 billion in assets consistent with our existing joint ventures. Our run rate NII is projected to cover our current dividend as we ramp that portfolio. Turning to the market environment, we are seeing an increase in M&A transactions activity across the private middle market. This trend is expanding our pipeline of new investment opportunities. We also expect that this increase in M&A activity will drive repayments of our existing portfolio investments, including opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments. We continue to believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting. Areas where we have a clear competitive advantage. In the core middle market, the pricing on high-quality first lien term loans remains attractive. Typically ranging from SOFR plus 475 to 525 basis points with leverage of approximately 4.5x EBITDA. Importantly, we continue to get meaningful covenant protections in contrast to the covenant light structures prevalent in the upper middle market. Our portfolio remains conservatively structured. As of December 31, PIK interest represented just 2.5% of total interest income among the lowest levels in the industry. Median leverage across the portfolio is 4.5 times with median interest coverage of 2.1 times. During the quarter, we originated four new platform investments with a median debt to EBITDA ratio of four times, interest coverage of 2.9 times, and the loan to value ratio of 43%. With regard to the software risk that has been a recent market focus, we have stuck to our knitting. Only 4.4% of the overall portfolio is software, and that 4.4% is structured consistently with how we invest in the core middle market. Primarily, all cash pay loans with covenants with leverage of 5.3 times and matures in only 3.4 years on average. It's enterprise software that is integral to the customer's businesses, the vast majority of which is focused on heavily regulated industries such as defense, healthcare, and financial institutions where safety, security, and data are paramount, and where change will be slower. Peers typically invested much larger percentage of their portfolios in software, 20 to 30% and much higher leverage seven times plus or loans against revenue, not EBITDA, with substantial PIK covenant light and long maturities. This story is a significant differentiator from our peers. We ended the quarter with four non-accrual investments representing only 0.5% of the portfolio at cost, and 0.1% at market value. These results reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on core middle market provides us with attractive investment opportunities, we provide important strategic capital to our borrowers. Core middle market companies, typically those with $10 to $50 million of EBITDA, operate below the threshold of the broadly syndicated loan or high yield markets. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence. We thoughtfully structure transactions with sensible leverage, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, equity co-investment. Additionally, from a monitoring perspective, receive monthly financial statements to help us stay informed on the performance of our portfolio companies. Regarding covenant protections, while the upper market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital. Our credit quality since inception over fourteen years ago has been excellent. PFLT has invested $8.7 billion in 545 companies and we have experienced only 26 non-accruals. Since inception, our loss ratio on invested capital is only 13 basis points annually. As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall, part for our platform from inception through December 31, we've invested over $615 million in equity co-investments, and have generated an IRR of 25% and a multiple on invested capital of 1.9 times. During the quarter, we continued to originate attractive investment opportunities and invested $301 million at a weighted average yield of 10%. $95 million was invested in new portfolio companies and $206 million was invested in existing portfolio companies. From an outlook perspective, our experienced and talented team and our wide origination funnel are well positioned to generate strong deal flow. Our mission and goal are a steady, stable, and protected dividend stream coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in first lien senior secured instruments and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn it over to Rick for a more detailed review of our financial results. Richard Allorto: Thank you, Art. For the quarter ended December 31, GAAP net investment income and core net investment income were both $0.27 per share. Our operating expenses for the quarter were as follows: interest and expenses on debt were $27.2 million, base management and performance-based incentive fees were $13.5 million, general and administrative expenses were $2.1 million, provision for taxes was $200,000, and credit facility amendment costs were $500,000. For the quarter ended December 31, net realized and unrealized change on investments including provision for taxes, was a loss of $30 million. As of December 31, NAV was $10.49 per share, which is down 3.1% from $10.83 per share last quarter. As of December 31, our debt to equity ratio was 1.57 times and our capital structure is diversified across multiple funding sources including both secured and unsecured debt. Subsequent to quarter end, we sold $27 million of assets to the PSSL1 joint venture and $133 million of assets to the PSSL2 joint venture. We used the net proceeds from these sales to pay down our revolving credit facility and reduce our debt to equity ratio to 1.5 times, which is within our target range of 1.4 to 1.6 times. As of December 31, our key portfolio statistics were as follows: The portfolio remains well diversified comprising 160 companies across 50 industries. The weighted average yield on our debt investments was 9.9% and approximately 99% of the debt portfolio is floating rate. PIK income equaled only 2.5% of total interest income. The portfolio is comprised of 89% first lien senior secured debt, less than 1% in second lien and subordinated debt, 4% in equity of PSSL1 and PSSL2, and 7% in equity co-investments. The debt to EBITDA on the portfolio is 4.5x, and interest coverage was 2.1 times. With that, I'll turn the call back to Art for closing remarks. Arthur Penn: Thanks, Rick. In conclusion, I'd like to thank our exceptional team for their continued dedication and our shareholders for their trust and partnership. We remain focused on delivering durable earnings, preserving capital, and creating long-term value for our stakeholders. That concludes our remarks. At this time, I would like to open up the call to questions. Thank you. Operator: If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Paul Johnson with KBW. Paul Johnson: Yes, good morning. Thanks for taking my questions. Interesting to hear that you guys have what I would consider an underweight software exposure in the portfolio. I know you've mentioned software as a defensive sector in the past. You've obviously done loans there in the past. I'm just curious why is software such a low exposure within the portfolio? Was that a strategic investment decision you guys have made? Or is there anything else driving that? Arthur Penn: Thanks, Paul. It's a good question. We basically just kind of stick to our knitting, which is cash flow loans at a reasonable multiple. Where we think there's great defensibility, where we can get covenants, where we can get cash interest. And, you know, we saw obviously, we saw this massive parade of software loans come by, and much of them were marching at seven times leverage, eight times leverage, leverage against revenues, ARR loans. We saw many of them, covenant light. Or PIK. And for us, that was not those were not comfortable loans for us to make. So we have done some software, about 4% of the portfolio where you know, with their reasonable multiples of cash flow, where we get our maintenance tests, where they're you know, we feel safe as enterprise software that's integral to their customers' lives and in industries that are heavily regulated. Where data privacy, safety, and security mean that any change that may happen will be yeah. It will take some time. So that's kinda military. That's healthcare. That's financial services. And, you know, we have maturities today at about three years, an average maturity of about about three years on you know, that 4% of the of the portfolio that's software related. So we feel very safe and comfortable. And so we basically just stuck to our knitting and didn't didn't, you know, chase, the supply that was coming through. Paul Johnson: Got it. Very helpful. Then last question I would just have is just on the NII this quarter. Mostly in relation to the to the new JV. You guys have that you expect to cover the dividend and I believe most of the plug there was from ramping the second JV. So I'm curious when you're when you when you say that you expect to ultimately cover the distribution with NII, does that assume essentially the JV at you know, the $1 billion asset target and, you know, generating sort of a run rate earnings from the JV. So essentially full optimization there or does it not necessarily assume, you know, full deployment within the JV as well as, I would ask assume Fed rate cuts in the meantime? About, the Fed cut, the Fed rate cut. Does that Arthur Penn: Yeah. No. That's a it's a great question. So look and and you can look at it, it's all public information. We have JV1 and PFLT, PSSL1 with Kemper. We have a a JV over PNNT with Pantheon. And so this is our third. You can look at those two as models in terms of ramp, in terms of income generation, you know, and percentages of of the vehicle that each BDC owns. You know? So, basically, when the way the way we look at it is once you get up to about a billion dollars you know, with our 75% ownership, you know, we should be we should be covering should be covering that dividend. When is that gonna happen? It's not gonna be next quarter. But we're we're off to a good start. We're over you know, we're at about $330 million now from a standing start last quarter. A lot of it will depend on M&A, and M&A is obviously the feedstock that will populate this JV. But we feel pretty good about it. You know, helping us cover that dividend. That does not include any equity rotation. We do expect if M&A happens, which we think it will, will not only populate the JV, it will also imply some equity rotation. On the existing portfolio, which will be helpful. And then you model in whatever base rate, you know, decrease you'd like 50 basis points, a 100 basis points. You know, we can go you know, Rick Rick can go through the model with you at some other time or a model with you. But, you know, there's a bunch of offsets, but we feel we feel like we're we're well set up to have a pathway to cover that dividend. Paul Johnson: Got it. Appreciate it, Art. That's all the questions for me. Thank you very much. Arthur Penn: Thank you. Operator: We will take our next question from Robert Dodd with Raymond James. Robert Dodd: Hi, guys. On the software question, right? I mean, your your portfolio is just a fraction over 4% in terms of software where I understand right, that's where software is the product of the business. Can you give us any thought? I mean, how much of the portfolio is is kind of software exposed. I mean, where it's not producing software, but it might be in the business of implementing software. For the government or or anybody else or or where software is a core part of the business but the business is not producing software itself. Arthur Penn: Yeah. It's a great question, which is, you know, kinda how you define it and where you draw the line. And assuming out to the bigger picture, the bigger picture question is, is how does AI impact you know, every company and every and and every portfolio. Right? So it's that's a we we that's above our pay grade for sure. You know, what the the difference the difference here is software is the main product. That's how we define it. You know? And I think that's it's pretty, you know, kind of including where software is a a is a is a big, big element of of of the company. A lot of our almost all of our companies use software in some way, shape, or form. AI can be a a help or it could be a a a hindrance. But we tried to really hone in on where where, you know, it was the product itself. Where where there's a human being attached to it where we feel very good that AI is not going to impact the human nature of the job anytime soon. You know, that did not that that did not you know, we have we have a bunch of do have service businesses, you know, We have we have a bunch of home service businesses where you're it's you know, HVAC repair and plumbing and okay. That's probably not that impacted by AI. AI could be a be a help. So that's one that's one end of the spectrum. And then you have, you know, kind of you know, we do have a lot of military defense, government services exposure you know, a, that's less likely for safety security, and privacy reasons to move to to AI quickly, it could adopt AI but, you know, requires human analysis. Like, there's a lot of government services that ultimately human being needs to be needs to analyze needs to synthesize AI could very well help those companies. So I don't know. I mean, it's all it's we're all grappling with, you know, how you define it and what is in the bucket and what isn't. And where where AI you know, kind of impacts portfolios. So we tried to be with this 4.4% or whatever, we tried to be, you know, really pure as to what our software really was know, the product. And I know I'm rambling, but I don't know if I gave you any color there, Robert. Robert Dodd: No. No. No. That was really that was really helpful. Thank you. So, yeah, I mean, it's it's it's a difficult topic. Just the next one, can on kinda copy and pull. On the JV, you know, like you said, I mean, you've gotten up to to north of $300 million already from kind of a a standing start. Now some of that, I do think you've kind of had in a sense, pre-stocked the on-balance sheet portfolio that so that you could you could drop things down. And, obviously, you've you've done it post quarter end as well. So, you know, that that the the the initial ramp was was possibly faster than than we should expect on on, you know, a quarterly basis. Would be my guess. I mean, if if the market is normal, good luck defining that, how long you know, what's what's plausible to get to a billion? Is it another is it three or four quarters, or is it eight to twelve? Arthur Penn: I I would just just to throw it out there because it gives me a lot of range, because this is going be largely driven by M&A, right? Yep. Right? Which you know, last year, meteor struck in the M&A market called Liberation Day. M&A was, you know, spiked for most of the rest of the year. It feels like it's coming back here. You know, we we had the JNF and and PNNT. That was an ex that's a an an early indication that maybe you know, maybe this time this time, it it it happens. We are feeling it. We're seeing it in our backlog of deals that we're looking at. So I'll throw out eighteen months just as a big broad, you know, kind of numbered, which gives me a lot of wiggle room on on either side of the know, twelve to twenty-four months. You wanna do a range. You wanna do, you know, twenty-four months out outside case. You can model that in. But quite frankly, it's gonna be driven by M&A. Robert Dodd: Got it. Thank you. Operator: We will take our next question from Brian McKenna with Citizens. Brian McKenna: Thanks. Good morning, everyone. Sorry if I missed this, but can you walk through the drivers of the unrealized marks in the quarter? And then when you look across the portfolio and the watch list today, are there any additional markdowns coming over the next quarter or two? I'm just trying to think through some of the puts and takes and what that means for the trajectory of NAV moving forward. Arthur Penn: Yeah. Yeah. Most of the markdowns I'll I'll call are and good question, Brian. Most of the markdowns I'll call are and we have a little bit of this, we'll call 2021 vintage, which was the post-COVID vintage where, you know, people thought, you know, that consumers were not going into stores again. Where, you know, logistics and supply chain stuff was was really doing very well. So we have a little bit of that. Thankfully, it's not that large, and that is kinda what is working its way through the the pipeline here of of markdowns. I'll point out a company called PL Acquisition. It stands for Pink Lily, which is a direct-to-consumer women's apparel business. I'll point out Research Now or Dynata is a marketing services business, which which has been softer. And I'll point out in the JV, a company called Wash and Wax which is a car wash company known as Zips, C-I-P-S. People were were doing a lot of car washing post-COVID. So think they're washing their cars again with with all the bad weather in the in the North in the last couple weeks. So seeing a little bit of bounce in in car washing, but, you know, I'd say that's generally the theme you've seen much bigger movements with with some other BDCs that have reported you know, NAV diminution due to, you know, Amazon relationships and home furnishing stuff. So we've got a little bit of that here. It's kinda working its way through. We don't really see much more, quite frankly, in that. It's kind of here we are five years later. And and I think with M&A starting to to move hopefully, we're going to start to see some upside in equity and some equity rotation to offset what I'll call a little bit of this 2021 vintage. Brian McKenna: Got it. That's helpful. And then just to follow-up there, you know, if you look at your portfolio today, what's the mix of loans just by the vintage year? And I'm curious how much of your portfolio has turned over since 2021? Arthur Penn: Know, I we don't have that handy right now. Let us do some work and and we can chat at a convenient time. And then, look, presumably, the data is in there. You know, anyone we we and you could sit there and look at the the origination date of of these of the portfolio. But I think it might might be some good work for a research analyst to to do. Just just an idea. Brian McKenna: Sounds great. I'll leave it there. Thanks, guys. Operator: We will take our next question from Christopher Nolan with Ladenburg Thalmann. Christopher Nolan: Hey guys. Rick, a $3.6 million charge related to the credit amendment and debt issuance cost. I presume that's nonrecurring. And is that related to the $75 million debt issuance in January. Richard Allorto: Sure. The first part, for PFLT, it was about $500,000 not 3.6 And yes, that is a one-time item. And and, no, it was not related to Again, the $75 million that was raised was, was at PNNT. Christopher Nolan: Thank you. Okay. My press release is and, also, just as a follow-up, on the M&A comments, what is the is there a there a lot of activity around the software sector? I'm just kinda curious. Given everything going on with AI. Whether or not software is is is Arthur Penn: Yeah. You know, we we have we you know, we're as you could tell, we're not one of the big software lenders. So we're probably not the the best party to ask around M&A and the software sector. My my presumption would be you know, when you have times of of kind of like this where the market's trying to figure things out in the sector, my assumption would be M&A would be lower for a while as things settle down and people revalue both equity and debt in in the space. But, again, we're we're probably not the best people to ask. Christopher Nolan: Great. That's it for me, and apologies for confusing companies there. Richard Allorto: Thanks. Arthur Penn: No no problem. We the good news is, in noon, you have an opportunity to ask the same questions again. Yeah. That's right. Thanks. Operator: And gentlemen, there are no further questions at this time. I will now turn the conference back over to Mr. Penn for any additional or closing remarks. Arthur Penn: Thanks, everybody, for your participation this morning. We look forward to speaking with you next in early May. Have a great day. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Greetings and welcome to the Incyte Fourth Quarter and Year End 2025 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad. We ask you to please limit yourselves to one question, then return to the queue. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press star 0. It's now my pleasure to turn the call over to your host, Alexis Smith, Vice President of Investor Relations. Please go ahead. Thank you. Alexis Smith: Good morning, and welcome to Incyte's Fourth Quarter and Full Year 2025 Earnings Conference Call. Before we begin, I encourage everyone to go to the Investors section of our website to find the press release, related financial tables, and slides that follow today's discussion. On today's call, I'm joined by William Meury, Pablo Cagnoni, and Thomas Tray, who will deliver our prepared remarks. Stephen Willey, David Neil Lebowitz, Matteo Trotta, and Mohamed Issa will also be available for the Q&A portion of today's call. I would like to point out that we will be making forward statements, which are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors discussed in our SEC filings for additional detail. I will now hand the call over to William Meury. William Meury: Alexis, thank you, and good morning, everyone. I'll cover two topics today. First, I'll give an overview of our performance in 2025. Then I'll turn to our outlook for 2026 and beyond, and the steps we're taking with our core business and pipeline to transition Incyte. As I touched on at JPM, there were several achievements in 2025 that stand out. First, our business exceeded expectations on three levels: total sales, Jakafi sales, and our core business sales ex-Jakafi. Second, we fundamentally changed the shape and maturity of our pipeline. We moved multiple assets from early to late-stage development. We now have several outlier opportunities for the treatment of MPNs, pancreatic cancer, colorectal cancer, and HS, that have the potential to drive revenue, earnings, and cash flow into the next decade. Finally, regulatory applications for Jakafi XR, Opsilor for moderate AD, and povastatinib for HS in Europe were submitted on a timely basis. The point here is we have much greater visibility into the potential growth profile of the company now than we did at the start of 2025. Everything we accomplished this past year commercially, scientifically, and operationally has created the foundation for an inflection point in '26 and beyond. Now I'll speak to our performance in '25 and the outlook for '26. Turning to revenue, the business performed exceptionally well this past year. Revenues in the fourth quarter totaled $1.51 billion, up 28% versus the prior year. For the full year '25, revenue totaled $5.14 billion, up 21% year over year. This was driven by strong commercial performance and an increase in milestone and contract revenue. Net sales in the fourth quarter totaled $1.22 billion, representing a 20% increase versus the prior year. For the full year '25, net sales were $4.35 billion, also up 20% year over year, exceeding both expectations and our guidance. Growth was broad-based with nearly every product contributing meaningfully. Focusing on our core business, Jakafi sales totaled $1.26 billion, representing over $400 million in growth and a 53% increase versus 2024. Opsalora, Niktimbo, and Manjoovi were the largest absolute growth contributors. This core business is expected to grow over 30% in '26 and has the potential to grow at a 15% to 20% five-year CAGR and approach $3 to $4 billion by 2030. Now a few comments about the key products, Jakafi, Opsilora, and our hematology and oncology products. Starting with Jakafi on slide nine, fourth quarter and full year sales exceeded expectations. In the fourth quarter, sales were $828 million, an increase of 7% versus the prior year. Full year sales totaled $3.093 billion, representing an 11% increase year over year. Jakafi remains an integral part of our business, and keeping it healthy is a priority. It continues to serve as a funding source for our pipeline and for future product launches. A few comments on the fundamentals of this business. First, prescriptions increased 11% in the fourth quarter and 9% for the full year 2025 despite a growing base and competition. Second, demand was up across all three indications. PV will be the largest and fastest-growing indication in '26. And with a penetration rate of only 30%, versus 60 to 70%, in frontline MF, it should be a reliable and significant source of growth going forward. And finally, formulary coverage for Jakafi remains excellent with near-complete coverage across plans. In '26, we expect net sales to be $3.22 billion to $3.27 billion. Prescriptions are expected to grow at a high single-digit rate, representing mid-single-digit sales growth compared to 2025. In terms of '26, given this timing, the second half of the year will be mostly about formulary access. '27 will be focused on conversion. We'll share more about our launch plans in future calls. Now, we'll turn to slide 10 for Opsalor. Net sales in the fourth quarter totaled $207 million, an increase of 28%, and full-year net sales were $678 million, up 33% versus 2024. Growth was driven by increased penetration in the US AD and vitiligo markets, where Opsilora prescriptions climbed 24% and 15%, respectively. The pediatric launch for Opsilor AD is off to a strong start in the United States, with sales already annualizing around $30 million. Both dermatologists and parents are increasingly seeking nonsteroidal options for atopic dermatitis, driven by concerns about long-term steroid use. International sales for Opsilora and vitiligo doubled to $130 million in 2025. In '26, we expect sales of $750 million to $790 million, representing roughly a 15% increase at the midpoint. This estimate is based primarily on continued double-digit volume growth in the United States for AD and vitiligo, partially offset by price actions to expand formulary coverage, as well as sustained double-digit growth internationally off of a larger base as we lap the strong full-year launch for Vitiligo in Europe. Most of the benefits of the moderate AD launch in Europe will be seen in '27 and beyond. As I said, our aim long-term is to nearly double the size of this business. The nonsteroidal segment of the AD market is growing 20% year over year, creating a significant tailwind as prescribing migrates from topical steroids to nonsteroidal options. We still have a modest share of each of those segments, so there is substantial headroom for growth. In addition to this, our international business and new indications will serve as meaningful catalysts for the next phase of expansion. And now on slide 11, we'll turn to our hematology and oncology products. Net product sales in the fourth quarter were $187 million, up 121% compared to the prior year. Full-year '25 sales were $583 million, representing an 83% increase compared to 2024, driven by Niktymbo, Manjuli, and Zionis. Nictimbo finished its first year at $152 million. We achieved broad penetration and deep utilization of BMT centers, reaching more than 1,400 patients with 13,000 infusions. In line with expectations, Dictimbo is being used widely in the fourth-line setting with increasing preference in the third line. As it relates to Manjubi, sales were up 20% versus the prior year based on a strong launch in follicular lymphoma in 2025. As you know, we released data in January in frontline DLBC where Monjube plus lenalidomide showed a 25% improvement in PFS, improving on R-CHOP chemotherapy, which is a regimen that still accounts for 50% of the first-line DLBCL market. This year, we plan to present the data at an upcoming medical meeting, work to incorporate MONJUVY into appropriate guidelines, and submit an SBLA in the first half with a potential FDA approval by early '27. Looking ahead, we've set our full-year guidance for the hematology and business at $800 million to $880 million for the year, representing approximately a 40% to 50% increase compared to our performance in '25. Now three takeaways about '26 that I'd like to reinforce before turning over the call to Pablo. First, our core business excluding Jakafi has the potential to be as large as Jakafi is today by 2030. A key part of that growth will come from product launches we expect late this year and early '27. I mentioned XR, Opsalor, and Manjoovi earlier, so I want to make a few comments about where we are with povastatin. The NDA for povastatin in HS has been submitted, and we anticipate filing acceptance this quarter. As you know, HS is the first of potentially three indications, the others being PN and vitiligo. POVO has the potential to be the first FDA-approved oral treatment for HS. Here, we have an opportunity to capture patients at two critical inflection points. First, in the pre-biologic setting, a population with no FDA-approved treatments today. These patients are cycling through antibiotics and steroids that don't address the underlying disease biology. Second, the post-biologic setting where IL-17s and TNFs are used, but where partial responses are common. An effective oral option could be transformative in both treatment settings. We'll talk more about launch plans in future calls. Second, our pipeline has the breadth and depth to support top-tier growth in the potential of two to three times our top line over time. In '26 alone, we will have 14 pivotal trials underway across seven assets by the end of the year and multiple data catalysts. Pablo will walk through the status of our key programs and the potential to double our business over time. And finally, we view BD as a multiplier, a way to extend and strengthen the core. We have the capacity to pursue a broad range of opportunities. Ultimately, the size and nature of any deal will be dictated by strategic fit and the potential for durable revenue, earnings, and cash flow. Now I'll hand it over to Pablo. Pablo Cagnoni: Thank you, William, and good morning, everyone. As William mentioned earlier, in 2025, the pipeline reached a new level of breadth and maturity, setting up a materially different outlook for the company going forward. First, our approved portfolio and regulatory footprint broadened with approvals for Mounjube in follicular lymphoma, Zynes in squamous cell anal carcinoma, and Obsilura in pediatric atopic dermatitis, alongside regulatory submissions for Jakafi XR, Opsilura, and povastatinib. Second, positive clinical data meaningfully advanced multiple programs, including phase three registrational data for povircitinib in hidradenitis suppurativa or HS, and early-stage results supporting pivotal development for the mutant color program in MFNET, KRAS G12D in pancreatic cancer, and TGF beta receptor two by PD one bispecific in MSS colorectal cancer. In 2026, we will continue to build on this momentum through additional approvals, regulatory filings, pivotal data readouts, and trial initiations. For a late-stage pipeline, we anticipate FDA filing acceptance for policitabine in HS this quarter, and we plan to submit an SBLA for tafasitamab in first-line DLBCL in 2026. With these submissions underway, we expect the potential approval and launch of four products in late 2026 and early 2027. The emphasis in '26 shifts to advancement across the portfolio, as we expect seven data readouts this year, including the positive tafasitamab data already shared in January, and 14 pivotal trials underway across hematology, oncology, and immunology by year-end. Together, this reflects a pipeline that is increasingly focused, more mature, and positioned to translate scientific progress into meaningful impact and long-term value creation. The hematology portfolio balances two priorities: expanding the addressable market of established products such as tafasitamab across the full spectrum of B cell lymphomas and axatilamab in graft versus host disease, and advancing novel therapies for myeloproliferative neoplasms via our MPM portfolio of targeted therapies. In GVHD, advancing Nictimbo in two first-line studies evaluating it in combination with ruxolitinib as well as in combination with steroids. Data from these trials are expected in early 2027 and early 2028, respectively. Our MPM pipeline remains a key area of focus where we're advancing three targeted therapies: nine eighty nine, our mutant cholera monoclonal antibody, seven eight four, our mutant COLR by CD three bispecific antibody, and o five eight, our JAK two v six one seven f small molecule inhibitor. Each of these programs is designed to address a well-defined disease driver with the potential for disease-modifying activity and the opportunity to fundamentally change how MPNs are treated. Looking ahead to upcoming milestones, we expect to report phase one data for o five eight in the second half of this year, and phase one data for seven eighty four in 2027. With that context, I would like to turn to slide 17 to review our progress with September and the breadth of development efforts for this program. As a reminder, last year we presented phase one data evaluating September in cholera-positive patients with essential thrombocythemia and myelofibrosis. The data presented at EHA and ASH in 2025 reinforced the potential of our approach to directly target the driver mutation, addressing both the underlying disease and key clinical manifestations. Importantly, this proof of concept results provide a strong foundation to advance nine eighty nine into pivotal phase three development. We expect to initiate our phase three trial evaluating nine eighty nine in second-line collard positive ET patients in mid-2026, following regulatory alignment in the first quarter. Turning to myelofibrosis, we expect to initiate a Phase III trial in second-line MF in 2026, following regulatory alignment midyear. In parallel, we continue to advance our ongoing phase one study, which is enrolling second-line ET, second-line MF, and first-line MF cohorts. We plan to share updated data in second-line ET and second-line MF midyear and new data from our cohort evaluating nine eighty nine as a monotherapy and in combination with ruxolitinib as a first-line therapy in the second half of 2026. Finally, we're advancing a subcutaneous formulation of nine eighty nine. We aligned with the FDA on this development strategy last month, and we plan to initiate a phase one study during 2026. In December, tafasitamab was approved in both Europe and Japan in combination with lenalidomide and rituximab for the treatment of adult patients with relapsed or refractory follicular lymphoma following at least one prior line of systemic therapy, further expanding its global footprint. In January, we reported positive top-line results from the pivotal Phase III FRONT MIND trial, which evaluated tafasitamab and lenalidomide in combination with R-CHOP as a first-line treatment for newly diagnosed high-grade DLBCL with IPI of three to five. The study met its primary endpoint of progression-free survival and achieved its key secondary endpoint of event-free survival by investigator assessment with no new safety signals observed. We plan to present additional data from the frontline study, including overall survival and subgroup analysis, at an upcoming medical congress this year. Based on these results, the SBLA for ProSigned DLBC BCL remains on track for submission in 2026. If approved, Mondruby has the potential to address the full spectrum of B cell lymphomas. Turning now to oncology, the oncology portfolio focuses on advancing novel therapies that target well-validated but historically difficult pathways in high-incidence cancers, including colorectal, pancreatic, and ovarian cancer. Starting with a nine o, our first-in-class TGF beta two by PD one bispecific antibody. Based on data we presented at ESMO, and following alignment with the FDA, we initiated a phase three study in December evaluating a nine o in combination with Falfox and bevacizumab compared to placebo in combination with Falfox and bevacizumab in first-line MSS colorectal cancer patients. Next, six six seven, our CDK two inhibitor, is being evaluated in patients with platinum-resistant ovarian cancer with cyclin E1 overexpression, a biomarker-defined population with significant medical need. The Myastra clinical program consists of two ongoing trials, a phase two single-arm study and a phase three study versus investigator's choice chemotherapy, as well as a planned phase three study evaluating six sixty seven in the first-line maintenance setting in combination with pevacizumab. Seven three four is a highly selective KRAS G12D inhibitor that has demonstrated promising antitumor activity in G12D mutated solid tumors, including pancreatic ductal adenocarcinoma or PDAC. Last month, at ASCO GI, we presented new efficacy and safety data evaluating seven thirty four both as a monotherapy and in combination regimens in patients with PDAC. At the planned phase three dose of twelve hundred milligrams a day, seven three four as a monotherapy demonstrated a thirty seven percent overall response rate in a predominantly third-line and later population, with a disease control rate of seventy eight percent. In combination with standard of care therapies, seven three four demonstrated a manageable tolerability profile when combined with botchemicitabine plus nab-paclitaxel and modify FOLFIRINOX, without compromising chemotherapy dose intensity. Taken together, this data supports the potential for seven thirty four to be meaningfully integrated into frontline treatment for patients with PDAC. Earlier this year, we gained alignment with the FDA on the registration program and are on track to initiate our phase three trial in first-time PDAC in the first quarter of 2026. If approved, seven three four would represent the first G12D targeted therapy for the treatment of patients with pancreatic cancer. With pivotal trials now underway for CDK two, TGF beta receptor by PD one, and KRAS G12D, our strategic focus is turning to how we can expand these programs across additional tumor types and clinical settings. Our objective is to broaden the potential impact of these programs and reach more patients over time. We expect to provide updates during 2026. Finally, in IAI, we have a JAK anchor franchise with topical to oral solutions that span across mild to severe immune-mediated dermatological conditions. First, an update with Opsalura. In early 2025, we shared results from the phase three program in prurigo nodularis, where Opsilura met its primary endpoint and demonstrated statistically significant improvement in itch compared to placebo in one of two registrational studies. In January, we received FDA feedback indicating that an additional clinical efficacy study will be required to support registration for this indication. As a result, we have decided to pause further development of Seleura MPN at this time. Opsalura has also been evaluated in a large phase three registrational program as a topical treatment for mild to moderate hidradenitis suppurativa, with results expected from the true HS1 and true HS2 trials later this year. Hironolitis suppurativa is also the most advanced indication for a novel JAK1 small molecule inhibitor. Earlier this year, we presented twenty-four-week phase three data that further reinforced the differentiated clinical profile of demonstrating deep and sustained improvement across multiple key endpoints. Importantly, povircitinib also showed a rapid and robust reduction in skin pain and draining tunnels, a defining symptom for patients and a critical treatment goal for clinicians. From a regulatory standpoint, we submitted the MA to the EMA during 2025 and anticipate acceptance of the NDA filing by the FDA in 2026. Beyond HS, our phase three registrational trials in vitiligo and PN continue to progress well. In vitiligo, we anticipate data from our two registrational Phase III trials STOP V1 and STOP V2 in mid-2026. In PN, we anticipate data from our stop PN one and stop PN two studies expected by year-end. Finally, we continue to explore its broader potential with phase two proof of concept data in asthma anticipated in 2026. Overall, 2026 is a pivotal year for Opsilure and povastatin, with important key regulatory and clinical milestones across all evaluated indications. To close, we have a catalyst-rich year ahead, with multiple late-stage data readouts, regulatory milestones, and pivotal trial initiations across our three core franchises, underscoring the breadth, depth, and maturity of our pipeline. We look forward to an exciting year of execution and to providing continued visibility as these milestones unfold. With that, I'll turn the call over to Thomas Tray for a financial update on the quarter. Thomas Tray: Thanks, Pablo. As William mentioned earlier, our total revenues and product revenues for the quarter were $1.51 billion and $1.22 billion, respectively, increasing 28% and 20% from the prior year. For the full year, our total revenues and product revenues were $5.14 billion and $4.35 billion, respectively, increasing 21% and 20% from the prior year. Our GAAP R&D expenses were $611 million for the quarter, increasing 31% from the prior year. Our GAAP R&D expenses were $2.05 billion for the year. Ongoing R&D expenses increased 8% year over year, driven by continued investment in our late-stage development assets. Moving to SG&A, GAAP SG&A expenses were $390 million for the quarter, increasing 19% year over year. Our GAAP SG&A expenses were $1.38 billion for the year, increasing 11% year over year, primarily driven by costs associated with the U.S. Oncology product launches in 2025 and the timing of certain other expenses. Ongoing operating expenses for the full year 2025 increased 11% year over year compared to a 19% increase in ongoing revenues during the same period, leading to a continued increase in operating leverage and margins. I'll now turn the call back over to William Meury. William Meury: Thanks, Thomas. Before we close, I want to reiterate our revenue guidance and address our expense outlook for 2026. As mentioned earlier, we have set full-year '26 revenue guidance of $4.77 billion to $4.94 billion, representing a 10% to 13% increase from the prior year. This includes net revenue expectations for Jakafi of $3.22 to $3.27 billion, Opsilora of $750 to $790 million, and hematology oncology of $800 to $880 million. Sales for our core business ex-Jakafi will range between $1.57 billion and $1.69 billion, representing roughly a 30% growth rate at the midpoint in 2026. As it relates to expenses, I think we've achieved the right balance between maintaining financial discipline and ensuring we are not underfunding strategic initiatives or compromising our growth prospects. We will continue to get leverage out of this business where we can, so that we can create financial breathing room to invest where it matters most. Ultimately, what we're solving for is the steepest possible growth curve post-'29 and durable earnings and cash flow. We expect total GAAP R&D and SG&A operating expenses to be $3.495 billion to $3.675 billion in '26. At the midpoint, this represents a 4% increase versus the prior year, driven primarily by targeted investments in our late-stage pipeline and launch readiness while maintaining tight control elsewhere. We expect R&D to be up roughly 10% from last year, consistent with advancing programs that we believe can meaningfully shape the company's future. 80% of our investment in R&D is concentrated in the seven programs Pablo reviewed earlier. As it relates to SG&A, G&A will be down 10% compared to last year, while sales and marketing is modestly higher to support the key launches in the second half of the year. Together, SG&A will remain relatively flat year over year, reflecting deliberate reallocation rather than broad-based spending. Finally, we anticipate the cost of goods to remain relatively stable in the 8% to 9% range of net sales. We have an excellent set of opportunities in front of us and a path to replace Jakafi. What matters most right now, like at any company, is execution, getting things done, which means orchestrating product launches, running multiple phase three trials to tight timelines, and managing the business at a detailed level. With that, I'll turn the call over to the operator for Q&A. Operator: Thank you. We'll now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And as a reminder, we ask that you please ask one question, then return to the queue. Press star 1 to be placed in the question queue. Our first question is coming from Marc Frahm from TD Cowen. Your line is now live. Marc Frahm: Hi. Thanks for taking my questions and congrats on the progress. Maybe to start with Pablo, for the CALAR pivotal programs, just your latest thoughts as you've gotten into designing the phase three, just kind of how to address the potential differences for nine eighty nine and dosing some of the different calR mutations to ensure full potency. Is the best approach to start low, titrate up for those that need it, maybe prospectively wrap people to different starting doses, or is it just to simplify things and max out the dose for everyone? And then maybe just a quick clarifying thing on the commentary around Opsolar pricing. How much of that was driven by your entry into new markets and needing to access those versus maybe some of the competitive launches putting pressure on the existing indications? Pablo Cagnoni: Yeah, go ahead. Pablo will take the first one. Thanks for the question, Marc. Good morning, Marc. So we're going to discuss this with the FDA this quarter. So I'm going to try not to get too far ahead of ourselves. What we're proposing in principle and for the ET second-line study, which we intend to initiate this half in 2026, is first of all, the enrollment would be in all patients, patients with all types of mutations, both type one and non-type one mutations. And we're going to discuss with the FDA a dosing strategy which we think will address the differential potency of nine eighty nine across the mutations that you brought up in your question. We're confident that we have a good strategy. We're also going to discuss the primary endpoint of the study, which obviously will be some version of hematologic response, but the question there is the timing for the evaluation of the primary endpoint, which we would like to discuss with the agency. So all in all, I think we're in a good position. I think we submitted a good package. We look forward to interacting with the agency, and we'll provide an update later this year. William Meury: Thanks, Pablo. And, Marc, as it relates to Opsalor, it's not a competitive issue. We take a very long-term view of Opsalora, have exclusivity to the end of the next decade. We just launched a pediatric indication. We potentially could have an HS indication. The market is really moving, as you know, as I mentioned, prescribing migrates from steroidal topicals to nonsteroidal topicals. This was about improving formulary coverage for the long term at the major PBMs so that it's a frictionless experience for dermatologists and patients. And I would expect the impact on ASP in '26 to roll off in 2027 and beyond. We'll be providing fewer discounts in the future than we did in the past. That's it. Thanks for the question. Operator: Thank you. Next question is coming from Tazeen Ahmad from Bank of America. Your line is now live. Tazeen Ahmad: Hi, guys. Good morning. Thanks for taking my question. Also, one on Opsalora. So can you just give us your sense of what the uptake is in the current approved indications? And the average number of tubes that are being used? We understand the importance of being on formulary, but we'd also like to get a better sense of how to better model sales on a go-forward basis. Thanks. William Meury: Yeah. I can break this down a little, Tazeen. First, the AD business is growing at almost 20% year over year. You saw that in our 25 results. And then you have a vitiligo business that's growing in the mid-teens. And roughly, 60% of our business is AD, and roughly 40% of it is vitiligo. I would also comment that we launched for pediatrics in 2025. And that business, when you look at prescription data on a weekly basis, is already annualizing at $30 million. So when you're thinking about modeling Opsalora, that business is going to grow over the next five years at about a 10% CAGR. That's how we think about net sales. The other piece of Opsalor that you have to think about is the international business. Now internationally, we finished '25 with $130 million in sales in Vitiligo. We're launching for moderate AD in that same market in the second half of the year, most of the benefit will be in '27. The AD market is five times the size of the vitiligo market. So I estimate there's probably $300 million in incremental revenue for Opsilora internationally over the next five years. So we're going to finish the year at roughly $700 million, give or take, just below. $300 million of that comes from the United States driven by AD and Vitiligo. And then $300 million internationally just with the launch in Modern AD. What I haven't factored into this is if we get an indication for HS for Opsilor at the 2027. Most of our growth will be volume. We expect some modest price actions over the next several years. I think most of the heavy lifting as it relates to securing formulary coverage and the investment in that is behind us. That's how you think about this business. Essentially, you're going to grow at a CAGR of, call it, 10 to 15%. Thanks for the question. Operator: Thank you. Next question today is coming from Michael Schmidt from Guggenheim Securities. Your line is now live. Michael Schmidt: Hey. Good morning, guys. This is Rosie on for Michael. Thanks for taking our questions. Just some questions on Frontline. I guess, longevity succeeding in a frontline PLBCL, you had mentioned that, you know, fifty percent of patients are receiving R-CHOP. But just help us understand how you're thinking about the overall opportunity for Monjuvi in this setting and just positioning versus Polyvi. And then a quick follow-up. I was on the trial, with the IPI eligibility criteria, it seems like the trial would maybe have a higher enrichment of patients with a poor prognosis. So I guess in this context, how should we think about the PFS benefit that you reported and are there any implications here for Monjuvi's potential use across a broader frontline population? Thank you. William Meury: Great questions. I'll have Pablo answer the second question and then we'll double back and answer the first question. Thanks, Pablo. Pablo Cagnoni: So you're correct. The study was focused on patients with IPI three to five, and that is a group with the worst prognosis compared to what has been reported by some of our competitors in the frontline DLBCL setting. I also would encourage you. What we know today, obviously, as mentioned in the script, is that about half the patients are still getting R-CHOP. And the recently introduced competitors in this space do not address the need of all patients with DLBCL. As you know, there's an entire subset of patients here with GCB DLBCL that are not currently addressed by one of the more recent entries in the space. We look forward to showing the full benefit of MONJUVY in this patient population. We think that the benefit in PFS that we reported is very competitive. As you know, the safety profile of Mounjube is very well established in this context. So we'll discuss the results in more detail over the course of the year. But we're very encouraged by what we're seeing across the entire spectrum of patients on DLBCL with IPI three to five. I'll just make a couple of comments, and then I'll ask Mohamed Issa, who runs Manjoovi, to finish up. Right now, we're going to have, by the '26, early '27, a three-indication product. And we'll finish this year somewhere in the range of the mid-$200 million. With an indication of frontline DLBCL, and I don't see it as a fight to the death between Polyvia and Manjoovi. We have a very positive study in frontline DLBCL with clear separation in terms of PFS. It's simply an intensification strategy with Manjoovi being added to LEN and R-CHOP versus a substitution or replacement strategy with Polyvi. And so there's incremental revenue associated with Manjoovi that will support building this core business in 2030 to $3 to $4 billion. Mohamed, do you have anything to add? Mohamed Issa: Yeah. Thanks. Thanks, Rosie, for the question. First-line DLBCL represents the largest potential opportunity for Manjoovi with approximately 30,000 patients treated annually. And fifty percent of those patients, as was mentioned, are still being treated with R-CHOP today. And as William just described, Mounjeevi is an addition to R-CHOP versus replacing R-CHOP. And as Pablo mentioned, the full spectrum of efficacy across all different types of patients with the PFS benefit that has been communicated, I think positions Manjoovi not just for short-term growth, but continues to make Manjoovi a meaningful contributor as you heard from William and others around our growth story in 2029 and beyond. Thanks for the question, Rosie. Operator: Thank you. Next question today is coming from Eric Schmidt from Cantor Fitzgerald. Your line is now live. Eric Schmidt: Thanks for my question. Maybe I'll ask about 890, your bispecific for colorectal cancer. Are we going to see any additional phase one two data in 2026? And does the pivotal study have an interim analysis? Thanks. William Meury: Thanks, Eric. Pablo, do you want Steven to take that? Pablo Cagnoni: Yes. Eric, good morning. So, yes, you will see additional data over the course of the year. That program, as I mentioned in my prepared remarks, was initiated. The phase three study was initiated already. We're in the process of expanding the footprint. We have identified more than 200 sites globally to execute this study, and we look forward to sharing updated data both in combination with falxpivacizumab as well as other combinations that we are implementing for that program. So you'll see more data over the course of the year. We'll give more clarity on the specific timing of those as the year progresses, depending on submissions to different conferences. Operator: Thank you. Next question today is from Salim Syed from Mizuho. Your line is now live. Eric Lavington: Hi. This is Eric Lavington on for Salim Syed. Thanks for taking our question. I was just wondering if we could get a little bit more color on the Opsilura in PN and why the FDA was asking for another phase three or recommending it. If that has any read-through to the Opsilor in HS or if it per chance might have to do with trial designs for, you know, HSPN. Thanks. William Meury: Great. Thanks for the question. Steven Stein will answer that for you. Steven Stein: Eric, thank you. You asked a few questions related to both PN and HS. So just in Pablo's prepared remarks, if you remember, we conducted two large Phase 3s in prurigo nodularis. The one study was positive and statistically significant. The second study just missed. Based on comments during the year that the FDA made, we approached them if their combined analysis could suffice to get across the finish line. Because we have conducted two studies and one was negative, they strongly recommended that an additional trial, a third study, would be needed in the setting and would obviously have to be positive to get it across the finish line. So it's a unique situation where we had two studies, one positive, one negative. And as Pablo said, that's why, you know, the program's currently paused while we debate whether or not to conduct an additional study. There is no read-through to HS. In our HS studies, we're doing standard regulatory development. Again, two large phase threes accruing very well. As you know, our proof of concept data is very strong there. And, obviously, we want those studies to be positive and get across the finish line. I don't know if Pablo wants to add anything else. Pablo Cagnoni: No. I just I will just add just a small comment on PN. While the second study did barely miss the primary endpoint of itch, it was very positive for the investigator global assessment of treatment success. So we're convinced that Opsalura has strong efficacy in patients with prurigo nodularis. As I mentioned in my prepared remarks, we paused further development there. We're discussing whether we will or will not do an additional trial to try to support that indication. I obviously agree with Steven. I don't think there's any read-through to the HS indication. William Meury: Thank you for the question. Operator: Thank you. Next question is coming from Salveen Richter from Goldman Sachs. Your line is now live. Salveen Richter: Good morning. Thanks for taking my question. Could you speak to the M. KLR bispecific here? You've guided to Phase I data next year. Maybe tell us more about this asset and how it could be differentiated from your current MKLR program. And then on June, where we'll see initial phase one data in the second half, is your current level of conviction for this asset? Walk us through the profile you want to see here to make that go, no-go decision. Thank you. William Meury: Thanks, Salveen. Pablo will take that. Pablo Cagnoni: Thank you, Salveen. Good morning. So let me take first the CALAR by CD three bispecific program. So that study is really now accelerating. So we're very encouraged that enrollment is going well. As you might remember, we designed our CALAR by CD T cell engager bispecific purposefully with the KALR arm binding to a different epitope from our KALAR antibody. The reason for that is, obviously, if patients for some reason do not respond to the KOLAR antibody, there would be ideal targets for the bispecific. Now in terms of understanding where exactly we'll place the bispecific in the treatment paradigm for patients with MPNs, I think it's too soon for me to elaborate too much there. We believe that there might be some patients that require a more potent approach or that require a molecule that produces faster responses or perhaps that after initial responses to the cholera antibody for some reason progress. As we generate the efficacy data that we will have next year for the bispecific, we will get more clarity on the working position in the treatment paradigm in patients with MPNs. As you know, and I reiterated at ASH last year, our goal by the end of the decade is to have a treatment solution for every single patient with MPNs. That's why we think that bispecific could play a role. Now in terms of the V six seventeen F program, we remain fully convinced that if you hit this driver mutation, the V six one seven M mutation patient MPN, if we hit it hard enough, we will get the same type of outcomes that we saw with the color antibody in MFNET and ET. This is a driver mutation. We have a small molecule inhibitor. We have a very strong preclinical package that we present repeatedly. And we believe that if we hit it hard enough, we will get the same kind of transformative clinical effects and molecular effects that we saw with nine eighty nine. We just need to generate that data. We are now entering the clinic with a new formulation that we've discussed recently, a solid dispersion formulation. We will have data later this year. Once we have that data, we'll tell you what the next steps for the program are. William Meury: And, Pablo, also the key is that with six one seven F, we'll cover three MPNs: MF, ET, and PV. Not just MF and ET. And the mutation frequency, as you know, Salveen, is two times, three times what it is for CalR. And so you'd essentially, with six seven, cover 80% of MF, ET, and PV. Operator: Thank you. Our next question today is coming from Jay Olson from Oppenheimer. Your line is now live. Jay Olson: Oh, hey. Thanks for taking the question. As you plan your 12 D PDAC study, can you share your thoughts on the trial design and how are you viewing the competitive landscape that's evolving in PDAC and potential advantages for your program? And do you plan to run any additional phase three studies beyond PDAC? William Meury: I'm going to have Steven comment on the trial design, then I can come back with the competitive landscape and the expansion of this program. Go ahead. Steven Stein: Yes, Jay. Thank you for the question. So as Pablo said in the updated ASCO GI, we had that thirty-seven percent response rate. We're very encouraging data on duration of response, potentially a read-through. Duration of treatment to PFS. So we're really encouraged. I think the second really important point there was the ability to combine our twelve D inhibitor with both standard of care chemotherapy regimens in the frontline. So gemobraxane plus modified fulforinox and the ability to deliver those regimens with the dose. So you can read through to that. Obviously, the study will go up on quintiles.gov as soon as it's open. And we intend to do a first-line study in combination with both chemotherapy regimens. We'll stratify accordingly, probably be 50-50% approximately each use, and then it'll be a comparison to the chemotherapy with standard time to event endpoints. We may look at things along the way in terms of response rate, etcetera, but it's a time to event study in that setting. In terms of other studies beyond PDAC, obviously, this is a compound that we really like. I just alluded to the activity in PDAC. We have interesting activity in other tumor types where 12 D is important, like colorectal cancer, and lung, etcetera. So stay tuned to developments there. And including in PDAC as well, there's potential to potentially do things like adjuvant or neoadjuvant studies as well, which, you know, we'll outline as soon as we're ready to do so. So it's an important compound to us. We, you know, may well be the first 12 D to get across the finish line in terms of mutation-specific therapy in a large tumor with massive unmet need and the ability to combine with both first-line standards of care chemotherapy. William Meury: Thanks, Steven. And, Jay, just regarding the competitive landscape, and I think this is true not just for seven thirty four or G12D, but also TGF beta by PD one. Both these cancers' response rates are low, survival times are short. And there haven't been novel treatments in the frontline setting in decades. G12D as a target was the Everest of oncology. TGF beta by PD one, no one's cracked the code. Now we have to convert phase one to phase three. But I don't think this is about competition. These are the largest wide-open white spaces in cancer. We could be first or early in pancreatic, and we could be first and only in colorectal. So right now, we have to execute this program. And as Pablo talked about and Steven, expand these programs. And we have the capabilities and the resources to maximize both assets. If we ever needed a partner, we would think about that carefully, expand our geographic reach, and we would do it on our terms. But we are sort of locked in on both of these, and I think competition is less important in phase three, execution is most important. Operator: Thank you. Our next question is coming from Matt Phipps from William Blair. Your line is now live. Madeline: Great. This is Madeline on for Matt Phipps. Thanks for taking our question. On POVO in HS, did the pre-NDA discussions with the FDA discuss the potential to include biologic-naive patients in the labeled indication? Thanks. William Meury: Yeah. Thank you for the question. I'll let Steven Stein answer it. Steven Stein: Yes, obviously, our study included both populations, pre-biologic and post-biologic. In fact, about thirty-three to thirty-six percent of patients had biologic exposure. You saw the activity, which we updated during the year, you know, showing extremely encouraging Hiscar response rate that increases over time. Excellent pain control upwards of seventy percent of patients over time, having little to no pain, and excellent data on draining tunnel. And that includes both populations. The post-biologic activity is a little higher. We submitted the NDA as we alluded to in our remarks, and that'll be by the end of this first quarter, should be signed off by the FDA. And we are seeking a label in both populations. Operator: Thank you. Our next question today is coming from Judah Farmer from Morgan Stanley. Your line is now live. Parth: It's Parth on for Judah. Thanks for taking our question. We just wanted to get incremental color on expectations for the nine eighty nine readout in frontline MF later this year. What are you guys looking for in order to kind of move forward in that setting? Thank you. Pablo Cagnoni: Great. So by the second half of this year, we'll have a pretty substantial dataset in patients with previously untreated myelofibrosis. And we're randomizing patients to nine eighty nine versus a combination of nine eighty nine ruxolitinib. So we'll have a very good understanding of what the efficacy is in that population. Now let me make something very clear. I believe the data we have today with nine eighty nine that we presented at ASH, that we have with nine eighty nine mostly previously treated patients with MF, a little bit of naive patients that were not eligible for Jakafi. I am convinced that the efficacy and safety of nine eighty nine will support development in the first-line setting. We do need the dataset that we'll present later this year in order to discuss with the FDA how to design and implement the phase three trials. But I am fully convinced that this medicine will be developable in first-line MF. And we'll give you more clarity later this year. Operator: Thank you. Next question today is coming from Andy Chen from Wolfe Research. Your line is now live. Brandon: This is Brandon on for Andy. Thanks for taking the question. Regarding the XR, any preliminary conversations with payers on formulary access? Or early signs that give you confidence on the eventual launch here? Thank you. William Meury: Yeah. It's a good question. We absolutely have had conversations with every major PBM. Here's how I would think about it. I think that Jakafi is the perfect product for an XR formulation. Because if you think about it, it treats a chronic symptomatic disease. The twice-a-day drug with a three-hour half-life. And we know that once-a-day formulations produce an adherence gain of 15 to 25%. So there is a medical reason why this product should be put on formulary. That's point number one. Point number two is we have to set a price that makes sense for the PBMs and the health plans for the patients, and for Incyte. And there is a price point that's going to make sense. We think about it in three contexts. One, is what is the net cost of the plan? Two, what is the coinsurance and patient out of pockets? And then three, what will be rebates? Now a new product, your goal is to get 80 to 100% coverage. With an extended-release formulation like Jakafi, you're probably not going to reach into that top tier of formulary coverage. But we should get enough formulary coverage to enable a conversion rate of 10 to 30%, pick the midpoint. Most of '26 will be about that. You'll start to see meaningful conversion in 2027. Thanks for the question. Operator: Thank you. Next question today is coming from Evan Seigerman from BMO Capital Markets. Your line is now live. Evan Seigerman: Hi, Thank you so much for taking my questions. When you're thinking about the Phase III HS data for OPSILURA in 4Q, talk to me about how you plan to manage the placebo response to this trial, especially with it being tested in kind of the mild to moderate patient population, which you could have a more exaggerated dynamic with the placebo. Thank you, guys. William Meury: Thanks, Evan. Go ahead, Steven. Steven Stein: Yeah, Evan. Thanks for the question. You're right. So when you have a lower burden of abscess and nodules, you can get an inflated placebo response rate. The two ways we're managing that in the phase three are a larger study, a greater n, and then setting the minimum number of requirements on abscess and nodules, which should manage an artificial placebo response rate. And then also looking at higher rates of Hiscar control, like Hiscar 75. So all of the above, larger study, minimum number of abscess and nodules, and a higher Hiscar control rate, and then, obviously, two studies as well. And that's the main ways we're trying to control the placebo response rate. Thanks. Operator: Thank you. Next question is coming from Derek Archila from Wells Fargo. Derek Archila: Hey, good morning. Thanks for taking the questions. Just quickly, so how much revenue contribution from RUX XR are you really baking into the Jakafi guide? And I just wanted to clarify. So you highlighted 30% penetration for Jakafi in PV right now. I guess, what level do you think you can get to before LOE? Thanks. William Meury: As it relates to the guidance for 2026, there's no incremental revenue associated with XR in that number. And so we expect that Jakafi in '26 between MF, PV, and GVHD will grow in the high single digits, and there is going to be some modest price actions, and that gets us to the current guidance. When you think about this business over the next three years, the two indications that are growing at a double-digit rate are PV and GVHD. And I would look at this as a, you know, mid maybe mid to high single-digit grower between now and 2028, the '28 when we actually transition and generics are introduced. I think it's the best way to model and think about the business. I think I've been pretty consistent about how to think about Jakafi. And as it relates to conversion, if we can pick up, take the midpoint 20%, you're going to have almost a quarter of $1 billion sitting at XR when we get to the twenty-ninth year. Thank you. Operator: Thank you. Next question is coming from Brian Abrams from RBC Capital Markets. Your line is now live. Brian Abrams: Hey, guys. Good morning. Thanks for taking my question. So on September, now that you have some alignment with the FDA, I was wondering if you could give us a sense of just the potential volumes and injection times that you're going to be testing for the subcu bioequivalence study. And maybe talk about the most probable path for integrating the subcu into the broader program and potential timelines there. Thanks. Pablo Cagnoni: So let me make a couple of comments on the subcu development. And it's a little bit early for me to answer your question with a lot of precision, so let me try this. The study will test the first thing we need to is what's the bioavailability of the formulation that we're going to test sub q. We obviously have preclinical data, but now we need human data to really understand exactly what that is. So that's point number one. The second, and as I mentioned, related to the first phase three trial in second-line ET is we need to align with the FDA, which we'll do this quarter, on the dosing strategy for patients with ET. Once we have those two pieces of data, bioavailability of the subcu formulation, and dosing strategy, I will be able to answer your question about volume and infusion time. As you remember, we signed a collaboration with Enable late last year, I believe in October, to use their infused device, which will allow very high volumes of infusion by the patients at home without the need to go to the doctor's office. It's a self-applied device. It takes about ten, fifteen minutes, and the patient does it without, you know, without any major discomfort. It's not a device the patients have to work continuously. They just do it during the time of infusion, and then they can remove it and throw it away. So we believe that that device will give us the alternative to really have a very simple subcutaneous infusion experience for patients, pretty much regardless of the dose. But in terms of specifics, we need a little bit more data to fully answer the question. We'll have that data over the course of the year. Operator: Thank you. Our next question is coming from Steven Willey from Stifel. Your line is now live. Steven Willey: Yes, good morning. Thanks for taking the question. On the mutant selective JAK inhibitor, I know you've made some comments recently about 35 being the exposure target that's needed to seek clinical benefit. Can you just elaborate on why you think that's the right target exposure if that's somehow limited by cross-reactivity on wild type and just whether you think the new formulation can get you meaningfully higher than IC 35? Thanks. Pablo Cagnoni: Yeah. It's an excellent question. So the reason for the IC 35 focus with the o five a program is because that's specific to o five a. It's not about the target. It's about the selectivity of the molecule that we have in the clinic. And that's what the animal model data suggests. That there is a window, the ideal window of selectivity between the effect on the mutant in the v six one seven mutant and the wild type is around the IC 35. So we believe that with the current formulation, based on preclinical data, we should be able to achieve that level of exposure. That question will be answered relatively quickly over the course of this year. And we believe we'll then have clinical data in the second half of 2026. But the IC 35 is related to the selectivity of the molecule. Now as I mentioned, I think towards the end of last year, we reiterated at JPMorgan earlier this year, we do have backup programs in this space. We are fully committed to this target. We believe hitting this target hard will translate into clinical benefit in this patient. So whether it's 58 in the second half of this year, we'll provide clarity on addressing this target or one of the backup programs remains to be seen, but we're fully committed to answering this question. Operator: Thank you. Our final question today is coming from Srikripa Devarakonda from Truist Securities. Your line is now live. Srikripa Devarakonda: Hey, guys. Thank you so much for taking my question. I wanted to just get your expectations for provercitinib in asthma with the phase two readout coming up. And also, you can help us understand where you see a place for this drug in the therapeutic landscape. Is it pre-biologic oral or for patients who are refractory? I know it's a little early ahead of the data, but any color you can give would be helpful. Thank you. William Meury: Yeah. I'll take the second part of your question, which I think relates to povastatin and HS. And then I'll turn it over to Pablo. I think the key here with povastatin is to think about what's happening in the obesity market right now. An oral pill. There is a lot of energy around Wegovy. Now I'm not suggesting that HS is like obesity. But there's a couple hundred thousand people in the United States being diagnosed and treated with HS. Only about twenty-five percent of those patients are taking an advanced systemic, and the only advanced systemics available are the IL-17s and TNFs. That's fifty thousand people. A hundred and fifty thousand people using products that are not approved for HF, antibiotics, and steroids. Our ability to drive sales of povastatin is to get to that group, that 75% of the market, where they haven't advanced to a biologic, they're not getting complete control with an antibiotic or a steroid. And so I think the path here is to get to this pre-biologic population, and 70% of our data are in that population. POVO is tailor-made for this group of patients, and I do expect that there'll be a great deal of trial and adoption. Once that happens, there's, of course, the post-biologic, and half the people that are on IL-17 don't get a full response, and so there are going to be patients there. The next thing we have to do as a company is create an experience for patients or physicians and make it easy to get the product. And that means making sure we verify benefits, we get the time to first fills really short, we clear PAs, and we reduce the abandonment rate. And if we do those two things, povastatin is going to be a major driver of revenue for this company in HS. And then, of course, you layer in PN and vitiligo, and we have a very sizable product. That's how I would think about it. If you want to turn to the asthma piece, Pablo Cagnoni: So, look, we know from all the data that we've been generating over the past several years across a range of indications that povastatin is a very strong, very potent anti-inflammatory medicine. In that context and knowing that asthma is an inflammatory disease, I think there's a strong rationale. There was a strong rationale when the study was started to develop over significant asthma, particularly in patients, obviously, that don't respond to inhaled corticosteroids or long-acting beta agonists, and particularly in patients with low eosinophilic asthma. Now we are conducting a well-designed randomized phase two study. We will have the data later this year. And based on that, we'll decide next steps. But, obviously, there was a strong scientific rationale to do that, and we look forward to sharing the data later this year. Operator: Thank you. We've reached the end of our question and answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Lauren Morris: Good day, ladies and gentlemen. And welcome to the Medpace Holdings, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' remarks, there will be a question and answer session. If your question has been answered or you would like to remove yourself from the queue, simply press star 11 again. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Lauren Morris, Medpace Holdings, Inc.'s Director of Investor Relations. You may begin. Good morning. Lauren Morris: And thank you for joining Medpace Holdings, Inc.'s fourth quarter and full year 2025 earnings conference call. Also on the call today is our CEO, August Troendle, our President, Jesse Geiger, and our CFO, Kevin Brady. Before we begin, I would like to remind you that our remarks and responses to your questions during this teleconference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and uncertainties as well as other important factors that could cause actual results to differ materially from our current expectations. These factors are discussed in our Form 10-K and other filings with the SEC. Please note that we assume no obligation to update forward-looking statements even if estimates change. Accordingly, you should not rely on any of today's forward-looking statements as representing our views as of any date after today. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior or replacements for the comparable GAAP measure. But we believe these measures help investors gain a more complete understanding of results. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call. The slides are available in the Investor Relations section of our website at investor.medpace.com. With that, I would now like to turn the call over to August Troendle. August Troendle: Good day, everyone. Cancellations were elevated again in Q4. Backlog cancellations in absolute and percent terms were the highest they have been in over a year. This resulted in a lower than anticipated net book-to-bill ratio of 1.04. The good news is that with a backlog conversion rate of 23.6%, our book-to-bill rate does not need to be very high to generate growth. I see no reason to expect the higher level of cancellations to continue but did not anticipate the spike in Q4. Only time will tell. Good opportunities continue to present themselves and I rate the overall business environment as adequate and headed in the right direction. Jesse will now make some comments on Q4 and the year. Jesse? Jesse Geiger: Thank you, August. Good morning, everyone. Revenue in 2025 was $708.5 million, which represents a year-over-year increase of 32%, and full year 2025 revenue was $2.53 billion, a 20% increase from 2024. Net new business awards and backlog in the fourth quarter increased 39.1% from the prior year to $736.6 million, resulting in a 1.04 net book-to-bill. For the full year 2025, net new business awards were $2.65 billion, an increase of 18.7%. Ending backlog as of December 31, 2025, was approximately $3 billion, an increase of 4.3% from the prior year. We project that approximately $1.9 billion of backlog will convert to revenue in the next twelve months. And our backlog conversion rate in the fourth quarter was 23.6% of beginning backlog. With that, I will turn the call over to Kevin to review our financial performance in more detail and discuss our 2026 guidance. Kevin? Kevin Brady: Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $708.5 million in 2025. This represented a year-over-year increase of 32%. Full year 2025 revenue was $2.53 billion and increased 20% from 2024. EBITDA of $160.2 million increased 20% compared to $133.5 million in 2024. Full year EBITDA was $557.7 million, an increase of 16.1% from the comparable prior year period. EBITDA margin for the fourth quarter was 22.6%, compared to 24.9% in the prior year period. Full year EBITDA margin was 22% compared to 22.8% in the prior year. EBITDA margins were impacted by higher reimbursable cost activity driven by therapeutic mix. In 2025, net income of $135.1 million increased 15.5% compared to net income of $117 million in the prior year period. For full year 2025, net income was $451.1 million compared to $404 million in 2024, which represents an 11.6% increase. Net income growth below EBITDA growth was primarily driven by lower interest income compared to the prior year period, as well as a slightly higher effective tax rate. Net income per diluted share for the quarter was $4.67, compared to $3.67 in the prior year period. For the full year 2025, net income per diluted share was $15.28 compared to net income per diluted share of $12.63 in 2024. Regarding customer concentration, our top five and top ten customers represent roughly 25% and 35%, respectively, of our full year 2025 revenue. In the fourth quarter, we generated $192.7 million in cash from operating activities, and our net days sales outstanding was negative 58.7 days. As of December 31, 2025, we had $497 million in cash. For full year 2025, we repurchased 2.96 million shares for $912.9 million. At the end of the year, we had $821.7 million remaining under our share repurchase authorization program. Moving now to our guidance for 2026. Full year 2026 total revenue is expected in the range of $2.755 billion to $2.855 billion, which represents growth of 8.9% to 12.8% over 2025 total revenue of $2.53 billion. Our 2026 EBITDA is expected in the range of $605 million to $635 million, representing growth of 8.5% to 13.9% compared to EBITDA of $557.7 million in 2025. We forecast 2026 net income in the range of $487 million to $511 million. This guidance assumes a full year 2026 effective tax rate of 18.5% to 19.5%, interest income of $24.3 million, and 29.2 million in diluted weighted average shares outstanding for 2026. There are no additional share repurchases in our guidance. Earnings per diluted share is expected to be in the range of $16.68 to $17.50. Guidance is based on foreign exchange rates as of December 31, 2025. With that, I will turn the call back over to the operator so we can take your questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. In fairness to all, we ask that you please limit yourselves to one question and one follow-up. One moment while we compile our Q&A roster. Our first question will come from the line of Max Smock with William Blair. Your line is open. Please go ahead. Christine Raines: Hi. Great. It's Christine Raines on for Max Smock. Thanks for taking our questions. So the first one is, what is embedded in your guidance for revenue growth excluding pass-throughs? Last quarter, I believe you alluded to high single-digit to low double-digit direct fee revenue growth in 2026. But wondering if your growth expectations for this component are now higher given your strong EBITDA guide and also what you expect the cadence of this revenue growth to look like? Kevin Brady: Yeah. Hi, Christine. This is Kevin. We do not provide guidance on direct service revenue. What I can tell you, though, is that from a reimbursable cost expectation, it's consistent with what we shared back in October and that we expect it to be in the 41% to 42% of revenue in 2026. So slightly higher than what we finished here this year. From a cadence standpoint, nothing I would call out in particular. I would say in terms of revenue, I do expect that reimbursable costs will start the year higher as a percentage of revenue than when we end the year. And so that being said, I do expect maybe some flatter top-line growth throughout the quarters than what we have experienced in past years. Christine Raines: Great. That was really helpful context. Then I noticed the acceleration in headcount growth in the quarter. What do you expect headcount growth to be in 2026? Should we expect this mid-single-digit growth cadence to continue, or will you need an acceleration in hiring to support your 2026 outlook? Thanks. Jesse Geiger: Hi. It's Jesse. We do expect accelerated growth. We anticipate hiring in 2026 to be above 2025 levels, somewhere in the mid to high single-digit growth area. Christine Raines: Great. Thank you so much. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is open. Please go ahead. Justin Bowers: Hi. Good morning, everyone. Just was hoping you could sort of unpack the business environment and the commentary in the prepared remarks. Like, are you quantifying RFP activity or win rates? And then also, there seemed to be a pretty good funding quarter in the funding environment in the quarter as well. So can you just help us understand that? August Troendle: The business environment was, as I said, reasonably good. RFPs, if they matter, were up a bit, both quarter over quarter and year over year. But I do not think there's anything really to call out beyond that. It was a higher cancellation rate that led us to miss. Our gross bookings have again been substantially better than last year, and I think doing fine overall. Justin Bowers: Okay. Is there any way to help us understand if the cancellations were normal, what the net bookings would be, and then with those cancellations, could you help characterize those a bit more? Was it in any therapeutic area, or customer area, vintage? August Troendle: No. Cancellations were a little bit skewed towards the metabolic area. It's been growing quite a bit, so there were a higher level of cancellations there. Overall, bookings have continued to be, you know, oncology is our strongest. Metabolic is still there, but there were some elevated cancellations. So it was kind of otherwise relatively normal. I do not have a, you know, we're not providing what the booking would have been. We do not give gross bookings. We're just netting them out, but the kind of directional magnitude of cancellations. But they would have been substantially higher if we had cancellations in a nice range. Justin Bowers: Okay. Thank you. I will jump back in the queue. Operator: Thank you. One moment for our next question. Our next question comes from the line of Ann Hynes with Mizuho Securities. Your line is open. Please go ahead. Ann Hynes: Thank you. I just want to ask some more questions on just the cancellations. Can you remind us what your historical range is and maybe what it was this quarter versus maybe the height that you saw in 2024 and early 2025? And again, I think the past few quarters, cancellations have been very stable. Is this driven by, like, maybe the competitive environment? M&A? Is it widespread, or is it just maybe one big client canceling something? So any more details would be great. August Troendle: Sure. No. It's widespread. There was no single or couple of very large projects that canceled. It was just a higher level of cancellations overall. Comparable to the past year, it was the highest level of cancellations out of backlog. If you combine backlog and kind of our entire portfolio, I think Q1 was a little bit worse because we had such a high cancellation among projects that had been awarded but were not yet recognized in backlog. But it was a high level overall, and again, pretty widespread. I do not know the, and I have no, there's no pattern to it. It was just kind of the usual random stuff that was very heavily concentrated. Ann Hynes: And then your revenue growth, maybe what are you assuming just cancellation trends for the remainder of the year? And I know burn rate was very strong. Maybe what's the driver of that? And what are you assuming in guidance for the rest of the year for burn rate? August Troendle: We do not guide the burn rate. Kevin Brady: Right. Kevin, you want to say something? Kevin Brady: Yeah. No. To August's point, we do not guide to a burn rate. It's just not something that we do. Ann Hynes: Alright. Thanks. Operator: Thank you. One moment for our next question. Our next question comes from the line of David Windley with Jefferies. Your line is open. Please go ahead. David Windley: Hi, good morning. Thanks for taking my questions. August, I wanted to kind of philosophically ask around therapeutic area concentration. You mentioned oncology being very strong and metabolic right behind it. And as people have seen and you've highlighted, metabolic has been on this very steep growth ramp. I guess, to me, the difference between those two areas is, like, oncology is spread across tens, if not hundreds, of different kind of micro indications, and metabolic seems to be very concentrated in diabetes and obesity. And so I wondered how you think about the concentration risk in metabolic and the crowding and the potential for cancellations like you apparently just saw because people say, you know, don't have enough differentiation. August Troendle: Yeah. And, you know, another big area is NASH. And there are a few others that, you know, for us are meaningful. But, yeah, it is, you know, of late heavily kind of toward the obesity, diabetes area specifically. I do not think we're at a level of overconcentration that, you know, that's a big worry. It will be decreasing as a percent of our revenue next year, I think. So I think it's going to kind of somewhat normalize, you know, head towards a more normal range, but I do not really see that as a big risk for us at this time. Does that answer your question, Dave? David Windley: I think it does. Yeah. I think it does. Thanks. I guess in exploring the pass-throughs, I think I understand that these metabolic trials carry relatively high pass-throughs. And so it seems to track that your rapid growth in metabolic has also then contributed to the rapid growth in pass-throughs as a percentage of revenue. And I think Kevin kind of referenced this. And maybe, you know, the cancellation in Metabolic is also what makes that moderate as you go through the year. Is that right? August Troendle: Yeah. Exactly. That's right. I mean, in terms of, you know, pass-throughs, have been driven largely by our metabolic programs. And, you know, we do expect them to, you know, start to normalize in this next year. And it does provide a headwind overall revenue growth, but it'll be more direct revenue, I guess. Which is fine. So, yeah, I think that's correct. David Windley: Got it. And if I could just sneak one clarification on this end. To what extent, you know, like, pass-throughs have outstripped your expectations in 2025. To what extent is that underlying, like, site level inflation and things like that that you're having to rebudget and add, and therefore, those adjustments are kind of going directly into backlog and right into revenue and kind of the pass-through outstripping is what's driving this higher burn rate. How much would you attribute to that? August Troendle: Almost none. You know, I think this is not an issue of, you know, sites changing, getting more, you know, these were known to be very high pass-through projects, you know, going in. You know, they're just the design of the project is just very heavy on investigator fees. And, you know, I think, you know, the characteristics of the, you know, stage of the project and, you know, what is burning overall in our backlog does cause our conversion rate to shift around quite a bit. As we get other projects that don't have as much, you know, relatively short duration, high, you know, burn that are being added, you know, have been awarded, you know, quarter to quarter. But it's not, I think, just the addition of pass-throughs. You know? It's the study itself. You know? Yeah. Has been opened up. You know? And there were some, you know, issues with, you know, recognizing it in backlog because of uncertainty of the program stuff. Those relatively short-term programs come on, okay, you got to get awards and they burn rather quickly. You know, I think that will normalize over time, and it is driven partly by the metabolic studies that we have. But not specifically because of a, you know, a change in the expectation, sites. David Windley: Okay. Thank you. Appreciate to ask your question. Thanks. Operator: Thank you. One moment for our next question. Our next question will come from the line of Charles Rhyee with TD Cowen. Your line is open. Please go ahead. Charles Rhyee: Yes. Thanks for taking the question. Maybe just two clarifications if I could. Kevin, you mentioned earlier that you expect pass-through revenues to be higher at the start of the year than at the end of the year. Does that suggest that you expect a lower metabolic mix as you exit '26? And then second question being, and maybe just a little bit of follow-up to David's question, the way I understand how you think about what goes into backlog versus when you talk about stuff getting canceled out of pre-backlog. So cancellations were broad-based but elevated. Were these cancellations less about funding and maybe more from either trials failing or decisions by sponsors to abandon programs? Kevin Brady: Maybe I'll take your first question, Charles, just in terms of, you know, reimbursables, and, you know, I do expect it to start the year higher. So, yeah, to August's comments, we do expect some of that metabolic shift to slow down a little bit. I wouldn't say it's materially so, but we do expect it to slow down a little bit. What was your second question, Charles? Charles Rhyee: Oh, yeah. It's just trying to understand, you know, you've talked about backlog versus pre-backlog. And my understanding was that pre-backlog cancellations is, you know, perhaps more of a funding issue. If something's canceling out of backlog itself, that's probably more of a, is that more of an issue that other trial may be, you know, wasn't successful or, you know, or sponsors actually decide to abandon a program. August Troendle: Yeah. I mean, that's the case. You know, things that, you know, start up, they restructure. They change. They decide to end study early. So there were a number of studies that ended early because of compound performance. So, yeah. I don't, but I don't think there was, there was no, like, pattern, and it wasn't just one or two very large projects. Charles Rhyee: Okay. Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Sean Dodge with BMO Capital Markets. Your line is open. Please go ahead. Sean Dodge: Maybe just on guidance. If you could help us with some of the margin puts and takes. At the midpoint, you have about 10 basis points of margin expansion for the year, and that's despite I know you all said accelerating hiring for the year, maybe a bit higher percentage. For the year of pass-throughs. How much pressure do you expect those to create? And then the offsets, is it just predominantly more productivity gains you can drive? And then where are those productivity gains expected to come from? Is technology, offshoring, something else? Kevin Brady: Yeah. Just and maybe just in terms of, you know, our guidance range, you know, kind of at the midpoint, it assumes kind of normal cancellation rates. As Jesse mentioned, from a hiring perspective, we expect to be in the mid to high single digits, which is lower than the expectation on revenue growth. And so what's driving that is just, you know, continued expectation that we continue to see good retention throughout 2026, which enables the productivity that we've seen, you know, throughout 2025 and exiting 2024. So it enables us to hire higher but at a slower rate. So it's not that I would say that we've got major cost savings initiatives that are out there or certainly not planning on restructuring. We always look for ways to operate in a more efficient way. And so that contributes to some of that margin improvement around the edges. But by and large, it's going to be driven by just slower hiring ability on good retention. August Troendle: And, you know, utilization overall. You know, we also have laboratory operations, which are not huge, but, you know, utilization lab is up. You know, test. So, you know, it's across the board. We've had good productivity. Sean Dodge: Okay. Thanks. And then maybe just one on AI since perceptions around that have had a pretty big impact on the space over the last week or so. Just maybe any thoughts you can share on, you know, how big of a technological step change you think this is for the space over the next few years? And then, you know, to what extent you think that's a longer-term net positive or negative for Medpace Holdings, Inc.? And, you know, how are you all positioning? Are you a little bit more insulated just given the, you know, the kind of the nature of your client base? How are you positioned for this? Are you investing around that? August Troendle: Yeah. I'll address it a little bit. Look, I think it's too early to know what kind of changes. You know, I do think that they will occur slowly. I would not anticipate really any productivity advantage, you know, overall net advantage to AI applications in 2026. And I think that's not because we're not rolling out and doing a lot of things in AI. It's that I think the investment is going to at least equal the, you know, the benefits seen in, you know, in this first year of kind of, you know, rolling out applications. You know, where this goes in terms of, you know, how much productivity enhancement there is, you know, in the long term and what that means to us. I mean, I do think that, you know, the productivity advances are, you know, going to be to the benefit, you know, part is to be rent to the providers of the models, etcetera. But are going to be benefits to clients. And what that means in terms of encouraging more development, etcetera. But, you know, overall, you think on the surface of it, it's a net negative to, you know, a service company that, you know, makes money by providing, you know, staff to, you know, to perform work that is now, you know, made more efficient. But I think that, you know, the timing of this, it's going to take years. You know, just what that means, what the opportunities for us are, you know, are difficult to see. I don't really think we have, you know, you take barriers to prevent, you know, I mean, we're to use AI in a lot of applications. We hope it does improve our productivity. And that means potentially, in the long run, fewer staff need otherwise have. And that means a little bit less revenue than you would have otherwise had at least net revenue. Sean Dodge: Okay. That's very helpful. Thanks again. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Jailendra Singh with Truist Securities. Your line is open. Please go ahead. Jailendra Singh: So outside of the cancellation spike you guys called out, did you also see any slowdown in decision making or business moving from pre-backlog to backlog or within pre-backlog? August Troendle: I'm sorry. Changes between pre-backlog and backlog? Yeah. Just in general in terms of decision making, like, are projects being getting delayed or, like, the way of moving from pre-backlog to backlog is that is the business still moving at the same pace outside of cancellation? August Troendle: Yeah. Look. I think things are moving along pretty well. There isn't at least an incremental, you know, sudden change in, you know, the progression of product. Nothing's seizing up or anything like that. So I think things are relatively normal. You always have cases where some things are held or slowed down for whatever reasons, drug availability, some they're waiting on results or something. There's always reasons why things can progress in the backlog slower than anticipated. They can change the design of the trial. You have to then rework things you get it launched. But I don't see any real trend there. In terms of in the past, sometimes we've seen because of funding a seize up in a lot of things that and prevents them from moving forward. We're not seeing that at this time. Jailendra Singh: Okay. And then my follow-up, just in general, about the competitive landscape as you guys have called out about, like, top three CROs kind of getting more aggressive in the market. Have you seen them kind of continuing to be aggressive in terms of broadening their focus within biotech or in terms of price? Has that had any impact on your win rate? Just give us a little bit more flavor about the landscape in general with these top players getting the space. August Troendle: Yeah. I don't think there's anything to say there. I mean, you know, I know they're more aggressively interested in the space because they say they are. But they've been involved in the space all along, and I don't really see a large change in the dynamic. So it's hard for me to know. I do not perceive a difference, see the same competitors in the space, and it seems to be the same as it was, you know, five years ago. Jailendra Singh: Got it. Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Dan Leonard with UBS. Your line is open. Please go ahead. Dan Leonard: Thank you very much. My first question, it looked like from your disclosure that you had a pretty good quarter in large pharma revenue growth. Was there anything unusual to call out there? And would that be sustainable? Kevin Brady: Yes, Dan. Nothing to really call out. I think it might have changed the percentage point, but nothing to call out there. It's not a focus. Large pharma is not a focus for us. Dan Leonard: Thank you. And a follow-up on that AI topic. August, you mentioned that 2026 is the first year you're rolling out applications. Can you elaborate on that comment? What are you rolling out this year and what do you anticipate, you know, what are you trying to accomplish? August Troendle: Yeah. I don't think we're just gonna Jesse, do you want to comment on that? Jesse Geiger: Yeah. I just say, in general, mean, fall into two categories. You know, one, just a number of different initiatives that are targeted on improving efficiency. You know, and that, you know, the blurry line between, like, what do you call AI improvement that's really, you know, tech-enabled support for different things across the organization that are focused in that category. And then the other category would be, you know, assisting with data analytics for feasibility. On-site selection and helping the team there with, you know, with some AI-enabled tech. That's where we're starting. Dan Leonard: Thank you very much. Operator: And one moment for our next question. Our next question will come from the line of Luke Sergott with Barclays. Your line is open. Please go ahead. Luke Sergott: Great. Thanks for the question here. I just wanted to kind of follow-up on Dave and on the kind of the margin questions. So, you know, as we like, can you help us understand the near-term leverage that you have to pull as a project starts to ramp on? And what I really want to get at is, let's assume you get some type of booking, you know, a year ago, and your assumption is that, you know, these are the types of resources that you're going to need to execute this trial. And as that ramps, it starts to either come out that you can actually use less resources or more resources. I just want to understand, like, your flexibility to ramp here. And this is, I think, important as you think about the overall mix of the bookings and how this has changed from a burn rate and capacity needs as you go, you know, as metabolic and continue to gain share. Kevin Brady: Yeah. I mean, in terms of our, you just remember that in terms of our business model, we like to hire heads because we are a training shop. We like to train and develop our people. And when you've got larger attrition rates, you're having to replace those individuals that are leaving plus onboard new people. And so what we've seen over the last year or so is that with improved retention rates, you're having to do less of that training. You're only training the ones that are coming in. And because of that, you're seeing, you know, more improved productivity because you're spending less time on training and development, and you've got more experienced individuals and staff that are on-site. So continue to operate under that business model of hiring ahead. And we'll continue to do that. But it's at levels that are less than what we had to do, you know, two years ago. So what you're seeing is that productivity and that improved utilization continue to play through for us. Luke Sergott: Alright. Great. And then I guess from your performance obligations over the last, you know, that are over three years long have continued to kind of trend down here off of, like, your peaks of 2024. Obviously, there's most of this probably due to the faster burning business. But anything else going here is, like, is there a change in the duration of these trials or the type of work that's going on? August Troendle: It certainly was a, you know, average change in the duration of our trials because we had this, you know, substantial ramp in metabolic trials, and a number of trials overall that were, but that kind of changes over time. I don't think there's a change in a particular class of trial. I just think it's a change in the mix of trials that we've had, you know, in the last few years, last year particularly. But I don't think there's a long-term trend in terms of trial duration changing for a given indication and, you know, stage of a trial. Luke Sergott: Okay. Great. Thanks. Operator: Thank you. And one moment for our next question. Our next question will come from the line of Michael Cherny with Leerink Partners. Your line is open. Please go ahead. Dan Clark: Great. Thank you. This is Dan Clark on for Michael Cherny. Just wanted to ask about pricing. How did that look in your new awards in 4Q? And how are you thinking about that for 2026? August Troendle: I don't think pricing is, you know, our pricing on net has changed materially over time. So I don't, you know, I don't think it should have an impact on margin. I think our margin is going to be maintained. I mean, given all the other factors, it's not going to be a driver of a margin change. Dan Clark: Okay. Got it. And then just one more on AI. When you're talking to customers or involved in RFPs, what are they kind of focused on, if anything, from an AI angle? Thank you. Justin Bowers: I think more, okay. Go ahead, Justin. Jesse Geiger: I was gonna say it's a balanced conversation. Because we do take a very measured approach to AI. You know, we want to balance the benefits with risk management and ensure that, a, we have quality adoption, and b, that we're not putting any of their information at risk. And so the conversations are kind of twofold. One, you know, what are we doing with AI to help with their studies? And at the same time, how are we being good stewards of data to make sure that we continue with high quality and confidentiality. Operator: Alright. Thank you. And one moment for our next question. Next question comes from the line of Jay Lewis with Baird. Your line is open. Please go ahead. Jay Lewis: Hey, thanks. Appreciate the question. I was wondering if you could give us any more color on the new signings in the fourth quarter, that tranche of business that would have largely moved into your pre-backlog? And could you give any quantification on that pre-backlog and maybe how much it's up year over year or quarter over quarter? August Troendle: Yes. We don't provide details on that. Q4 was a bit light on, as was the prior Q4, but we don't give, you know, exact magnitude on that. Jay Lewis: Okay. And then could you speak to the impacts that you've seen from this accelerating M&A environment with large pharma buying your clients and any impacts that may have had on your revenue, your bookings, or your future revenue projections? August Troendle: I'm sorry. What have a feedback? Jay Lewis: Yeah. Accelerating M&A environment. With large pharma buying some of your clients. August Troendle: Yes. It's obviously a potential. Our clients, a number of our clients have been purchased in the past year, they continue to be. But we have a pretty broad base of clients. So I don't anticipate that to be an issue. Generally, we don't lose the work that we're doing with the client. We generally lose the client long term, and we get incorporated into a large pharma. But generally not a short-term risk. But it happens not infrequently. Jay Lewis: Good. Thank you. Operator: Thank you. And I would now like to hand the conference back over to Lauren Morris for closing remarks. Lauren Morris: Thank you for joining us on today's call and for your interest in Medpace Holdings, Inc. We look forward to speaking with you again on our first quarter 2026 earnings call. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0. A member of our team will be happy to help. Please stand by. Your meeting is Hello, and welcome to today's 2025Q4 Earnings Call. Please note that this call is being recorded, and we are standing by should you need any assistance. It is now my pleasure to turn the meeting over to Jackie McConagha, Senior Vice President of Investor Relations. Please go ahead, ma'am. Jackie McConagha: Good morning, everyone, and welcome to Marriott International, Inc.'s fourth quarter 2025 Earnings Call. On the call with me today are Anthony G. Capuano, our President and Chief Executive Officer, Kathleen Kelly Oberg, our Chief Financial Officer and Executive Vice President Development, and Pilar Fernandez, Senior Director of Investor Relations. Before we begin, I would like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Unless otherwise stated, our RevPAR, occupancy ADR, and property level revenues for comments reflect system-wide constant currency results for comparable hotels, and all changes refer to year-over-year changes for the comparable period. Statements in our comments and the press release we issued earlier today are effective only today and will not be updated as actual events unfold. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks today on our Investor Relations website. As you all know, this is Leeny's last earnings call. There is no doubt that everyone listening has benefited greatly from her leadership, wisdom, and insight. Leeny, thank you for everything. You will be greatly missed by us all. And now, I will turn the call over to Tony. Anthony G. Capuano: Thanks, Jackie, and good morning, everyone. I'll have some comments about Leeny and her incredible career with Marriott International, Inc. at the end of the call. But for now, let's move on to our prepared remarks. Our team produced excellent results in 2025 as Marriott International, Inc. continued to experience solid momentum in our business around the world. With rooms growth as one of the top company priorities, I'm proud that Marriott International, Inc.'s industry-leading global portfolio stood at nearly 1,780,000 rooms across more than 9,800 properties in 145 countries and territories at the end of December. Conversions remained a key driver of growth, contributing around a third of our signings and openings during the year. With an incredibly strong fourth quarter for signings, our team inked nearly 1,200 deals representing 163,000 rooms excluding M&A during the year. At the end of December, our pipeline had grown to a record 610,000 rooms, up 2% from the prior quarter and up 6% from the prior year. Nearly 265,000 of the pipeline rooms were under construction, including rooms that are pending conversion, up 15% year over year. In 2025, 75% of our conversion rooms joined the system and began contributing to fee growth within twelve months of signing. For the full year 2026, net rooms growth is expected to accelerate up to 4.5% to 5%. Our intent to recommend scores rose in every region around the world, and we continued to gain market share with RevPAR index globally year over year. Full year global RevPAR rose 2%, with RevPAR in the US and Canada rising 0.7% and international RevPAR increasing over 5%. Leisure and luxury led the way, with leisure RevPAR up 3%, while group RevPAR rose 2% and business transient RevPAR was flat for the full year. Full year luxury RevPAR increased over 6% while select service RevPAR declined 30 basis points. Our portfolio is well-positioned to benefit from continued expected strength at the upper end as higher-end consumers remain resilient and continue to prioritize spending on experience and travel over goods. 10% of our open rooms globally and 10% of our pipeline rooms are in the luxury segment. Turning to the fourth quarter, we were pleased that worldwide RevPAR ended up at the high end of our guidance range. RevPAR increased 1.9% thanks to a strong end of the year, with December RevPAR coming in well ahead of our prior expectations. December global RevPAR rose 2.8%, showing the strongest monthly year-over-year growth since February, led by strong leisure demand, particularly for our luxury and resort hotels. By region, fourth quarter RevPAR was again strongest in APAC, which continues to benefit from double-digit rooms growth as well as solid macroeconomic growth in many countries. Fourth quarter RevPAR in APAC increased nearly 9% with growth broad-based across the region and double-digit RevPAR gains in key markets including India, Japan, and Australia. Fourth quarter RevPAR in EMEA rose 7% with strong growth across most of the region led by 17% growth in The UAE. RevPAR in CALA rose over 2% as resilient leisure demand, especially during the festive season, was partially offset by the impact of comparisons to some citywide events in 2024. City Express hotels across the region are benefiting from being integrated into our ecosystem and are performing very well, contributing to strong signings for this brand in CALA during the year. While the operating environment in Greater China remains challenged by weak macro conditions and soft consumer sentiment, robust leisure trends and continued inbound travel recovery helped RevPAR return to growth in the fourth quarter. RevPAR rose over 3% driven by ADR. ADR growth was driven by stronger rates in Hong Kong, Taiwan, Hainan, and Tier one markets offsetting continued softness in tertiary markets within the Chinese Mainland. In the U.S. and Canada, fourth quarter RevPAR was around flat. Luxury again saw solid growth, which was offset by declines in the select service tier. Leisure transient RevPAR rose 2% in the quarter, while group RevPAR increased 1%. These gains were offset by a 3% decline in business transient RevPAR largely due to a meaningful decline in government RevPAR in the quarter. Government RevPAR was down over 30% during the forty-three-day U.S. Government shutdown though it has since moderated to down around 15%. During the year, we meaningfully expanded the breadth and depth of our portfolio across customer tiers, from luxury to mid-scale and across traditional as well as alternative lodging product offerings. We extended our lead in luxury with the opening of several notable hotels, including the St. Regis Aruba, the Lake Como Edition, and Nekahui, a Ritz Carlton Reserve in Costa Rica. We also signed a record 114 luxury deals during the year. We continue to have growing owner interest in all of our midscale brands, given their compelling brand design, the power of our revenue engines, and their simple bundled affiliation costs, which we believe are the lowest in the industry. Since entering the segment less than three years ago, we've experienced incredible growth. At the end of the year, we had over 450 open and pipeline Four Points Flex, Studio Res, and City Express by Marriott in 26 countries and territories around the world. We also had 100 open and pipeline Series by Marriott properties. During 2025, we were pleased to add several new brands to our portfolio. Lifestyle brand Citizen M, which was fully integrated onto our platforms in November, Series by Marriott, our new global collection brand for the midscale and upscale segments, and the Outdoor Collection by Marriott Bonvoy. Our focus on being in more places with the best brands and experiences helps fuel the growth of our powerful Marriott Bonvoy loyalty program. Last year alone, 43 million new members joined Bonvoy, propelling the membership base to 271 million members worldwide at year-end. We continue to augment the Bonvoy platform with popular collaborations like Uber and Starbucks, and with new bespoke Envoy moments and immersive experiences. We recently won the Point Sky Award for the Best Hotel Loyalty Program for the third year in a row. And we're thrilled that Marriott Bonvoy is now the official hotel supporter of the 2026 FIFA World Cup with our extensive portfolio of hotels across the 16 host cities and curated fan activations poised to provide incredible memorable experiences throughout the 104-match tournament. We are actively investing in technology, data, and AI, both internally and with partners, to transform the guest and the associate experience. The multi-year transformation of Marriott International, Inc.'s three major tech systems, property management, reservations, and loyalty is well underway. And we're rolling out the new systems to a meaningful number of our hotels around the world in 2026. We see AI as an opportunity to potentially redefine the customer acquisition paradigm that has governed our industry for the past several decades. We believe our industry-leading scale, the breadth and depth of our global portfolio, our large and engaged customer base, and our strong relationships with partners across the ecosystem position us well to capitalize on the significant opportunities Gen AI represents. While AI search and commerce models are still emerging, we're excited about AI's ability to further personalize and simplify the travel search and the booking process. And we're optimistic about the potential for AI to bring more consumers into the Marriott Bonvoy ecosystem and help strengthen our direct booking channels in a very efficient manner. In the first half of this year, we plan to start deploying natural language search on marriott.com and on the Bonvoy mobile app. We're also optimizing our content for generative AI technologies, so our properties are well-positioned wherever and however consumers are searching. Furthermore, we are actively collaborating with numerous tech companies across the space. For example, we are one of the initial companies working with Google on their forthcoming Google AI mode travel product, and with OpenAI on their Ad Pilot program. Before I end my prepared remarks, I want to thank our team around the world for their hard work and care that they bring to Marriott International, Inc. every day. And Leeny, for the last time, I'll turn the call over to you to discuss our financial results in more detail. Kathleen Kelly Oberg: Thank you, Tony. Good morning. I'll start by reviewing our strong financial performance. Fourth quarter total gross fee revenues grew 7% to $1.4 billion ahead of expectations. Growth was primarily due to higher RevPAR, room additions, and an 8% increase in credit card fees, partially offset by a 20% decline in residential branding fees. Growth in credit card fees reflected higher spending on our co-brand credit cards with particularly strong increases in international markets, including Japan and The UAE. Incentive management fees or IMFs rose 16% to $239 million primarily due to strong results in the U.S. and Canada, where IMFs rose over 30% led by New York City, and resorts in Florida. Fourth quarter adjusted EBITDA rose 9% to $1.4 billion. Our adjusted results for the fourth quarter and the full year exclude the one-time charges related to Sonder exiting our system in November. For full year 2025, gross fee revenues rose 5% to $5.4 billion with IMFs up 3%. Co-branded credit card fees rose over 8% to $716 million, and residential branding fees declined 10% to $72 million. As noted in our press release, during the fourth quarter, we moved the other cost that had been in our G&A and other line to owned, leased, and other expense. This should help enhance understanding of our G&A costs. As our G&A line now captures only true general and administrative expenses. The above property costs needed to support and operate Marriott International, Inc.'s business. The other expenses that were reclassified from general, administrative, and other are certain costs associated with our property-related fee revenues. Such as guarantee expense, bad debt expense, and certain brand-related or property-related expenses as well as costs associated with certain third-party agreements. Unlike G&A expenses like wages, benefits, and rent, these other expenses tend to vary more with RevPAR and size. In the new presentation format, full year owned, leased, and other revenue net of owned, leased, and other expense totaled $218 million including $23 million of Sonder related charges. Owned, leased, and other revenues net results prior to the reclassification were $378 million which was ahead of our prior expectation. The year-over-year increase in the amounts prior to the reclassification reflects the inclusion of the Sheridan Grand Chicago, and strong property results. More than offsetting the impact of renovating hotels and lower termination fees. In 2025, the company benefited from over $90 million of above property cost savings related to our enterprise-wide initiative to enhance productivity across the company. That is also yielding cost savings to our owners. Full year G&A declined 8% to $870 million. G&A and other before the reclassification totaled $1.03 billion and excluding the $23 million of Sonder related charges, totaled just over $1 billion a decline of 6% year over year. G&A expenses were a bit above prior expectations primarily due to compensation expenses. Full year adjusted EBITDA rose 8% to $5.38 billion and adjusted EPS rose 7% to $10.02. We were pleased that with the power of our strong cash-generating asset-light business model and our disciplined investment approach, we returned over $4 billion to shareholders through dividends and buybacks in 2025. I'll now talk about our 2026 expectations. With our growing pipeline and strong momentum in conversions, we expect net rooms growth between 4.5% to 5%, including our typical of between one and one and a half percent room deletions. For full year 2026, we expect similar global RevPAR growth to 2025 between 1.5% to 2.5%. This assumes a relatively steady macroeconomic environment. With the exception of Greater China, RevPAR growth in international regions is expected to remain higher than it was in the U.S. and Canada, although we do expect RevPAR growth in the U.S. and Canada to be a bit stronger than in 2025. We currently anticipate RevPAR in Greater China to again be roughly flat year over year. The World Cup is expected to contribute around 30 to 35 basis points of global RevPAR growth for the full year. The sensitivity of 1% change in full year 2026 RevPAR versus 2025 could be around $55 million to $65 million of RevPAR related fees. For the full year, fee revenues could rise 8% to 10% to $5.9 billion to $5.96 billion. IMFs are expected to be flat to up slightly year over year. As we have discussed, we're currently in discussions with Visa, Chase, and American Express and expect to have new deals in the U.S. in place later this year. At this point, our guidance does not include any impacts from these new deals. As a reminder, our program is already the largest by far in the industry and has been for some time. If you remember, we combined the Starwood American Express and Marriott Chase Visa program we acquired Starwood and these two programs have been the strong power leaders in this industry since then. However, our guidance does include a meaningful expected year-over-year increase of around 35% in co-branded credit card fees going into our franchise fees line. The increase is primarily the result of two factors. The first is continued strong growth in spending across our global card portfolio. The second is an increase in the royalty rate. Or the share of payments from the card companies that Marriott International, Inc. recognizes in our franchise fees line. We receive money from the credit card companies to pay for points, to permit funding, the benefits, our loyalty program. And Marriott International, Inc. receives a royalty for our licensed intellectual property that we recognize in the franchise fee line. Since the launch of Marriott Bonvoy in early 2019, we've dramatically grown our global portfolio of hotels, and the number of loyalty program members and Bonvoy penetration has increased from 58% to 68%. We've added six countries to our co-branded credit card program since '19 and now have 34 cards in 11 countries. And we expect to continue to add cards in new countries around the world. With COVID now in the rearview mirror, and a very strong Marriott Bonvoy program, we have increased Marriott International, Inc.'s royalty rate. We were able to do this because we recently amended a long-standing contractual limitation affecting the royalty rate. The increase in the royalty rate is supported by GAAP required valuation that were performed by third parties when the credit card deals were signed. We remain keenly focused on enhancing the value Bonvoy brings to each of its constituencies. Our customers, our hotel owners, and the company. Moving on to full year residential branding fees. These fees could increase around 40% in 2026. As a reminder, this powerful fee stream that reflects our industry-leading position in residential branded properties is very lumpy. Depending on the timing of units. Sales. Timeshare fees, as usual, are expected to be relatively in line with the prior year, $110 million to $115 million. Owned leased and other revenue net of owned leased and other expenses expected to total $230 million to $240 million. Results are expected to be impacted by renovations at certain large hotels in the portfolio, including W Barcelona and the Ritz Carlton Tokyo. 2026 1% to 3% compared to 2025 levels. Full year adjusted EBITDA could increase between 8% to 10%, to roughly $5.8 billion to $5.9 billion. Our adjusted effective tax rate for 2026 is expected to remain between 26% to 26.5%, and our underlying core cash tax rate is anticipated to remain in the low 20% range. Strong adjusted EBITDA growth combined with a meaningful reduction in share count leads to expected full year adjusted diluted EPS growth between 13% to 15%. For the first quarter, Global RevPAR could increase 1% to 2%, reflecting the positive impact of the Olympics in EMEA, being offset by the negative impact of the timing of Easter and Chinese New Year, as well as the U.S. and Canada having tough comparisons versus the U.S. Inauguration last year. First quarter gross fee revenues could increase 7% to 8%. The increase is expected to be driven by meaningful growth in co-branded credit card fees, partially offset by an approximately 10% to 15% decline in residential branding fees due to timing. IMFs are expected to be around flat compared to the first quarter of last year. Owned, leased, and other revenue net of owned leased and other expense, is expected to ramp up over the year. The first quarter, it could total around $15 million compared to $29 million in 2025, largely due to renovations at several large hotels and a couple of other small items. Of course, this is with our new reclassification. Our first quarter affected adjusted effective tax rate is expected to be around 24.5%, two percentage points higher than last year's first quarter tax rate which was lower due to last year's release of a reserve. We expect $1 billion to $1.1 billion of investment spending in '26, similar to 2025 spending, excluding Citizen Now. Let me talk about the three broad buckets of investment. First, around 25% is related to renovations to owned and leased hotels. Second, roughly 35% to 40% is expected to come from continued spending on our digital tech transformation. The overwhelming portion of which is expected to be reimbursed over time as well as other corporate systems. The remaining 35% to 40% is expected investment in our contracts. For both existing units typically used in connection with valuable contract renewals, extensions, or renovations that result in incremental fee revenue over time and for new units as we continue to expand our global portfolio. Our approach to using key money has not changed. And deals that use key money historically have yielded significantly more value than deals without key money. Our capital allocation philosophy has not changed. We're committed to our investment-grade rating and investment. We're in growth that is accretive to shareholder value. Excess capital is returned to shareholders through a combination of share repurchases and a modest cash dividend, which has risen meaningfully over time. In 2026, we expect another year of strong capital returns of over $4.3 billion. Full guidance details for the first quarter and the full year are in the press release and Tony and I are now happy to take your questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. To leave the queue at any time, please press 2. Once again, that is 1 to ask a question. We will pause for just a moment to allow questions to queue. Thank you. Our first question will come from Shaun Clisby Kelley with Bank of America. Your line is open. Shaun Clisby Kelley: Hi. Good morning, everyone. Leeny, it's hard to believe it's been a decade of working together, so congratulations on an outstanding career, and thanks for all you've done. It's been a real privilege. So appreciate it. Kathleen Kelly Oberg: Thank you, Shaun. Shaun Clisby Kelley: So, you know, for whoever wants to take it, you know, Tony, I think, as is often the case with these calls, a lot of attention on net rooms growth, and this is our first look for 2026. So an acceleration obviously great to see, and especially at your size and scale. So can you just talk a little bit about what you think is kind of most important in driving the pipeline forward? And obviously, what you're seeing in terms of openings this year, what brands you're gonna lean on the most, within that pipeline to drive the numbers that you're seeing on the four and a half to five percent. Thanks. Sure. I'll give you a broad answer, and then I'll let my head of global development chime in with some color commentary. Anthony G. Capuano: I think, again, you heard in the prepared remarks that both in terms of signings and openings, about one-third are coming from conversions. We've talked about that phenomenon in some of the prior quarters. It's a combination of factors, Shaun, that gives me a lot of confidence about the momentum we have in conversions. Number one, we have a more attractive stack of conversion-friendly brands than at any time in my career. I think we've got dedicated resources in the continents that are specifically focused on both individual asset conversions and portfolio conversions. And I think the organization has rallied around a level of creativity in terms of how we both identify close transactions for conversions and get them open. You heard in the opening comments, it is a remarkable statistic that about 75% of our conversion openings opened within twelve months of signing. So to be sure conversions some of the conversion-friendly brands like our soft brand collections luxury collection, Autograph and Tribute, certainly series, some of those sorts of brands will be among the biggest drivers. And then when you look internationally, there is an almost insatiable demand for luxury. We're seeing that across many of our markets. And we're seeing a parallel momentum in luxury demand. Finally, mid-scale, it's hard to believe we haven't even been in the mid-scale tier for three years, but we shared some of the statistics by brand and across our midscale portfolio. I expect that to continue to accelerate. Kathleen Kelly Oberg: Yeah, the only thing I would add Shaun is a reminder of the work that we've been doing over the last eighteen months, which obviously a chunk of it was about making sure that we were as streamlined as possible from an expense perspective. As we really saw the back end of COVID. But more importantly was to be able to be quicker. To be faster. And that was really through every single part of the whether it was through Bonvoy, whether it was through development, in everything that we do to try to really accelerate the pace at which we grow. And from that perspective, I think you see in the pipeline, when you look at the year-over-year pipeline and even the pipeline growth from the end of the year, you can see those numbers show forth. And frankly, I'm really proud to say I expect the company to do a lot more of that after I retire and that I'm about their opportunities to do that going forward. And that we're very comfortable with this 4.5% to 5%. Shaun Clisby Kelley: Thank you very much. Operator: Our next question comes from Daniel Brian Politzer with JPMorgan. Your line is open. Daniel Brian Politzer: Hey, good morning, everyone. Thanks for taking my questions. And Leeny, certainly, I echo that sentiment. Congratulations. It's been a pleasure working with you, and we wish you the best of luck. I wanted to touch on the credit card fees and that 35% step up. Can you maybe talk about why now, why were you able to kind of increase the royalty rate, what drove that, any order of magnitude on that rate? And is this something you've done in the past? And as you think about going forward and the credit card deal that you're in the process of negotiating, is this, you know, is this effectively a mark to market that could lead to some element of a pull forward from that? Thanks. Anthony G. Capuano: Yes. So maybe we'll try the same approach. I'll make some overarching comments, and then Leeny can get a little more granular. As you heard in Leeny's remarks, there was an existing, contractual, agreement that had to be modified and we did that. But I think the other two important factors in response to your question of why now, We wanted to ensure that we preserve the financial strength and stability of the Bonvoy program. And simultaneously, we want to ensure that we preserve the value proposition for our 271 million members. And so the confluence of those three factors really were the catalyst to making this adjustment. Kathleen Kelly Oberg: Yeah. And I'll point to my prior answer, which is a reminder that we have spent a lot of time and energy in making sure that we found efficiencies. That certainly is a helpful component to making sure that we're balancing the needs of all our constituents. It's really critical, the value of our Bonvoy Program, to our customers and to our owners and also to the company itself. And so it's been a very careful evaluation of the appropriate level and we're confident and comfortable with this new level of royalty fee percentage. Operator: Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open. Stephen Grambling: Hi, Leeny, thanks as well for all the insight, and look forward to keep your dialogue going in the future. You know, Tony, I think you mentioned that the Google and OpenAI partnerships, were something that that's in the nascent stages, but I was hoping to get a bit more detail on what these partnerships entail. Are these more about testing distribution channels, and are you providing access to inventory and data? Or is it more about comparing these as an advertising channel? And if so, how do those costs compare to traditional search channels? Thanks. Anthony G. Capuano: Thank you. I'll try and answer that, although I would give you the caveat. Often in our industry people talk about various facets of the business through the lens of what inning are we in. I would suggest to you that we're pulling into the players' parking lot. We're not even in uniform or on the field. So it is quite early. But with that said, we are the last year, November '25, we began working with Google and that was really to design a property search experience that will help facilitate bookings through Google's AI mode. As part of that experience, users will get to describe exactly what they're looking for in plain language. And then they'll get to compare different hotels and browse information you know, room photos, amenities, reviews, prices and the like. And then they'll be able to follow-up and refine those options. And then the booking will be processed through AI mode. With OpenAI, this is really just the early days of their ad pilot program. So what I would say to you is philosophically, we are working very closely and very collaboratively with the subject matter experts, the biggest, most innovative and creative companies in the space, both to learn from them but also to shape or have some word in shaping this evolving distribution landscape. Operator: Thank you. Our next question will come from Michael Bellisario with Baird. Your line is open. Michael Bellisario: First, congrats, Leeny, on a great run. My question is for Tony. You recently talked about in an interview just sort of the economic model for franchisees becoming less favorable, but could you just expand on that a little bit? I guess, what are you doing to make the math better pencil for, both existing and prospective franchisees? Thanks. Anthony G. Capuano: Thanks for the question. I appreciate it. The reality is while you've seen tremendous performance from the big global brand companies, We recognize and focus every day on the fact that the owner and franchise community is at a different stage in their recovery from the damage done by the pandemic. And our recognition of that really drives our focus around looking at and attacking every variable in the equation that drives owner returns. To state the obvious, we are an asset-light business model. With a focus on high growth. So we have got to do everything in our power to ensure that those returns recover and recover quickly. So what does that mean precisely? Of course, the work we do every day to drive top-line revenue. The work we do every day to enhance margins, looking at every facet of affiliation costs with a Marriott International, Inc. brand, and seeing if there are opportunities. You'll recall from a few quarters ago, we shared with you that we had lowered the charge out weight for a Bonvoy program. We'll continue to look at every aspect of the affiliation costs and see what we can do to try and drive margins. We're also, maybe the last piece, we are in some ways looking with a blank sheet of paper at the entirety of the hotel operating model. The services we provide, the staffing models that we use, how we schedule, how we purchase, all of the things that influence the profitability at the property level are being evaluated by our teams around the world. Operator: Thank you. Our next question comes from Elizabeth Dove with Goldman Sachs. Your line is open. Elizabeth Dove: Hi, there. Thanks for taking the question and echo everyone sentiment, Leeny, you'll definitely be missed. I'm wondering if you could maybe expand a little on what you're seeing in a bit of a pulse check on the consumer here, I suppose, in the U.S. You mentioned US and Canada RevPAR will be a little bit better. This year, some World Cup in that. But any more details you can share and just what you're seeing, whether in booking windows, leisure, business transient groups, kind of across the board, any more color? Thanks. Yeah. Sure. Thanks, Lizzie, very much. Kathleen Kelly Oberg: So, you know, I'd say steady as she goes. You know, clearly leisure continues to be the meaningful outperformer. You know, up Q4 globally, leisure was up 4%. Group up 2%, while BT was down. That's Some of that was related to the government shutdown, but But clearly when you look overall, you continue to see both nights and rates very strong globally in the leisure sector and that extends down our premium resorts. And certain large cities where you've got great leisure demand. And when I think about, kind of group, it also continues to be steady. Attrition has actually been positive. And as we look at the group pace going into next year, it's up 6%. And while that's down one percentage point, compared to a quarter ago, that's quite normal as you enter a year. And we actually expect to see across all three segments in 'twenty six that they will be up low single digits when you look about leisure, BT, and group. In terms of the booking window, again, similar, twenty-two days in the fourth quarter. Business transient, always about a week shorter, and leisure a little bit longer. And we continue to see the same trend in Greater China, which is that they have a meaningfully shorter booking window. So I think we've clearly got some extraordinary events in The US and Canada that will help us to the tune of probably 40 ish basis points from our expectations from World Cup. But I think you'll also know, you can recognize that we really start to see extraordinary events and experiences happening almost every year that we start explaining the benefit from it because the reality is people love to travel to have experiences. So that trend of those expenditures by consumers growing faster than goods continues and we expect that to go forward. At the same time that view of the K distribution where our lower-end consumer and guest have had a tougher time. I think that we expect to also the same. Government business ended up the year about 15% down, and that clearly impacts our lower-end hotels. So this disparity between the top end and the bottom end, we expect to continue. Although perhaps not to be quite as wide as it was in twenty-five. Operator: Thank you. Our next question will come from Richard J. Clarke with Bernstein. Richard J. Clarke: Hi, thanks for taking my questions. And yes, just echoing, been a pleasure working with you the last six or seven years, Leeny. Just a couple of sort of follow-ups, I guess, on the credit card points you've made. Would you have expected credit card spending to have accelerated or is the acceleration up to sort of 35% growth all to do with the royalty changes? And secondly, has there been any sort of change in anything, maybe your negotiations with Chase or American Express you know, since those concerns around interest rate caps or the CCCA reform negotiations. Like, has that changed those negotiations? Are those fully on track as they were before? Kathleen Kelly Oberg: So thanks very much, Richard, and likewise. So good reminder, no, we do expect the basic credit card business to show the same high single-digit growth rate that we've been seeing continue on into 2026. And that again is separate and apart from a new credit card deal. And then it is the other component that leads us to the approximately 35% increase in the credit card guidance for 2026. On the second question, I'll Yes. On the second question, Richard, obviously we are in close contact with both Chase and American Express. But broadly we've not seen some of the discussions on Capitol Hill have any measurable impact on the pace or progress we've made on our credit card deal negotiations. Richard J. Clarke: Thank you. Operator: Our next question will come from David Brian Katz with Jefferies. Your line is open. David Brian Katz: Good morning and thanks for taking my questions. Leeny, at the risk of dating both of us, you know, for a new person picking up the space. The patience and grace of the IR team, you know, sets the tone for everything. All the best. Thank you very much. I wanted to ask about you know, Nug and the investment spending you know, therein. I to the risk of parsing your words, you know, Leeny, I think you said your policy on key money and investment hasn't changed. Is the amount year over year that's included in this guide versus you know, last year's one one. You know, changing in some way. And, hypothetically, if you wanted to accelerate your nug, right, we always looked at the growth rates you know, versus everyone else's. Yeah. Could you theoretically spend more to drive it higher? You know, just curious what's all in there. Thank you. Kathleen Kelly Oberg: Yeah. Sure. Absolutely. Great question. I'll try to cover what I can and leave the rest for Tony. There were several questions in there. So first to your point, over time we have seen a bit more key money required across all the tiers. And I emphasize the a bit. When you think about the way that financing interest rates, cost of construction, and you think about the cap stack for a hotel that makes sense and you can be sure it is industry-wide. That that is the case. We also have a distinctly strong pipeline in luxury and full service which at the margin tend to have a bit more key money. But generate meaningfully higher fees and NPV. From that perspective. Other thing is that when I talk about that roughly 40%, remember that there is it is in the borderline of kind of close to 50% that you will see spent on extending, renovating getting new and better agreements for existing hotels, that then also improve our fee stream as well as for new development. So when I look at the overall new development, the numbers relative to last year for new development are not meaningfully different. And I remind you of our business model. We don't have an issue with having to constrain key money. When we have great deals come to us, we have, as you know, the free cash flow to absolutely go. And spend it. However, we're very disciplined. And we do find that the where we use our key money, those deals are more valuable per key than deals that don't require money. So I think that financial make sure that we're getting a great ROICC is very important overall. And I'll turn to Tony. Anthony G. Capuano: Yeah. David, the only thing I would add, I might just double click on Weeny's comment about the discipline we use. I suppose there is a path out there to buy deals in a non-economic way. That has not ever been our model nor will it be going forward. We deploy company's capital when we think we can drive outsized economics for the shareholders. As you heard from Leeny. And I'll just give you one statistic maybe that underscores that a little bit. While the aggregate amount of key money may have increased when you're driving the sort of record deal volumes we have with 1,200 deals signed just last year. The amount of key money per deal signed last year was actually lower than what it was back in 2019 and about flat to where it was in 'twenty four. So I think that's a good illustration of a continued discipline we apply to the deployment of MI Capital. Operator: Thank you. Our next question will come from Brandt Antoine Montour with Barclays. Your line is open. Brandt Antoine Montour: Congratulations, Leeny. Thank you for everything you will be missed. So just going to ask the credit card question in a slightly different and perhaps a little bit more direct way. But does this adjustment change the way that we should think about upside from the ongoing negotiations? Kathleen Kelly Oberg: So, again, I'll reiterate what I said, Brandt, in my comments during the script is that first of all, the two are totally separate. There this this is a function of an agreement that has been changed as well as the strength and the power and size and scale of Bonvoy and the efficiency with which we run it. So that is really regarding the royalty rate. Relative to the credit cards, I just point you to the fact that we already have by far, the largest credit card program in the industry, combining the former AmEx SPG program as well as Chase Bonvoy. We were by far the largest then. So, again, that's not anything to do with what's going on with the royalty rate. But just a reminder, that you've really got already a huge program with over $700 million in fees. And then also just to know that the way these credit card deals roll out is they involve introduction of new and refresh and that all has to be put through the systems for the consumers. And we do expect that will take some time for that to roll out and stabilize. So, again, the two items are separate but it's also a good reminder of the size and scale and the amount that we are already producing from our credit card programs. Operator: Our next question will come from Aryeh Klein with BMO Capital. Your line is open. Aryeh Klein: Thanks, and, I'll echo the congrats, Leeny. Tony, I think you talked a little bit about some of the investments you're making on the tech side. I'm hoping you can unpack a little bit where you think we are in that investment process? And could this spend potentially accelerate as you invest in AI? And then just separately, quick one on the World Cup. Curious what you're seeing, you know, as far as international demand I know it's early, but I imagine booking windows there might be a little bit longer. Thanks. Anthony G. Capuano: Sure. So as we've talked about in multiple we are replat the bulk of the investment is the replatforming of our three most important technology platforms. Central reservations, property management system, and the loyalty platform. We have moved from development into deployment. We have started portfolio of test hotels. Those rollout are going great. A lot fewer bugs than we expected and a lot more, rapid resolution of those bugs than maybe we had hoped. So you should start to see that ramp up in a really meaningful way throughout the balance of 2026. By design, we've started to deploy these platforms in select service hotels which have a few less layers of complexity. As we start to roll out into the full-service tier and even into the luxury tier, we'll move as judiciously as we have to date to ensure we identify and resolve any bugs, but we're feeling really, really good about the pace of spending. And I don't know that it'll be materially different than what we've described. Over the last few quarters. And then I think on the second question about World Cup, again it's early. I happen to be with the FIFA leadership over the weekend. I asked them specifically whether they were seeing any hesitancy from inbound international visitors for the World Cup. And they these are their words. They were stunned by volume of ticket requests they've seen from around the world. As soon as the website launched. So it early, but we're feeling really good about the early returns. Kathleen Kelly Oberg: And just as a reminder, we did see in 2025 a decline in guests to The US, although for our entire system. Cross border was actually up a percent because of international travel. And we do so far see some increase in international international far guests booking in our hotels. It's still quite early days as you know, on many of the match dates you don't know exactly yet which countries are going to be playing. But we are very pleased at what we're seeing so far. We went through an exhaustive set of work to really evaluate the number of matches, 104, the attendance expected, comparing to other events like this to come up with our estimates. And obviously, it is early days. I could expect that as you get closer and closer to the finals that you see these booking windows really get smaller and smaller. But for now, we are very pleased with what we're seeing from broad demand. But I would say it's too soon to say any more than that. Operator: Thank you. Our next question will come from Conor T. Cunningham with Melius Research. Your line is open. Conor T. Cunningham: Hi, everyone. Thank you, and congrats again, Leeny. Just maybe two points of clarification. Just on the change in royalty rate sorry. The talk about this more, but just is the is it a is it a change revenue recognition, or is there an increased cash you know, conversion rate as well? And then if you could just give a little bit more color on owned owned and leased. You know, I think you talked a little bit about that in your prepared remarks, just any more color there would be helpful. Thank you. Kathleen Kelly Oberg: Yeah. So just real quick on the owned lease. That is really I'd say all things fairly similar with the exception that we've clearly got a couple large owned leased renovations. We do also later in the year have the Barbados hotels coming back into the system more fully. Which does offset some of that. The other thing in the owned leased and net is where the payment that we make, to a third party, they do share a very modest, immaterial amount. And as our royalty rate goes up, they will also share in that increase. But again, a very modest immaterial amount. And it is not related to revenue recognition. This is a function that as we have the payments that are negotiated with our credit card companies of what they pay to be associated with Bonvoy, we then divide that into the buckets that I talked about before. To make sure that the program has the resources it needs to provide great value to our guests and our members as well as paying for the actual cost of the points to support the program and then also to compensate Marriott International, Inc. for its licensed IP. And given both the size and scale and work we've done on a and the relief from a contractual requirement, we are now able to increase that royalty rate to a level that we're comfortable with. Conor T. Cunningham: Awesome. Thank you. Operator: Thank you. Our next question comes from Smedes Rose with Citi. Your line is open. Smedes Rose: Thank you. Leeny, best of everything to you going forward. It's been a pleasure. I wanted to ask that guys have covered a lot of ground, but I just wanted to ask a little bit. You mentioned the strength in leisure. That's obviously been sort of a highlight in hotel world, especially for you guys. Over the course of this year. And I just wanted to ask you, are you seeing is there anything that's comment sort of underlying trends within leisure? Are you seeing an uptick in interest in all-inclusive platforms? Are you seeing incremental redemptions for loyalty points to support your leisure stays or anything that you could just point to. I'm just wondering kind of just the sort of overall changes, if anything, within the leisure category. Kathleen Kelly Oberg: Sure. I'll start and Tony can fill in. On your question about redemptions, continues to be roughly about 5% of nights. That is, frankly, where it's been for a while with some slight variations. So, that part, remains fairly stable. We obviously are much more dynamic in our pricing now when we are able to help for hotels that are seeing a low occupancy period can then make it more attractive to customers to redeem and then similarly make sure that the highest end are getting rates that reflect the demand that they have there. And then I would also say that within the leisure space overall that obviously, the fundamental strength of the economy matters a lot. And so continued strong economic performance in the markets where our hotels are is a big driver. And then when you look at the leisure demand overall, resorts and luxury continue to be the leaders. Anthony G. Capuano: And Smedes, maybe the only thing I would tack on we were talking about this yesterday. At some point, there are so many tentpole special events around the world that we shouldn't call them special anymore. They become sort of a norm. But this phenomenon of event travel is becoming more and more consistent. You heard some of the comments at the open about the impact we expect to hear and see from the World Cup. We've got the Winter Olympics now going on in Italy. We expect a Q1 impact of about 100 basis points on EMEA RevPAR as a byproduct of travel to both Milan and Cortina. And so I think the reality is we'll continue to see in sports and music these major events, that will just be a further bolster to the base trends we're already seeing in leisure. Kathleen Kelly Oberg: The several percentage points, Smedes, that leisure gained in share of night since COVID has absolutely stuck. So you're seeing leisure at 45%. Of our nights globally. Group continues to be in the ballpark of a quarter and BT is the one that's still several percentage points lower than it was in 2019. Operator: Thank you. Our next question comes from Robin Margaret Farley with UBS. Your line is open. Robin Margaret Farley: Great. Thank you. And, Leeny, definitely best wishes. I want to add that to, I know, to everyone else's comments. Two clarifications. One is on the unit growth, increase 4.5% to 5%. Can you just clarify, is that all organic with acquisitions be on top of that? Or could that 4.5% to 5% be a mix of organic and acquisitions to be determined? And then my other question, and I think you've pretty much answered it. I know there's been a number of questions on the step up in the credit card. Cobrand fees. So the royalty rate, this sort of 20% or so of the step up in credit card fees is is that sort of a onetime adjustment, but you know, you're not giving guidance for 2027 yet? But in other words, the idea is you really probably that high single-digit increase from usage and things is what the ongoing increase would be after this sort of step up. That's more of a onetime step up in '26. Thank you. So thanks, Robin, very much. And, yes, our 4.5% is organic. That is organic growth from the work that the team has been diligently going after. You know, and also all the work that goes into opening. So, yes, that's all organic. And then, on the royalty rate, as we have described earlier in this call, we've worked very hard to make sure that we are doing what's in the best interest of our constituencies and we're very comfortable with the change that we've made and where we are. Operator: Thank you. Our next question comes from Trey Bowers with Wells Fargo. Your line is open. Trey Bowers: Hey, guys. Leeny, sorry to see you go, especially as I transitioned to this side of the aisle, but it's been great working with you all these years. Just gonna build on an earlier question around business transient travel. Do you guys expect that that does get back to kind of pre-pandemic levels? Or is just the changed a little bit? And in that case, has it changed at all just your thoughts around where you're looking to drive Nug, even the design of the hotels? Or is your expectation eventually that fully recovers? Kathleen Kelly Oberg: Well, so, you know, first of all, 2019 is getting to be a longer and longer time away. And you think about just how the market has evolved and how much we've grown I mean, we've grown probably 25% since then and a lot of that is international and across all chain scales. So it does get harder to truly compare apples to apples. But I do think when you look at classic business travel related to the level of economic activity that that part will continue to have the same trends it had before, which is that people need to meet person to person to do business. There are also other elements, for example, not as many companies having five days a week in the office all the time that I think make your traveling consultant at 25 years old not necessarily quite on the road quite as many days. But we do expect that certainly overall, I think you'll see the level of demand get back to 2019 levels. The counter to that is I think leisure is going to continue to be stronger. And so from that perspective, this percentage of leisure being greater than it was before and business being less I actually think will continue to be as it is. Although, again, perhaps not quite the way it is right now. Anthony G. Capuano: And I might just reiterate something I said a year or two ago. And that is while I think it is a fantastic phenomenon for our business, Our ability to tell you with perfect precision the trip purpose, of every guest in our hotel has become a little murkier because you see these combined trip purposes with folks tacking on leisure to business travel. So while we might not be able to give you the exact same precise answer we might have given you in the past on market mix, I think we feel really good about the overall recovery of travel volumes. Operator: Thank you. At this time, we've reached the end of our allotted time for questions. I would now like to turn the call back over to Anthony G. Capuano, for any closing or final remarks. Anthony G. Capuano: Well, thank you all for calling today. For those of you that attended or may have read about the Alice conference, Leeny received the financial advisor of the Year award. She should have received the Financial Advisor of the quarter century. She has been an extraordinary leader, an extraordinary partner. She has an unwavering belief in the power and potential of travel and of Marriott International, Inc. and has steered us through some of the most difficult, complex challenges that the company has faced over all these years. She will be deeply missed. As you might expect, for those of you that know her well, she's not spent the last year taking a victory lap. Instead, she spent the year getting everything buttoned up. Preparing Jen so that we'll have a seamless transition. But, Leeny, thank you. We'll miss you. Kathleen Kelly Oberg: Thank you so much. I consider myself incredibly fortunate to have spent my career at Marriott International, Inc. The travel and hospitality industry is extraordinarily dynamic and frankly with tons of growth opportunity. And innovation ahead of us. And I know that you and Jen and Shaun and the team are gonna absolutely take the company to new and greater heights after I retire. Best of all, frankly, the reality that the way you win in our business is by taking care of people and treating people well. Doesn't get any better than that. So with that, I thank you, and I thank everybody on the phone very much. For all your time and energy that you put into helping understand Marriott International, Inc. and our strategies. Operator: Thank you all. Thank you. That brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Craig Marshall: Good afternoon and good morning, everyone, and thank you for your interest in BP's Full Year 2025 results. I'm delighted to welcome our guests in the room and those on the webcast. I'm joined today by Carol Howle, Interim Chief Executive Officer; Kate Thomson, Chief Financial Officer; and Gordon Birrell, Executive Vice President, Production and Operations. Before I hand over to Carol, let me draw your attention to our cautionary statement. In this presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website. And with that, over to you, Carol. Carol Howle: Thank you, Craig, and it's a real privilege to be here as Interim CEO ahead of Meg O'Neill's arrival as Chief Executive Officer at the beginning of April. And on behalf of the entire BP team, I do just want to take this opportunity to thank Murray for his 34 years of service, his leadership and contributions to the company. So stepping back for a moment, as we started 2025, it was clear to us that this was a year of turnaround. We hadn't been performing as strongly as we should have been, and that required urgent and focused intervention. And we have made good progress in 2025 to address that. Kate, Gordon and I will spend around 30 minutes talking through our performance highlights and delivery of our plan. And we know we've got more to do. So we've got more to do to accelerate the delivery and to position the company for the future opportunities that we have ahead of us. And the team and I have great conviction in our potential to deliver significant growth in shareholder value. And from my 25 years in BP, I know we have fantastic assets, and we've got exceptional people. Our strategic direction is right. We've made a good start in delivering against the plan that we laid out 12 months ago, and I just want to thank everyone at BP for that delivery. And as I said, we look forward to Meg joining in April. She's an outstanding leader. And together as a leadership team, we're going to continue to drive forward our strategy in accelerating the turnaround of this great company. Now Kate run through some of the highlights on the video at 7:00 a.m. So I'll just recap a few of them. Our operational performance was strong across the group. Reported upstream production was lower than 2024, which reflected portfolio changes, but underlying production was held broadly flat, and we've exceeded our annual guidance from 12 months ago. We set new records in upstream plant reliability and refinery availability with both above 96% for the year. We started up 7 major projects and our reserves replacement ratio was 90%, up from an average of around 50% in the previous 2 years. Based on provisional data, our operational emissions in 2025 were 37% less than in 2019, a reduction well in excess of our 20% target. Our supply trading and shipping business remains a distinctive competitive advantage for BP, delivering an average around 4% uplift to BP's returns, which now extends over the past 6 years. We concluded the strategic review of Castrol with an agreement to sell a 65% shareholding, and we believe the sale and the retention of a position in Castrol represents a very good outcome for shareholders. It allows us to realize value today while continuing to benefit from future growth of that business. And in 1 year, we've completed and announced over $11 billion of our $20 billion divestment program. Let me now turn to safety, our #1 priority. Our commitment to our safety goals is unwavering. It's to eliminate fatalities, life-changing injuries and Tier 1 process safety events across our operations. Tragically, in 2025, 4 colleagues lost their lives while working in our U.S. retail business. Two were killed in separate incidents where they were struck by passing vehicles as they carried out emergency roadside assistance. In response, we've permanently stopped roadside assistance next to active traffic lanes, a decision made solely to protect the safety of our people. Our thoughts remain with their families, friends and colleagues of the 4 people who lost their lives. On process safety, we've seen encouraging progress. Combined Tier 1 and Tier 2 events are down by around 1/3 compared with the previous year. While process safety has improved, we recognize we have more to do. We must learn from every incident and every challenge to keep us safe today and tomorrow. Turning then to our primary targets, where we've made good progress this year. Kate will provide further details on each of them shortly, but the headlines are we increased adjusted free cash flow by around 55% in 2025 on a price-adjusted basis. Net debt was $22.2 billion at the end of last year, which is $800 million lower than at the end of 2024. We've now delivered $2.8 billion of our $4 billion to $5 billion structural cost reduction target since the start of the program, including around $2 billion in 2025. Going forward, we have increased this target to $5.5 billion to $6.5 billion, which includes the expected cost reductions from the divestment of Castrol. Kate will cover that shortly. And return on average capital employed was around 14% in 2025 on a price-adjusted basis, and that's up from 12% in 2024. So we are executing our plan. We're taking decisive action on costs, capital and portfolio. And that, combined with the Board's decision to suspend the share buybacks and fully allocate excess cash to the balance sheet, that will create a strong platform to invest with discipline into our deep hopper of oil and gas opportunities. In the near term, this is supported by 3 more major projects that we expect to bring online by the end of 2027 with 6 more projects sanctioned. We're on track to bring a further 8 to 10 projects online between 2028 and 2030. And as we look to the long term, our success in exploration and access in 2025 has created a real sense of excitement around the company and around the opportunities that we have ahead of us, including in the Middle East, Brazil and Namibia. And there's more to come with planned exploration wells this year, including in Libya, Angola, Brazil and the Gulf of America. So we see potential to drive disciplined organic production growth over the longer term, underpinned by our distinctive resource hopper and our capability, our people, our technology, our experience, and that will maximize value for our shareholders. So more on that from Gordon shortly as well as the significant progress being made by the team in the downstream, which I'll cover and come back to later. But for now, let me hand over to Kate. Katherine Thomson: Thank you, Carol, and good afternoon, everyone. It's great to see you all here. Thank you for joining us. We covered our fourth quarter and full year results in the video released earlier today at 7:00 a.m. U.K. time. So I'll just do a quick recap of the headlines here. We generated underlying replacement cost profit or net income of $7.5 billion in 2025 against the backdrop of a weaker price environment. This result was underpinned by strong operating performance, which Carol already highlighted. Operating cash flow for the year was $24.5 billion, including an adjusted working capital build of $2.9 billion this year. We improved capital efficiency and tightened further our discipline, delivering full year CapEx of $14.5 billion, including a reduction of organic CapEx to $13.6 billion. For 2025, including the fourth quarter dividend announced this morning, shareholder distributions for the year were around 30% of our 2025 operating cash flow and within the guidance issued last February. As mentioned in this morning's release, the guidance for shareholder distributions is now retired, but the dividend remains our first financial priority. As we guided in our trading statement, we recognized impairments of around $4 billion after tax this quarter. These impairment charges are largely related to our transition businesses, including biogas and renewables, where we took decisive action to manage our pace of growth and to high-grade our portfolio to maximize returns. While these are noncash adjustments in our financial results, we do recognize that every impairment reflects a prior capital outlay. We're committed to doing better for our shareholders on capital allocation, driven by a disciplined and rigorous focus on returns as we progress only the best opportunities from our hopper. Now I'd like to provide more details on the progress we've made on our 4 primary targets in 2025. We're 4 quarters into our 12-quarter plan, and we've made a good start, and we are focused on accelerating wherever we can. If I start with adjusted free cash flow, we are progressing ahead of our target for greater than 20% compound annual growth through 2027. On both a reported and a price-adjusted basis, we generated around $13 billion of adjusted free cash flow. Our targets are presented on $70 per barrel at 2024. So on a price-adjusted basis, this represents around a 55% growth from last year. This achievement was supported by interventions made on CapEx, the significant improvement in downstream operating cash flow generation and good progress in the Upstream. Moving on to return on capital employed. On a price-adjusted basis, return on average capital employed increased from around 12% in 2024 to around 14% in 2025. We remain confident in achieving our price-adjusted target of over 16% in 2027. Moving to costs, where we are fundamentally shifting the cost performance culture right across the organization to safely achieve top quartile wherever possible. In 2025, we delivered around $2 billion of reductions, a material step-up from 2024. This brings cumulative reductions to $2.8 billion to date. That's equivalent to around 60% of our $4 billion to $5 billion target by 2027 versus the 2023 baseline. Reflecting the recently announced outcome of the Castrol strategic review, we now expect to deliver structural cost reductions of $5.5 billion to $6.5 billion by 2027. And as a reminder, this doesn't include any expected additional savings from the intended sale of our Gelsenkirchen refinery. Importantly, our cost reductions have more than offset around $2 billion of costs related to growing our business and environmental factors such as inflation, resulting in underlying operating expenditure reduced by over $700 million since 2023. Looking ahead, we plan to deliver a further $1.2 billion to $2.2 billion of structural cost reductions. After taking account of an assumption for inflation and growth costs, we expect to see an acceleration in the reduction of our underlying operating expenditures from now through to 2027. Taken together, this means underlying operating expenditure could reduce to around $19 billion to $20 billion by 2027. Based on cost benchmarking and competitive analysis, we believe we're making good progress. We're ahead of plan in some areas behind in others, but overall on track. In Oil and Gas, the business has maintained its top quartile cost position, keeping unit production costs at around $6 per barrel on average over the last 4 years. This is supported by the delivery of around $600 million of structural cost reductions in 2025, offsetting inflationary pressures and business growth costs. Not all of our operated regions rank us top quartile on cost, and we are in action to safely address this. In customers, over the last 4 years, our cost performance benchmarked in the middle to lower quartile range. And as a result, we laid out a target at the CMU to lower our total cash cost to gross margin ratio by over 10 percentage points by 2027, and we are now halfway there. We delivered $700 million of structural cost reductions, which contributed to this improvement. We believe this brings us up to the higher end of the second quartile, and we are in action to be firmly within top quartile by 2027. Turning to areas of our business where we have more to do to safely reduce our cost base. In refining, we have a target of sustainably reducing our cash breakeven by $3 per barrel by 2027. That's equivalent to around $1.5 billion of additional cash flow. This year, we delivered around 80% of our cash breakeven target, mostly through commercial optimization and improved availability. Structural cost reductions also contributed around $300 million this year, driven primarily by optimization of maintenance and supply chain efficiencies. We need to continue to safely lower costs to improve our competitive positioning and underpin our aim of being first quartile margin per barrel and second quartile refining cost per barrel in 2027. Within group central functions, our 2025 cost base needs to improve to reach top quartile. We are already in action when we saw an 8% reduction in '25 through initiatives such as reducing headcount in higher-cost locations, leveraging strategic third-party partnerships and simplifying processes and driving digital efficiencies throughout the businesses. We expect to see the contribution from these actions to increasingly show up in our 2026 results, and we are working to drive to top quartile on average across our functions. Turning next to our target to strengthen the balance sheet. This is key to enabling us to manage and grow the business through the commodity cycle. We continue to target net debt to be in the range of $14 billion to $18 billion by the end of 2027 and have visibility to moving into that range with the expected closing of the Castrol transaction. In 2025, operating cash flow and divestment and other proceeds was $30.4 billion. I would note that this is after paying $1.2 billion towards the Gulf of America settlement liability accounted for in our working capital. Our uses of cash, including $1.2 billion to redeem hybrid bonds, came to $29.6 billion. So overall, this led to an $800 million reduction in our net debt. As we look ahead, we are seeking to accelerate the strengthening of our balance sheet, not only to allow us to more easily tolerate commodity cycles, but also to drive higher free cash flow for our shareholders. We look beyond financing debt when considering our capital structure. We also consider financial obligations, including hybrid bonds, leases and Gulf of America settlement liabilities. At the end of 2025, these financial obligations added up to around $58 billion. Looking ahead and as we consider sources and uses of cash, out of the $20 billion divestment program announced last February, we've received $5.3 billion in 2025. The remaining $15 billion is underpinned by the $6 billion anticipated proceeds from the Castrol transaction and a deep hopper of quality assets that we continuously high grade. In 2026, we expect this to result in another $3 billion to $4 billion of divestment proceeds. All proceeds in 2026 are expected to be heavily weighted to the second half of the year. Turning now to uses of cash, and I'll start with dividends, our first financial priority. You can expect these to increase by at least 4% per year. Today, we announced a dividend per ordinary share of $0.0832. We, of course, continue to pay down the Gulf of America settlement liability through to the end of 2033, but the liability is largely settled by the end of 2032. In 2026, our gross payment is around $1.6 billion and in 2027, around $1.2 billion. After adjusting for changes related to tax amounts, the net liability is expected to be around $4 billion in 2027. We also continue to manage leases, hybrids and finance debt to optimize finance costs. Leases give us flexibility in relation to assets we choose not to own directly. With regard to hybrids under the S&P rules, we currently receive 50% equity treatment for the $12 billion issued during COVID in 2020. Within these rules, we can reduce the stack by up to 10% in any 1 year, up to a cumulative reduction of 25%. We intend to remain within these limits while, of course, continuing to manage maturities proactively. Moving on to CapEx. We have exercised discipline in capital allocation, investing in only the highest returning opportunities across the portfolio and pacing investment more deliberately. We've tightened our 2026 CapEx range to a range of $13 billion to $13.5 billion, and that's at the low end of the range we previously guided through to 2027. Spending this year will be slightly weighted to the first half. All these actions, together with the Board's decision to suspend share buybacks and fully allocate excess cash to the balance sheet are in service of optimizing finance costs and accelerating the improvement in free cash flow. Let me now hand over to Gordon. Gordon Birrell: Thanks, Kate. I'd like to spend a few minutes walking through the progress we've made in safely growing the Upstream over the past year. 2025 was a strong year for project execution as we started 7 major projects out of the 10 we expect to bring online between 2025 and 2027. Five of these were ahead of schedule. And we've now started up around 150,000 of the 250,000 barrels of oil equivalent per day net peak production that we expect to have online by 2027. This includes projects such as GTA in Mauritania and Senegal, [ SIP ] in Trinidad and Murlach in the North Sea. Delivering major projects takes focus and drive. We've encountered and overcome some challenges in some of our projects along the way. And I'm extremely proud that according to the most recent IPA benchmarks, we are ranked best overall -- ranked best-in-class overall for our projects starting up and staying up. Furthermore, of the wells that we drill, many as part of major projects, around 3/4 are in the top or second quartile. As mentioned by Carol, based on provisional data, our operational emissions in 2025 were 37% less than in 2019, a reduction well in excess of our target of 20%. Our methane intensity, again, based on provisional data, fell to 0.04%, thanks to improved operational performance, significantly below our 2025 target of 0.2%. You also heard from Carol that we had record plant reliability in 2025 of over 96%. We also had wells reliability of almost 98%. We saw strong base delivery, decline management and turnaround execution with standout examples, including ACG in Azerbaijan and Argos in the Gulf of America. This helped to keep our managed base decline comfortably within the 3% to 5% range. This level of operational delivery is a direct result of the years of investment we've made in world-class capability and cutting-edge technology. This has been a key differentiator for us, and we're not standing still. We're expanding the use of dynamic digital twins, AI and automation across the business. This includes real-time reservoir wells and facilities monitoring and optimization. These have played a key role in helping to increase BP operated production on average by around 2% every year for the last 5 years, while also protecting on average around 4% more from going off-line. The delivery of these elements enable us to beat our 2025 production plan. Furthermore, 2026 production, excluding divestments, is now expected to be around 2.3 million barrels of oil equivalent per day, broadly flat compared to 2025. This is an increase compared to the outlook we gave you this time last year. We're also working hard to strengthen our resource base. 12 months ago, we set a target to achieve 100% reserve replacement ratio by the end of 2027 or said another way, that we'll book around the same amount of proven reserves that we produced. We're making good progress towards that target. As a result of the strong operational delivery and project execution that I just described, in addition to some benefit from higher prices, we have increased our 2025 organic reserve replacement ratio to 90%. We have a high-quality pipeline of major projects due online between 2028 and 2030, including Kaskida and Tiber-Guadalupe in the Gulf of America, Shah Deniz Compression in Azerbaijan and Tangguh UCC in Indonesia. These 4 projects alone are expected to add another 250,000 barrels of oil equivalent per day of higher-margin net peak production. And I'm particularly proud of our exceptional year for exploration with 12 discoveries in 2025, including in the Gulf of America, Namibia and, of course, Brazil. People ask me, what's behind our exploration success? My response is that it is a blend of a deeply experienced exploration team and the application of advanced technology. We have examples where the combination of seismic technology with high-powered computing and advanced algorithms has enabled us to light up the subsurface by creating images with unprecedented clarity. Our capability and technology have also been important factors in being selected to help governments develop their discovered resources, such as in Kirkuk in Iraq and Karabagh in Azerbaijan. This combination of our exploration success and discovered resource access is enabling us to reduce -- to reload our resource hopper. And others are also acknowledging the progress we've made to strengthen our resource base. When benchmarked using [ WoodMac ] data, we now have the second longest remaining resource life of the majors. In summary, we believe that our deep resource base is a real competitive advantage. It creates what we call quality through choice. It provides the potential for long-term organic growth and combined with disciplined investment criteria, enables us to progress the most value-accretive options with the highest returns. Along with our high-quality assets, outstanding capability and advanced technology, we believe this is distinctive and a key differentiator supporting the BP investment case. I'd like to finish by providing an update on the exciting Bumerangue discovery in Brazil, our largest find in the last 25 years. We're making good progress. The in-situ analysis is materially complete, and our initial estimate is that there is around 8 billion barrels of liquids in place, split roughly 50% oil and 50% condensate. As is normal at this stage, there is a wide range of uncertainty around this estimate. We've appointed senior leadership and are currently working on design concepts, including the potential for an early production system. We're also putting plans in place for an appraisal program, which we expect to start around the end of the year. This will use the Transocean's deepwater Mykonos rig following the drilling of our Tupinamba exploration prospect in a neighboring block. This will provide us with data from locations across the reservoir to enable us to describe the fluid characteristics and resource potential. As you can see, we're in action with confidence and our excitement in this huge opportunity is growing. With that, I'll hand back to Carol. Carol Howle: Thanks, Gordon. And yes, a lot of great progress in the Upstream. And it was also a strong year for the Downstream, having delivered a significant step-up in performance. We continue to optimize our cost base safely with around $1.6 billion of structural cost reductions delivered to date. And customers delivered their highest underlying earnings since 2019 with all businesses growing year-on-year. And our approach to investments in our refineries in midstream has created the ability for us to consistently run the kit above 96% and capture that margin. And we're also progressing our business improvement plan at TA and the commercial integration of our BP Bioenergy acquisition is now complete. We're also in action to focus our portfolio on our leading integrated businesses, having announced the sale of Castrol, completed the sale of [ Netherlands Retail ], and we continue to progress the intended sale of our refinery, Gelsenkirchen and Austria Retail as well. So let me just close now before we turn to questions for the next 45 minutes or so. We've reflected today on where we've come from as a company and the really good progress we've made in 2025. And we know we need to accelerate delivery in every dimension of our reset strategy. And we're resolute on what our focus needs to be for BP. We need to build on a good year and operate well consistently quarter in, quarter out. We need to accelerate the strengthening of the balance sheet, which includes taking the decision to suspend the buyback and delivering the $20 billion of the divestment program. Our discipline on capital allocation is key, and we must continue to simplify our portfolio. We've made progress in addressing that in 2025, and it will remain the central focus for us going forward. We've also made good progress on our cost base, and we're in action to take our businesses and functions to top quartile by the end of 2027. And all of this must be in service of materially improving cash flow and returns and value for our shareholders. And as we look ahead, we have a portfolio of world-class assets and the richest set of organic opportunities for growth that we've had in many years. The Board and the leadership team are aligned around our goal to become a simpler, stronger and more valuable company and in turn, grow shareholder returns. We're in action. We do have more to do, and we can and will do better for our shareholders. With that, we go to Q&A. Craig Marshall: Okay. Super. Thank you, Carol, and thanks, everybody, for listening to our remarks. What we're going to do is, as usual, take one question, please, from those in the room and those online. We'll certainly come back to everybody if there's time and an extra question, I can assure you. And we will aim to finish by around 2:30 U.K. time here. So Michele, you are quick off the mark there, so we'll turn to you first. And if I can just ask everybody to say their name and the company they're with, please. Thank you. Michele Della Vigna: Michele Della Vigna from Goldman Sachs. Thank you very much for the wealth of information provided today. I wanted to come back to the finance cost. I think it's very helpful to look at all of the different sources of debt and to lay out the $15 billion reduction. I was wondering what does it mean in terms of reduction in actually the finance cost by 2027? How much could we expect that to go down by then? Katherine Thomson: Yes. Thank you for the question, Michele. And I understand, of course, why you're asking that. Look, what we've tried to do today is be utterly transparent on the totality of the financial obligations that we are managing. And I think it underlines the imperative to do something now to really strengthen our balance sheet and make a step change in the pace at which we do that in service of growing free cash flow. There are a couple of elements that it's worth just calling out. So the Deepwater Horizon obligation, that is a payment that we will make each year. This year, it's $1.6 billion next year, it's $1.2 billion, then it's materially complete by the end of 2032. And then we turn pretty much to hybrids and debt. We've got a net debt target of 14% to 18%. That is our first priority. And we are determined to deliver that. We've got line of sight to it now. And we will, of course, be stepping through that as we go through the year and we get proceeds in. I'm very cognizant of the S&P limitations on hybrid, the 10% in any 1 year up to a cumulative of 25%. Having said all of that, I think it's incumbent on us as we have excess cash to make the very best economic decisions in terms of how we deploy that. You can do the rule of thumb based on what you can see our current financing costs are today to have a sense of what a $15 billion total reduction could look like by 2027. The actual reduction will obviously depend on the choices that we make as we deploy that excess cash. But this is ultimately about materially changing the total financial obligations we are servicing and as a consequence, drive higher free cash flow and position us strongly to have the best opportunity to develop the set of organic options that we have ahead of us, which are unique. Craig Marshall: Thank you, Michele. We'll go to Martijn Rats just in the second row there, please. Martijn? Martijn Rats: It's Martijn Ratz of Morgan Stanley. I want to sort of ask a question about the dividend. The guidance for growth in dividend per share is still 4% plus. But when the buyback was still there, you could say, well, like a good couple of points of that actually does come from the share reduction -- share count reduction from the buyback. So in many ways, there is a little bit of an underlying upgrade in the outlook for the total dividend burden of the company. And I was wondering if there's a sort of the fact that you removed the buyback but capped the dividend growth. Is there also a signal in there that there is confidence in the long run? And is that something that I'm interpreting correctly here as in like -- because you could also said, look, most of the dividend growth actually just come from the buyback -- share count reduction. But despite that, we are keeping the dividend growth on track. Katherine Thomson: Yes. I mean, mathematically, you could reach the conclusion you've outlined, Martin, I completely agree with you. I think it's really important we have a progressive dividend, and we've been really clear only a year ago that that's a 4% increase per annum and the Board is comfortable. We want to retain that. That's the first priority in our financial frame. Beyond that, it's about building back the balance sheet and then investing for growth. Yes, the flywheel for share count reduction has changed with the decision around the suspension of the buyback. But I think one of the things that Meg and I will need to step through when she comes in, in April is contemplate what sort of balance sheet we want that is in support of the growth options that we have ahead of us, and we'll need to step through that. But for now, the financial frame is clear. The only thing we are altering is we are suspending the buybacks and putting all of that excess cash against strengthening our balance sheet. The dividend, the 4% growth per annum is exactly what we want to maintain right now. Craig Marshall: I'm going to go over to this side. Chris Kuplent, please. Christopher Kuplent: Chris Kuplent, Bank of America. I've got another one for you, Kate. You showed the performance in 2025 in most respects was well ahead of targets you laid out 12 months ago. So I wonder whether you could talk us through the decision-making tree, why in the end, you decided to suspend the buyback. Katherine Thomson: I don't know that it's as complicated as a tree actually, Chris. I think this is just strong financial discipline. Over the last year, we've created a materially different hopper of options in terms of future earnings growth. And now the right decision to take is to strengthen our balance sheet to give us the foundation from which we will access that. And it will also create a degree of choice over how much of that we continue to hold as working interest. You know that we have significant growth opportunities in the Paleogene in Brazil, there's others in Namibia. We currently hold Paleogene in Brazil 100%. And at some point, we can make choices around how much we may want to dilute. The strength of the balance sheet that we have will allow us to make choices that are positioned to enable us to capture maximum shareholder value. So I don't think it's as complicated as a decision tree on the balance sheet. This is just about the right decision now to take an action that materially increases the pace at which we strengthen our balance sheet and gives us that foundation for the future. Craig Marshall: Okay. I'll stay on this slide, Josh. Joshua Eliot Stone: It's Josh Stone here from UBS. I'm going to come back to the use of cash, if that's okay. I think you've taken a very brave decision to spend the buyback, and I think ultimately the right decision for the reasons you've laid out. One thing that's not very clear, though, is where -- at what point would you feel more comfortable to reinstate the buyback program? Is it a case of having to wait for a new CEO to sort of decide that leverage level? Do you have some views yourself of at what point the leverage level would be appropriate for BP to be able to buy back its own stock? Katherine Thomson: Thanks, Josh. I'm sure at some point, someone is going to ask a question of Carol and Gordon here on the panel as well. When will we reinstate? You can see from the sort of pro forma impact of the remaining divestment proceeds, what we think that the order of magnitude could be as we deliver the remaining $20 billion over the next couple of years. So I think there's an opportunity to deliver a materially stronger balance sheet. I'm probably going to repeat myself a couple of times this afternoon, so please bear with me. I think it's really important that Megan and I have the space with Gordon and the team to go through the hopper of options that we've got in terms of our growth looking ahead. We've got an incredibly powerful set of organic growth that we've created through the drill bit that's more value accretive than going and buying barrels. And we need to consider those and think about how they rank and which ones we invest in what order of priority. Once we're clear on that, then I think we can decide what sort of balance sheet we need to support that. And I think it's important that we have the time and space to do that. For now, what we're focused on is delivering the net debt target, the $14 billion to $18 billion. And once we have delivered that, then I think we'll be in a position to update you, but I'm not going to suggest when that may or may not occur right now. We've got plenty of things to step through. Craig Marshall: Go back over this side, Doug. Douglas George Blyth Leggate: Thank you. I think folks have flogged the financial question, Kate, a bit. So I will turn to Gordon, if I may. Gordon, you gave a few hints on Bumerangue, obviously. I wonder if I could ask you just to give us a few more hints. The recoverable number is pretty critical to the outlook for Bumerangue. You've talked about high-quality rock -- rule of thumb, I would say, 40%. Could you give us an idea of what you're thinking and what working interest would you be prepared to go forward with an early production system? I'm sorry, it's Doug Leggate from Wolfe. Gordon Birrell: Doug -- thanks for the question. Let me take the equity question first. We're in -- it's early days, and we're in no rush to take a partner. When we do take a partner, it will be the right partner for value and the right partner who can bring something to the table to help us develop this field. We're not putting out a recoverable number right now because I'd like to understand a bit more across the reservoir, what the variability is across the reservoir, if nothing else, before we put any more numbers. I remain excited by it. There's nothing I see that has diminished my excitement about this field at 100%, 8 billion barrels in good terms to develop on. So we're going to do the appraisal program early next year. That will enable us to lock down a development concept at that point in time. But just as a reminder of what we did put out there last year that should take you a long way to figure things out, Doug, would be 1,000 meters of hydrocarbon column, 900 condensate, 100 oil. And we did say the gradient across the rock was consistent, which would tell you it's well connected in the vertical sense. And we told you it's 300 kilometers square. So there's a reasonable amount of data out there and there are reasonable analogs out there, I would say, but we're not going to put a recoverable number out until we get a little -- we reduce that uncertainty range down to something that we're more comfortable with. Well, it could be a wide range. I'm comfortable for the moment at 100. We'll find the right partner and we'll come down. But it's material for our company, and it really -- and the terms are good. So we'll retain a very significant proportion of this field. Craig Marshall: Thank you, Doug. Lydia. Lydia Rainforth: It's Lydia Rainforth from Barclays. I'm going to come back to capital discipline. What's different this time? And we've talked -- the Board have talked about needing more rigor, more diligence. Kate, you referenced that there have been write-downs and impairments. And you're all very compelling at that. There's lots of opportunities. But how do you -- has anything changed in that capital allocation process? What's different? How do investors trust that you're going to make the right decisions going forward? Carol Howle: I think let me start on that and see whether you want to jump in, Kate. So there has been a real cultural shift in cost and discipline in BP. And I think you'll have seen that from the results from 2025 in terms of the progress around cost reductions, I think also capital productivity, and Gordon can give some great examples around that productivity efficiency gains that we're seeing on the production side. We know that every dollar has to compete within the portfolio. We're very much focused on that. We're only going to be investing in the very best of opportunities. It's what we are holding ourselves to account on. So everything needs to compete, and that's why we made some very difficult portfolio decisions last year, and we'll continue to review the portfolio and make those right commercial decisions going forward. Katherine Thomson: I guess the only other thing I think I absolutely agree with you, Carol, is as a leadership team, we know how important this is. It's got a huge degree of focus, and we know we need to get this right. You've seen a significant structural shift for us in terms of strategy. We know that we went too far, too fast a number of years ago. But as we take investment decisions today, we are focused very hard on interrogating the level of confidence that we've got on the returns, testing hard the downside risk as we take every single investment decision. And I think in time, that will show up with less impairments. Of course, you're always going to have impairments that are driven by environment around you. I hold those slightly differently to impairments that you could argue are a consequence of capital allocation. But the impairments that we've taken in 4Q are a direct consequence of a deliberate decision to tighten the capital that we're deploying and the pace at which we're deploying it to maximize returns and shareholder value in terms of cash flow. Craig Marshall: Gordon, do you want to talk capital efficiency? Gordon Birrell: Yes. Just a plug for the teams out there doing it every day. I mean, some tremendous real examples of capital productivity in Azerbaijan and ECG and Atlantis, we're drilling these long undulating horizontal wells with geo-steering -- so a significant reduction in dollars per of rock contacted. In BPX in our Lower 48 business, 20% improvement in completion time, 9% improvement in drilling time. So in Lower 48, we can unlock the same amount of resources in a year using 8 rigs that used to take us 10 rigs. So that's real capital productivity coming through, which means there's less capital required to hit our targets means we can allocate capital elsewhere. So the capital productivity drive that we've been on for a number of years is starting to come through to the bottom line in terms of activity. Craig Marshall: Thank you. I'm going to go to the forward and I'm go to this side of the room. Paul Cheng at Scotia. Paul, can you hear us? Paul Cheng: If I could, Kate, on the $5.5 billion to $6.5 billion on the cost reduction target increase, how much does that relate to the sale of the Castrol interest? And also, when you look at, say, cumulatively, you're talking about $2.8 billion of the savings. Can you break down between portfolio impact and the actual cost saving? Katherine Thomson: Yes. Paul, thank you for your question. In terms of the change in the target, we've added $1.5 billion on to the $4 billion to $5 billion just to reflect the transaction on Castrol. So hopefully, that's fairly straightforward. With regard to the $2.8 billion that we've delivered today to date rather. You may remember when we set this target out there, we talked about probably around half of the savings coming from our supply chain and our third-party optimization. That's exactly the analysis that I've looked at in terms of that $2.8 billion. Half of it has come from supply chain and third party. And then of the remaining half, it's pretty evenly split actually between organizational optimization and portfolio. So that's the way to hold the $2.8 billion delivery so far. Craig Marshall: Thanks, Paul. This slide, Alex. Unknown Analyst: My question is about the remaining divestments you have until the end of '27, which are the priorities in terms of assets you want to sell in terms of the sectors, probably more in the downstream or you are counting on the farm down of some of the discoveries in '25 for this target? That's -- you can elaborate on that. Carol Howle: So when we look at the portfolio, I mean, we're very much looking at it with regards to the best returns for BP, where could others see more value in certain assets than we do. And so we're looking at that as well. So we're looking across the whole portfolio across upstream and downstream and also into the low carbon business. At the moment, we do have under process the Gelsenkirchen refinery. We're looking at Austria retail. As you know, we've also got interested parties for Lightsource BP. So that will also be an area that we're looking at. And there are certain areas that we'll consider whether we farm down on them. I don't think there's a contingent decision. We don't need to. It's a question of what's the right decision for BP, for example, in our position in the Paleogene. So we're looking at each specific piece in the portfolio in terms of its value add to BP from a strategic perspective, the value for us, the value for our shareholders, and then we're weighing it up on that basis. Did I miss any, Kate? Katherine Thomson: No. I mean we'll update you as we go. We've got a really good hopper in terms of depth and breadth of quality on assets. So we have plenty of choice, and we aren't in a rush. You can see we've said for this year, 3 to 4 on top of Castrol a typical level of just ongoing high grading of our portfolio of assets. We won't guide in advance where that's likely to come from. We will make those value-based decisions as we step through them. Craig Marshall: Okay. Thank you. One more question, yes. Mark Wilson: It's Mark Wilson from Jefferies. It's a really interesting setup because by 2027, when you've got your balance sheet down, you should have a concept development for Bumerangue. So Bumerangue clearly looms large in your future. I'd like to ask, firstly, does this just outweigh all the others? You've got 2 of the 12 total exploration discoveries. So just give us a pecking order there. And early '27 comes up very quickly. Are you telling us you would be happy to appraise this through '27 at 100% working interest? Gordon Birrell: Let me just comment on the quality of our hopper. If you look at the WoodMac benchmarking, they're using our numbers, using their methodology, they give us 23 years of production at the current production level. That's the longevity we've created in the company through accessing discovered undeveloped barrels like Karabagh, like Kirkuk as well as through the drill bit with Namibia, with what we've done in Egypt, what we've done in Trinidad and what we've done in Bumerangue. So we have a very rich hopper of opportunities. So I won't give you a rank order, but clearly, Bumerangue has the potential to be very, very material for our company. And Brazil is a country we know well. We've operated there for many, many years in different types of businesses there. Namibia is very exciting. Of course, the discoveries are under the Azule brand, but we've drilled 3 wells there, 3 exploration wells in Block 85 and 2 discoveries, 2 nice discoveries, liquids, good quality rock, good quality fluids. So I would expect them to come to the fore rather quickly. And then we have our ongoing program in Trinidad, which we like as well. So there have been a number of discoveries in Trinidad that will push close to the front of the queue, I think. And then, of course, in Azerbaijan, we've got Karabagh, which is discovered, undeveloped that we also are working hard on to make that into an economic investment. So I wouldn't put any rank order on them. They will all compete on the day based on their economics. They won't all get funded for sure. and we'll back to quality through choice, as I mentioned earlier. Your question about would we go through the full appraisal phase as 100% BP, we could. If we have a partner before then that would add value to BP, then of course, we would take a partner. So I'm not 100% committing to it, but we're -- as I mentioned earlier, we're in no rush to take a partner. It has to be for value here. Craig Marshall: Thanks, Mark, for your question. We'll go over to the side, Biraj. Biraj Borkhataria: It's Biraj Borkhataria, One of the things I was struggling with the morning was reconciling the net debt target, which was unchanged with the buyback cut. You're obviously cutting CapEx as well, you're cutting OpEx as well. So just trying to understand the moving parts there. I know you're going to potentially redeem some of the hybrids, so that will put upward pressure on that number. But a couple of other moving pieces. Has your view on the ability to sell Lightsource changed? Because there's not -- I don't know how much equity value is there, but there's obviously a lot of debt associated with that. And secondly, could you just rationalize why you did a partial sell-down for Castrol rather than the whole thing, which I think was part of the original plan? Katherine Thomson: I have one question or 3. I'll let you off Biraj. So I think your first -- maybe it was an observation as opposed to a question, which is the net debt target hasn't changed. No, it hasn't. I'd like to deliver the target and then we'll see. I'll just take the opportunity while I'm talking about that target again, just to make it clear, that is not an automatic trigger for us to reinstate the buyback. We need to take a holistic view of the balance sheet. We need to set ourselves up for the growth that we've got. And I think it's appropriate that we think about that very carefully before we start talking about it. Having said that, of course, we understand the share buyback is a tool for returning excess cash to shareholders. And we do need to think hard about the balance between investing for growth and returning to shareholders. For now, the imperative is strengthening that balance sheet, and we're utterly clear on that. A couple of things that also came through on some of the earlier questions in the room were around -- is the change in buyback something around confidence? There's something that I heard earlier on in the room, and you're asking a question around confidence in Lightsource. But I think one of the things that's important to iterate right now is you can see from the results we've printed today that actually our underlying performance is incredibly strong. So this is not a lack of confidence. If anything, I'm more confident in the delivery against our plan than I was a year ago when I stood up here. This is around creating the right strength. And on Lightsource, I think Carol mentioned it just a couple of moments ago, we've got a number of interested parties who are looking very hard at Lightsource, and we're working through that. And of course, we'll only transact for value. But right now, we're moving through that process, but there's no need to rush. And then on Castrol, we took our time to completely evaluate what a transaction around Castrol could look like. It's a great asset. It's a great business with a real future ahead of it in terms of earnings growth. And we came to the conclusion that the transaction that we signed with Stonepeak just before Christmas was the right transaction to do. It is a good value decision, a good value transaction, EV of $10.1 billion, and it gives us good multiples, I think 8.6x EV EBITDA, which is at least as good as, if not better than other precedent transactions. And on top of that, the retention of the 35% gives us the opportunity to share in future upside. So I think it's a good transaction for us and for shareholders, and it materially derisks that $6 billion against our balance sheet, which is really important. Craig Marshall: Thanks, Biraj. We'll stay in this side. Irene. Irene Himona: Irene Himona at Bernstein. Carl, I wanted to ask a question not as Interim CEO, but as Head of Trading. When you are adding to the portfolio, things like [ IKEA ], biogas and Lightsource renewables, you had expressed a sort of vision that by enhancing or adding more tradable products, the return from trading would thereby improve. And today, you disclosed a 4% enhancement to group ROACE from trading, which to me sounds sort of top end of the range you had given before. It used to be 2% to 4% or 3% to 4%. So I wanted to ask, is this 4% over the last 6 years legacy oil and gas? Or have these businesses which actually you impaired today, have they made any contribution to that profitability of trading? Carol Howle: So thank you for the question, Irene. So we have delivered, as you said, 4% from Supply Trading and shipping for the sixth year in a row. And what I would just call out there is that, that's been through a number of commodity cycles through lots of different volatility sets. So what we have is a really competitively advantaged team who look at our BP business from the asset base. So I think we sort of said before, we look at what can we optimize and deliver from the asset base. That's around 2%. We look at around 1% from optimization and 1% from value trading. So within that, we do work, for example, with IKEA around routes to market and around the different types of channels, whether that's into utilities or into transport. So we support that. We've also supported working with refineries and with our oil and gas business, as you say. I think what we've seen is a real sort of change in, one, the BP portfolio, we've got such a rich set of opportunities at higher sort of levels of return, which means we need to make really difficult choices. So that's what you will have seen in Q4 around the IKEA impairment, for example. We're making difficult choices in terms of where we're putting our CapEx going forward because we see returns elsewhere. I would say we don't guide forward on the 4%. But I would say I think the capability and the experience within the team has meant that we can deliver that through a number of different opportunity sets, and we optimize the assets that BP has, and we will continue to do that going forward. Craig Marshall: Okay. Thanks, Irene. We don't have any further questions online. So we'll stay in the room. Is that Al Syme? Alastair Syme: Alastair Syme at Citi. I'm not sure I'm asking this. Can I ask about the Mona project? I appreciate it's under [indiscernible], but the decision to go forward on that development to leave Morgan, what's the sort of the time line? And how should we think about the financials given that you didn't get anything under the AR7 auction? Carol Howle: So I'll say that is a JV discussion. So in terms of that decision to move forward with Mona. So I mean, I think it is a question for the JV. One thing I would say is, from our perspective, we're not looking at any increase or update in terms of what we said previously with regard to capital allocation to that JV. So that just remains consistent from what we said previously in case that was behind the question. Craig Marshall: Thanks, Alastair. No questions on this side. I'm going to round 2 then. Lydia the front, please. Lydia Rainforth: It's Lydia again from Barclays. I haven't asked a question about technology and AI, and particularly, it's one of my favorite topics. But when you think about sort of what you can achieve, the progress that is made on AI, and it won't just be cost, it will be recovery rates, et cetera. So can you just share your thoughts on the Agentic AI side? Gordon Birrell: Yes. I'll -- let me have a go at that. The -- one of the things I'm particularly excited about is what we call Wells Advisors. So BP has been drilling wells for well over 100 years. So you could imagine the amount of learnings, data and knowledge that we have in our system, and that's a variety of systems. So we've now created an AI system where our well site leaders, the people on the rig who are making day-to-day decisions, facing problems, problem solving, they can access all that data through Wells Adviser, which is using AI as a platform. So huge benefits of that. The other one that we're doing right now, again, in the wells, I've got examples in every discipline, but I like the wells ones, I have to say, the kick detection. We monitor all our wells with an extra pair of eyes now from monitoring centers in Houston and in Sunbury. And we've put AI algorithms in place that we have small kicks tiny kits that the human may not detect on the rig floor. We're picking them up using AI. And with 90% success rate, we can detect small kits within roughly a minute. And that allows us to react before it becomes a problem, before you have to shut down drilling, before you have to shut the well and then circulate out that pressure, it allows you to react with weight on bit and mud weight. And it just allows the drilling to happen more smoothly. So there's lots of examples where we're doing that across every technical discipline in my shop with [indiscernible] and his team's help, of course, with the digital expertise, their AI expertise. So I think every function across the company has examples like that. Craig Marshall: Super great. We'll go stay on this side, who definitely are the keenest with Lucas there, please. Lucas Herrmann: Thanks very much, Craig. It's Lucas Herrmann from BNP. One perhaps -- well, for you, Carol or you Gordon equally, it's -- I'm listening to what you're saying, and there's a very rightful targeting of balance sheet, et cetera, and search to improve the balance sheet. And in doing that, obviously, you're taking away from equity holders in the near term and you're asking them to stay with you. And you're not giving equity holders a date whereby they might expect to see greater distributions from the company in line with many of your peers. So effectively, I'm sitting here and I'm thinking, well, what's the investment case around this stock? And increasingly, it comes back to, obviously, improvement, much of which though you've already stated and indicated, but it comes back to what you're trying to emphasize, I think, is growth. And okay, if I'm going to believe in growth, and the growth opportunity of your portfolio. What should I expect in terms of the continued release from you, demonstration from you around your opportunity set and why it is that I should accord a higher multiple effectively to this stock and your business going forward, given that in the context of immediate return, I'm really -- I'm not expecting very much over the course of the next 2 to 3 years, given the way you've defined and thought about balance sheet. I think there is a question in there somewhere. It's asking you effectively, please tell me what the investment case for BP is, whether that's an appropriate definition. But more importantly is how do you see the investment case for BP? Or should we just be waiting for Meg to arrive? And I know you've got your own views, but at that point, you formulate as a group. So I'm not trying to insult anyone. I'm just trying to understand. Carol Howle: No, no, I completely understand. And look, let me just start on that last bit because I think what is clear, the Board and the leadership team, we're very clear that the strategic direction is right in terms of what we laid out in February. So we are focused on delivering that. We're focused on delivering the primary targets. We know that there's more opportunity there, and that is a good thing because we know that there is more that we can deliver. So we're focused on improving performance, improving competitiveness and, of course, doing all of that safely. So very much focused on that. We're in action. That doesn't change when make comes because that is our strategic direction. In terms of -- and I'll let Gordon speak sort of more deeply to the hopper. But we do have and the team has created the best set of opportunities from an upstream exploration access perspective that we've seen for a long time. So there is a lot of opportunity set there. As Kate said, it's created at the drill bit. We're not looking at going and buying expensive barrels in order to increase our reserves or to look at the sort of resilience and length of those reserves. So we believe we've got a differentiated portfolio versus our competitors. And our challenge is deciding how we access it, what's the best value for our shareholders and delivering the returns and making sure that we actually deliver on the major project execution success that we've seen previously. We brought these projects online last year, 5 ahead of schedule. That is significant capability. As Gordon says, IPA benchmarking, best-in-class for bringing projects up and keeping them up. So these are all things from a forward profile perspective that you can look to from BP delivery. But Gordon, do you want to. Gordon Birrell: No. Thank you. And I'll just emphasize a couple of things. And Lucas, I would offer you reasons to believe short term, medium term, long term. Short term, the base is strong. What's online today, we're managing decline within that 3% to 5%. The infill program that we have that short-term barrels that pays the bills strong, rigs running very efficiently. 70% of the wells that we drill are first and second quartile. So short term, you've got an efficient machine that's bringing resource forward into production into cash. Medium term, I would say you've got BPX growing to 650,000 barrels per day of high-quality production, average returns across BPX at the moment, 45% IRR at $65 WTI, $3.50 Henry Hub. And then the Paleogene comes on in '29 through '30 and will ramp up. So that's the medium term. We've got strong medium term. And then longer term, you've got -- when I say longer term, early 2030s, I hope. We'll bring on Bumerangue, the Azule fields will start coming on in Namibia. There's more to go in Angola, and there'll be much more Paleogene to come on as well. We've got 10 billion barrels of oil in place in the Paleogene. The first 2 projects, Kaskida, Tiber-Guadalupe are only developing about $600 million. So there's a huge amount of running room in the Paleogene longer term. So there's a short-term case, medium-term case and long-term case. that I believe are reasons to believe. Craig Marshall: Thanks, Lucas. And I'll just come back to what we said earlier, the simpler, stronger, more valuable BP. The simpler piece is the action we're taking on the portfolio. These are the right decisions to simplify the portfolio. It creates optionality. The stronger piece, which is about the cost we're taking out of the system, the opportunity there that we've got and also around really focusing that portfolio and the optionality that I think Gordon talks about. And ultimately, that more valuable BP is the piece around what can we do in combination as we try to drive that simplification and strengthening the company. So I think that real focusing discipline is something. And of course, we run the company, not just for the next week, the next quarter. These are around long-term value optimization decisions. And I think we feel like they're the right things to be taking. So I think come back to that simpler, stronger, more valuable piece. Maybe -- yes, Kim, sorry, I had a question from you. Unknown Analyst: [ Kim Foster ] from HSBC. There's been a revival of interest in the MENA region from IOCs. And of course, BP was sort of early in this trend. I wonder if you could give us an update on early resource access and early-stage activity in places like Libya, Iraq, Kuwait. And also maybe just a word about your exploration plans in the Gulf of Mexico, where I think you accessed a lot of acreage in the recent license round. Gordon Birrell: Yes. Let me just go to the Middle East first, Kim. So there is actually an exploration well we're drilling right now, Matsola offshore Libya that our exploration team is very excited by. It's probably the most watched exploration well in the industry right now. We spudded the well in January. It's a relatively short well. So we'll know the result of that one relatively quickly. And then, of course, in Iraq, we've been in Rumaila for many years, and that's been a tremendous success story. We've managed to hold production flat in Rumaila for many, many years. That led us to be invited into Kirkuk within the contract area, 3 billion barrels oil in place. In the bigger area, likely to be 20 billion barrels in place. So huge resources there. So we've made huge progress. And of course, Abu Dhabi, the P5 investment program that we've been putting our dollars into along with the partners onshore Abu Dhabi is showing up in terms of growth as well. So a huge amount of growth in our portfolio in the Middle East. Gulf of America exploration program, it's part of reloading the hopper. So our exploration hopper, we've been around the world and actively, like many companies, actively reloading our hopper. The Gulf of America, of course, an area that we know very well, been there for many years. And we've reloaded some in the Mayo scene, but mainly in the Paleogene. So that's created even more running room. The next exploration well in the Paleogene will be [indiscernible], which we will spud later this year, which could be quite an exciting tieback to Kaskida eventually. So again, creates longevity on that Paleogene opportunity that we have. So there's lots of running room in the Gulf of America, a lot in the Paleogene, still some in the Miocene that we've been producing from historically for many, many years. Craig Marshall: Okay. We'll move over to this side, Maurizio. Maurizio Carulli: Maurizio Carulli from Quilter Investment Management. First of all, well done for having cut the buyback. It was the right thing to do and probably you even managed to do at the right time. The question is past year, there were 3 important new appointment at Board level, Albert Manifold as the new Chair and the former CFO of Shell and the former CEO of Devon with strong oil experience. It's possible for what you can say to get a sense of how these changes are filter through the senior management day-to-day business. And ideally, if it is possible to get an answer from each of you free. Carol Howle: Checking our homework. So I mean, the first thing I'd say is Albert is our Non-Executive Chairman. So he's responsible for oversight of our delivery and our strategic direction. And we, as the leadership team and CEO when Meg comes in, are responsible for the day-to-day running of the company. So we do have many interactions, as you can manage with the Board on that basis in terms of sharing with them progress against strategic milestones and in particular, the delivery that we've been talking about here. We talk about also where we are on portfolio and where we believe that we need to get to and why. And we also share with them competitor insights. We share with them benchmarking, how we're looking to continuously improve what we're doing. So having that composition of the Board means that we have people who've been in the industry. We have people who are outside of the industry who challenge us in different ways as well from a technology perspective. And I think that just helps us generate more ideation and thinking, and we challenge ourselves from that perspective. So the intent there is to make even better decisions with the use of that capability set. How do you feel about it, Kate? Katherine Thomson: Sure that's 3 questions in one. But look, I've been on the Board now for 2 years. And my reflections are during that time, I think the conversations in the boardroom have got better and better. Albert coming in as Chairman. He's been incredibly supportive. He brings a different style and that freshness is great, and I think we welcome it. It's great to have a different set of eyes coming in to ask questions. And it's really important in any area of any business that you have a freshness coming in and an ability to look from the outside and ask the right questions. So I welcome that. I particularly welcome the number of ex-CFOs I have around me. That's a real treat. And then I think the addition of Dave Hager, as you know, deep upstream experience, particularly on the onshore. Again, we have retirements that will continue to roll through as a Board, and it's important that the Board is thinking ahead of those to make sure that the succession is smooth, and that's a lot of what you've also seen happening in the boardroom. But I think the Board are incredibly supportive of management. I think we have really good quality conversations and debates. It's not just a monologue and presentation. It's a conversation, which I think is incredibly helpful. Gordon Birrell: Maurizio, just I'll give you a very brief answer. I found Dave Hager and Simon Henry a tremendous challenge. They're very experienced oil and gas people, of course, their ability to challenge William Lynn and myself in the matter of oil and gas investments, performance is actually tremendous. And I would call out Melody Meyers as well. Melody has been around a few years, and her challenge on safety, frankly, has made us a better company. And then, of course, Albert is value-driven, and we like that. Craig Marshall: Yes, Josh, and then we'll come back to the phone. Joshua Eliot Stone: Josh Stone again from UBS. I wanted to ask you about your integrated model because in the past, when anyone's challenged you on that, you've always said lots of value in trading. We won't sort of entertain splitting up parts of the business. But if we look at the last sort of year, it feels like there's been an awful lot of oil and gas sort of satellite ventures set up of sort of the consolidated parent. And you yourselves have done some of the things as I think about your offshore wind venture. It sounds like you're [indiscernible] lightsource BP, maybe also on Kirkuk. So when you think about the potential for maybe doing more transactions like this to unlock value from your -- particularly from your oil and gas business, actually, in particular, I'm thinking about BPX because you talked about some particularly attractive returns there. Is your view still that BPX is far better on the consolidated business? Or actually, could this be one where there's a lot of strategic value as an independent company? Carol Howle: I mean I think I'll come and add something on the trading side, and then I'll pass it to Gordon. So I mean, I think first thing I would say is BPX is a core part of BP. It's got a great production forecast through to the end of the decade. I'll let Gordon talk to that. And it's also a great shore of onshore expertise that we share across the rest of BP. So that would be difficult to replicate. In terms of decisions around do we keep it for integrated value or not, the key thing there is what is the best value for BP. So if we do believe that actually it's better value, somebody else will value that position more and we can actually utilize the proceeds from that into a different opportunity that we value more even if there is trading value associated with it, we will make the right decision for BP on that basis. Now that doesn't mean, of course, from the trading perspective, we don't try and negotiate in terms of what those terms are or whether we can keep access in any way, shape or form for the better value, the additive value. But it's all about is this the right thing for BP to do strategically? Are we going to get fair market value proceeds in? Can we use those proceeds elsewhere more wisely for something that creates a better opportunity and does it deliver better value for shareholders? If the answer is yes, if my trading team are listening, then the answer is that's what we'll do. Gordon? Gordon Birrell: Yes. And I would just add, Josh, it's a great question. But BPX, 7 billion barrels of oil and gas equivalent in place, 30, 3-0 Tcf of gas 15 yet to develop. It's a core part of BP. And there is the integration value, which I'll finish on, but it's such a core part of BP. And the performance in the last 2 years has just come on leaps and bounds and maybe 2 metrics that I haven't mentioned already. The NPV per acre that we have is the highest -- we're either 1, 2 or 3 in the 3 basins that we operate in the Permian, the Delaware side of the Permian, the Eagle Ford or the Haynesville. We're #1, 2 and 3 NPV per section. We're first quartile in reserves per foot drilled in -- across the 3 basins that we're drilling. And most recently, in the last 6 months, we've been knocking out the park in terms of reserves and production per well from East Texas in the Haynesville. So it's a core part of our company. performance has improved. It's a key part of our growth -- and the team in Denver work hand in glove with Carl's team to maximize the value that we get from the production. So we like having it in the portfolio and no intention to sell off at this point. Craig Marshall: Thanks, Gordon. We'll go to the phone follow-up question with Paul Cheng. Paul? Paul Cheng: Paul Cheng, Scotiabank. Carl, I mean, there's a little bit of the other side of the question of what Josh just asked. On one hand, I think you guys were saying that you want to create a simpler and streamlined operation of BP. And on the other hand, that from time to time that you have formed joint venture like whether it's in Angola, in Norway and now that after the sales of Castrol, -- and I think we all have seen from history, joint venture maybe is great in day 1, but over time, become very difficult to manage and complicated the operation and your decision-making. And so how do you balance the 2 objectives? Carol Howle: So I think, Paul, let me start, and then I'll pass it to the team. So we balance it in terms of what do we think is going to create the best value for BP, what's the best opportunity in the market and then how can we execute it in the most efficient way. And we've got a number of these JVs that we participated in, and we've learned a lot as well from the JVs that we participated in over the years. Some of that has been how to improve or where we need to reduce complexity or indeed where we've been able to bring learnings into BP and also improve ourselves from that. But the key is around it's a value conversation that we have, and we will always look to try and minimize complexity and improve safety and the operational reliability around them. But we do have a lot of experience in the area, both for JVs that we are no longer in, but also the ones that we're deeply embedded in today. Katherine Thomson: And maybe if I add a couple of other thoughts, Paul. I think the philosophy of being simple is good, and I think complexity can slow you down and it can make you expensive and neither are particularly helpful when you're trying to create maximum value. But there are times where you can create unique opportunities to create value through a marriage of assets and partners. And I would -- I'd call out [indiscernible] and Azule actually because I think what you've had there is you've had a symbiosis occur where you've had the right partner with the right marriage of assets put together to create a differential value proposition. It doesn't occur everywhere. But where those circumstances exist, then I think it's appropriate to contemplate stepping into that complexity to create the incremental value. And we see something very similar with Castrol. As we looked across the entire range of different options we had on Castrol, the transaction that we signed just for Christmas was the transaction that would deliver the most value for us as a company. And I think that's important that we always have that philosophy as our very, very core as we contemplate different structures. But I don't think you can ever rule them out. It's about creating the most value, and that will come down to facts and circumstances. Craig Marshall: Thanks, Kate. We'll come back to the room. A question at the back with Matt. Matthew Lofting: Matt Lofting, JPM. Just a follow-up on the cost reduction program. The progress through the $2.8 billion in the last 2 years has been really good and swift. It looks like the, I guess, the target ex Castrol implies that the run rate slows over the next 2 years. I just wondered what's holding you back from being more ambitious in raising that target at this point? Katherine Thomson: Should I take that one? Carol Howle: Yes. Why don't you. Katherine Thomson: Look, we have -- we've delivered really well so far against the 4 to 5, $2.8 billion, so well over halfway there. Honestly, on cost, I don't think you're ever done. I mean, ultimately, why are you focused on your cost base? It's to make you the most efficient company and the most competitive company you can be amongst your peer group, that has to be why you're doing this in order to drive incremental cash flow. And we talked about AI earlier. I think a lot of the areas of the company, we are looking hard at AI, both in terms of cost reductions, but also increased productivity. And I think we're just at the early stages of truly understanding what it's going to unlock. I think there are so many opportunities there that we don't yet contemplate. With regard to upgrading targets, I think there's far more value to be gained by actually demonstrating what we're delivering rather than continually upgrading targets. So measure us on what we do as opposed to the targets that we put out. And I think you can hear we are really, really focused on this area of efficiency and competitiveness, and we will keep going. We will continue to strive. Our competitors are not standing still and neither are we. Craig Marshall: Thank you. Take one more question from Doug. And then Chris will come to you. Douglas George Blyth Leggate: Kate, I'm going to come back to you, if I may. Listening to the questions in the room, there still seems -- maybe it's a U.S. versus European thing, I'm not sure, but there still seems to be a perception that cash returns and value return are the same thing, and they're obviously not. You have $158 billion enterprise value if we take the capital structure as it sits as it was at the end of '25. You've talked about taking that down to $143 that's 2027. Where do you see the optimal capital structure? However you want to express it as the $7 billion versus the $5 billion of debt holders versus shareholders or maybe even in breakeven terms, where do you see the optimal capital structure by 2030? Katherine Thomson: I think that's a work in progress. This is the bit that I feel we need to spend quite a lot of time reflecting on in consideration of how we want to step into these growth options we have ahead of us. I think it's the right question to ask, come back and ask me again in 6 months when I've had time to go through all of this with Meg, prejudging where we should get together as a leadership team once Meg is in role, I think, would be inappropriate. I think there's a moment in time as we, as a new leadership team come together and take a really good look at where we're taking our company in the next 5 years. and debate that with the Board. And then when we're ready, we'll be able to update that. It's absolutely the right question to ask. I just don't have a great answer for you right now because we're still working through that. Craig Marshall: Thanks, Doug. We're going to take 2 last questions, one from Chris and then one at the back. Christopher Kuplent: It's Chris Kuplent again from Bank of America. I might be quick. Kate, I realize you've added the $1.5 billion Castrol leaving your OpEx into your targets. What about your free cash flow target for 2027? It looks like Castrol did amazingly well this year, running at about a $700 million number or so in terms of free cash flow. Where are you in terms of how much free cash flow you've sold so far, 5 billion achieved in '25 plus 6 billion announced -- and do you, therefore, feel those are still free cash flow-wise rounding errors before you have to update us on your 2027 free cash flow target? Katherine Thomson: Yes. Let me give you a quick answer and maybe we can come back to that with the IR team offline, Chris. As I look at the free cash flow targets, of course, they were excluding any divestment on Castrol. Of course, what we've got is we are taking operating cash flow out from the divestment. But of course, we're also reducing CapEx. But on the other side, I'm reducing my finance costs. So as I look at the totality of that, it's probably in the order of a couple of hundred million, but we have a range around our free cash flow generation. I'm still very confident of us delivering the targets. I see no need to change that right now when I contemplate the impact of the transaction. But we can take you through the bridge, if that's helpful. Craig Marshall: Great. Thanks, Chris. And final question at the back there. Henry Tarr: It's Henry Tarr at Berenberg. As I look at the developments ahead of you, as you get to 2027, it looks like there's potentially a lot that could come on with Bumerangue and the Paleogene and elsewhere. Is that going to be possible within the current CapEx frame? And then as you sort of look at those developments and you're going through the process now as to how you're going to sort of ramp them up, how are you going to try and keep costs sort of under control and manage these developments? Are you going to approach them in a certain way to try and minimize the potential for any cost overruns, et cetera? Katherine Thomson: Shall I take the capital frame first, Gordon? -- and then let you talk about developments and costs. Look, Gordon and William challenge me hard regularly on competing for capital inside the frame. As you know, we've got a lot of choice there. We're very comfortable with regard to our 13% to 15% frame for the next 2 years as we step through the initial phases of these understanding and then progression of these opportunities. No need to change that. We'll update beyond that when we're ready. But Gordon, in terms of cost control? Gordon Birrell: Yes. And just to add on CapEx, the Paleogene is fully funded within our capital frame that we have. Both projects are FID-ed, Kaskida, Tiber-Guadalupe, so fully funded. The big spend on Bumerangue really doesn't kick in until closer to FID, depending on whether we do an early production scheme or not, and we just need to make choices around that. In terms of cost, I think this is where technology and AI comes in. The platform or the FPSO of tomorrow won't look like the one of the past. And our most recent platform that we brought online, absent GTA in Azerbaijan, [indiscernible] Central East fully controlled from onshore, so much less staff offshore, easier shifts on people, less people exposed to hazard. So I think that's the future, and that will keep costs down. So it's application of technology, continuing to work the supply chain. That's always going to be a feature of upstream where a huge amount of our spend and OpEx is in the supply chain. So I see lots of opportunity actually to keep costs under control as we grow the company. Craig Marshall: Super. Thanks, Gordon. I think what we'll do is we'll close the Q&A on that note. A big thanks as ever to everybody for their questions in the room and for those online. We do look forward to meeting with many of you in the coming weeks and coming months. And on behalf of Carol, Kate and Gordon, thanks again.
Craig Marshall: Good afternoon and good morning, everyone, and thank you for your interest in BP's Full Year 2025 results. I'm delighted to welcome our guests in the room and those on the webcast. I'm joined today by Carol Howle, Interim Chief Executive Officer; Kate Thomson, Chief Financial Officer; and Gordon Birrell, Executive Vice President, Production and Operations. Before I hand over to Carol, let me draw your attention to our cautionary statement. In this presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website. And with that, over to you, Carol. Carol Howle: Thank you, Craig, and it's a real privilege to be here as Interim CEO ahead of Meg O'Neill's arrival as Chief Executive Officer at the beginning of April. And on behalf of the entire BP team, I do just want to take this opportunity to thank Murray for his 34 years of service, his leadership and contributions to the company. So stepping back for a moment, as we started 2025, it was clear to us that this was a year of turnaround. We hadn't been performing as strongly as we should have been, and that required urgent and focused intervention. And we have made good progress in 2025 to address that. Kate, Gordon and I will spend around 30 minutes talking through our performance highlights and delivery of our plan. And we know we've got more to do. So we've got more to do to accelerate the delivery and to position the company for the future opportunities that we have ahead of us. And the team and I have great conviction in our potential to deliver significant growth in shareholder value. And from my 25 years in BP, I know we have fantastic assets, and we've got exceptional people. Our strategic direction is right. We've made a good start in delivering against the plan that we laid out 12 months ago, and I just want to thank everyone at BP for that delivery. And as I said, we look forward to Meg joining in April. She's an outstanding leader. And together as a leadership team, we're going to continue to drive forward our strategy in accelerating the turnaround of this great company. Now Kate run through some of the highlights on the video at 7:00 a.m. So I'll just recap a few of them. Our operational performance was strong across the group. Reported upstream production was lower than 2024, which reflected portfolio changes, but underlying production was held broadly flat, and we've exceeded our annual guidance from 12 months ago. We set new records in upstream plant reliability and refinery availability with both above 96% for the year. We started up 7 major projects and our reserves replacement ratio was 90%, up from an average of around 50% in the previous 2 years. Based on provisional data, our operational emissions in 2025 were 37% less than in 2019, a reduction well in excess of our 20% target. Our supply trading and shipping business remains a distinctive competitive advantage for BP, delivering an average around 4% uplift to BP's returns, which now extends over the past 6 years. We concluded the strategic review of Castrol with an agreement to sell a 65% shareholding, and we believe the sale and the retention of a position in Castrol represents a very good outcome for shareholders. It allows us to realize value today while continuing to benefit from future growth of that business. And in 1 year, we've completed and announced over $11 billion of our $20 billion divestment program. Let me now turn to safety, our #1 priority. Our commitment to our safety goals is unwavering. It's to eliminate fatalities, life-changing injuries and Tier 1 process safety events across our operations. Tragically, in 2025, 4 colleagues lost their lives while working in our U.S. retail business. Two were killed in separate incidents where they were struck by passing vehicles as they carried out emergency roadside assistance. In response, we've permanently stopped roadside assistance next to active traffic lanes, a decision made solely to protect the safety of our people. Our thoughts remain with their families, friends and colleagues of the 4 people who lost their lives. On process safety, we've seen encouraging progress. Combined Tier 1 and Tier 2 events are down by around 1/3 compared with the previous year. While process safety has improved, we recognize we have more to do. We must learn from every incident and every challenge to keep us safe today and tomorrow. Turning then to our primary targets, where we've made good progress this year. Kate will provide further details on each of them shortly, but the headlines are we increased adjusted free cash flow by around 55% in 2025 on a price-adjusted basis. Net debt was $22.2 billion at the end of last year, which is $800 million lower than at the end of 2024. We've now delivered $2.8 billion of our $4 billion to $5 billion structural cost reduction target since the start of the program, including around $2 billion in 2025. Going forward, we have increased this target to $5.5 billion to $6.5 billion, which includes the expected cost reductions from the divestment of Castrol. Kate will cover that shortly. And return on average capital employed was around 14% in 2025 on a price-adjusted basis, and that's up from 12% in 2024. So we are executing our plan. We're taking decisive action on costs, capital and portfolio. And that, combined with the Board's decision to suspend the share buybacks and fully allocate excess cash to the balance sheet, that will create a strong platform to invest with discipline into our deep hopper of oil and gas opportunities. In the near term, this is supported by 3 more major projects that we expect to bring online by the end of 2027 with 6 more projects sanctioned. We're on track to bring a further 8 to 10 projects online between 2028 and 2030. And as we look to the long term, our success in exploration and access in 2025 has created a real sense of excitement around the company and around the opportunities that we have ahead of us, including in the Middle East, Brazil and Namibia. And there's more to come with planned exploration wells this year, including in Libya, Angola, Brazil and the Gulf of America. So we see potential to drive disciplined organic production growth over the longer term, underpinned by our distinctive resource hopper and our capability, our people, our technology, our experience, and that will maximize value for our shareholders. So more on that from Gordon shortly as well as the significant progress being made by the team in the downstream, which I'll cover and come back to later. But for now, let me hand over to Kate. Katherine Thomson: Thank you, Carol, and good afternoon, everyone. It's great to see you all here. Thank you for joining us. We covered our fourth quarter and full year results in the video released earlier today at 7:00 a.m. U.K. time. So I'll just do a quick recap of the headlines here. We generated underlying replacement cost profit or net income of $7.5 billion in 2025 against the backdrop of a weaker price environment. This result was underpinned by strong operating performance, which Carol already highlighted. Operating cash flow for the year was $24.5 billion, including an adjusted working capital build of $2.9 billion this year. We improved capital efficiency and tightened further our discipline, delivering full year CapEx of $14.5 billion, including a reduction of organic CapEx to $13.6 billion. For 2025, including the fourth quarter dividend announced this morning, shareholder distributions for the year were around 30% of our 2025 operating cash flow and within the guidance issued last February. As mentioned in this morning's release, the guidance for shareholder distributions is now retired, but the dividend remains our first financial priority. As we guided in our trading statement, we recognized impairments of around $4 billion after tax this quarter. These impairment charges are largely related to our transition businesses, including biogas and renewables, where we took decisive action to manage our pace of growth and to high-grade our portfolio to maximize returns. While these are noncash adjustments in our financial results, we do recognize that every impairment reflects a prior capital outlay. We're committed to doing better for our shareholders on capital allocation, driven by a disciplined and rigorous focus on returns as we progress only the best opportunities from our hopper. Now I'd like to provide more details on the progress we've made on our 4 primary targets in 2025. We're 4 quarters into our 12-quarter plan, and we've made a good start, and we are focused on accelerating wherever we can. If I start with adjusted free cash flow, we are progressing ahead of our target for greater than 20% compound annual growth through 2027. On both a reported and a price-adjusted basis, we generated around $13 billion of adjusted free cash flow. Our targets are presented on $70 per barrel at 2024. So on a price-adjusted basis, this represents around a 55% growth from last year. This achievement was supported by interventions made on CapEx, the significant improvement in downstream operating cash flow generation and good progress in the Upstream. Moving on to return on capital employed. On a price-adjusted basis, return on average capital employed increased from around 12% in 2024 to around 14% in 2025. We remain confident in achieving our price-adjusted target of over 16% in 2027. Moving to costs, where we are fundamentally shifting the cost performance culture right across the organization to safely achieve top quartile wherever possible. In 2025, we delivered around $2 billion of reductions, a material step-up from 2024. This brings cumulative reductions to $2.8 billion to date. That's equivalent to around 60% of our $4 billion to $5 billion target by 2027 versus the 2023 baseline. Reflecting the recently announced outcome of the Castrol strategic review, we now expect to deliver structural cost reductions of $5.5 billion to $6.5 billion by 2027. And as a reminder, this doesn't include any expected additional savings from the intended sale of our Gelsenkirchen refinery. Importantly, our cost reductions have more than offset around $2 billion of costs related to growing our business and environmental factors such as inflation, resulting in underlying operating expenditure reduced by over $700 million since 2023. Looking ahead, we plan to deliver a further $1.2 billion to $2.2 billion of structural cost reductions. After taking account of an assumption for inflation and growth costs, we expect to see an acceleration in the reduction of our underlying operating expenditures from now through to 2027. Taken together, this means underlying operating expenditure could reduce to around $19 billion to $20 billion by 2027. Based on cost benchmarking and competitive analysis, we believe we're making good progress. We're ahead of plan in some areas behind in others, but overall on track. In Oil and Gas, the business has maintained its top quartile cost position, keeping unit production costs at around $6 per barrel on average over the last 4 years. This is supported by the delivery of around $600 million of structural cost reductions in 2025, offsetting inflationary pressures and business growth costs. Not all of our operated regions rank us top quartile on cost, and we are in action to safely address this. In customers, over the last 4 years, our cost performance benchmarked in the middle to lower quartile range. And as a result, we laid out a target at the CMU to lower our total cash cost to gross margin ratio by over 10 percentage points by 2027, and we are now halfway there. We delivered $700 million of structural cost reductions, which contributed to this improvement. We believe this brings us up to the higher end of the second quartile, and we are in action to be firmly within top quartile by 2027. Turning to areas of our business where we have more to do to safely reduce our cost base. In refining, we have a target of sustainably reducing our cash breakeven by $3 per barrel by 2027. That's equivalent to around $1.5 billion of additional cash flow. This year, we delivered around 80% of our cash breakeven target, mostly through commercial optimization and improved availability. Structural cost reductions also contributed around $300 million this year, driven primarily by optimization of maintenance and supply chain efficiencies. We need to continue to safely lower costs to improve our competitive positioning and underpin our aim of being first quartile margin per barrel and second quartile refining cost per barrel in 2027. Within group central functions, our 2025 cost base needs to improve to reach top quartile. We are already in action when we saw an 8% reduction in '25 through initiatives such as reducing headcount in higher-cost locations, leveraging strategic third-party partnerships and simplifying processes and driving digital efficiencies throughout the businesses. We expect to see the contribution from these actions to increasingly show up in our 2026 results, and we are working to drive to top quartile on average across our functions. Turning next to our target to strengthen the balance sheet. This is key to enabling us to manage and grow the business through the commodity cycle. We continue to target net debt to be in the range of $14 billion to $18 billion by the end of 2027 and have visibility to moving into that range with the expected closing of the Castrol transaction. In 2025, operating cash flow and divestment and other proceeds was $30.4 billion. I would note that this is after paying $1.2 billion towards the Gulf of America settlement liability accounted for in our working capital. Our uses of cash, including $1.2 billion to redeem hybrid bonds, came to $29.6 billion. So overall, this led to an $800 million reduction in our net debt. As we look ahead, we are seeking to accelerate the strengthening of our balance sheet, not only to allow us to more easily tolerate commodity cycles, but also to drive higher free cash flow for our shareholders. We look beyond financing debt when considering our capital structure. We also consider financial obligations, including hybrid bonds, leases and Gulf of America settlement liabilities. At the end of 2025, these financial obligations added up to around $58 billion. Looking ahead and as we consider sources and uses of cash, out of the $20 billion divestment program announced last February, we've received $5.3 billion in 2025. The remaining $15 billion is underpinned by the $6 billion anticipated proceeds from the Castrol transaction and a deep hopper of quality assets that we continuously high grade. In 2026, we expect this to result in another $3 billion to $4 billion of divestment proceeds. All proceeds in 2026 are expected to be heavily weighted to the second half of the year. Turning now to uses of cash, and I'll start with dividends, our first financial priority. You can expect these to increase by at least 4% per year. Today, we announced a dividend per ordinary share of $0.0832. We, of course, continue to pay down the Gulf of America settlement liability through to the end of 2033, but the liability is largely settled by the end of 2032. In 2026, our gross payment is around $1.6 billion and in 2027, around $1.2 billion. After adjusting for changes related to tax amounts, the net liability is expected to be around $4 billion in 2027. We also continue to manage leases, hybrids and finance debt to optimize finance costs. Leases give us flexibility in relation to assets we choose not to own directly. With regard to hybrids under the S&P rules, we currently receive 50% equity treatment for the $12 billion issued during COVID in 2020. Within these rules, we can reduce the stack by up to 10% in any 1 year, up to a cumulative reduction of 25%. We intend to remain within these limits while, of course, continuing to manage maturities proactively. Moving on to CapEx. We have exercised discipline in capital allocation, investing in only the highest returning opportunities across the portfolio and pacing investment more deliberately. We've tightened our 2026 CapEx range to a range of $13 billion to $13.5 billion, and that's at the low end of the range we previously guided through to 2027. Spending this year will be slightly weighted to the first half. All these actions, together with the Board's decision to suspend share buybacks and fully allocate excess cash to the balance sheet are in service of optimizing finance costs and accelerating the improvement in free cash flow. Let me now hand over to Gordon. Gordon Birrell: Thanks, Kate. I'd like to spend a few minutes walking through the progress we've made in safely growing the Upstream over the past year. 2025 was a strong year for project execution as we started 7 major projects out of the 10 we expect to bring online between 2025 and 2027. Five of these were ahead of schedule. And we've now started up around 150,000 of the 250,000 barrels of oil equivalent per day net peak production that we expect to have online by 2027. This includes projects such as GTA in Mauritania and Senegal, [ SIP ] in Trinidad and Murlach in the North Sea. Delivering major projects takes focus and drive. We've encountered and overcome some challenges in some of our projects along the way. And I'm extremely proud that according to the most recent IPA benchmarks, we are ranked best overall -- ranked best-in-class overall for our projects starting up and staying up. Furthermore, of the wells that we drill, many as part of major projects, around 3/4 are in the top or second quartile. As mentioned by Carol, based on provisional data, our operational emissions in 2025 were 37% less than in 2019, a reduction well in excess of our target of 20%. Our methane intensity, again, based on provisional data, fell to 0.04%, thanks to improved operational performance, significantly below our 2025 target of 0.2%. You also heard from Carol that we had record plant reliability in 2025 of over 96%. We also had wells reliability of almost 98%. We saw strong base delivery, decline management and turnaround execution with standout examples, including ACG in Azerbaijan and Argos in the Gulf of America. This helped to keep our managed base decline comfortably within the 3% to 5% range. This level of operational delivery is a direct result of the years of investment we've made in world-class capability and cutting-edge technology. This has been a key differentiator for us, and we're not standing still. We're expanding the use of dynamic digital twins, AI and automation across the business. This includes real-time reservoir wells and facilities monitoring and optimization. These have played a key role in helping to increase BP operated production on average by around 2% every year for the last 5 years, while also protecting on average around 4% more from going off-line. The delivery of these elements enable us to beat our 2025 production plan. Furthermore, 2026 production, excluding divestments, is now expected to be around 2.3 million barrels of oil equivalent per day, broadly flat compared to 2025. This is an increase compared to the outlook we gave you this time last year. We're also working hard to strengthen our resource base. 12 months ago, we set a target to achieve 100% reserve replacement ratio by the end of 2027 or said another way, that we'll book around the same amount of proven reserves that we produced. We're making good progress towards that target. As a result of the strong operational delivery and project execution that I just described, in addition to some benefit from higher prices, we have increased our 2025 organic reserve replacement ratio to 90%. We have a high-quality pipeline of major projects due online between 2028 and 2030, including Kaskida and Tiber-Guadalupe in the Gulf of America, Shah Deniz Compression in Azerbaijan and Tangguh UCC in Indonesia. These 4 projects alone are expected to add another 250,000 barrels of oil equivalent per day of higher-margin net peak production. And I'm particularly proud of our exceptional year for exploration with 12 discoveries in 2025, including in the Gulf of America, Namibia and, of course, Brazil. People ask me, what's behind our exploration success? My response is that it is a blend of a deeply experienced exploration team and the application of advanced technology. We have examples where the combination of seismic technology with high-powered computing and advanced algorithms has enabled us to light up the subsurface by creating images with unprecedented clarity. Our capability and technology have also been important factors in being selected to help governments develop their discovered resources, such as in Kirkuk in Iraq and Karabagh in Azerbaijan. This combination of our exploration success and discovered resource access is enabling us to reduce -- to reload our resource hopper. And others are also acknowledging the progress we've made to strengthen our resource base. When benchmarked using [ WoodMac ] data, we now have the second longest remaining resource life of the majors. In summary, we believe that our deep resource base is a real competitive advantage. It creates what we call quality through choice. It provides the potential for long-term organic growth and combined with disciplined investment criteria, enables us to progress the most value-accretive options with the highest returns. Along with our high-quality assets, outstanding capability and advanced technology, we believe this is distinctive and a key differentiator supporting the BP investment case. I'd like to finish by providing an update on the exciting Bumerangue discovery in Brazil, our largest find in the last 25 years. We're making good progress. The in-situ analysis is materially complete, and our initial estimate is that there is around 8 billion barrels of liquids in place, split roughly 50% oil and 50% condensate. As is normal at this stage, there is a wide range of uncertainty around this estimate. We've appointed senior leadership and are currently working on design concepts, including the potential for an early production system. We're also putting plans in place for an appraisal program, which we expect to start around the end of the year. This will use the Transocean's deepwater Mykonos rig following the drilling of our Tupinamba exploration prospect in a neighboring block. This will provide us with data from locations across the reservoir to enable us to describe the fluid characteristics and resource potential. As you can see, we're in action with confidence and our excitement in this huge opportunity is growing. With that, I'll hand back to Carol. Carol Howle: Thanks, Gordon. And yes, a lot of great progress in the Upstream. And it was also a strong year for the Downstream, having delivered a significant step-up in performance. We continue to optimize our cost base safely with around $1.6 billion of structural cost reductions delivered to date. And customers delivered their highest underlying earnings since 2019 with all businesses growing year-on-year. And our approach to investments in our refineries in midstream has created the ability for us to consistently run the kit above 96% and capture that margin. And we're also progressing our business improvement plan at TA and the commercial integration of our BP Bioenergy acquisition is now complete. We're also in action to focus our portfolio on our leading integrated businesses, having announced the sale of Castrol, completed the sale of [ Netherlands Retail ], and we continue to progress the intended sale of our refinery, Gelsenkirchen and Austria Retail as well. So let me just close now before we turn to questions for the next 45 minutes or so. We've reflected today on where we've come from as a company and the really good progress we've made in 2025. And we know we need to accelerate delivery in every dimension of our reset strategy. And we're resolute on what our focus needs to be for BP. We need to build on a good year and operate well consistently quarter in, quarter out. We need to accelerate the strengthening of the balance sheet, which includes taking the decision to suspend the buyback and delivering the $20 billion of the divestment program. Our discipline on capital allocation is key, and we must continue to simplify our portfolio. We've made progress in addressing that in 2025, and it will remain the central focus for us going forward. We've also made good progress on our cost base, and we're in action to take our businesses and functions to top quartile by the end of 2027. And all of this must be in service of materially improving cash flow and returns and value for our shareholders. And as we look ahead, we have a portfolio of world-class assets and the richest set of organic opportunities for growth that we've had in many years. The Board and the leadership team are aligned around our goal to become a simpler, stronger and more valuable company and in turn, grow shareholder returns. We're in action. We do have more to do, and we can and will do better for our shareholders. With that, we go to Q&A. Craig Marshall: Okay. Super. Thank you, Carol, and thanks, everybody, for listening to our remarks. What we're going to do is, as usual, take one question, please, from those in the room and those online. We'll certainly come back to everybody if there's time and an extra question, I can assure you. And we will aim to finish by around 2:30 U.K. time here. So Michele, you are quick off the mark there, so we'll turn to you first. And if I can just ask everybody to say their name and the company they're with, please. Thank you. Michele Della Vigna: Michele Della Vigna from Goldman Sachs. Thank you very much for the wealth of information provided today. I wanted to come back to the finance cost. I think it's very helpful to look at all of the different sources of debt and to lay out the $15 billion reduction. I was wondering what does it mean in terms of reduction in actually the finance cost by 2027? How much could we expect that to go down by then? Katherine Thomson: Yes. Thank you for the question, Michele. And I understand, of course, why you're asking that. Look, what we've tried to do today is be utterly transparent on the totality of the financial obligations that we are managing. And I think it underlines the imperative to do something now to really strengthen our balance sheet and make a step change in the pace at which we do that in service of growing free cash flow. There are a couple of elements that it's worth just calling out. So the Deepwater Horizon obligation, that is a payment that we will make each year. This year, it's $1.6 billion next year, it's $1.2 billion, then it's materially complete by the end of 2032. And then we turn pretty much to hybrids and debt. We've got a net debt target of 14% to 18%. That is our first priority. And we are determined to deliver that. We've got line of sight to it now. And we will, of course, be stepping through that as we go through the year and we get proceeds in. I'm very cognizant of the S&P limitations on hybrid, the 10% in any 1 year up to a cumulative of 25%. Having said all of that, I think it's incumbent on us as we have excess cash to make the very best economic decisions in terms of how we deploy that. You can do the rule of thumb based on what you can see our current financing costs are today to have a sense of what a $15 billion total reduction could look like by 2027. The actual reduction will obviously depend on the choices that we make as we deploy that excess cash. But this is ultimately about materially changing the total financial obligations we are servicing and as a consequence, drive higher free cash flow and position us strongly to have the best opportunity to develop the set of organic options that we have ahead of us, which are unique. Craig Marshall: Thank you, Michele. We'll go to Martijn Rats just in the second row there, please. Martijn? Martijn Rats: It's Martijn Ratz of Morgan Stanley. I want to sort of ask a question about the dividend. The guidance for growth in dividend per share is still 4% plus. But when the buyback was still there, you could say, well, like a good couple of points of that actually does come from the share reduction -- share count reduction from the buyback. So in many ways, there is a little bit of an underlying upgrade in the outlook for the total dividend burden of the company. And I was wondering if there's a sort of the fact that you removed the buyback but capped the dividend growth. Is there also a signal in there that there is confidence in the long run? And is that something that I'm interpreting correctly here as in like -- because you could also said, look, most of the dividend growth actually just come from the buyback -- share count reduction. But despite that, we are keeping the dividend growth on track. Katherine Thomson: Yes. I mean, mathematically, you could reach the conclusion you've outlined, Martin, I completely agree with you. I think it's really important we have a progressive dividend, and we've been really clear only a year ago that that's a 4% increase per annum and the Board is comfortable. We want to retain that. That's the first priority in our financial frame. Beyond that, it's about building back the balance sheet and then investing for growth. Yes, the flywheel for share count reduction has changed with the decision around the suspension of the buyback. But I think one of the things that Meg and I will need to step through when she comes in, in April is contemplate what sort of balance sheet we want that is in support of the growth options that we have ahead of us, and we'll need to step through that. But for now, the financial frame is clear. The only thing we are altering is we are suspending the buybacks and putting all of that excess cash against strengthening our balance sheet. The dividend, the 4% growth per annum is exactly what we want to maintain right now. Craig Marshall: I'm going to go over to this side. Chris Kuplent, please. Christopher Kuplent: Chris Kuplent, Bank of America. I've got another one for you, Kate. You showed the performance in 2025 in most respects was well ahead of targets you laid out 12 months ago. So I wonder whether you could talk us through the decision-making tree, why in the end, you decided to suspend the buyback. Katherine Thomson: I don't know that it's as complicated as a tree actually, Chris. I think this is just strong financial discipline. Over the last year, we've created a materially different hopper of options in terms of future earnings growth. And now the right decision to take is to strengthen our balance sheet to give us the foundation from which we will access that. And it will also create a degree of choice over how much of that we continue to hold as working interest. You know that we have significant growth opportunities in the Paleogene in Brazil, there's others in Namibia. We currently hold Paleogene in Brazil 100%. And at some point, we can make choices around how much we may want to dilute. The strength of the balance sheet that we have will allow us to make choices that are positioned to enable us to capture maximum shareholder value. So I don't think it's as complicated as a decision tree on the balance sheet. This is just about the right decision now to take an action that materially increases the pace at which we strengthen our balance sheet and gives us that foundation for the future. Craig Marshall: Okay. I'll stay on this slide, Josh. Joshua Eliot Stone: It's Josh Stone here from UBS. I'm going to come back to the use of cash, if that's okay. I think you've taken a very brave decision to spend the buyback, and I think ultimately the right decision for the reasons you've laid out. One thing that's not very clear, though, is where -- at what point would you feel more comfortable to reinstate the buyback program? Is it a case of having to wait for a new CEO to sort of decide that leverage level? Do you have some views yourself of at what point the leverage level would be appropriate for BP to be able to buy back its own stock? Katherine Thomson: Thanks, Josh. I'm sure at some point, someone is going to ask a question of Carol and Gordon here on the panel as well. When will we reinstate? You can see from the sort of pro forma impact of the remaining divestment proceeds, what we think that the order of magnitude could be as we deliver the remaining $20 billion over the next couple of years. So I think there's an opportunity to deliver a materially stronger balance sheet. I'm probably going to repeat myself a couple of times this afternoon, so please bear with me. I think it's really important that Megan and I have the space with Gordon and the team to go through the hopper of options that we've got in terms of our growth looking ahead. We've got an incredibly powerful set of organic growth that we've created through the drill bit that's more value accretive than going and buying barrels. And we need to consider those and think about how they rank and which ones we invest in what order of priority. Once we're clear on that, then I think we can decide what sort of balance sheet we need to support that. And I think it's important that we have the time and space to do that. For now, what we're focused on is delivering the net debt target, the $14 billion to $18 billion. And once we have delivered that, then I think we'll be in a position to update you, but I'm not going to suggest when that may or may not occur right now. We've got plenty of things to step through. Craig Marshall: Go back over this side, Doug. Douglas George Blyth Leggate: Thank you. I think folks have flogged the financial question, Kate, a bit. So I will turn to Gordon, if I may. Gordon, you gave a few hints on Bumerangue, obviously. I wonder if I could ask you just to give us a few more hints. The recoverable number is pretty critical to the outlook for Bumerangue. You've talked about high-quality rock -- rule of thumb, I would say, 40%. Could you give us an idea of what you're thinking and what working interest would you be prepared to go forward with an early production system? I'm sorry, it's Doug Leggate from Wolfe. Gordon Birrell: Doug -- thanks for the question. Let me take the equity question first. We're in -- it's early days, and we're in no rush to take a partner. When we do take a partner, it will be the right partner for value and the right partner who can bring something to the table to help us develop this field. We're not putting out a recoverable number right now because I'd like to understand a bit more across the reservoir, what the variability is across the reservoir, if nothing else, before we put any more numbers. I remain excited by it. There's nothing I see that has diminished my excitement about this field at 100%, 8 billion barrels in good terms to develop on. So we're going to do the appraisal program early next year. That will enable us to lock down a development concept at that point in time. But just as a reminder of what we did put out there last year that should take you a long way to figure things out, Doug, would be 1,000 meters of hydrocarbon column, 900 condensate, 100 oil. And we did say the gradient across the rock was consistent, which would tell you it's well connected in the vertical sense. And we told you it's 300 kilometers square. So there's a reasonable amount of data out there and there are reasonable analogs out there, I would say, but we're not going to put a recoverable number out until we get a little -- we reduce that uncertainty range down to something that we're more comfortable with. Well, it could be a wide range. I'm comfortable for the moment at 100. We'll find the right partner and we'll come down. But it's material for our company, and it really -- and the terms are good. So we'll retain a very significant proportion of this field. Craig Marshall: Thank you, Doug. Lydia. Lydia Rainforth: It's Lydia Rainforth from Barclays. I'm going to come back to capital discipline. What's different this time? And we've talked -- the Board have talked about needing more rigor, more diligence. Kate, you referenced that there have been write-downs and impairments. And you're all very compelling at that. There's lots of opportunities. But how do you -- has anything changed in that capital allocation process? What's different? How do investors trust that you're going to make the right decisions going forward? Carol Howle: I think let me start on that and see whether you want to jump in, Kate. So there has been a real cultural shift in cost and discipline in BP. And I think you'll have seen that from the results from 2025 in terms of the progress around cost reductions, I think also capital productivity, and Gordon can give some great examples around that productivity efficiency gains that we're seeing on the production side. We know that every dollar has to compete within the portfolio. We're very much focused on that. We're only going to be investing in the very best of opportunities. It's what we are holding ourselves to account on. So everything needs to compete, and that's why we made some very difficult portfolio decisions last year, and we'll continue to review the portfolio and make those right commercial decisions going forward. Katherine Thomson: I guess the only other thing I think I absolutely agree with you, Carol, is as a leadership team, we know how important this is. It's got a huge degree of focus, and we know we need to get this right. You've seen a significant structural shift for us in terms of strategy. We know that we went too far, too fast a number of years ago. But as we take investment decisions today, we are focused very hard on interrogating the level of confidence that we've got on the returns, testing hard the downside risk as we take every single investment decision. And I think in time, that will show up with less impairments. Of course, you're always going to have impairments that are driven by environment around you. I hold those slightly differently to impairments that you could argue are a consequence of capital allocation. But the impairments that we've taken in 4Q are a direct consequence of a deliberate decision to tighten the capital that we're deploying and the pace at which we're deploying it to maximize returns and shareholder value in terms of cash flow. Craig Marshall: Gordon, do you want to talk capital efficiency? Gordon Birrell: Yes. Just a plug for the teams out there doing it every day. I mean, some tremendous real examples of capital productivity in Azerbaijan and ECG and Atlantis, we're drilling these long undulating horizontal wells with geo-steering -- so a significant reduction in dollars per of rock contacted. In BPX in our Lower 48 business, 20% improvement in completion time, 9% improvement in drilling time. So in Lower 48, we can unlock the same amount of resources in a year using 8 rigs that used to take us 10 rigs. So that's real capital productivity coming through, which means there's less capital required to hit our targets means we can allocate capital elsewhere. So the capital productivity drive that we've been on for a number of years is starting to come through to the bottom line in terms of activity. Craig Marshall: Thank you. I'm going to go to the forward and I'm go to this side of the room. Paul Cheng at Scotia. Paul, can you hear us? Paul Cheng: If I could, Kate, on the $5.5 billion to $6.5 billion on the cost reduction target increase, how much does that relate to the sale of the Castrol interest? And also, when you look at, say, cumulatively, you're talking about $2.8 billion of the savings. Can you break down between portfolio impact and the actual cost saving? Katherine Thomson: Yes. Paul, thank you for your question. In terms of the change in the target, we've added $1.5 billion on to the $4 billion to $5 billion just to reflect the transaction on Castrol. So hopefully, that's fairly straightforward. With regard to the $2.8 billion that we've delivered today to date rather. You may remember when we set this target out there, we talked about probably around half of the savings coming from our supply chain and our third-party optimization. That's exactly the analysis that I've looked at in terms of that $2.8 billion. Half of it has come from supply chain and third party. And then of the remaining half, it's pretty evenly split actually between organizational optimization and portfolio. So that's the way to hold the $2.8 billion delivery so far. Craig Marshall: Thanks, Paul. This slide, Alex. Unknown Analyst: My question is about the remaining divestments you have until the end of '27, which are the priorities in terms of assets you want to sell in terms of the sectors, probably more in the downstream or you are counting on the farm down of some of the discoveries in '25 for this target? That's -- you can elaborate on that. Carol Howle: So when we look at the portfolio, I mean, we're very much looking at it with regards to the best returns for BP, where could others see more value in certain assets than we do. And so we're looking at that as well. So we're looking across the whole portfolio across upstream and downstream and also into the low carbon business. At the moment, we do have under process the Gelsenkirchen refinery. We're looking at Austria retail. As you know, we've also got interested parties for Lightsource BP. So that will also be an area that we're looking at. And there are certain areas that we'll consider whether we farm down on them. I don't think there's a contingent decision. We don't need to. It's a question of what's the right decision for BP, for example, in our position in the Paleogene. So we're looking at each specific piece in the portfolio in terms of its value add to BP from a strategic perspective, the value for us, the value for our shareholders, and then we're weighing it up on that basis. Did I miss any, Kate? Katherine Thomson: No. I mean we'll update you as we go. We've got a really good hopper in terms of depth and breadth of quality on assets. So we have plenty of choice, and we aren't in a rush. You can see we've said for this year, 3 to 4 on top of Castrol a typical level of just ongoing high grading of our portfolio of assets. We won't guide in advance where that's likely to come from. We will make those value-based decisions as we step through them. Craig Marshall: Okay. Thank you. One more question, yes. Mark Wilson: It's Mark Wilson from Jefferies. It's a really interesting setup because by 2027, when you've got your balance sheet down, you should have a concept development for Bumerangue. So Bumerangue clearly looms large in your future. I'd like to ask, firstly, does this just outweigh all the others? You've got 2 of the 12 total exploration discoveries. So just give us a pecking order there. And early '27 comes up very quickly. Are you telling us you would be happy to appraise this through '27 at 100% working interest? Gordon Birrell: Let me just comment on the quality of our hopper. If you look at the WoodMac benchmarking, they're using our numbers, using their methodology, they give us 23 years of production at the current production level. That's the longevity we've created in the company through accessing discovered undeveloped barrels like Karabagh, like Kirkuk as well as through the drill bit with Namibia, with what we've done in Egypt, what we've done in Trinidad and what we've done in Bumerangue. So we have a very rich hopper of opportunities. So I won't give you a rank order, but clearly, Bumerangue has the potential to be very, very material for our company. And Brazil is a country we know well. We've operated there for many, many years in different types of businesses there. Namibia is very exciting. Of course, the discoveries are under the Azule brand, but we've drilled 3 wells there, 3 exploration wells in Block 85 and 2 discoveries, 2 nice discoveries, liquids, good quality rock, good quality fluids. So I would expect them to come to the fore rather quickly. And then we have our ongoing program in Trinidad, which we like as well. So there have been a number of discoveries in Trinidad that will push close to the front of the queue, I think. And then, of course, in Azerbaijan, we've got Karabagh, which is discovered, undeveloped that we also are working hard on to make that into an economic investment. So I wouldn't put any rank order on them. They will all compete on the day based on their economics. They won't all get funded for sure. and we'll back to quality through choice, as I mentioned earlier. Your question about would we go through the full appraisal phase as 100% BP, we could. If we have a partner before then that would add value to BP, then of course, we would take a partner. So I'm not 100% committing to it, but we're -- as I mentioned earlier, we're in no rush to take a partner. It has to be for value here. Craig Marshall: Thanks, Mark, for your question. We'll go over to the side, Biraj. Biraj Borkhataria: It's Biraj Borkhataria, One of the things I was struggling with the morning was reconciling the net debt target, which was unchanged with the buyback cut. You're obviously cutting CapEx as well, you're cutting OpEx as well. So just trying to understand the moving parts there. I know you're going to potentially redeem some of the hybrids, so that will put upward pressure on that number. But a couple of other moving pieces. Has your view on the ability to sell Lightsource changed? Because there's not -- I don't know how much equity value is there, but there's obviously a lot of debt associated with that. And secondly, could you just rationalize why you did a partial sell-down for Castrol rather than the whole thing, which I think was part of the original plan? Katherine Thomson: I have one question or 3. I'll let you off Biraj. So I think your first -- maybe it was an observation as opposed to a question, which is the net debt target hasn't changed. No, it hasn't. I'd like to deliver the target and then we'll see. I'll just take the opportunity while I'm talking about that target again, just to make it clear, that is not an automatic trigger for us to reinstate the buyback. We need to take a holistic view of the balance sheet. We need to set ourselves up for the growth that we've got. And I think it's appropriate that we think about that very carefully before we start talking about it. Having said that, of course, we understand the share buyback is a tool for returning excess cash to shareholders. And we do need to think hard about the balance between investing for growth and returning to shareholders. For now, the imperative is strengthening that balance sheet, and we're utterly clear on that. A couple of things that also came through on some of the earlier questions in the room were around -- is the change in buyback something around confidence? There's something that I heard earlier on in the room, and you're asking a question around confidence in Lightsource. But I think one of the things that's important to iterate right now is you can see from the results we've printed today that actually our underlying performance is incredibly strong. So this is not a lack of confidence. If anything, I'm more confident in the delivery against our plan than I was a year ago when I stood up here. This is around creating the right strength. And on Lightsource, I think Carol mentioned it just a couple of moments ago, we've got a number of interested parties who are looking very hard at Lightsource, and we're working through that. And of course, we'll only transact for value. But right now, we're moving through that process, but there's no need to rush. And then on Castrol, we took our time to completely evaluate what a transaction around Castrol could look like. It's a great asset. It's a great business with a real future ahead of it in terms of earnings growth. And we came to the conclusion that the transaction that we signed with Stonepeak just before Christmas was the right transaction to do. It is a good value decision, a good value transaction, EV of $10.1 billion, and it gives us good multiples, I think 8.6x EV EBITDA, which is at least as good as, if not better than other precedent transactions. And on top of that, the retention of the 35% gives us the opportunity to share in future upside. So I think it's a good transaction for us and for shareholders, and it materially derisks that $6 billion against our balance sheet, which is really important. Craig Marshall: Thanks, Biraj. We'll stay in this side. Irene. Irene Himona: Irene Himona at Bernstein. Carl, I wanted to ask a question not as Interim CEO, but as Head of Trading. When you are adding to the portfolio, things like [ IKEA ], biogas and Lightsource renewables, you had expressed a sort of vision that by enhancing or adding more tradable products, the return from trading would thereby improve. And today, you disclosed a 4% enhancement to group ROACE from trading, which to me sounds sort of top end of the range you had given before. It used to be 2% to 4% or 3% to 4%. So I wanted to ask, is this 4% over the last 6 years legacy oil and gas? Or have these businesses which actually you impaired today, have they made any contribution to that profitability of trading? Carol Howle: So thank you for the question, Irene. So we have delivered, as you said, 4% from Supply Trading and shipping for the sixth year in a row. And what I would just call out there is that, that's been through a number of commodity cycles through lots of different volatility sets. So what we have is a really competitively advantaged team who look at our BP business from the asset base. So I think we sort of said before, we look at what can we optimize and deliver from the asset base. That's around 2%. We look at around 1% from optimization and 1% from value trading. So within that, we do work, for example, with IKEA around routes to market and around the different types of channels, whether that's into utilities or into transport. So we support that. We've also supported working with refineries and with our oil and gas business, as you say. I think what we've seen is a real sort of change in, one, the BP portfolio, we've got such a rich set of opportunities at higher sort of levels of return, which means we need to make really difficult choices. So that's what you will have seen in Q4 around the IKEA impairment, for example. We're making difficult choices in terms of where we're putting our CapEx going forward because we see returns elsewhere. I would say we don't guide forward on the 4%. But I would say I think the capability and the experience within the team has meant that we can deliver that through a number of different opportunity sets, and we optimize the assets that BP has, and we will continue to do that going forward. Craig Marshall: Okay. Thanks, Irene. We don't have any further questions online. So we'll stay in the room. Is that Al Syme? Alastair Syme: Alastair Syme at Citi. I'm not sure I'm asking this. Can I ask about the Mona project? I appreciate it's under [indiscernible], but the decision to go forward on that development to leave Morgan, what's the sort of the time line? And how should we think about the financials given that you didn't get anything under the AR7 auction? Carol Howle: So I'll say that is a JV discussion. So in terms of that decision to move forward with Mona. So I mean, I think it is a question for the JV. One thing I would say is, from our perspective, we're not looking at any increase or update in terms of what we said previously with regard to capital allocation to that JV. So that just remains consistent from what we said previously in case that was behind the question. Craig Marshall: Thanks, Alastair. No questions on this side. I'm going to round 2 then. Lydia the front, please. Lydia Rainforth: It's Lydia again from Barclays. I haven't asked a question about technology and AI, and particularly, it's one of my favorite topics. But when you think about sort of what you can achieve, the progress that is made on AI, and it won't just be cost, it will be recovery rates, et cetera. So can you just share your thoughts on the Agentic AI side? Gordon Birrell: Yes. I'll -- let me have a go at that. The -- one of the things I'm particularly excited about is what we call Wells Advisors. So BP has been drilling wells for well over 100 years. So you could imagine the amount of learnings, data and knowledge that we have in our system, and that's a variety of systems. So we've now created an AI system where our well site leaders, the people on the rig who are making day-to-day decisions, facing problems, problem solving, they can access all that data through Wells Adviser, which is using AI as a platform. So huge benefits of that. The other one that we're doing right now, again, in the wells, I've got examples in every discipline, but I like the wells ones, I have to say, the kick detection. We monitor all our wells with an extra pair of eyes now from monitoring centers in Houston and in Sunbury. And we've put AI algorithms in place that we have small kicks tiny kits that the human may not detect on the rig floor. We're picking them up using AI. And with 90% success rate, we can detect small kits within roughly a minute. And that allows us to react before it becomes a problem, before you have to shut down drilling, before you have to shut the well and then circulate out that pressure, it allows you to react with weight on bit and mud weight. And it just allows the drilling to happen more smoothly. So there's lots of examples where we're doing that across every technical discipline in my shop with [indiscernible] and his team's help, of course, with the digital expertise, their AI expertise. So I think every function across the company has examples like that. Craig Marshall: Super great. We'll go stay on this side, who definitely are the keenest with Lucas there, please. Lucas Herrmann: Thanks very much, Craig. It's Lucas Herrmann from BNP. One perhaps -- well, for you, Carol or you Gordon equally, it's -- I'm listening to what you're saying, and there's a very rightful targeting of balance sheet, et cetera, and search to improve the balance sheet. And in doing that, obviously, you're taking away from equity holders in the near term and you're asking them to stay with you. And you're not giving equity holders a date whereby they might expect to see greater distributions from the company in line with many of your peers. So effectively, I'm sitting here and I'm thinking, well, what's the investment case around this stock? And increasingly, it comes back to, obviously, improvement, much of which though you've already stated and indicated, but it comes back to what you're trying to emphasize, I think, is growth. And okay, if I'm going to believe in growth, and the growth opportunity of your portfolio. What should I expect in terms of the continued release from you, demonstration from you around your opportunity set and why it is that I should accord a higher multiple effectively to this stock and your business going forward, given that in the context of immediate return, I'm really -- I'm not expecting very much over the course of the next 2 to 3 years, given the way you've defined and thought about balance sheet. I think there is a question in there somewhere. It's asking you effectively, please tell me what the investment case for BP is, whether that's an appropriate definition. But more importantly is how do you see the investment case for BP? Or should we just be waiting for Meg to arrive? And I know you've got your own views, but at that point, you formulate as a group. So I'm not trying to insult anyone. I'm just trying to understand. Carol Howle: No, no, I completely understand. And look, let me just start on that last bit because I think what is clear, the Board and the leadership team, we're very clear that the strategic direction is right in terms of what we laid out in February. So we are focused on delivering that. We're focused on delivering the primary targets. We know that there's more opportunity there, and that is a good thing because we know that there is more that we can deliver. So we're focused on improving performance, improving competitiveness and, of course, doing all of that safely. So very much focused on that. We're in action. That doesn't change when make comes because that is our strategic direction. In terms of -- and I'll let Gordon speak sort of more deeply to the hopper. But we do have and the team has created the best set of opportunities from an upstream exploration access perspective that we've seen for a long time. So there is a lot of opportunity set there. As Kate said, it's created at the drill bit. We're not looking at going and buying expensive barrels in order to increase our reserves or to look at the sort of resilience and length of those reserves. So we believe we've got a differentiated portfolio versus our competitors. And our challenge is deciding how we access it, what's the best value for our shareholders and delivering the returns and making sure that we actually deliver on the major project execution success that we've seen previously. We brought these projects online last year, 5 ahead of schedule. That is significant capability. As Gordon says, IPA benchmarking, best-in-class for bringing projects up and keeping them up. So these are all things from a forward profile perspective that you can look to from BP delivery. But Gordon, do you want to. Gordon Birrell: No. Thank you. And I'll just emphasize a couple of things. And Lucas, I would offer you reasons to believe short term, medium term, long term. Short term, the base is strong. What's online today, we're managing decline within that 3% to 5%. The infill program that we have that short-term barrels that pays the bills strong, rigs running very efficiently. 70% of the wells that we drill are first and second quartile. So short term, you've got an efficient machine that's bringing resource forward into production into cash. Medium term, I would say you've got BPX growing to 650,000 barrels per day of high-quality production, average returns across BPX at the moment, 45% IRR at $65 WTI, $3.50 Henry Hub. And then the Paleogene comes on in '29 through '30 and will ramp up. So that's the medium term. We've got strong medium term. And then longer term, you've got -- when I say longer term, early 2030s, I hope. We'll bring on Bumerangue, the Azule fields will start coming on in Namibia. There's more to go in Angola, and there'll be much more Paleogene to come on as well. We've got 10 billion barrels of oil in place in the Paleogene. The first 2 projects, Kaskida, Tiber-Guadalupe are only developing about $600 million. So there's a huge amount of running room in the Paleogene longer term. So there's a short-term case, medium-term case and long-term case. that I believe are reasons to believe. Craig Marshall: Thanks, Lucas. And I'll just come back to what we said earlier, the simpler, stronger, more valuable BP. The simpler piece is the action we're taking on the portfolio. These are the right decisions to simplify the portfolio. It creates optionality. The stronger piece, which is about the cost we're taking out of the system, the opportunity there that we've got and also around really focusing that portfolio and the optionality that I think Gordon talks about. And ultimately, that more valuable BP is the piece around what can we do in combination as we try to drive that simplification and strengthening the company. So I think that real focusing discipline is something. And of course, we run the company, not just for the next week, the next quarter. These are around long-term value optimization decisions. And I think we feel like they're the right things to be taking. So I think come back to that simpler, stronger, more valuable piece. Maybe -- yes, Kim, sorry, I had a question from you. Unknown Analyst: [ Kim Foster ] from HSBC. There's been a revival of interest in the MENA region from IOCs. And of course, BP was sort of early in this trend. I wonder if you could give us an update on early resource access and early-stage activity in places like Libya, Iraq, Kuwait. And also maybe just a word about your exploration plans in the Gulf of Mexico, where I think you accessed a lot of acreage in the recent license round. Gordon Birrell: Yes. Let me just go to the Middle East first, Kim. So there is actually an exploration well we're drilling right now, Matsola offshore Libya that our exploration team is very excited by. It's probably the most watched exploration well in the industry right now. We spudded the well in January. It's a relatively short well. So we'll know the result of that one relatively quickly. And then, of course, in Iraq, we've been in Rumaila for many years, and that's been a tremendous success story. We've managed to hold production flat in Rumaila for many, many years. That led us to be invited into Kirkuk within the contract area, 3 billion barrels oil in place. In the bigger area, likely to be 20 billion barrels in place. So huge resources there. So we've made huge progress. And of course, Abu Dhabi, the P5 investment program that we've been putting our dollars into along with the partners onshore Abu Dhabi is showing up in terms of growth as well. So a huge amount of growth in our portfolio in the Middle East. Gulf of America exploration program, it's part of reloading the hopper. So our exploration hopper, we've been around the world and actively, like many companies, actively reloading our hopper. The Gulf of America, of course, an area that we know very well, been there for many years. And we've reloaded some in the Mayo scene, but mainly in the Paleogene. So that's created even more running room. The next exploration well in the Paleogene will be [indiscernible], which we will spud later this year, which could be quite an exciting tieback to Kaskida eventually. So again, creates longevity on that Paleogene opportunity that we have. So there's lots of running room in the Gulf of America, a lot in the Paleogene, still some in the Miocene that we've been producing from historically for many, many years. Craig Marshall: Okay. We'll move over to this side, Maurizio. Maurizio Carulli: Maurizio Carulli from Quilter Investment Management. First of all, well done for having cut the buyback. It was the right thing to do and probably you even managed to do at the right time. The question is past year, there were 3 important new appointment at Board level, Albert Manifold as the new Chair and the former CFO of Shell and the former CEO of Devon with strong oil experience. It's possible for what you can say to get a sense of how these changes are filter through the senior management day-to-day business. And ideally, if it is possible to get an answer from each of you free. Carol Howle: Checking our homework. So I mean, the first thing I'd say is Albert is our Non-Executive Chairman. So he's responsible for oversight of our delivery and our strategic direction. And we, as the leadership team and CEO when Meg comes in, are responsible for the day-to-day running of the company. So we do have many interactions, as you can manage with the Board on that basis in terms of sharing with them progress against strategic milestones and in particular, the delivery that we've been talking about here. We talk about also where we are on portfolio and where we believe that we need to get to and why. And we also share with them competitor insights. We share with them benchmarking, how we're looking to continuously improve what we're doing. So having that composition of the Board means that we have people who've been in the industry. We have people who are outside of the industry who challenge us in different ways as well from a technology perspective. And I think that just helps us generate more ideation and thinking, and we challenge ourselves from that perspective. So the intent there is to make even better decisions with the use of that capability set. How do you feel about it, Kate? Katherine Thomson: Sure that's 3 questions in one. But look, I've been on the Board now for 2 years. And my reflections are during that time, I think the conversations in the boardroom have got better and better. Albert coming in as Chairman. He's been incredibly supportive. He brings a different style and that freshness is great, and I think we welcome it. It's great to have a different set of eyes coming in to ask questions. And it's really important in any area of any business that you have a freshness coming in and an ability to look from the outside and ask the right questions. So I welcome that. I particularly welcome the number of ex-CFOs I have around me. That's a real treat. And then I think the addition of Dave Hager, as you know, deep upstream experience, particularly on the onshore. Again, we have retirements that will continue to roll through as a Board, and it's important that the Board is thinking ahead of those to make sure that the succession is smooth, and that's a lot of what you've also seen happening in the boardroom. But I think the Board are incredibly supportive of management. I think we have really good quality conversations and debates. It's not just a monologue and presentation. It's a conversation, which I think is incredibly helpful. Gordon Birrell: Maurizio, just I'll give you a very brief answer. I found Dave Hager and Simon Henry a tremendous challenge. They're very experienced oil and gas people, of course, their ability to challenge William Lynn and myself in the matter of oil and gas investments, performance is actually tremendous. And I would call out Melody Meyers as well. Melody has been around a few years, and her challenge on safety, frankly, has made us a better company. And then, of course, Albert is value-driven, and we like that. Craig Marshall: Yes, Josh, and then we'll come back to the phone. Joshua Eliot Stone: Josh Stone again from UBS. I wanted to ask you about your integrated model because in the past, when anyone's challenged you on that, you've always said lots of value in trading. We won't sort of entertain splitting up parts of the business. But if we look at the last sort of year, it feels like there's been an awful lot of oil and gas sort of satellite ventures set up of sort of the consolidated parent. And you yourselves have done some of the things as I think about your offshore wind venture. It sounds like you're [indiscernible] lightsource BP, maybe also on Kirkuk. So when you think about the potential for maybe doing more transactions like this to unlock value from your -- particularly from your oil and gas business, actually, in particular, I'm thinking about BPX because you talked about some particularly attractive returns there. Is your view still that BPX is far better on the consolidated business? Or actually, could this be one where there's a lot of strategic value as an independent company? Carol Howle: I mean I think I'll come and add something on the trading side, and then I'll pass it to Gordon. So I mean, I think first thing I would say is BPX is a core part of BP. It's got a great production forecast through to the end of the decade. I'll let Gordon talk to that. And it's also a great shore of onshore expertise that we share across the rest of BP. So that would be difficult to replicate. In terms of decisions around do we keep it for integrated value or not, the key thing there is what is the best value for BP. So if we do believe that actually it's better value, somebody else will value that position more and we can actually utilize the proceeds from that into a different opportunity that we value more even if there is trading value associated with it, we will make the right decision for BP on that basis. Now that doesn't mean, of course, from the trading perspective, we don't try and negotiate in terms of what those terms are or whether we can keep access in any way, shape or form for the better value, the additive value. But it's all about is this the right thing for BP to do strategically? Are we going to get fair market value proceeds in? Can we use those proceeds elsewhere more wisely for something that creates a better opportunity and does it deliver better value for shareholders? If the answer is yes, if my trading team are listening, then the answer is that's what we'll do. Gordon? Gordon Birrell: Yes. And I would just add, Josh, it's a great question. But BPX, 7 billion barrels of oil and gas equivalent in place, 30, 3-0 Tcf of gas 15 yet to develop. It's a core part of BP. And there is the integration value, which I'll finish on, but it's such a core part of BP. And the performance in the last 2 years has just come on leaps and bounds and maybe 2 metrics that I haven't mentioned already. The NPV per acre that we have is the highest -- we're either 1, 2 or 3 in the 3 basins that we operate in the Permian, the Delaware side of the Permian, the Eagle Ford or the Haynesville. We're #1, 2 and 3 NPV per section. We're first quartile in reserves per foot drilled in -- across the 3 basins that we're drilling. And most recently, in the last 6 months, we've been knocking out the park in terms of reserves and production per well from East Texas in the Haynesville. So it's a core part of our company. performance has improved. It's a key part of our growth -- and the team in Denver work hand in glove with Carl's team to maximize the value that we get from the production. So we like having it in the portfolio and no intention to sell off at this point. Craig Marshall: Thanks, Gordon. We'll go to the phone follow-up question with Paul Cheng. Paul? Paul Cheng: Paul Cheng, Scotiabank. Carl, I mean, there's a little bit of the other side of the question of what Josh just asked. On one hand, I think you guys were saying that you want to create a simpler and streamlined operation of BP. And on the other hand, that from time to time that you have formed joint venture like whether it's in Angola, in Norway and now that after the sales of Castrol, -- and I think we all have seen from history, joint venture maybe is great in day 1, but over time, become very difficult to manage and complicated the operation and your decision-making. And so how do you balance the 2 objectives? Carol Howle: So I think, Paul, let me start, and then I'll pass it to the team. So we balance it in terms of what do we think is going to create the best value for BP, what's the best opportunity in the market and then how can we execute it in the most efficient way. And we've got a number of these JVs that we participated in, and we've learned a lot as well from the JVs that we participated in over the years. Some of that has been how to improve or where we need to reduce complexity or indeed where we've been able to bring learnings into BP and also improve ourselves from that. But the key is around it's a value conversation that we have, and we will always look to try and minimize complexity and improve safety and the operational reliability around them. But we do have a lot of experience in the area, both for JVs that we are no longer in, but also the ones that we're deeply embedded in today. Katherine Thomson: And maybe if I add a couple of other thoughts, Paul. I think the philosophy of being simple is good, and I think complexity can slow you down and it can make you expensive and neither are particularly helpful when you're trying to create maximum value. But there are times where you can create unique opportunities to create value through a marriage of assets and partners. And I would -- I'd call out [indiscernible] and Azule actually because I think what you've had there is you've had a symbiosis occur where you've had the right partner with the right marriage of assets put together to create a differential value proposition. It doesn't occur everywhere. But where those circumstances exist, then I think it's appropriate to contemplate stepping into that complexity to create the incremental value. And we see something very similar with Castrol. As we looked across the entire range of different options we had on Castrol, the transaction that we signed just for Christmas was the transaction that would deliver the most value for us as a company. And I think that's important that we always have that philosophy as our very, very core as we contemplate different structures. But I don't think you can ever rule them out. It's about creating the most value, and that will come down to facts and circumstances. Craig Marshall: Thanks, Kate. We'll come back to the room. A question at the back with Matt. Matthew Lofting: Matt Lofting, JPM. Just a follow-up on the cost reduction program. The progress through the $2.8 billion in the last 2 years has been really good and swift. It looks like the, I guess, the target ex Castrol implies that the run rate slows over the next 2 years. I just wondered what's holding you back from being more ambitious in raising that target at this point? Katherine Thomson: Should I take that one? Carol Howle: Yes. Why don't you. Katherine Thomson: Look, we have -- we've delivered really well so far against the 4 to 5, $2.8 billion, so well over halfway there. Honestly, on cost, I don't think you're ever done. I mean, ultimately, why are you focused on your cost base? It's to make you the most efficient company and the most competitive company you can be amongst your peer group, that has to be why you're doing this in order to drive incremental cash flow. And we talked about AI earlier. I think a lot of the areas of the company, we are looking hard at AI, both in terms of cost reductions, but also increased productivity. And I think we're just at the early stages of truly understanding what it's going to unlock. I think there are so many opportunities there that we don't yet contemplate. With regard to upgrading targets, I think there's far more value to be gained by actually demonstrating what we're delivering rather than continually upgrading targets. So measure us on what we do as opposed to the targets that we put out. And I think you can hear we are really, really focused on this area of efficiency and competitiveness, and we will keep going. We will continue to strive. Our competitors are not standing still and neither are we. Craig Marshall: Thank you. Take one more question from Doug. And then Chris will come to you. Douglas George Blyth Leggate: Kate, I'm going to come back to you, if I may. Listening to the questions in the room, there still seems -- maybe it's a U.S. versus European thing, I'm not sure, but there still seems to be a perception that cash returns and value return are the same thing, and they're obviously not. You have $158 billion enterprise value if we take the capital structure as it sits as it was at the end of '25. You've talked about taking that down to $143 that's 2027. Where do you see the optimal capital structure? However you want to express it as the $7 billion versus the $5 billion of debt holders versus shareholders or maybe even in breakeven terms, where do you see the optimal capital structure by 2030? Katherine Thomson: I think that's a work in progress. This is the bit that I feel we need to spend quite a lot of time reflecting on in consideration of how we want to step into these growth options we have ahead of us. I think it's the right question to ask, come back and ask me again in 6 months when I've had time to go through all of this with Meg, prejudging where we should get together as a leadership team once Meg is in role, I think, would be inappropriate. I think there's a moment in time as we, as a new leadership team come together and take a really good look at where we're taking our company in the next 5 years. and debate that with the Board. And then when we're ready, we'll be able to update that. It's absolutely the right question to ask. I just don't have a great answer for you right now because we're still working through that. Craig Marshall: Thanks, Doug. We're going to take 2 last questions, one from Chris and then one at the back. Christopher Kuplent: It's Chris Kuplent again from Bank of America. I might be quick. Kate, I realize you've added the $1.5 billion Castrol leaving your OpEx into your targets. What about your free cash flow target for 2027? It looks like Castrol did amazingly well this year, running at about a $700 million number or so in terms of free cash flow. Where are you in terms of how much free cash flow you've sold so far, 5 billion achieved in '25 plus 6 billion announced -- and do you, therefore, feel those are still free cash flow-wise rounding errors before you have to update us on your 2027 free cash flow target? Katherine Thomson: Yes. Let me give you a quick answer and maybe we can come back to that with the IR team offline, Chris. As I look at the free cash flow targets, of course, they were excluding any divestment on Castrol. Of course, what we've got is we are taking operating cash flow out from the divestment. But of course, we're also reducing CapEx. But on the other side, I'm reducing my finance costs. So as I look at the totality of that, it's probably in the order of a couple of hundred million, but we have a range around our free cash flow generation. I'm still very confident of us delivering the targets. I see no need to change that right now when I contemplate the impact of the transaction. But we can take you through the bridge, if that's helpful. Craig Marshall: Great. Thanks, Chris. And final question at the back there. Henry Tarr: It's Henry Tarr at Berenberg. As I look at the developments ahead of you, as you get to 2027, it looks like there's potentially a lot that could come on with Bumerangue and the Paleogene and elsewhere. Is that going to be possible within the current CapEx frame? And then as you sort of look at those developments and you're going through the process now as to how you're going to sort of ramp them up, how are you going to try and keep costs sort of under control and manage these developments? Are you going to approach them in a certain way to try and minimize the potential for any cost overruns, et cetera? Katherine Thomson: Shall I take the capital frame first, Gordon? -- and then let you talk about developments and costs. Look, Gordon and William challenge me hard regularly on competing for capital inside the frame. As you know, we've got a lot of choice there. We're very comfortable with regard to our 13% to 15% frame for the next 2 years as we step through the initial phases of these understanding and then progression of these opportunities. No need to change that. We'll update beyond that when we're ready. But Gordon, in terms of cost control? Gordon Birrell: Yes. And just to add on CapEx, the Paleogene is fully funded within our capital frame that we have. Both projects are FID-ed, Kaskida, Tiber-Guadalupe, so fully funded. The big spend on Bumerangue really doesn't kick in until closer to FID, depending on whether we do an early production scheme or not, and we just need to make choices around that. In terms of cost, I think this is where technology and AI comes in. The platform or the FPSO of tomorrow won't look like the one of the past. And our most recent platform that we brought online, absent GTA in Azerbaijan, [indiscernible] Central East fully controlled from onshore, so much less staff offshore, easier shifts on people, less people exposed to hazard. So I think that's the future, and that will keep costs down. So it's application of technology, continuing to work the supply chain. That's always going to be a feature of upstream where a huge amount of our spend and OpEx is in the supply chain. So I see lots of opportunity actually to keep costs under control as we grow the company. Craig Marshall: Super. Thanks, Gordon. I think what we'll do is we'll close the Q&A on that note. A big thanks as ever to everybody for their questions in the room and for those online. We do look forward to meeting with many of you in the coming weeks and coming months. And on behalf of Carol, Kate and Gordon, thanks again.
Kenneth Ko: Can you hear me, Brett? Brett Kelly: I can hear you. Can you hear me? Kenneth Ko: Yes. Yes, I can. We're live, Brett. So we're good to go. Brett Kelly: Yes, that's cool. It just says my microphone is muted. That's all. But look, if we're live. Good day, and welcome to our First Half 2026 Results for Kelly Partners Group Holdings Limited. My name is Brett Kelly, the Founder and CEO, and I'm joined by my colleague, Kenneth Ko, our Chief Financial Officer. It's really terrific to meet with everyone today, and we'll have a short presentation, which was published this morning and we'll take largely as having been read, and then we'll move to some questions. We like to have this front page that makes a quick clear summary. The team has grown strongly, while maintaining the revenue per person. We've grown our number of partners and businesses and are now operating in a new country, Ireland that's performing well. Revenue has grown by 17%, revenue run rate has grown by 22% and shares have increased 0.8% over the period, which is still below the number of shares at IPO in 2017. Our free cash flow per share has grown by 10% and our return on invested capital plus organic growth continues to remain strong. Next page, Kenneth, thanks. We'll go through the highlights about us and capital allocation. But the big rocks that we wanted to share to understand, where the firm is and where it's going are these big themes, which are -- we are trying to build a global firm, an Australian global firm for private business owners, who we describe as people that want to go somewhere, so those active business owners. And we are now in a position, where we have a global team. We have people generating revenue 24 hours a day, essentially 7 days a week all across the globe, which is frankly, tremendous, and we are delivering on this prospect of growing a global business from Australia through the U.S. and now into Ireland through our 51% ownership in the Kudos network that has 60 firms in 48 countries. We believe many of those firms will become Kelly Partners firms over time. with an emphasis on the expression over time. In terms of M&A, we have a programmatic acquisition playbook that is well practiced and very well proven, and we are implementing that in the territories that we're seeking to play with our focus remaining on Australia, where we are obviously very advantaged. We are building and have quietly been building a suite of software applications for our firms that are unique and different and give us a way of differentiating for our people and clients. And we are working on our data consistency and our ultimate implementation of AI broadly and specific tools to continue to make Kelly Partners the best place to work for talented young accountants that really want to help clients and build their careers. We've outlined in some slides in simple terms what that all looks like, but we can see clearly that we are growing our revenue outside Australia, and that is developing a more differentiated posture and reality for the business. We're very excited to see that the huge engagement of private equity over the last 5 years, we think will provide real opportunities for Kelly Partners. In the recent AI-driven rerating of businesses like ourselves and CBIZ that's listed in the U.S. we believe that many of these PE-backed investments are going to struggle to exit at valuations that their investments assumed. We believe that, that will create more opportunity for Kelly Partners as a listed permanent capital holdco at likely lower valuations. It will mean, I think, that AI will drive fear into vendors, meaning that they will increasingly look to exit their businesses with their pending retirements. I think there'll be more dead PE deals that will provide acquisition opportunities over the next 5, up to 10 years. And I think there's a separation of the leadership-driven tech-enabled firms from the rest. I think attitude and age to a degree are going to very much matter for the ability of a firm to adopt AI and apply it effectively. But AI will be adopted in every piece of software we use and platforms we play on by our clients and by ourselves. And so, I think it will just become ubiquitous and frankly, quite helpful for our teams. Implementation in terms of acquisitions is the hard work, and it really matters and KP has a playbook and a track record that makes us very confident in our ongoing ability to win in that way. In terms of software, since 2021, we've been building internal software development capability supplemented by external capability. And we've been building tools like a single point of truth for our directors that sits over the top of our other systems and gives us a unique view of how we're playing the game. We've built applications for our teams, clients, client niche, and we're building an order platform for our Kudos firms. We just call that out because it's a quiet key part of our business that we've been investing in, and we will continue to double down in that space. In terms of how AI will disrupt the accounting industry, I don't think anyone knows all of the ways that AI will impact, but technology has always impacted our industry, and it will continue to, I think, add value to our firm more than it actually destroys value. The principal advantage our firm has is the quality of our people and their alignment to our purpose. When you take very smart people and give them new and better tools, I believe that we will be uniquely placed to find ways to create and deliver value with AI or any future technology. Our clients' needs remain very similar. And in particular, our core product is our trusted advice, which we believe in a world of more information and easier computation will frankly become more valued. While there is a commoditization of accounting generally that's been going on for some decades, certainly since my involvement in accounting 30 years ago, what's always remained true is that the people that have trusted relationships and really deep expertise at solving complex problems are best placed to prosper in a -- and navigate a changing environment, which our industry has always been. So very interestingly, one thing to look at is the age of our workforce and our team are young, highly qualified professionals. And I think that this profile of our people and our partners, the average age of our partners is about 42 is very, very different from the industry. The average age of partnerships in private client firms of the nature that we seek to acquire is typically over 60. We don't believe that cohort is going to be very good at taking on the new technology that is confronting the industry and creating opportunities for the industry. We've popped a slide in there to show the sort of indiscriminate impact of recent share price movements with KPG is down 49.51% in the last 12 months and Constellation Software is down 49.94% that I'm feeling comfortable that this is a broader sell-off, Xero is down 52%, Salesforce down 40%. We think the markets done what it is done. And what we will continue to do is focus on our business and let the market do whatever it does. It's Mr. Market is having a crazy day, and that's okay. By the way, we've been here before during the pandemic, I think people will note that our share price fell well more than 50% and the world didn't end either. So we will seek to take advantage of the recent share price change through buybacks, using our employee share scheme to give our team long-term exposure to the upside of the stock. I'm very confident that we will very much benefit all shareholders by this momentary opportunity. So calling out some quick highlights, we've got this KPG in 10 seconds. revenue growth of 17% in the half. Margin remains very, very strong. Parent NPATA is growing. Our returns on equity are strong, gearing is strong, cash flow and the efficiency of our cash conversion is strong. So we feel very good about the way the business is operating. We speak to the long consistent business model and flywheel that we operate and its ability to generate consistent results. and remain very confident that, that model and our flywheel remains very strongly placed. I'm particularly pleased that we've had 6 firm join us in the last 6 months and the demand to join the group has never been stronger. I'll leave these slides to read in your own time if you haven't read them yet, but revenue growth, EBITDA, programmatic acquisition, cash conversion, return on invested capital, return on equity are all in very, very strong places. We've always looked at the progress of the firm in 5-year period. We said in 2020, 2021 that we would look to accelerate our growth, and we're pleased that over the 5 years since there, we've nearly tripled our revenue from $48.9 million to $135 million last June. Our run rate is at $165 million. And so, we are in that acceleration phase that's requiring some investment, but we feel very good about our ability to foresee and deliver on the business plan. We shared this slide on the earning power of the business and the sense of our numbers just for shareholders to have some clarity, and that's for you to review in your own time. So profitability right across all of the firms, EBITDA margins have improved, and they remain as strong as anyone I'm aware of at our scale in the industry globally. In terms of capital allocation, this is a slide that we've shared consistently over the years, and we'll leave that there for your review. So we aim to build per share intrinsic value over time. And you can see the strong performance of our compounding of book value at a CAGR of 34.9% for nearly 19 years. It will be 20 years in June, and we're very pleased with that progress. We believe that it demonstrates that there's a systematic way and a flywheel to what we're doing. Our mindset is as investors operating a holding company that experts at the specific small circle of competence that we understand, which is the $2 million to $10 million revenue accounting firms. And we think that's proven out in our track record over nearly 20 years. I'll leave this for you to review in your own time, but it just shows our emphasis and our focus on a return per share that is on issue for all shareholders. EPS and free cash flow per share continue to grow. And again, emphasis on per share returns. And you'll notice from 2021 to '26, that returns nearly doubled in line with the revenue growth. In terms of locations, we're pleased to be into Ireland with a fantastic firm and partner. It's a 55-year-old firm grown by father and son. And now with Stefan Asple operating, it's a great story. We're into India, Hong Kong and Philippines, strong in Australia and growing in the United States. We are the only firm to my knowledge, from Australia that's ever had an equity interest in a U.S.-based firm. And we believe that the U.S., Australian and U.S. Ireland, niche cross-border private company and their family growth opportunity is very differentiated and very outside the realms of AI to disrupt ever. In terms of the platform, the platform is very strong and very differentiated in our view. I'll leave that for you to review in your own time. So our strategy to become a top 10 accounting firm in Australia is well and truly on its way. In our mind, we exclude the big 4 and other firms that are not pure-play accounting and tax firms. And we've really taken our place with names that have been around for 50 to 100 years longer than us in Australia. We consider our position in the Australian market to be very strong with profitability far beyond our typical competitive firms and less exposure to AI impact on things like audit services, where our audit services are 5% of our revenue or less. Most of these comparable firms are 25% to 40% of their revenue in the audit space. So we expect to continue to grow very, very strongly in Australia and to be able to maintain our profitability, our profitable margins in the sectors that we operate. Now in terms of going global, that plan is proceeding and frankly, better than expected. It's an ambitious and difficult challenge to take on board. When you're trying to do something that other people haven't done before, no one would expect it would be easy. And it hasn't proven easy, but we are, as we always do, just working through to make that happen. I really couldn't be more pleased with the progress we've made with the quality of our team, our partners and our impact in these markets. And the demand, frankly, is overwhelming and exciting. So where I was hopeful and thought well considered in this approach 3 years ago when we started today, I'm certain that we can build a strong global presence for Kelly Partners as Australia's global accounting firm for private business owners that want to go somewhere more so than they ever have been. It's extremely exciting. If you consider today, the business that we own by revenue outside Australia after 3 years is the same size as the business that we listed on the ASX in 2017. And that was in terms of our ASX listing after 11 years of building the group from the foundation. It's taken us 3 years to duplicate that size in each market. So it's a great effort by all of the team, and there's a lot to do to really build that business to its full capacity. But it should be certain that the addressable market outside Australia is something like 10x the addressable market that exists within Australia. We will continue to drive our advantaged position in Australia, while gently proceeding to grow our private business in an intelligent and capital-light manner. In terms of partnerships, this is how many we've done and sort of what the pipeline looks like. And we have a process, we have a great pipeline. Great. I might hand over to Kenny to talk about capital allocation, which remains very strong and take us through the financials. Kenneth Ko: Okay. We've got one more slide here, Brett, on the additional investment and then just the financials, Brett. Brett Kelly: Great. Well, I was a little bit early there, Kenny. Additional investment, we often get asked, could we get the full walk-through earnings or the full earnings through to KPG without additional investment. We make really clear here how we've driven this investment over time and -- we've always got a return on this additional investment. It's really just a choice as to either pay dividends, retain cash or invest in the internal capacity of the business. We've chosen to invest in the internal capacity of the business and grow that business, and that has worked out really well. So we'll continue to do that. We're looking for shareholders that are long term in their orientation in the way that we are as owners and that partnership has proven to be very, very effective over time. We're not -- while we will be very diligent about this investment, we're not running the business for short-term cash profits in terms of NPAT. We're looking at continuing to grow the capacity of the firm to drive these types of growth numbers. I think that the return on the capital that we're investing is sensational, frankly, we're keeping it at strong ROICs. And so, I'm keen to deploy the capital available to that use. Kenneth Ko: Great. Thanks, Brett. So great to see everyone again. Brett Kelly: Any time, Kenny. Any time. Kenneth Ko: Great to see everyone again present the financial results and highlights for the half year ended 31st of December 2025. I will start off with this slide that shows the key financial metrics for the group and the parent. Starting off with the highlight for the year in an increase in group revenue from $64.9 million to $76 million being a 17% growth on prior year and the underlying EBITDA for our operating business is growing 15.2% to $21 million. The margins are comparable to last year. Our underlying NPATA for the parent has increased 12.8% to $5.6 million on $4.9 million last year, and we continue to generate great cash flows and strong balance sheet, as you can see below, and great return on equity and invested capital metrics. On the income statement, as I alluded to just now, revenue increased 17% to $76 million. Our run rate currently is $164.2 million. The revenue growth is driven by organic growth of 4.2% and acquired revenue growth of 12.8%, noting that, as Brett said earlier, we completed 6 acquisitions this year, all of them throughout the year. So those acquisitions really contributed partly into the half year numbers. Out of the 6 acquisitions, 2 we completed in August, 2 we completed in October and another 2 we completed in December. So really, those acquired businesses only contributed a few months of revenues and profits to the results. Our Australian operating business EBITDA margin is at 31.3% and our group operating business EBITDA margin of 27.6%. I just wanted to bring everyone back to the profitability slide that Brett shared before, showing that the EBITDA margins for all of our cohorts has increased for the half, and it shows our efforts to increase those margins across all our businesses. On the right there in the table, our underlying EBITDA increased 15.2% for our operating businesses and 10.8% after taking into account the parent additional investments. Underlying NPATA, as I said just now, attributable to shareholders, increased 12.8% to $5.6 million. We continue to present our numbers pre-AASB, so including the rent expense because we think that makes sense and that's how we've shown numbers throughout the years. In terms of the balance sheet, our net debt to underlying EBITDA is 1.79x compared to 1.42x in 30th of June 2025. And again, due to the debt we've taken out to complete the EMEA acquisitions that I just mentioned. Return on equity metrics remain strong for both the group at 38.1% and the parent at 32.6%, respectively. Very pleased to see our lockup days decreased to 49.8 days, and it shows the discipline of which our business managed their working capital, and it's quite a bit of reduction from the prior periods. In terms of debt and liquidity, our net debt increased $18.6 million to $77.1 million since 30th of June 2025, again, mainly to fund our India acquisitions and other funding requirements such as partner buy in loans. And I note that during the year, we completed those 6 acquisitions had revenues of $18 million to $22 million, so aligned to the net debt increase. One thing to note for our key large shareholders, if you compare the working capital debt against the prior period, you will see a substantial increase of $8 million from $7.7 million to $15.2 million. And that's because at 31 December 2025, our bank, Westpac gave us temporary overdrafts to complete the 2 acquisitions in the half, and they were in the process of being refinanced to long-term debt. Both of them have been converted to long-term debt as of today. So those so-called working capital debts would be reclassed as long-term debts. Our principal debt repayments for the half is $7 million. So annualizing that, that represents annual debt repayments of $14 million, and it's in line with the 5-year amortization of the loans. If you look at our acquisition term debt there of $60 million, that equates to around 4x to 5x the -- that annual repayment of $14 million. We continue to maintain a healthy cash and facility headroom. And that's the debt and liquidity slide. On the next slide, the cash flows. Cash from operations increased 6.4% in the half. Our scheduled debt reductions increased from $5.4 million to $6.2 million due to the increase in debt, obviously. And as I mentioned there, you would see that -- during the half, we repaid scheduled debt reductions of $6.2 million, plus an additional debt repayment of $0.8 million annualizing to a $14 million debt repayment. Our growth CapEx there relates to a major fit-out of our Griffith office, which is a very well-performing business within the group. And again, our cash conversion is high at 101.1% for the half compared to 103% in the prior half and is consistent with our expected 85% to 100% conversion ratios. Parent and NCI waterfall, I won't go through this in detail, but this provides us with a reconciliation of the 51% to 49% interest in the parent and NCI to the statutory profits shown in the financials. And as you can see there, there are various parent attributed costs such as parent tax, interest and depreciation. They're comparable to what we've done in the prior half. And obviously, the additional investments and some non-recurring expenses. Those all contribute to the difference in the proportion between the parent and NCI earnings. And that's it for me, Brett. Brett Kelly: Good man, Kenny. Thank you very much. Why don't we go to questions? That's probably enough from us and really keen to -- we've got a great showing of shareholders today. So very pleased if you drop your questions in the Q&A chat. I'll get to work trying to answer them with Kenny. Brett Kelly: So current share price, notwithstanding what has changed in the last 6 months that impacts the decision between investing capital and acquisitions versus buybacks. Nothing has changed other than the change in the share price. Acquisitions are still our first and best place to invest, and you'll continue to see that. We think share prices just move around, and we've never run the business with a short-term focus on the share price. Second question, can you explain the slowdown in revenue growth from 24% to 17%? Kenneth Ko: Yes, I'll take that. Brett Kelly: Yes. I would -- I throw that to you, Kenny. But frankly, I wouldn't see it as a slowdown. Over to you, Kenny. Kenneth Ko: So on that question, so if one looks at the run rate revenue of $164.2 million and you compare that revenue to our FY '25 revenue of $134.6 million, the increase is 22%. And as I explained earlier in the presentation, because of the timing when we did those 6 acquisitions, we did 2 in August, 2 in late October and 2 in December. really, they really didn't really contribute that much to the acquired growth. Hence, there's that timing difference in having that full acquired growth reflected in the numbers. I hope that answers your question. Brett Kelly: Just looking for any other questions? I can't see any other questions. Kenneth Ko: I think, Brett, you have to click on the new post and it generates the new question. Brett Kelly: There we go. I'll just open it again. So Brett, during an interview with compounding quality in October '24, you mentioned that Kelly Partners was investing in AI through a joint venture with a 51-49 partnership to develop AI-specific tools since then there's a little public communication on this initiative. Can you provide an update? We have looked at that joint venture and a number of others and we've decided instead of doing those joint ventures to continue to work with our own software development and partners within the business. The terms and pricing of those proposed joint ventures didn't make any sense to us. And we believe that we had more to contribute than was being recognized. So we just continue to push on ourselves with our own initiatives, and we feel very comfortable with that approach. There's a lot of developments going on in AI that is just application-specific that we think might be useful in the short term, but we don't see them having any particular enduring value and getting duplicated very quickly. So we're being constantly asked to invest either time or capital in these joint ventures, always been -- been careful, where we involve ourselves. And next question, you've have been very positive about the impact of AI on the profession, given the significant efficiency gain AI could unlock combined with the structural supply-demand imbalance. You previously noted that accounts currently perform roughly 8 tasks out of the 80 task clients require. When would you expect those efficiency to translate into higher organic growth for the group? I don't expect higher organic growth. If we have organic growth of typically, we think about 6%. It comes out at about 4% after we continue to acquire firms and get rid of some of the poorly performing clients that typically impacts our reported organic growth. I'm pretty happy with 5% organic growth. And if those tools deliver more organic growth, that would be nice, but not necessarily a focus for us. How would you currently -- next question, how would you currently describe the M&A pipeline? Has the market softened? There's never been any impact of our share price on our M&A pipeline, certainly not a negative one. People really sell because they're ready to take on a partner that can add value and/or retire. We've got a very, very strong pipeline, as strong as it's ever been. It continues to improve every year. And we just don't see any particular negative impact at all. Next question, group has made substantial additional investors. which have impacted NPATA and EBITDA margins, when should investors expect to see the returns on these investments, improved profitability and operating efficiencies. If you look at overall organic -- sorry, overall growth in revenue, if we're growing at 30%, it takes us longer to get margins up to the levels that we would like because we just have less time to focus on each of those businesses that join us. But frankly, we're really matching our effort with the ability of a firm that joins us to take on our effort to get those margin improvements. I'm comfortable with where the margins are at the moment, and I expect them to continue to remain very strong. Next question for us uneducated Americans, can you translate the term debtor days? Debtor days are receivable days and lockup days are work in progress days plus receivables days. basically the working capital being absorbed by our business. Can we get an update on any potential IPO? We are working to make sure that we've got the debt that we need to continue to grow the business. And when we've got the resolution of our debt structuring sorted out, it is our intention to pursue a listing on an appropriate market other than the ASX. And that's about as much as we can say about that legally at this time. And you built strong -- next question, you built strong momentum through programmatic acquisitions, Philippines BPO platform is now material to group capacity. How do you balance accelerating that offshore leverage with preserving partner economics? The Philippines BPO is not focused on providing team members to Kelly Partners. It's a business that provides team members to all sorts of businesses. Out of its 1,150 team members, less than 20 of those would be with Kelly Partners. But that number can grow over time, and that will help us to have the right number of people right across all of our firms all throughout the world, as well as maintain and improve partner economics. Next question, back in July 2025, KPG sent out a shareholder survey about potential future investments. Any update about that survey? No update at this point. Next question is the recent internal capital raising to still be used for the reasons stated at the associated meeting. Yes. Yes, it is. We are going to continue to deliver on all of the undertakings that we have made. A question about -- can you talk more about Kelly Partners Investment Office. We can't buy KPG shares by a KPIO, as far as I understand with the rules, the independent trustee rules that relate to that vehicle. We can check that. It would certainly make sense. And at what share price would you consider buybacks over acquisitions? I've always said that when I think about investing in a business, I wouldn't buy one share in a business if I wasn't prepared to buy all of the shares of that business. Certainly, at the price that -- at the current share price, I would be more than happy to own all of the shares of our business. That said, our current posture is to continue to partner with firms in their growth, and we see a huge pipeline of that opportunity. We see that as our core competency, as our real tiny but valuable circle of competence, and we expect to continue to do that and do a lot more of that. That said, we are a holding company. We have investment expertise. We found this pocket of opportunity in the accounting industry 20 years ago. If we were of the view that we found another pocket of opportunity, then we would seek to develop that opportunity as well. We've spoken, I think, comprehensively on AI and there's plenty of information in the pack. There's a question there around, is it an opportunity, I think we've spoken to. Can you please talk more about the fortress balance sheet initiative that you're kind of working on and that we referred to during the full year presentation. Yes, we have the view that we should keep gearing low as we have. I think Kenny, net debt to EBITDA. Kenneth Ko: 1.79x -- 1.79x. Brett Kelly: Yes, 1.79x, we think is very conservative given the 6 deals we've done in the last 6 months. We typically see that sort of contract strongly. We don't see any particular pressure on our balance sheet at all. And we will look -- the way that Berkshire Hathaway has over 60 years as a public company, we're always trying to run the business like a battleship that can perform in all circumstances. And we traded strongly through the global financial crisis in 2007 and '08, and we traded very strongly through the pandemic, and we continue to trade very, very strongly. I'm very confident about the business' positioning relative to what we see in the industry in particular. I think we shared as much as we want to share about what our software developers are up to. We run -- we try to run a balance between being very transparent and being very careful not to share the trade secrets of KPG. You can see the results, most of the -- most businesses that are achieving outstanding results in their industries are doing that largely through trade secrets. And so, we wanted to let shareholders know that we, for a long time now, have been working on our software development capability, which definitely entails thinking about automation, AI and these types of areas. We hadn't previously disclosed the dollars that we've been investing. We wanted to just reassure people that we are not asleep to these issues, while we're not sharing the specific things that we're doing that might give our competitors a heads up to what we're up to. Can you give an update on increasing the size of acquisitions team? Yes, it's really just 3 of us doing it. We keep looking for talented people to join the acquisition team. But when they turn up, they are expecting salaries of up to USD 0.5 million, that's a proposal we can resist at this point. So we'd like to increase the size of that team, but I'm not sure that -- at that type of pricing haven't been able to convince myself at. That makes sense as of now. That might change. And you've got us here. If there are any other questions, I'm just seeing that there's another one. Please lock them in. We're going to be out of time soon. Not a question, just a comment. I hope that you and the businesses have come back stronger from the recent California fires and Florida hurricane events. Thanks. Thank you for your comment. And yes, we're doing our best. It's been -- last year was a terrible year, and so I'm very happy to be in 2026 away from that. Where do we see the business in 10 years, 20 years? We're trying to build an enduringly valuable holdco that has as its principal business, the Kelly Partners accounting business that will be Australia's global accounting firm for private business owners, who want to go somewhere. Over a 20-year period, we see ourselves as being a globally respected listed holding company with a reputation for compounding per share value as well as anyone ever has as well as finding unique pockets of opportunity to drive those returns. Not a question, but thank you for the shareholder letter about the stock price performance earlier today. Happy to get that out. We don't spend a huge amount of time on Investor Relations, not because we don't respect our investors and our shareholding partners, but rather, we know that the best thing that we can do for you as shareholder partners is to focus on the business to keep our eye on the ball. Share price is just a scoreboard, interesting, but we can't do anything about the scoreboard by staring at it. We have to keep our eye on the ball of the business and delivering on the business plan and the long-term value creation vision of the business. which you can be assured we are doing very strongly. Any book recommendations, recently required big ideas on nuggets and wisdom. I just saw that Jim Collins, a shareholder of mine, has literally just texted me before this meeting and shared that Jim Collins, who's one of my favorite authors, has a book coming out called What to Make of a Life. And the subtitle is Cliffs, Fog, Fire and the Self-Knowledge Imperative. I'm really excited about that book coming out. I think that will be quite cool. I've loved reading Brad Jacobs, How To Make A Few Billion and How To Make A Few More Billion. In particular, the piece I like about that book is Brad talks a lot about mindset. If you read the book by the founders of 3G Capital talks about thinking big. You read the first chapter of Steve Schwarzman's book talks about the importance of thinking big. Certainly, both of those gentlemen have challenged me to think much bigger about what's possible for the group. But what Brad Jacobs has done is encourage me to focus on the role of mindset, and he talks a lot about cognitive behavioral therapy and meditation and ways to think to keep yourself centered and grounded amid the pressures of life and also how to expand your sense of what's possible. I love his little obligation that is his little observation that he says, you've got to bring a love vibe to your business. People have to feel really cared about and that they're on a mission with you. And I just love that idea. I just think it's very nicely expressed and very much aligns with my values and the values here at Kelly Partners. So really, really like that book. Now I have a bad books at any one time going. And -- and I'm excited to share that I have written a new book called Progress, which is 75 big ideas for life and business, which you'll see come out this year ahead of our 20th anniversary on June 12th. That's a book that I've pulled together. It's the first time I've written anything that's not an interview book. I also published this year a book called Political Wisdom, which is interviews that I've done with 6 Australian Prime Ministers. It's part of a wisdom series I've been writing since 1998, one every 7 years, which is nearly the 30th -- 30-year anniversary, which is cool. And I pulled together a book of 14 interviews from our Be Better Off Show podcast that we'll publish this year as well. So keep your eye out for those. We always got some book recommendations. So great question. Happy to chat about them. In terms of nuggets of wisdom, I must comment that I love the letter that Warren Buffett wrote for Thanksgiving. I love the way that he handled his transition. I thought the last Berkshire meeting was not only hugely informative, but very, very moving. And the most impactful part of that meeting was when Buffett was asked why had he been able to continue for 60 years in his role. He mentioned that he just liked working for his shareholders, who many of he knew personally, and he loved delivering for those people. I thought that was profound and moving and certainly share that mindset. I highly recommend anyone to watch that 2 or 3 times over. There's just acres of wisdom in that particular meeting and it was really any sharpest. Where can you purchase books? All will be on Amazon. And if you can't find them, let me know, and I'll find a copy for you. Well, going once, going twice, I really appreciate everyone joining us today. I think we've got through about 30 questions. I hope our responses have been useful. I'm incredibly excited about where the business is, the opportunities we have in front of us, the value that we're delivering to our people and our clients and the positive impact we're making in our communities. When we started the business in 2006, we hope that we could make the accounting industry better for its people and clients and communities, and we know that we're doing that. I want to thank all of our team members from our most junior through to our most senior, all of our partners, all of our shareholders and all of our clients and the communities that encourage us in and allow us to prosper within them. We're in the business to make a positive difference. We have a flywheel of positive outcomes, as we put in more effort, we get great positive feedback, and that encourages us to frankly do more. And so, I feel incredibly blessed and privileged to lead our organization of people that I just could not speak more hardly of or be more proud of. The most consistent feedback I get on Kelly Partners is when I send people to meet our people and they come back to me and they say, it's the most incredible privilege of my role, the feedback that I received from all over the world saying I cannot believe Brett, the quality of your people, of their work and their care for their people and he or she is a client it is really, really very, very special. So I'd like to thank everyone for joining us today on the 10th of February 2026. For me here anyway, Kenneth in -- I'm here in California. Ken's in Hong Kong, we probably should have mentioned and for all of you in Sydney and around the world that have joined us today. If there's anything that we've missed, please reach out to us with an e-mail, and we'll certainly come straight back to you. I appreciate your time. And as I like to say, thank you, Kenny, and have a great day.
Operator: Welcome to the Lee Enterprises 2026 First Quarter Webcast and Conference Call. Jared Marks: The call is being recorded and will be available for replay at investors.lee.net. At the close of the planned remarks, there will be an opportunity for questions. Participants accessing this call by webcast may submit written questions through the website and they will be answered during the call as time permits. Otherwise, you will receive a response letter. A link to the live webcast can be found at investors.lee.net. I would now like to turn the call over to your host, Jared Marks, Vice President, Finance. Please go ahead. Jared Marks: Thank you, and good morning, everyone. We appreciate you joining us today. With me on this morning's call are Nathan Becky, President and Interim Chief Executive Officer, and Josh Reinholz, Vice President, Interim Chief Financial Officer, and Treasurer. Earlier today, we issued a news release announcing preliminary results for our 2026. The release and the accompanying presentation are available at investors.lee.net. As a reminder, this morning's discussion will include forward-looking statements based on current expectations. These statements are subject to certain risks, trends, and uncertainties that could cause actual results to differ. Such factors are described in this morning's news release and in our SEC filings. During the call, we refer to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in the tables accompanying the release. With that, I'll turn the call over to Nathan Becky. Nathan Becky: Thank you, Jared. Good morning, everyone, and thank you for joining us. Lee Enterprises delivered a strong start to fiscal 2026, highlighted by significant first-quarter adjusted EBITDA growth and a transformational improvement to our capital structure. Adjusted EBITDA grew 61% year over year to $12 million, driven by consistent execution across the core business and disciplined cost management. Last week, we completed a $50 million equity investment that materially strengthens our balance sheet and significantly improves our liquidity. In this morning's call, we'll provide a closer look at the financial stability that the transaction provides and the transition following the closing of the deal. Before we dive into that, let me begin by reinforcing the fundamentals of our three-pillar digital growth strategy which has enabled Lee to rapidly transform over the last five years into a digital-first company. Our transformation into a strong and stable digital media company is not theoretical. It's measurable, repeatable, and scalable. Digital is no longer an emerging segment inside a legacy business but the primary economic engine of the company. The trajectory of Lee is increasingly governed by digital growth rates, digital markets, and digital unit economics. This shift represents disciplined execution, expanding our audience through rich local content, accelerating digital subscription growth, and building a digital advertising business that delivers results. With nearly $300 million in digital revenue over the last twelve months, we are well-positioned to reach our $450 million digital revenue target by 2030. Our investment thesis is centered on a strengthened balance sheet and continued debt reduction. The $50 million common stock private placement shores up our balance sheet in both the near and long term and will lead to future deleveraging. Furthermore, with the close of this deal, our already favorable credit agreement will see a significant boost. We'll touch on the details of this transaction and the amended credit agreement in just a moment. But for now, I'd just point out the transformational impact these will have on our future. By strengthening the balance sheet and improving the company's capital structure, we are putting the company in a much better position to execute our strategy and deliver long-term value to our shareholders. I'm excited to share the details of the strategic deal that closed this past week. We raised $50 million in gross proceeds through a private placement of common stock at $3.25 per share. The private placement was anchored and backstopped by David Hoffman, with additional existing investors also participating. This transaction followed a comprehensive review of the company's performance and capital structure, consideration of alternatives, and approval by both the Board and shareholders who recognize that by strengthening the balance sheet and reducing the interest rate under our credit agreement, the company would be in a better position to execute and create long-term shareholder value. As part of the closing of the transaction, we welcome Mr. Hoffman as Chairman of the Board of Directors. Concurrently, with this private placement, the credit agreement has been amended to reduce the interest rate on our outstanding debt to 5% from 9% for the next five years. On $455 million in debt, the interest rate is expected to generate approximately $18 million in annual interest savings or up to $90 million over the five-year period. That significant cash flow improvement over the five-year horizon will allow us the flexibility to invest in our core business and drive digital growth. The proceeds from the deal will be used primarily for working capital and to fund current and future digital transformation projects. This transaction accelerates our ability to strengthen our digital platforms, enhance the consumer's experience, and deliver measurable performance for our local advertising clients. In the near term, it improves operating efficiency while positioning us with a more flexible, scalable digital infrastructure designed to support sustainable long-term growth. Fiscal 2026 presents a tremendous opportunity for growth driven by the strength of our digital businesses and operational discipline. Particularly as we've already delivered strong first-quarter results. At a macro level, we are a leading provider of high-quality local news information, and advertising in 72 markets across the US. Our local journalism is what sets us apart. As a digital-first subscription platform, we provide breaking news and local content that commands a strong audience, and attracts advertisers within the local communities we serve. Over the last twelve months, sustained growth of 14% in our digital-only subscription revenue has further diversified our revenue mix and boosted our reliance on growing revenue streams. At the same time, we've maintained disciplined cost management across the organization, particularly in legacy costs and corporate overhead. These efforts are driving steady momentum in adjusted EBITDA which was $50 million over the last twelve months. Now I'll hand the call over to Josh to run through our first-quarter results. Thanks, Nathan. Josh Reinholz: Our strong first quarter was marked by meaningful year-over-year improvement in adjusted EBITDA driven by continued progress in our digital transformation and disciplined cost. Q1 adjusted EBITDA increased by a significant 61% or $5 million over the prior year reflecting improved operating efficiency and higher expense control. These results demonstrate the company's ability to expand profitability even as we navigate dynamic changes in the digital media landscape. On the digital subscription front, we finished the quarter with $23 million in revenue, from our 609,000 digital-only subscribers. 5% growth in digital-only subscription revenue was fueled by increased efforts to maximize engagement within our subscriber base as well as to optimize price within our highly engaged subscriber cohorts. Targeted investments in personalization content delivery, and life cycle marketing are increasing subscriber lifetime value and improving overall monetization. Q1 finished with over $70 million in total digital revenue. Which represented over 54% of our total rep. This progress builds on the continued evolution of our revenue with digital revenue mix improving 330 basis points year over year digital-only subscription revenue growing 5%, and digital sources representing 71% of total advertising revenue. Underscoring the transformational effect of our digital growth strategy. The strength of our first-quarter performance clearly demonstrates a strong foundation for Lee's future as a digital-first company. Lastly, and most significantly, Q1 saw substantial growth in adjusted EBITDA. Up $5 million or 61% over the prior year. Our first-quarter growth in adjusted EBITDA was driven by strong cost control. Particularly tied to our legacy revenue streams. With total cash costs declining $17 million over the prior year. The operational efficiency demonstrated this quarter was primarily driven by reduced headcount, and legacy print costs. This quarter represents our third consecutive quarter of adjusted EBITDA growth on a comparable basis. The year-over-year improvement in adjusted EBITDA margin was also quite substantial. With the 2026 representing 9.4% compared to 5.3% in the prior year. Another brief note on the quarter. Our results included $2 million in business interruption insurance proceeds tied to the cyber incident last year. Excluding these proceeds, Q1 adjusted EBITDA showed very strong 35% growth. We expect to receive further insurance proceeds as the fiscal year progresses. Overall, our first-quarter results highlight the strength of our digital strategy and our continued path towards transforming local media. Compared to our broader peer group, we have consistently outperformed across several key indicators of digital growth. Including digital subscription revenue, and digital agency rep. Over the past three years, digital subscription revenue has grown significantly. More than double that of our nearest competitor. Reflecting the consistent strength of our local journalism, effective subscription strategies for managing both volume and rate, and continual improvement in digital platforms. Over the past year, we have continued to modernize our technology and expand our product ecosystem using data-driven marketing, and audience insights to deepen engagement and enhance monetization. Post-transaction, we expect to further bolster our digital products and technology. Ultimately, our goal is improving the user's experience by delivering journalism that is credible, and timely as well as intuitive, accessible, and engaging across devices. Our roadmap will ensure our platforms evolve alongside audience expectations also supporting sustainable business outcomes. On the advertising side, revenue from our amplified digital agency has also outpaced peers. Growing at a 5% annual rate over the last three years. This performance underscores our ability to generate sustainable, digital advertising growth through scalable solutions, innovative services, and highly skilled digitally focused teams. Looking ahead, our trajectory toward 90% digital revenue by fiscal 2030 positions us to operate a sustainable business model that is no longer dependent on print products. As Nathan mentioned earlier, our focus remains on strengthening our digital products enhancing audience engagement, and building scalable capabilities that position the company for sustained performance in a digital media landscape. Just six years ago, our revenue was primarily print. Making up nearly 80% of our operating. As of 2026, 54% of our revenue is now digital. This transformational shift demonstrates that we're less reliant on legacy print than ever before. As we move forward, we will continue to build on this digital revenue growth momentum while also managing our declining legacy revenue streams all driving us towards a day when we are sustainable solely from our digital platforms. Our core digital business has grown 12% annually from fiscal 2021 to fiscal 2025. And that is translated to comparable annual growth in digital gross margin. Replacing our print revenue with growing and profitable digital revenue, sets us up to achieve long-term sustainability. By fiscal 2030, we will be sustainable from just our digital revenue and margin. Which is something we're more confident in now than ever as post-transaction, we begin to realize the impact of the transformational Vistas project we have underway and that are forthcoming. From a cost perspective, we have a consistent track record of disciplined cost management. While making strategic investments that support long-term growth. We remain steadfast in our commitment to long-term financial sustainability and the continued delivery of high-quality local journals. In fiscal 2026, reducing legacy costs and complexity throughout our business remains a top priority for us. By enhancing operational rigor this year, without compromising quality, we strengthened our long-term position and are poised to drive sustainable shareholder value over the long term. Lastly, before I pass it back to Nathan, I just like to reiterate how impactful the amended credit agreement is to our long-term financial. Since refinancing in March 2020, we have paid down $121 million of principal. With a strengthened balance sheet and a reduced interest rate, our path to debt reduction is stronger than ever. On $455 million in debt, the interest rate reduction of 5% is expected to generate approximately million dollars in annual interest savings or up to approximately $90 million over the five years. This savings is a boost that will generate long-term debt reduction and shareholder value creation. Another recent improvement to our balance sheet is the strategic termination of the company's fully funded defined benefit pension plan. Since the plan's assets were sufficient to cover all obligations, the company is free from any future cost uncertainty. Lastly, we have identified $26 million in non-core that we are actively working to monetize. These asset sales will contribute toward future debt reduction. I'll now pass the call over to Nathan for final remarks. Thanks, Josh. Nathan Becky: Looking ahead to the full year, we're reaffirming our outlook for fiscal 2026 of adjusted EBITDA growth in the mid-single digits. The strength of our first quarter positions us well to achieve our 2026 outlook. Josh Reinholz: The transaction and interest reduction give us increased confidence in not only fiscal 2026, but also the next five years. Nathan Becky: In other news, Josh Reinholz: recently announced a new strategic partnership with Huddl. A leader in sports technology video analysis, and data. Huddl works with thousands of high schools and local sports teams across the nation, providing video, data, and tools to support athletes, coaches, and communities. This partnership represents one of the largest collaborations in local sports media and aligns with our mission to serve our communities with high school sports coverage at the core. It also reinforces our commitment to journalism and storytelling that bring communities together. This partnership with Huddl will allow us to serve our communities even better by adding video content with free access and continue to tell the amazing local sports stories that reflect the pride, passion, and connection people feel for their schools and teams. Nathan Becky: What leaves deep roots in local communities Josh Reinholz: we create meaningful value for both our readers and advertisers positioning our digital platforms as the place to go for local sports consumption and advertising. While in the early stages, we're extremely excited to partner with the Huddl team and we'll share more as the relationship develops. Operator: With that, Josh Reinholz: open the call for questions. Nathan Becky: Lee? Operator: Thank you. At this time, we will be conducting a question and answer session. As a reminder, if you are accessing this call by webcast, you may submit typed questions on your screen. Those questions will be answered during the call as time permits. Nathan Becky: Questions. Josh Reinholz: We have no questions from our live participants. I'll now turn the call back to Nathan for closing remarks. Great. Thank you. I'll reiterate that we are a leader in local content and are well underway on a significant digital transformation. We have become a digital-first organization growing our digital revenue mix to 54% as of this past quarter. More than doubling over the past five years. With the $50 million private placement transaction supporting both deleveraging and continued digital investment, and up to $90 million in interest savings over the next five years we've meaningfully strengthened our balance sheet and increased our financial flexibility. With a clear strategy, strong foundation, and a compelling future, we are set up now more than ever for our next stage of evolution as a digital media company. I want to thank our employees for their dedication, and our shareholders for their continued support. Operator: Thank you. We have reached the end of our question and answer session. This concludes our call. You may now disconnect.
Operator: Good morning, and welcome to The Manitowoc Company Fourth Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ion Warner, Senior Vice President, Marketing and Investor Relations. Please go ahead. Ion Warner: Good morning, everyone, and welcome to our earnings call to review the company's fourth quarter and full year 2025 financial performance and business update as outlined in last evening's press release. Joining me this morning with prepared remarks are Aaron Ravenscroft, our president and chief executive officer, and Brian Regan, our executive vice president and chief financial officer. Earlier this morning, we posted our slide presentation to the investor relations section on our website, www.manitowoc.com, which you can use to follow along with our prepared remarks. Please turn to Slide two. Before we start, please note our safe harbor statement in the material provided for this call. During today's call, forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 are made based on the company's current assessment of its markets and other factors that affect its business. However, actual results could differ materially from any implied or actual projections due to one or more of the factors among others described in the company's latest SEC filings. The Manitowoc Company does not undertake any obligation to update or revise any forward-looking statement whether the result of new information, future events, or other circumstances. And with that, I'll now turn the call over to Aaron. Aaron Ravenscroft: Thank you, Ion, and good morning, everyone. Please turn to slide three. To start, I'd like to express my appreciation to our team for their hard work and never-ending passion for our company and for our customers. With their grit and determination, we delivered solid results in the fourth quarter. 2025 was a hard-fought year. Given the great trade reset in the U.S., the operating environment wasn't exactly as we anticipated. Even so, The Middle East remained strong, and we began to see green shoots in Europe and Asia Pacific. We also continue to make great progress on our Cranes Plus 50 strategy. Non-new machine sales grew 10% to $690 million, reaching another record. We continue to grow our aftermarket footprint, adding territory coverage in North Carolina, South Carolina, and Georgia in The United States, and several key provinces in France. In addition, we opened or upgraded new locations in Nashville, Phoenix, and Baton Rouge in The U.S., Sydney, Australia, and two locations in France. Lastly, we grew our field service technician population to over 500. Equally important to growing our aftermarket presence, new product development is the life of our company and critical to growing our population of cranes in the field. At the very end of 2024, we launched the MCT 2205, which is the largest topless tower crane we have ever produced. We sold 19 of these units last year, which was a great result. During 2025, we launched 11 new cranes, including the GRT 550 rough terrain, a five-axle hybrid all-terrain crane, and the MCR 815, which is the largest left-in tower crane that we've ever sold. In March, we will unveil two more special cranes at CONEXPO. We will launch an 80-ton boom truck, which is the largest boom truck that we've ever produced, and we will launch an eight-axle 700-ton all-terrain crane, which is also the largest all-terrain crane we've ever developed. A big thank you to our engineering teams. It's been a big lift to extend our product portfolio into these higher ranges. Please turn to Slide four. Turning our focus to the Manitowoc Way, I'm extremely pleased that we achieved an RIR of 0.94. For the first time in our company's history, we reduced our recordable injury rate below one. We also reduced our first aid incidents by 10% year over year. For some perspective, in 2015, we had 91 recordable injuries. In 2025, we had just 42. Our long-term goal remains zero injuries. Next, I would like to announce our CEO awards for the Manitowoc Way. Although our teams in the factories continue to do an awesome job, I was pleased that our winners were from the front end of our business. I'm happy to announce our MGX Brands in Chesapeake was recognized for the new blast hopper concept, which was built by one of our welders and increased operational efficiency by 70% and improved safety. Second, our sales team in Portugal was recognized for their work that they did on a large military contract in Spain. In addition to selling multiple cranes, the team helped the customer with all of their rigging hardware needs, offering a complete suite of lifting products. Lastly, I want to recognize three outstanding team members who received this year's CEO award for their exceptional service to our customers: Stephane Dumont, Vitaly Hartemef, and Nick Bird. Congratulations to each of them for their leadership and unwavering commitment to our customer success. Our entrepreneurial spirit inspires all of us to strive for excellence in serving our customers. Please move to slide five. Turning our attention to the market, we generated orders of $803 million during the fourth quarter, up 56% year over year. Backlog ended the year at $794 million, up 22% from a year ago. Regionally, The Americas remains pretty complicated. A year ago, U.S. elections fueled customer sentiment. However, that momentum was reversed by the tariff situation, which still remains fluid. Folks want and need new cranes, but they are waiting until the very last minute to place orders. Our fourth-quarter orders were highlighted by three large orders in December, which secured build slots for these dealers and customers throughout 2026. Rental rates have remained flat, which is my biggest concern. Regardless of the specific tariff, the cost of new cranes is going up, and rental rates need to follow for crane operators to justify the purchase of new cranes or fleet renewals. Overall, dealer inventory is okay. It's not desperately low nor is it concerningly high. In Europe, we continue to see improvement driven by several new economic programs across the continent. Without a doubt, the tire crane market has improved significantly. New machine orders were up 64% year over year during the fourth quarter. I was with a couple of our key dealers in early January, and their sentiment is a lot better than it was a year ago. Similarly, mobile crane orders in the quarter were up 39% year over year. Customers are beginning to feel better about the outlook on project work throughout the region. In The Middle East, I remain fairly optimistic, but the ride is definitely getting bumpier. In Saudi, while projects are moving forward, cash continues to tighten, which is making folks nervous. In Dubai, the large residential projects, which are skyscrapers by American standards, remain extremely hot. The Stargate Data Center Project, however, in Abu Dhabi is moving slower than I anticipated. The tower crane work on phase one has been completed; surprisingly, phase two has not yet started. Meanwhile, the new Dubai Airport has already let the first three construction packages, and the fourth is under review. So the groundwork is underway, and I would expect to see tower crane work sometime this year. The Asia Pacific market resembles Europe. Momentum and sentiment are improving, and South Korea's optimism has grown despite a still weak currency, bolstered primarily by the announcement of large Samsung and SK Hynix semiconductor projects. Australia reflects a similar positive trend. We are waiting for the green light on a major power transmission project, which will provide a meaningful boost in sentiment. With that, I'll pass it on to Brian to walk you through the financials before I close with an update on our strategy. Brian Regan: Thanks, Aaron, and good morning, everyone. Please turn to Slide six. Our fourth-quarter results were in line with our expectations and prior guidance, demonstrating solid performance and resilience despite ongoing volatility in global markets and the continued headwinds from tariffs. We delivered strong orders for the quarter and achieved trailing twelve-month non-new machine sales of $690 million. In addition, we made meaningful progress in reducing our working capital, generating $78 million of free cash flows during the quarter. Quarterly orders totaled $803 million, driven by whole goods stocking orders in The Americas after two quarters of lagging orders and the continued improvement in the European tower crane demand. We saw a 64% increase in new crane orders year over year. Year-end backlog was $794 million, up 22% versus the prior year. Net sales for the quarter were $677 million, up 14% year over year, supported by strong shipments in North America, European tower cranes, as well as continued growth from our non-new machine sales strategy, which reached $191 million. Adjusted EBITDA for the quarter was $40 million, and consistent with our expectations, we were able to mitigate approximately 85% of these headwinds through targeted pricing and sourcing actions. On a GAAP basis, our provision for income taxes was $5 million. GAAP diluted income per share was $0.20, and on an adjusted basis, $0.32, a decrease of $0.09 from the prior year. Net tariffs resulted in $0.13 of unfavorable impact to DEPS on a year-over-year basis. Cash flows from operations for the year were $22 million, which was negatively impacted by payments of approximately $45 million associated with the settlement of the EPA matter. Capital expenditures were $38 million, including $19 million for rental fleet investment. Free cash flow was a use of $15 million. We ended the year with a cash balance of $77 million. Excluding the EPA matter, free cash flow was $30 million. Our net leverage ended the year at 3.15 times, and total liquidity was a healthy $298 million. Please turn to Slide eight. We expect improved results in 2026 with net sales in the range of $2.25 billion to $2.35 billion and adjusted EBITDA between $125 million and $150 million. When looking at the midpoint of our guidance, expected improved results are driven by one, pricing to offset the incremental tariff headwind; two, the European tower crane market; and three, continued growth in our new non-new machine business. Additionally, we implemented a restructuring plan to streamline our organization with projected savings of roughly $10 million in 2026. These projected savings are expected to offset inflation and foreign currency headwinds. We project free cash flow to be $40 million to $65 million, which includes $45 million to $50 million in capital expenditures. We expect to improve our net leverage to below three times during the year, improving our liquidity and adding flexibility for strategic investments. With that, I'll turn the call back to Aaron for closing remarks. Aaron Ravenscroft: Thank you, Brian. Please turn to slide nine. Looking back, 2025 was not the year that we expected, but there's plenty of optimism as we move forward. Europe and Asia Pacific are moving in the right direction, the Middle East business remains positive. The American market appears poised for a rebound with interest rates trending down and the tariff environment stabilizing. Fundamentally, fleets continue to age, and at some point, a major refresh will be required. Strategically, we continue to execute our Cranes Plus 50 strategy. We have new locations planned in Portugal, Mexico, Chile, and France, and we continue to hire field service techs. Recently, we also announced a new distribution agreement with Hyub, where MGX will represent their products across 13 states. Really excited about this opportunity given the synergies between knuckle boom cranes and boom trucks. In line with our Cranes Plus 50 strategy, we continue to expand our portfolio of lifting solutions. In closing, our long-term aspirational goal is simple. We want to achieve a return on invested capital of 15%. While stronger end market demand will certainly help, the key lies in continuing to grow our non-new machine sales, which is far less cyclical and delivers gross margins around 35%. I am confident that we are making progress and moving in the right direction. As Warren Buffett wisely said, someone is sitting in the shade today because someone planted a tree a long time ago. We continue to grow our orchard at Manitowoc. With that, operator, please open the lines for questions. Operator: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question today is from Jerry Revich with Wells Fargo. Please go ahead. Kevin Ujerik: Good morning, Jerry. This is sorry, not Jerry. It's Kevin Ujerik on for Jerry Revich. How are you guys? Aaron Ravenscroft: Good, Kevin. Thanks, Kevin. Yeah. So first question that I had was about the 2026 outlook. How should we think about the sales growth by region? Which regions are expected to show the highest growth and what products are contributing? Brian Regan: Yes. I think from a regional standpoint, our tower crane business continues to do strong, and the expectation will continue into 2026 to be a tailwind for us. That's the tower cranes. The U.S. is a bit of a mixed bag. While, you know, we did see some good orders and we got a good backlog, I think the tariffs still create some headwind for us. Hence why we're doing the restructuring action. Kevin Ujerik: Gotcha. And then for the Crane Plus 50 strategy, could we talk about how to think about it through 2026 and the cadence? Aaron Ravenscroft: Yeah. So, I mean, in terms of our cadence, I'd say it's pretty flat across it. The only thing that goes up and down is the used. So we look at non-new machine sales heading into the year. I think we're in a good position relative to the number of techs we've added, number of locations we've added. That being said, you know, we do have some headwind because we've had some good use sales the last couple of years, and tariffs have thrown a little bit of a wrench in there in terms of moving units from Europe to The United States. But, yeah, I mean, I think it's probably safe in terms of a modeling standpoint to just assume that it's roughly the same every quarter. Don't you think, Brian? Brian Regan: Yeah. Yeah. I think like you said, I think the used I think Q4, we had a good used quarter. So we saw a good revenue number. From a margin standpoint, the used is a little bit less than the normal margin in our non-new machine sales. So, you know, with expected lower revenue on the used next year, I think, you know, the margin should be a little bit better. Kevin Ujerik: Okay. Got it. That's all I have for questions. Thank you. Ion Warner: Thanks, Kevin. Operator: Showing no further questions, this concludes our question and answer session. Would like Ion Warner: Gary, got a couple of emails that have come my way with questions. So, I'll just ask the question and have management answer. The first question that came in was, what are your orders in January? Aaron Ravenscroft: I'll take that one. So in terms of our orders in January, very, I would say, good month, approximately $225 million. When I look at it in terms of the you know, where the good news came from. We've ended our winter campaign for tower cranes. That was a good program for us. So that's the first time in a few years we've had a good winter campaign, so that was good. In North America, of course, we had some large stocking orders during the fourth quarter. So it was down a little bit, but overall, I would say it was still a pretty good number. Demand for large RTs and crawler has been really good. So pleased to see the continued progress in January. So, yeah, good month. Ion Warner: Okay. We received another question by email and I'll read it. Can you give us an update on the Manitowoc Way and your implementation of Lean? At the company? Aaron Ravenscroft: Yeah. So, I mean, these days, I sort of look at the Manitowoc Way in three buckets. First, on the shop floor, I'm really, really proud of the things that we're doing. You know, a good example, I was in France a couple of weeks ago, and the team is really, I'd say, honed in on the details now where it's not just sort of talking about five minutes, but really diving into how do we apply SMED, changing out machine tools, how we're programming robots. So I feel like we're along our way, you know, well along our way, and the team doesn't need much help. I can be more of a cheerleader on that side of the business. In terms of the office, I'm still super excited to see what we can do with AI. I think that's gonna give us a lot of tools to crunch data that we really couldn't attack in the past. We've had a couple of smaller wins so far, but nothing to brag about, I would say, just yet. Then lastly, when I look at the company, you know, the more we continue to invest in the MGX, and the aftermarket, non-new machine sales, and all these new locations, we've got a lot of work to do on that in terms of sharing lessons learned. I find lots of creative solutions when I go visit the locations, but we're sharing them the way, I would say, that we do at the factory level. So I'd say that's really our focus in the next couple of years is how do we get better and really focus on the customer experience. So it's nice to see that what we're doing with Lean is starting to play in lots of different applications than just the shop floor. Ion Warner: Got it. Oh, got another one. About the seasonality. How do you see the first quarter looking? Brian Regan: Evan, I'll take that one. Okay. While we don't give quarterly guidance, I think we do expect 2026 to be similar in that Q2 and Q4 are generally our strongest quarters. Specifically related to Q1, I think we've got a few headwinds where Q1 will be impacted by one being tariffs, the big tariff hit came, really in the second part of the year. So we have that headwind. Also, FX will impact us negatively in the first quarter. And the restructuring actions that we took are going to be a positive impact later on in the year. So I think Q1 will be unfortunately a little bit low relative to the rest of the year. Aaron Ravenscroft: Anything else, Diane? Ion Warner: Nope. Those are the inbound questions that I got in my email. Brian Regan: Thank you. Operator: With no further questions, I would like to turn the conference back over to Ion Warner for any closing remarks. Ion Warner: Thanks, Gary. Please note a replay of our earnings call will be available later this morning by accessing the Investor Relations section of our website at www.manitowoc.com. Thank you, everyone, for joining us today and for your continued interest in The Manitowoc Company. We look forward to speaking with you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Chris Potochar, Vice President of Treasury and Investor Relations. Chris Potochar: Good morning, everyone. Thank you for joining us for our fourth quarter and full year 2025 earnings call. Mark Bertolini, Oscar Health's Chief Executive Officer; and Scott Blackley, Oscar Health's Chief Financial Officer, will host this morning's call. This call can also be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release which can be found on our Investor Relations website at ir.hioscar.com. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our quarterly report on Form 10-Q for the period ended September 30, 2025, and filed with the Securities and Exchange Commission and other filings with the SEC, including our annual report on Form 10-K for the period ended December 31, 2025, to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the fourth quarter and full year 2025 earnings press release available on the company's Investor Relations website at ir.hioscar.com. We have not provided a quantitative reconciliation of estimated full year 2026 adjusted EBITDA as described on this call to GAAP net income because Oscar is unable without making unreasonable efforts to calculate certain reconciling items with confidence. With that, I will turn the call over to our CEO, Mark Bertolini. Mark Bertolini: Good morning. Thank you, Chris, and thank you all for joining us. Today, Oscar announced fourth quarter and full year 2025 results and the 2026 outlook. We reported total revenue of $11.7 billion, a 28% increase year-over-year. Our SG&A expense ratio of 17.5% improved by approximately 160 basis points over the prior year, reflecting continued efficiency gains through growth, disciplined expense management and AI and technology advancements across the business. MLR increased 570 basis points year-over-year to 87.4% and our 2025 loss from operations was $396 million, primarily due to higher market morbidity resulting in a higher risk adjustment payable. Oscar is on track to return to profitability this year. We expect a significant year-over-year improvement of nearly $750 million in earnings from operations in 2026, representing the midpoint of our guidance. Scott will discuss our financials in more detail shortly. Before I get into our business highlights, I want to provide an update on the performance of the individual market. Overall, 2025 was a reset year for the industry. The industry-wide increase in market morbidity due to Medicaid lives entering the market and program integrity initiatives shifted market dynamics. Oscar embraced the change and positioned the company for strong top line growth and margin expansions in 2026. We took decisive actions with a disciplined pricing, distribution and product strategy to go after profitable growth as competitors pulled back or exited the market. Our pricing strategy always assume the expiration of enhanced premium tax credits. Our final 2026 rates also reflected higher market morbidity, elevated trend and the effects of program integrity initiatives. Early 2026 open enrollment results demonstrate the resilience of the individual market. The latest CMS data indicates overall market membership of 23 million lives representing a better-than-expected decline of 5% year-over-year. We expect many passively enrolled members facing higher premiums will exit the market when the grace periods expire. We will, therefore, have greater clarity on final paid membership and market contraction when CMS releases final enrollment data midyear. Current enrollment data indicates market contraction may track toward the lower end of our original projection of 20% to 30%. The individual market stability underscores the priority consumers place on maintaining health coverage, more small business owners, working Americans and gig workers are running the market as group insurance fails to meet their affordability needs. The individual markets fundamental characteristics, combined with a larger and growing addressable market can absorb morbidity changes without dramatic trend impacts Oscar is in a strong position to continue leading the individual market and defining the future of consumer-centered health care for all Americans. Now I will review our business highlights. The 2026 open enrollment period was a record for the company. Oscar delivered another year of above-market growth, and we are privileged to serve 3.4 million members as of February 1, 2026. We expect to start the second quarter with approximately 3 million paid members, a 58% increase year-over-year. Member retention remains solid across the book, driven by our suite of affordable products, agenetic AI features and a superior member experience. Oscar's market share across our footprint increased from 17% in 2025 to 30% in 2026. We continue to grow IFP and ICRA membership in prominent service areas, including new and existing markets in Arizona, Florida, New Jersey and Texas. The team created new cost-effective bronze and gold plans to support consumers losing enhanced premium tax credits and expanded broker partnerships by 60% to manage distribution across the overall market. Our integrated strategy, which we deployed well ahead of enhanced premium tax credit exploration, positioned us to profitably capture new membership in the active shopping season. Product innovation was a key growth driver of this open enrollment. We launched several new lifestyle offerings tailored to certain conditions at stages of life. These include Hello Menno, the first menopause plan in the ACA, when a Salud, our Spanish first experience for members with diabetes and Hive Health with Oscar, our landmark ECR plan. Our lifestyle products are attracting new consumer segments and creating a loyal customer base. Members enrolled in our lifestyle products have above-average retention rates and are 50% more likely to recommend Oscar to family and friends. They are also more likely to come in as direct enrollments, demonstrating the greater attachment to our brand. Our deep understanding of the consumer and the strength of our product experience continue to create powerful entry points for consumers, positioning us for long-term IFP and ICRA growth. Oscar investments in AI are creating efficiencies across the business as we grow. We lowered administrative costs by 160 basis points year-over-year while significantly increasing membership. AI is integrated across the Oscar platform, enabling teams to automate routine tasks, efficiently scale our service operations and improve decision support. For example, our Agentic AI bot for care guides reduced response times by 67% during peak and open enrollment period. AI is also central to our member experience. Oswell, our industry-first Health agent now completes 86% of questions received from members with high accuracy and quality. We continue to embed Oswell across our product portfolio to help members take control of their health. The impact of AI on our efficiency and the quality of the interactions for our members is unparalleled in this pace in my 40 years in this industry. In summary, Oscar's disciplined pricing, record high membership and top line growth lay a strong foundation for this year. We are well positioned to significantly expand margins and return to profitability in 2026. Our strategic priorities position Oscar to shape the next evolution of the individual market in the following ways. First, accelerate National IFP and Ecraexpansion. Second, create lifestyle products with an exceptional consumer experience; and third, drive operational excellence through AI and frictionless execution. The individual market is the engine of consumer-driven health care. When consumers choose how and where to spend their money, they exploit inefficiencies and improve the quality of the interaction. We see in our own growth, the power of designing products around consumer needs. That's the promise of the individual market. the promise of choice, the promise of long-term innovation, innovation our country needs to turn healthcare into a market that fits real lives and creates meaningful coverage for life. I want to thank our Oscar team for their dedication to our customers if we're delivering a successful open enrollment. Our 12 years of experience in the individual market will drive results for 2026 and beyond. I will now turn the call over to Scott. Scott? Richard Blackley: Thank you, Mark, and good morning, everyone. 2025 was a challenging year for ACA carriers as market morbidity stepped up across the industry. We experienced these industry-wide trends with higher-than-expected claims and lower-than-expected risk adjustment offset leading to a net loss of $443 million in 2025. Over the course of 2025, we took appropriate steps to position Oscar to deliver strong earnings in 2026 including disciplined pricing and cost management actions. I'll begin with a brief overview of fourth quarter results, review of our full year performance and then discuss our outlook for 2026. Starting with the fourth quarter. We ended the year with approximately 2 million members, an increase of 22% year-over-year. Membership growth was driven by solid retention, above-market growth during open enrollment and continued SEP member additions. The fourth quarter medical loss ratio was 95.4%, an increase of 730 basis points year-over-year. During the quarter, we received an updated risk adjustment report for claims through October. The report indicated that overall market morbidity remains stable from the third quarter to the fourth quarter. However, relative to our expectations, Oscar's membership skewed healthier than the broader market, which required an increase of our risk adjustment accrual of $275 million in the fourth quarter. The fourth quarter risk adjustment true-up was partially offset by $99 million of favorable in-year development and $36 million of favorable prior period development, primarily related to claims run out from the prior year. Overall utilization in the quarter was modestly above our expectations. Inpatient utilization continued to moderate while outpatient and professional increase, which we believe was associated with members accelerating care as the enhanced premium tax credits expired. Pharmacy utilization was largely in line with our expectations. Turning to the full year. Total revenue increased 28% year-over-year to $11.7 billion, driven by membership growth, partially offset by an increase in the net risk adjustment payable. The full year medical loss ratio was 87.4%, an increase of 570 basis points year-over-year. Risk adjustment was a headwind throughout 2025, driven by higher market morbidity which we primarily attribute to the full year impact of members entering the ACA market as a result of Medicaid redeterminations as well as program integrity efforts. Risk transfer as a percentage of direct premiums was approximately 18.5% for 2025, representing a 390 basis point increase year-over-year. Switching to administrative costs. We continue to drive improvements in our SG&A expense ratio. The full year SG&A expense ratio improved by approximately 160 basis points year-over-year to 17.5%. The year-over-year improvement was driven by fixed cost leverage, lower exchange fee rates and disciplined cost management, including an increased impact from technology and AI initiatives. The loss from operations for the full year was approximately $396 million, a change of $454 million year-over-year, driven primarily by the higher risk adjustment payable. The adjusted EBITDA loss for the full year was approximately $280 million, a change of $479 million year-over-year. Turning to 2026. We have been preparing for the expiration of the enhanced premium tax credits for some time and took deliberate actions in 2025 to position the business for profitable growth and improved financial performance. We introduced innovative and affordable plan designs aligned with member needs, optimized our distribution strategy and took a measured approach to geographic expansion. Our disciplined pricing assumed and expected market contraction at the high end of our previously communicated 20% to 30% range driven by the expiration of enhanced premium tax credits and CMS program integrity initiatives. We also refiled rates in states covering approximately 99% of our membership to reflect the higher market morbidity in 2025. Together, these actions position us to profitably drive share growth. For 2026, we expect total revenues to be in the range of $18.7 billion to $19 billion, an increase of 61% year-over-year at the midpoint, driven by another year of above-market growth during open enrollment, solid retention and rate increases. While our weighted average rate increase for 2026 was approximately 28%, the increase on a per member per month basis is lower, reflecting shifts in member age and metal mix. Our outlook also reflects elevated churn this year, driven primarily by passively enrolled members facing higher premiums following the sunset of the enhanced premium tax credit and ongoing CMS program integrity initiatives. From a member profile perspective, our average member is 38 years old, approximately 1 year younger year-over-year. As expected, we saw migration from silver plans to Bronson gold plants, reflecting plan designs intended to offer affordable options following the expiration of the enhanced premium tax credits. For 2026, we expect risk adjustment as a percentage of direct premiums to be approximately 20% based on our updated membership mix and 2025 risk adjustment experience. Turning to medical costs. We expect our medical loss ratio to be in the range of 82.4% to 83.4%, representing 450 basis points of year-over-year improvement at the midpoint. Our outlook reflects elevated market morbidity observed in 2025, an incremental increase in morbidity in 2026 and medical cost trends and utilization patterns largely consistent with our 2025 experience. We also incorporated additional third-party data to assess the risk profile of new members, which is tracking modestly better than our pricing expectations, while renewal risk scores are in line with our expectations. With respect to seasonality, we expect MLR to be lowest in the first quarter and highest in the fourth quarter as members meet their annual deductibles. On administrative expenses, we expect continued improvement in our SG&A expense ratio. We expect the SG&A expense ratio to be in the range of 15.8% to 16.3%, representing an approximately 140 basis point year-over-year improvement at the midpoint. We continue to see the benefits of scale as fixed cost leverage and variable expense efficiencies driven by technology and AI are expected to drive further improvement in our SG&A expense ratio. We expect our SG&A expense ratio to be fairly consistent in the first 3 quarters with an uptick in the fourth quarter. We expect to meaningfully improve financial performance and a return to profitability in 2026. We expect earnings from operations to be in the range of $250 million to $450 million, a significant improvement of nearly $750 million year-over-year implying an operating margin of approximately 1.9% at the midpoint. Adjusted EBITDA is expected to be approximately $115 million higher than earnings from operations. Shifting to the balance sheet. we have taken opportunistic steps to strengthen our capital position and optimize our capital structure. As a reminder, during the third quarter, we increased our capital in preparation for 2026 growth, completing a $410 million convertible notes offering due 2030, generating $360 million of net proceeds. Subsequent to that transaction, we entered into a new $475 million 3-year revolving credit facility. The transaction was well supported by a strong syndicate of top-tier banks and executed on favorable terms, further strengthening our balance sheet and providing additional flexibility as we execute on our strategic plans. We ended the year with approximately $5.5 billion of cash and investments, including $414 million at the parent. As of December 31, 2025, our insurance subsidiaries had approximately $1 billion of capital in surplus, including $315 million of excess capital. To help frame our capital position in the context of our growth outlook, I want to spend a moment on regulatory capital requirements. While individual states vary, a useful rule of thumb is that for every $1 billion of premiums, we are required to hold approximately $50 million of capital, which reflects roughly 55% quota share reinsurance ceding percentage for 2026. Overall, our capital position remains very strong. In closing, 2025 marked a shift in the individual market dynamics. Oscar has been in the ACA since its inception. And today, we are operating from a position of scale and experience. That perspective has informed the actions we've taken to position our business for profitable growth in a rational market and improved financial performance. We are well positioned to return to meaningful profitability this year. With that, I'll turn the call back over to Mark for his closing remarks.. Mark Bertolini: Oscar is stronger than ever. Our decisive actions in 2025 position us to take a significant leap forward on profitability in 2026. We primed Oscar for the market of the future. The team introduced new affordable consumer products. We increased broker distribution with new tools, data and training to efficiently move new and existing members to Oscar Plans. We drove strong retention, showcasing brand loyalty and followership. 2026 is the springboard for Oscar to accelerate financial performance toward our long-term targets. Our playbook drives repeatable value in the market with ongoing product innovation, geographic expansion and membership growth. We are not here by accident. Our growth is the culmination of years spent navigating the market and obsessing about the consumer experience. We proved consumers vote where they find value. Oscar's growth is not just about retaining our book of business. It's about staying ahead of the consumer, driving long-term individual market growth and setting a new standard for healthcare. Now I will turn the call over to the operator for the Q&A portion of our call. Operator: [Operator Instructions] Your first question comes from the line of Josh Raskin from Nephron Research. Joshua Raskin: I guess the obvious question is how you get comfort on this new membership coming in for 2026 and why you think the MLRs will be down so much? And then I guess, related to that, maybe, Scott, if you could provide a little bit more color on your assumptions around risk adjustment, I heard the 20% accrual. But as you become a larger part of the market, I think you said 30% market share overall. Does that actually help, does that reduce your overall accruals? So I know there's a bunch in there. Richard Blackley: Yes, Josh, can you just restate the second half of your question? I want to make sure I get that right. Joshua Raskin: Just more color on the assumptions around your risk adjustment in 2026. And my point being, if you're 30% of the market does that make your risk accruals more market rate, right? Meaning are you going to see less volatility as you become a larger part of the market? Richard Blackley: Yes, understood. All right. Well, let's start off with kind of the membership and our ability to project what we see there. So I would kind of bifurcate the membership between -- we've got a significant portion of our membership or renewing members we have a lot of information about those members and feel like we can project what their behaviors are going to look like. And then we also have a population that is new members for Oscar. We obviously picked up share. So we do have a lot of new members One of the things that we've increasingly done is to leverage third-party data to pull in clinical information about those members. That really is giving us a fairly rich amount of information about those members in terms of their historical utilization trends. It also helps us to target our outreach to help them manage their care journey. So we feel like we've got better insights into this oncoming membership and we've had really at any point in our history. So those are kind of the building blocks in terms of why we're comfortable with the MLR projections. On risk adjustment in '26, I would say that you can see from my talking points that we're actually expecting our risk adjustment as a percentage of direct revenues to increase year-over-year from 25% to 26% to about 20% in 2026. It's an interesting thing that we're starting to see a little bit of a barbell between the plans who really cater to the highest morbidity populations and the plans that have everyone else, we're picking up a very large share of young, healthy members. And so that's driving risk adjustment higher. We are continuing to look at ways to get more information about what is going on outside of our books because that's the hardest part of forecasting risk adjustment. We've been engaged with Wakeley on helping around this new reporting that they're proposing to bring forward in the first quarter. We're expecting that will give the entire market more visibility into what's going on with membership. That should help all of us in forecasting risk adjustment and so I don't know that it's going to decrease the challenges in making that estimate as accurate as it can be, but it certainly will give us a head start. Operator: Your next question comes from Jessica Tassan with Piper Sandler. Jessica Tassan: So I appreciate the color on membership. Can you elaborate maybe a little on the fourth quarter utilization pull forward you described. You guys spoke about higher retention. So should we think about the pull forward as being kind of silver members in '25 who are disinclined to utilize care in '26 due to higher deductibles? Just any color on 4Q utilization and how it relates to your 2026 utilization expectations? Richard Blackley: Yes. Thanks for the question, Jess. So I want to emphasize utilization was modestly higher than our expectation in the quarter. Really, when I look at the MLR performance in the quarter, I really would say that it is vastly driven by the risk adjustment true-up. In terms of the utilization pressure, we did see -- we had a modest expectation of an increase as we went into the end of the year. members losing their subsidies likely to go ahead and seek care. We saw that. We think that was a primary driver of some of the movement we saw in outpatient and professional. We also saw things like substance abuse disorders that ticked up, some mental health benefits that ticked up in labs types of things. So really things that would indicate to us these were members that we're just trying to make sure that they took advantage of the benefits why they have them don't give us a lot of concern about carryforward impact of those types of activities. Jessica Tassan: Got it. And then just -- I know you all mentioned that overall market-wide membership could come in a little bit better than the 20% to 30% disenrollment you had been forecasting last year. Can you just maybe offer any color on the overall size of the market post the fluctuation? And then secondarily, just any comments on kind of the adequacy of pricing market-wide. So how should we get comfortable with the fact that all of the peers have been also priced appropriately and that risk adjustment doesn't end up being a problem in '26 might was in '25. Mark Bertolini: From the standpoint of effectuation versus actual enrollment, we believe that the market -- the market currently has shrunk by 5%. However, a lot of people have changed their plan signs and it was purposeful on our part to give brokers specific transitions that they could do for their members to impact the loss of enhanced premium tax credits. And so as a result, in our book, we saw silver drop in half as a percentage of what it was before and bronze increase by almost 50% and gold almost quadruple. And that's the kind of shift we saw in our membership mix. That means people are carrying higher deductible plans. And this is the big open question mark for the rest of the year, 2 things. One, when we get closer to pages and our pads are on par with where they've been in the last couple of years anyway. The next question is how many people when they see their premium actually pay it. And that's the first piece that will get us to the end of the year, and that's where we go from 3.4 million lives as we currently stand in February, the 3 million lives by the time April 1 rolls around. The next big question is this is as big a political issue is any other thing around in premium enhanced premium tax credits is as people start to use their plans and realize the amount of out-of-pocket that they need to pay to use those plans, will they maintain coverage? Or will they drop out? And this is where the big paths of enrollment, you don't know how they're going to behave until they start using the plans. It's going to create a lot of financial hardship for most Americans who only have $400 in their bank account. And this is where we have an open question. And we think by the end of the year that, that number drops to the lower end of our range, which was 20% to 30% reduction in the overall market size. Operator: Your next question comes from Andrew Mok with Barclays. Unknown Analyst: This is Tiffany on for Andrew. Can you share where OEP membership landed for the book and give us a sense of where paid rates are tracking in January '26 versus January 2025. Mark Bertolini: Our OEP ended with 3.4 million lives enrolled. We have not seen all the page yet, but our current pads are sitting close to where they were last year. and a little lower than they were in '23 and '24 on the Oscar book. Richard Blackley: And as a reminder, we expect that as of the end of the first quarter, we'll have 3 million paid members. That's what our expectation is for that time period. . Unknown Analyst: Okay. Got it. That's helpful. Can you provide a bit more color around expected membership cadence following the 1Q grace period? And how we should think about that throughout the year? Richard Blackley: Sure. So in terms of churn expectations, through the first quarter, we're obviously going to see higher churn as we see the effects of the higher payment rates or premiums that Mark just talked about. And so we'll see a dip from 3.4 million down to $3 million by our estimate by the end of the first quarter. From there, we're expecting churn patterns to look more similar to what we saw pre-ARPA, so in the range of 1% to 2% a month in terms of kind of churn from the end of the first quarter through the end of the year. The other thing I'd just point out is the other factor impacting the churn rates is that we are expecting to see less SEP membership this year than what we've seen in recent years as some of the things like the continuous enrollment for people below the FPL 150 level now that, that's expired, we would expect to see less of that membership. So while in recent years, we've seen our overall membership trending up throughout the year, we would expect this year to kind of revert to more pre-ARPA trajectories where you see membership decrease throughout the year. Operator: Your next question comes from the line of Jonathan Yong with UBS. Jonathan Yong: Can you just talk about your mix of metal tiers. It sounds like Bronson Gold went up significantly and silver went down. And I assume you're skewing a little bit more towards bronze which typically has had more variability. How would you characterize your historical experience with bronze and how you're thinking about this time around? Richard Blackley: Yes. I would say it's going to be interesting, everything that you might think about metals, we should probably discard because we've seen a transition from people who've historically been in silver to other metal mixes. So I don't think you're going to be able to really proxy history. Bronze in general for us has always been a high-performing product. So the fact that we've seen more growth in bronze than in silver, and we've seen that transition is actually something that we are completely comfortable with. If I just kind of pull up for a second and talk about the metals. Overall, our general philosophy is that our plans need to have margins that are in a relatively tight band. We would expect that all of them generate strong contribution towards total company profitability. I do think that with the momentum -- with the movement from silver to bronze and gold, we will see those plans look and act actually more similar to each other. Obviously, bronze has higher deductibles. So we may see a bit higher churn in that population than we may see in other populations that don't have those higher deductibles. As Mark talked about, we think that may be a driver over time of more churn. Jonathan Yong: Great. And then just going back to the membership gains. If I think of that 400,000 that's going to roll off by 2Q, I assume those are the passive renewals. So that would imply a little less than half of your membership is "new" I guess are those new members coming in from new markets that you entered into? And I know you have data, you're using third-party data to get a better sense of the members. But I guess how much has things changed from last year to what it may look like this year where maybe that third-party data may not be as accurate. Mark Bertolini: I'll let Scott talk about the third-party data, but let me just sort of dimension this for your calculation is pretty close. That 400,000 is going to be passive that will roll off. We have grown a bit. And what we did early in the summer as we went out and enrolled 11,000 new brokers. We met with 17,000 brokers over the summer and gave them a list of members that they have with us. and showed them the members that were most affected by the lack of enhanced premium tax credit and what plans you could move them to based on their needs. They went and did that. And we gave them access through our broker portal to our campaign builder software, which we used to outreach to members to reach those people and give them the information before open enrollment. And that's why we got off to a fairly significant start early on because the brokers had it all stacked up, ready to go. Our view was the more we can help the brokers get people to the right place, the more they can be productive elsewhere, which is then what happened, is that they went to other plans who either were leaving the market or had not prepared the broker community or the membership with the right kind of product changes and move those members as well. So that's sort of the lay of the land on how our growth occurred. We weren't sure how it was going to roll out for new membership, but it obviously had a significant impact. Richard Blackley: Yes. And Jonathan, with respect to the third-party data, I would say that for new initiations, most of those people, we've got clinical information from third parties that gives us a good basis to have an expectation of how they're going to perform. And importantly, it gives us a lot of information about who we need to start to engage to help them manage their healthcare conditions. That's important both from the perspective of managing our costs as well as getting the member in as early as we can, which is a positive thing for risk adjustment as well. There are a portion of our new initiations who are new to the market, who we don't have great information about, but we do have a significant amount of data over time as to what those types of people might look like in terms of their acuity. And we've -- in looking at kind of the information that we do have about those members, we're not seeing anything in terms of the characteristics of them that costs us to think that there's something there that should be concerning for us. . Operator: Your next question comes from the line of John Ransom with Raymond James. John Ransom: So if we take 3 million as kind of the "real member number, approximately what percent of those do you think work with the broker and tried to tailor the coverage versus the remaining passive renewals. I think that would be helpful. Mark Bertolini: We generally see 90%, 95% of our members come through the brokers, although in some of our custom plans, like -- hello Meno, we saw a lot of direct enrollment, significant direct enrollment. People specifically wanting that product and came directly through us through the exchanges. So -- but generally, and we're looking at 90%, 95%. John Ransom: And then my -- I mean this is kind of a basic question. So you all can downgrade your opinion of my IQ. But what I don't understand is, I get the passive enrollment, but you've got to pay the first premium before you get covered. So what kind of member gets passively renewed pays the first premium and then decides to drop off? Mark Bertolini: Again, that's the big question this year versus prior years, usually when they start paying premium, they stay with us. unless there's some sort of event where they don't require our coverage anymore. However, in this case, when they start looking at the out-of-pocket costs associated with plans that they were moved to or stayed in. They're going to start to say, wait a minute, this is expensive, and I'm not going to be able to afford this. Now what we see, and this is an important aspect, it's far different than prior years in the marketplace is that most Americans now see health care is the single largest line item in their homes, in their family budget, more than their own mortgage. The result is that they are afraid of a lot of people who buy from us are afraid of losing the house or losing their family or having to go bankrupt if they don't get coverage. So then the real question, the pivot question that we have and I met with the AHA Board of Directors a couple of weeks ago, is what happens when they can't pay the deductible? And how do we handle that? And that's where we're sort of looking at this mill and saying, does it create this enrollment. Do people still hold on to it because they're afraid of losing their homes or going into bankruptcy. We're not sure. So we're not -- we're hedging our bets on the level of disenrollment that will occur as a result. Richard Blackley: John, just to add 1 more dimension there. When you look at our expectation and what we're seeing on payment rates, if you're going from having an out-of-pocket premium that you were paying in 2025 to having an out-of-pocket premium that you're paying to '26. And you have actively enrolled and even passively enrolled. We're seeing relatively strong payment rates in those categories. It's really the population where you're going from a $0 plan to something that you've got to pay out of pocket. So you've either lost your subsidy or you've transitioned from 1 plan to another. That's where we expect to see really high nonpayment rates. And the way the whole process works, you may not make your first payment in January, but you don't ultimately churn off until the end of the quarter because you are in a grace period until then. . John Ransom: I see. So passive going from 0 premium to some premium. And we know that like call centers, in some cases, we used to send these people up and never had a payment link. But our understanding was of care wasn't a big user of these legacy call centers. So you've got payment links. It's just that they go from, say, $0 to $100 a month, and they just -- that's just a bridge to part. Is that right? Richard Blackley: You are correct. We did not -- we are not a big user of call centers. . Operator: Your next question comes from the line of Stephen Baxter with Wells Fargo. Stephen Baxter: I want to come back to some of the questions on mix. I appreciate you're saying that silver is lower in both gold and bronze are much higher. But is it possible to get maybe the percentages kind of before and after for each category? And basically, the crux of it is that, obviously, your membership, PMT seem like they're going to be up somewhere in the 50% range. So we're kind of comparing that to the overall revenue increase on the guidance line and it's a little bit hard for us to square quite why. There's not maybe more of a PMPM yield in there. So it'd be great to have some more quantification on that? And then I have a follow-up at this time. Mark Bertolini: Sure. So for Bronze for the prior 2 years, around 25% and '26 to 39%. Silver has been steady at 71% in the prior 2 years. This year, they're at 36%. In gold, which is in the low -single digits, 3%, 4% for the last 2 years is now 25%. So fairly significant changes. And the bronze and the gold plans we offered were $0 with fairly -- not very rich benefits. Richard Blackley: Stephen, the other thing I would just mention is that the characteristics of the membership are important to modeling your revenue. So the fact that we're seeing a year younger membership has an impact on PMPM revenue. So you need to factor that in. That's 1 of the reasons why I discussed that in the call is to help with your ability to project revenue with that information. Stephen Baxter: Got it. No, that's helpful. And then maybe just qualitatively, like is there any difference in terms of this MLR guide, how you're thinking about kind of what you're budgeting in for retain membership and sort of how you're thinking about this newer to the planned membership and how that might perform? I would love to understand is philosophically how you're thinking about that part of it? Richard Blackley: Yes. Well, we obviously modeled membership with a lot of our past history. So we will have experiences that are different for returning members versus new initiations. I would say that in the aggregate, given the amount of work we've been doing on this population going -- which is now over 2 years that we've been expecting that the subsidies are going to go away. And so starting with the whole, how do we design plans to capture people who had a price shock. We've really built in, I think, a deep level of expectation and understanding about how those different populations are going to perform. I talked about all the ways that we tried to triangulate and get data about those folks. But I think that in general, I would say we're using our historical experience with each of those populations to project the future, feel like that the estimates that we've made both in pricing. And now we've taken everything that we've heard to date and built that into our guidance. And I feel like we're being very balanced in our estimates. Mark Bertolini: And the increase in risk adjustment allowed also takes MLR up. Operator: Your next question comes from the line of Scott Fidel with Goldman Sachs. Unknown Analyst: This is Sam Becker on for Scott Fidel. Yes, I was just curious on what are your levers -- key levers to achieving EBITDA profitability without the extension of the enhanced subsidies? And what are those key headwinds or tailwinds when thinking about MLR and SG&A from 2025 to 2026. Mark Bertolini: Well, there are a number of them. First, it's growth. So it's growth drives a reduction in overall percentage of costs. AI, where we're able to create a better member experience and greater stickiness, and we're seeing that on a regular basis. We have a dozens of LLMs on the back end of the business. and now 2 agentic AIs are about to launch another here in the next few months. So we're now having a lot of impact where people can access us quicker with much more accuracy and without having to wait on phones, which would also again reduces our costs. And then on the MLR front, we are constantly working on our contracts and our utilization management, and we task the team to deliver so many hundred basis points every year and opportunities to keep our trend in line with where we think the market should be. And so all of those things together, and there are a lot of levers that we manage every day through the management process are the things that we track to make sure that we commit our targets. Richard Blackley: And Sam, I just want to make 1 point really clear. Our guidance is on EBIT. So it's not on adjusted EBITDA. I did talk about it in the call that we would expect adjusted EBITDA to be $115 million above our earnings from operations guidance that we put out. So I just want to make sure that we're talking about the same things. Thank you. . Operator: Your next question comes from the line of Michael Hall with Baird. Unknown Analyst: This is Olivia on for Michael. Because exchange marketplace risk adjustment is net neutral, creating a reliance on other plans in our markets the lack of visibility, any 1 plan has into the rest of the market makes risk adjustment mechanics difficult in our view. Looking to 2026 and beyond, you mentioned the potential Wakely industry report in 1Q, whether it's through this potential Wakely report or other efforts, can you share how you're getting more insight into the rest of the market as well as your thoughts on what can be done to make risk adjustment more transparent and less volatile in the future. Is there any potential reform you think could be done to improve risk adjustment? And I have a follow-up at this time. Richard Blackley: Olivia, thanks for the question. Look, I think that estimating risk adjustment, as you say, is the most difficult thing that we have to do each quarter because you're both trying to project your own performance inside your own book and also the market. It's -- I think we're quite good at projecting our own market -- our own book and what the performance is where we do get surprised by how the market moves in ways that we can't see. I'm optimistic that working with Wakeley, and it sounds like most of us in the industry are working with them as an important service provider to all of us. to help get more timely information about what's going on with the market because that's the most challenging part of our ability to project that. So I think we're taking steps in that direction. I'm not sure that we'll get all the way there in this first report, but I do think that with the support of many of the industry players that we can increase visibility into this estimate over time. . Unknown Analyst: And if I can squeeze in 1 more, please. When I think about healthcare innovation, 2 specific areas I see offer leading the way and becoming an agent of change are in ICRA that could disrupt an employer group market that is ripe for change and leading the charge in crafting condition and disease-specific plans, which appear to be the future of health insurance. Both are exciting, but both are early on. So as you look ahead, what do you think needs to happen to catalyze the rate of adoption. And as a first mover, what type of competitive advantages do you believe this will present us for longer term? Mark Bertolini: So from a micro standpoint, Olivia, we are not only concentrating on products to capture membership in the insurance company, but we've also built out the front end of the business where we can now work with employers to convert them. There's a lot of opportunity in revenue and actually in a higher margin, unregulated and not requiring any risk capital to work with employers to move employees into defined contribution and once in defined contribution, work with brokers to get them into whatever plan works for them, whether that is an Oscar plan or not? So you're going to start seeing us over time report 2 different kinds of revenue in the model. where we're going to have revenue coming out of the conversion of employers that have defined contribution, the whole brokerage work that's done there, and then also membership that we capture inside our own health plan. So the acre opportunity is much larger than just the membership, although our membership did double this year. And given what happened in the individual market relative to rates, there was some reluctance on employers to jump in now. We need to show that we can stabilize that marketplace and get more people in. So that's sort of the lay of the land on ICRA. On the disease or the lifestyle products, we truly believe and this is the proposal that we put in front of the administration and 1 they've talked about is to separate the investment decision from the financing decision. The investment being what I buy versus how I pay for it. And the opportunity to create HSA Roth IRA like funds, where people can take whatever funding mechanism they have, whether that's their employer, their own money, Medicare, Medicaid or other subsidies like from the ACA and put them into a bucket -- and by buying a qualified health plan manage the rest of their costs by themselves, and this is where our new Agentic AI tool is headed than having a marketplace where people can use the money that they receive for healthcare to buy what they want in their local market, a narrow network with a plan design that changes with their life, starts to create the opportunity for lifetime value of membership and change the investment thesis that insurance companies would have in managing that membership and how we would approach it, which leads to the lifestyle products. if we can move with a family or an individual through their lifetime, offering them new designs that allow them to stay with their network, be effective in managing their current health status and live as fully as they can until the last day, I think that's the ultimate culmination of an individual market where all Americans can get healthcare that they want their choice -- and where we have a market so large, the morbidity changes really have no impact on the overall underwriting cycle of the business. Operator: Your next question comes from the line of Raj Kumar with Stephens. Raj Kumar: Maybe just following up on the kind of ICAcommentary. Just curious on the membership associated with the IV arrangement and kind of what's the initial uptake from that employee base -- and then historically, have you seen kind of the ICRA population exhibit a more kind of stickier membership base? Or should we expect a similar level of churn relative to the kind of broader individual plan? Mark Bertolini: I think -- first of all, we're not giving out actual ICRA numbers by segment yet. It's not meaningful enough to move the dial, although we see all of these efforts being successful so far. The more important part is, again, back to this thesis of I have my money, I buy it the way I want. We think ICRA's stickier because as long as I have the funds to pay for it, I can keep what I bought. I don't have to change it. If my financial -- if my funding circumstances change, I just use the different funding to keep the same thing I had. So we view ICRA as a development moving beyond the ACA model. which is helping people when they can't afford health insurance to a model where I now buy my own insurance, my own network, the product design that fits me at this time, it allows me to stay with my product and my network for as long as I want. That's where the member experience and all these tools we're building comes in where people can actually use it the way they need to and have the information they need to use it most effectively. Raj Kumar: Got it. And then as a quick follow-up, just kind of curious on the new member engagement rates for 2026. And how is that comparing to what you're seeing or experiencing at this same point last year? Richard Blackley: Yes, I don't think that It's too early to tell -- after the first quarter, we'll have a better idea. . Operator: Your next question comes from the line of Craig Jones with Bank of America. Craig Jones: Right. I was wondering what you've assumed in your guidance, does the change in the percentage of 0 utilizers between 2025 and 2026. I think that will need to come down the exploration enhanced tax credits. I was just going to give us an exact percentage, maybe just how do you think it will compare to your 2019 percentage prior to when those were enacted? Richard Blackley: Yes, correct. Thanks for the question. In general, we don't comment on the portion of our book that's nonutilizers. It's a normal part of given that we have a very healthy membership, we would anticipate that not all of those members need care in any given year. So we do have a portion of the book that doesn't utilize. When I look at the -- how our book has evolved, there our book is younger than it was a year ago. So it isn't necessarily the case that you should assume that we'll see lower levels of nonutilization. We take all of those factors into account when we set our guidance for MLR. And as I talked about earlier, we've done a terrific amount of work to build up our estimates around those projections and we feel like we've -- we're as comfortable as we can be with them at this point in the year? . Craig Jones: Okay. Got it. And then maybe for those 400,000 number that you expect to roll off by the end of the quarter, what do you think their 2025 MLR was? And how would that compare to, say, historically what your members that rolled off would be. Richard Blackley: Yes. I'm not going to dimension the specifics of those members. When I look at the difference between 2025 MLR and 2026 MLR. It's really a story about the changes in market morbidity on a year-over-year basis. That's really the biggest driver. We've taken into our pricing for the upcoming year, all the changes that happened in market morbidity last year, our expected increases as people are leaving the ACA in '26. We've built all of those things in. We've included a trend that is higher than what we've seen in the historically but relatively consistent with last year. So we feel like we've taken all of those building blocks that's going to impact utilization next year into our pricing, which gives us confidence about our ability to return to profitability next year. . Operator: There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello everyone thank you for joining us and welcome to the CTS Corporation Fourth Quarter 2025 Earnings Call. After today's prepared remarks, we will host a question and answer session. To withdraw your question, please press 1 again. I will now hand the call over to Kieran O'Sullivan. Please go ahead. Kieran O'Sullivan: Good morning, and thank you for joining us today. I'm pleased to report another solid quarter for CTS Corporation, demonstrating the continued progress and strength of our diversification strategy and operational execution. For the fourth quarter, we delivered strong performance with revenue growth of 9% year over year, with our diversified end markets growing 16% versus the prior year period. I am particularly pleased with our diversification progress as these markets now represent almost 60% of overall company revenue. New business awards in transportation were strong, which will drive long-term growth in that end market. As we look to the year ahead, we see continued growth momentum across our diversified markets, increasing revenue and quality of earnings. In transportation, we continue to expand our portfolio of powertrain agnostic products. Prateek Dravidi, Chief Operating Officer, is also joining myself and Ashish Agrawal, our CFO, for today's call. Ashish will now take us through the safe harbor statement. Ashish? I would like to remind our listeners that this conference call contains forward-looking statements. Ashish Agrawal: These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in the press release issued today, and more information can be found in the company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available with today's earnings press release and the supplemental slide presentation, which can be found in the Investors section of the CTS Corporation website. I will now turn the discussion over to our CEO, Kieran O'Sullivan. Kieran O'Sullivan: Thank you, Ashish. We finished the fourth quarter with sales of $137 million, representing a solid 9% increase compared to 2024. Our diversified end markets were up 16%, while transportation sales were essentially flat. For the full year, sales were $541 million, up 5% from $515 million in 2024. Diversified end market sales were 59% of overall company revenue in the fourth quarter and 57% for the full year 2025. Our book-to-bill ratio for the fourth quarter was 1.03, compared to 2024. Kieran O'Sullivan: For the full year 2025, the book-to-bill ratio was 1.04 compared to 1.01 in 2024, indicating sustained customer demand across our diversified portfolio of products. Looking at bookings performance, medical bookings showed robust growth driven by continued strength in therapeutic applications. Industrial bookings were strong, driven by stabilized OEM demand and a recovery in distribution. Kieran O'Sullivan: Defense bookings were down, though our pipeline remains strong with backlog levels supporting future growth. We added three new customers in defense and one in the industrial market. In transportation, we had strong new business awards in the quarter. We added floor hinge accelerator technology to our portfolio and secured a first win. Our operational execution was evident, as we expanded our gross margin by 150 basis points in the fourth quarter and for the full year. We maintained strong cash flow generation supporting our balanced capital allocation approach that includes strategic investments in growth and returning cash to shareholders. Fourth quarter adjusted diluted earnings were $0.62 per share, up from $0.50 in 2024 as we continue to focus on driving profitable growth. For the full year 2025, adjusted diluted earnings were $2.23 per share, up from $2.12 in 2024. Ashish will add further color on our financial performance later in today's call. Our medical end market delivered strong performance in the fourth quarter, with sales increasing 41% versus the prior year period. Reflecting the strong growth momentum across our medical portfolio, particularly in therapeutic applications, where we're seeing robust demand. For full year 2025, sales were $85 million compared to $70 million in 2024, up 21%. Kieran O'Sullivan: Bookings in the quarter were up 37%, compared to the prior year period. The book-to-bill ratio for 2025 was 1.07, similar to 2024, reflecting continued momentum in this end market. We continue to see growth prospects in minimally invasive applications where our precision sensors and transducers are enhancing ultrasound imaging capabilities for medical professionals. These technologies are critical in helping clinicians detect artery restrictions with greater accuracy, while enabling more effective delivery of treatment medications directly to targeted areas. This represents meaningful advancement in patient care and clinical outcomes. Our teams are engaged in next-generation product development to further enhance diagnostic and therapeutic capabilities with our customers. We are working closely with leading medical device manufacturers to integrate our advanced sensing technologies into their platforms, creating solutions that can provide even more detailed imaging and diagnostic information to healthcare providers. I want to emphasize the life-saving nature of the solutions we provide to the medical industry. We are proud to highlight that our products support solutions that help save lives. Kieran O'Sullivan: This mission-critical role in healthcare drives our commitment to the highest quality standards and continuous innovation. Additionally, our products aid blood analysis and flow, cancer treatment, and are incorporated into pacemakers and cochlear implants. Our therapeutic products enhance skin aesthetics, and in combination with other medical procedures, help improve skin tightness. During the fourth quarter, we had multiple wins across all regions for medical ultrasound. We also had a large win for therapeutic products and a win for a pacemaker application. Demand remains strong for therapeutic products, and we expect increased volumes in 2026. Over time, we expect volume increases in portable ultrasound diagnostics as healthcare systems increasingly move to point-of-care solutions. Therapeutic products should continue to enhance our overall growth profile supported by an aging population and minimally invasive treatment options. Aerospace and defense sales for full year 2025 were $83 million, up 20% from $69 million in 2024. Sales for the fourth quarter were down 4% from 2024, due to the timing of certain programs. SideQuest revenues in the fourth quarter were $6 million as we navigated government funding cycles, which we expect to improve in 2026. While bookings were down in the fourth quarter, full year bookings were up 15%. Our pipeline remains strong with backlog levels supporting future growth. We are making progress on our strategy, moving from a component supplier to a supplier of sensors, transducers, and subsystems, and this is further validated by the naval award in 2025. We received multiple orders in the quarter for naval sonar and hydrophones. In addition, we had wins for RF filters with applications in anti-jamming and in drones. Finally, we secured new awards deploying our frequency, vibration, and temperature sensing capabilities. In the quarter, we added three new customers for underwater locator beacons and for Sonobuoy Electronics. The SideQuest operation continues to drive a pipeline of opportunities as we move into 2026, and as mentioned earlier, we expect decision-making and funding to improve this year. The long-term nature of defense programs provides revenue visibility and supports our diversification objective. Our industrial end market demonstrated solid momentum in the fourth quarter, continuing the gradual recovery trend we've been tracking throughout 2025. We are seeing signs of stabilization and growth both from our OEM customers and distribution partners as industrial activity rebounds from previous cyclical lows. Sales in the fourth quarter were up 16% compared to the prior year period, underscoring our expectation of continued market strength. Full year 2025 sales were £140 million compared to £125 million in 2024, up 12%. Bookings in the quarter were up 22% from the same period last year. The book-to-bill ratio for the full year 2025 was 1.11 compared to 1 in 2024. We were successful with multiple wins across a diverse range of industrial applications in the quarter, including distribution components, industrial printing, and DMC applications for our components help ensure electromagnetic compatibility in industrial equipment. Temperature sensing applications represented another area with wins for heat pumps, pool and spa, and for commercial appliances. These applications leverage our expertise in precision sensing to help industrial customers optimize their operations and improve energy efficiency. We added a new customer in the quarter for a frequency application. Demand across the industrial end market is expected to remain healthy in 2026. We expect our industrial performance to benefit from the long-term megatrends of automation and connectivity that should enhance our growth prospects. The increasing digitization of industrial processes, push for greater energy efficiency, and the ongoing automation of manufacturing create expanding opportunities for our advanced sensing technologies. Ashish Agrawal: Transportation sales faced headwinds, Kieran O'Sullivan: sales of £234 million for 2025 compared with $250 million in 2024, down 7% driven by the previously discussed market dynamics in China and in the commercial vehicle market. Fourth quarter sales were CHF 56 million, essentially flat versus the same period last year. Despite sluggish market conditions, we secured new business awards of approximately $100 million in the fourth quarter. We gained significant awards across various product groups, including accelerator module wins with OEMs in China, Japan, Europe, and North America. As mentioned earlier, we added Floor Hinge technology to our portfolio of products and secured a first win with revenue expected in 2028. Floor hinge designs are expected to expand in EV applications, especially in international markets. In the quarter, we secured a smaller award for a commercial vehicle actuator application. Across our sensor portfolio, we had wins for passive safety, braking, and transmission position sensing. We also secured an advanced development contract for our drive pad technology with a large Japanese OEM, adapting to future software-defined vehicle architectures. Overall, we continue to strengthen our footwall presence while adding powertrain agnostic sensing capabilities. Total book business was approximately $1 billion at the end of the quarter. Interest in our e-brake product offering weight and cost advantages continues across OEMs at a slower pace as certain OEMs continue to recalibrate EV investments and launch dates. The electronic brake market represents a growth opportunity as the industry moves toward more advanced driver assistance systems and autonomous capabilities. Overall, our solutions deliver meaningful cost and weight benefits to OEMs, which become increasingly important as they balance performance, efficiency, and affordability requirements. We remain confident in the long-term growth prospects for our e-brake and other footwell products. These, along with existing and new sensor applications, increase our ability to grow content. Turning to the outlook for 2026. For our diversified end markets, demand is expected to be solid. In the medical market, we see continued momentum in therapeutics, where we have expanded capacity. In aerospace and defense, revenue is expected to grow given our backlog, SideQuest capabilities, and the normalization of government funding. Industrial and distribution sales are expected to be solid. Longer term, we expect our material formulations supported by three leading technologies and their derivatives to continue to drive growth in key high-quality end markets in line with our diversification strategy. Across transportation markets, production volumes are expected to be flat to marginally down given the tariff impact, consumer demand, and in line with global light vehicle volume forecasts from IHS. The North American light vehicle market is expected to be in the 15 to 16 million unit range. European production is forecasted in the 16 to 17 million unit range. China volumes are expected to be in the 32 million unit range. We continue to monitor potential impact from supply chain issues related to rare earth metals and semiconductors, although we are not seeing any significant immediate impact. We anticipate general softness in commercial vehicle demand in 2026, with the potential for improvement in the second half of the year. Qualification of our next-generation smart actuator across our customers' platforms is progressing, and we plan to implement further product enhancements later in 2026. We continue to closely monitor and evaluate the tariff and geopolitical environment while focusing on agility and adapting to cost and price adjustments in close collaboration with our customers and suppliers as we navigate supply chain pressures. Our strong balance sheet, healthy cash generation, and experienced teams provide us with the tools necessary to manage these headwinds while continuing to invest in growth opportunities and also advancing innovation. Our increasingly diversified business model continues to enhance our growth and quality of earnings. Assuming the continuation of current Ashish Agrawal: market conditions Kieran O'Sullivan: for full year 2026, we expect sales in the range of $550 million to $580 million and adjusted diluted EPS to be in the range of $2.30 to $2.45. Now I'll turn it over to Ashish, who will walk us through our financial results in more detail. Ashish? Ashish Agrawal: Thank you, Kieran. Fourth quarter sales were $137 million, up 9% compared to 2024 and down 4% sequentially from 2025. Sales to diversified end markets increased 16% year over year. Sales to transportation customers were down 1% from the fourth quarter of last year. Foreign currency changes impacted sales favorably by $2 million in the fourth quarter. Our adjusted gross margin was 39.1%, up 150 basis points compared to 2024, and up 20 basis points compared to 2025. The year-over-year improvement in gross margin was driven by operational improvements and the favorable impact of end market mix. Earnings were $0.67 per diluted share in the fourth quarter compared to $0.38 for the same period last year. Adjusted earnings for the fourth quarter were $0.62 per diluted share compared to $0.50 per diluted share for the same period last year. For the full year, revenue was $541 million, an increase of 5% compared to 2024. Diversified end markets were up 16% year over year. SideQuest added $22 million in revenue in 2025, which was lower than expected mainly due to the timing of government contract awards. Excluding SideQuest, sales to diversified end markets grew 14%. Sales to the transportation end market were down 7%, mainly due to the lower sales of commercial vehicle products. Foreign currency impacted sales favorably Ashish Agrawal: by $3 million in 2025. Ashish Agrawal: Our adjusted gross margin was 38.5% in 2025, up 150 basis points compared to 2024. Primary drivers of the improved gross margin include the favorable impact of end market mix and operational improvements. Foreign currency rates also had a favorable impact of approximately $2 million in 2025. We remain focused on strengthening our gross margin profile by growing our diversified end markets, as well as continued operational improvements. Our adjusted EBITDA margin for the year was 22.8%, an improvement of 40 basis points from 2024. For the full year 2025, our earnings were $2.19 per diluted share. Adjusted earnings were $2.23 per diluted share compared to $2.12 per diluted share for 2024. The US tax legislation changes had an adverse impact of approximately $0.03 on adjusted earnings per diluted share for 2025. Moving to cash generation and the balance sheet. Our cash flow was strong, and we generated $29 million in operating cash flow for 2025 and $102 million for the full year. Our balance sheet remains strong, with a cash balance of $82 million and borrowings of $58 million from our credit facility at the end of 2025. During the quarter, we repurchased 398,000 shares of CTS Corporation stock totaling approximately $17 million. For the full year, we repurchased approximately 1.4 million shares totaling $57 million. In total, we returned $62 million to shareholders through dividends and share buybacks in 2025. We have another $90 million remaining under our current share repurchase program. We remain focused on strong cash generation and appropriate capital allocation and continue to support organic growth, strategic acquisitions, and returning cash to shareholders. This concludes our prepared comments, and we would like to open the line for questions at this time. Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. To withdraw your question, please press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. If you'd like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, please press star 1 again. Your first question comes from the line of Hendi Susanto from Gabelli Funds. Your line is open. Please go ahead. Hendi Susanto: Good morning, Kieran and Ashish. Congratulations on finishing strong in 2025. Kieran O'Sullivan: Thanks, Hendi, and good morning. Hendi Susanto: Given, I would like to ask, your assumption within your 2026 guidance with regard to the smart actuator. Do you have more updates and insights into customer preference in terms of their dual sourcing approach? Kieran O'Sullivan: Yeah, Hendi. We are actually continuing on both the legacy platform and on the new platform, which we launched last year. And the new platform is getting launched across different engine platforms. And I think I mentioned in the prepared remarks that we're also enhancing the cost reduction efforts in that area in the second half of this year as well. So we feel pretty good about where we're going on that side of it. Hendi Susanto: Okay. Okay. And then any insight into new products in transportation or in other diversified end markets that you have positive expectations for in 2026? Kieran O'Sullivan: Hendi, on the transportation side, you probably saw that we secured approximately $100 million in new business awards across all regions with accelerator modules, but also brought in some new products into the portfolio with brake applied sensing, floor hinge, which will add revenue in 2028 because of the longer development life cycle. And we're advancing on current sensing. We've got an advanced development award we're very excited about with our drive pad, which links up to the software-defined vehicle architecture for the future. So we feel a lot of good things going there. On the medical side, a lot of momentum. We're making good progress on therapeutics. We're also making progress on diagnostics. And you saw some other wins mentioned there as well. Prateek, do you want to elaborate on diagnostics maybe or therapeutics? Prateek Dravidi: We continue to see strong momentum in both the therapeutics as well as the aesthetics application. We have strong collaboration with some of our key customers at this point, working jointly with their product development to launch products that have strong potential in the future. At the same time, we are also launching products in the connectivity component space, especially in aerospace and defense, that have strong potential in the future as well. Kieran O'Sullivan: Good. So, Hendi, hopefully, that gives you some color about what we're doing. Hendi Susanto: Thank you, Kieran, and Ashish. I'll get back to the queue. Kieran O'Sullivan: Thank you, Hendi. Operator: As a reminder, if you'd like to ask a question, please press 1 on your telephone keypad. To withdraw your question, please press 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Your next question comes from the line of John Franzreb with Sidoti and Co. John, your line is open. Please go ahead. John Franzreb: Good morning, everyone, and thanks for taking the questions. Curious about what you said about SideQuest, Kieran. You said that there were maybe some deferrals in some of the jobs. Did you have actual revenue move from Q4 into Q1, or is it longer-tailed than that? Kieran O'Sullivan: No, John. I think we were making reference to just the timing of government funding in 2025. It was a little lighter than we expected, and we expect that to normalize here in 2026. And so, revenue wasn't as robust as we would have liked it to have been. But you know what, we don't give up. And for 2026, we already have some good contracts coming through in the pipeline with some momentum. So still more work to do, but key for us going forward as well. John Franzreb: Got it. And when we think about the revenue guidance for the year ahead, what is the maybe the net new product introduction relative to the offset of maybe some of the programs that are going end of life? Do you have a sense of how much incremental revenue represents new products coming online this year? Ashish Agrawal: John, this is due with a number of factors. Yeah. We don't have a number to give you, John, but as you look at the different things that Kieran and Prateek both talked about, we get more revenue recognition quicker on the diversified side. On the transportation side, as we've talked about in the past, it takes two to three years. So the floor hinge win that we had in Q4, we'll expect revenues from that in 2028. So as you see momentum on the diversified side, a good portion of that is either coming from new products or new customers or new products with existing customers, and there's good momentum on growth activity as it relates to that. And Prateek also mentioned some of the traction that we are getting on the diagnostic side with portable ultrasound, where we don't have meaningful revenues at this point, but we see that as a growth market. John Franzreb: Got it. Got it. And it also seems to me that you're becoming a little bit more confident in some of the industrial opportunities. Am I misreading that, or is the visibility improving versus, say, three months ago? Kieran O'Sullivan: John, we think it's improving. It's been a constant improvement quarter over quarter throughout 2025. And if you even look at the book-to-bill ratio of 1.11, and bookings were up 22%. So we feel like we're on a good steady path of improving trend here. John Franzreb: Good. And regarding the outlook in the transportation sector, dare I say it, you're only down 1% in the fourth quarter. Do you feel like we're bottoming, or what's your assessment of what you see in the transportation market? And really, could you kind of give an update on the two main parts for commercial versus the ground vehicle? Kieran O'Sullivan: Yeah. John, I think you know, we're a little bit conservative. We haven't called it bottom. We'd like to get a quarter of data or two behind us, but you can tell we're definitely trending in that direction. We've seen some improvement, small improvement in commercial vehicle in the fourth quarter. We think for 2026, the first half is going to be a little bit lighter than the second half, a little bit richer. And there could be some pre-buy with the new emission standards coming out in 2027. And on the light vehicle side, if you look at the market, it's just what people are saying out there. It's a very mixed bag. You got some people saying, up two or 3%, some people saying flat, some people saying down a point or two. We think somewhere between flat and slightly down is where the light vehicle market is going this year. John Franzreb: Yeah. I agree with you. It seems like the number's moving every other week almost. Can you talk a little bit about what you're seeing in the M&A market? I know that's a core part of the growth strategy. Maybe talk about what you're seeing as far as the opportunity pipeline. Kieran O'Sullivan: Yes, John. We're actively working the pipeline. Nothing to report today. But, obviously, the biggest focus is on diversification and expanding that diversification rate. And some niche technologies for transportation. But, you know, valuations are still high. Looking for the right assets, and we're working it hard. John Franzreb: Okay. Fair enough. And just one last question. You talked a little bit about China. Can you maybe give us an overall assessment of what you're seeing in your other markets by geography, excluding transportation, if you will? Ashish Agrawal: Ashish, do you want to? Yeah. When you look at the diversified market, that was your question, John. Right? Yes. Yes, sir. We are expecting good momentum across the board in different parts. Activity is good. We are not seeing any concerns from any parts of the world from the diversified end markets. On the defense side, we are focused primarily in North America with some exposure in Europe that we are continuing to build. On the medical side, we are seeing good momentum across the world as well as in industrial. We are seeing good momentum in all different parts. John Franzreb: Okay. That's good to hear. Thanks for taking my questions. I appreciate it. Kieran O'Sullivan: Thanks, John. Thank you. Operator: Your next question comes from the line of Hendi Susanto with Gabelli Funds. Your line is open. Please go ahead. Hendi Susanto: Hi, Kieran and Ashish. I have two more follow-up questions. In industrial and distributor, how do you characterize among your sales matching the end demand and then sales toward inventory rebuild at your customers? Kieran O'Sullivan: Hendi, what I would say is that through distribution, what we've seen is solid demand, good increases year over year, quarter over quarter. And we also see our customers actively managing their inventory. So some of them have their inventory levels down, some more optimized. But we feel good about demand there going forward. Hendi Susanto: Okay. And then, Kieran, what is your latest market assessment of the China transportation market? We know that transportation design cycles may take two to three years, but in China, it's fast. So any strategic direction for 2026 in terms of your transportation business in China? Kieran O'Sullivan: Yes. Hendi, we would say we believe it's reached the new normal over there. We are with the transplant OEMs out of Japan and selectively with some local Chinese customers. The other thing when you talk about the speed over there, we have our local team for the Chinese market in China, and they're actively engaged with new products and development over there. So we feel good about the work we're doing there and obviously working that pretty hard because it's a tough market. Hendi Susanto: Thank you, Ashish. Thank you, Kieran. Kieran O'Sullivan: Thanks, and thank you, Hendi. Operator: As a reminder, if you'd like to ask a question, please press 1 on your telephone keypad. To withdraw your question, please press 1 again. Please pick up your handset when asking a question. If you're muted locally, please remember to unmute your device. There are no further questions at this time. I will now turn the call back to Kieran O'Sullivan for closing remarks. Kieran O'Sullivan: Thanks, Elizabeth, and thank you all for your time today. Diversification remains a strategic priority to drive growth and margin expansion. In addition, we are expanding in vehicle powertrain agnostic solutions. We are guided by our Evolution 2030 strategic initiative to enhance our emphasis on growth, operational rigor, employee engagement, while also giving back to the communities where we operate. We look forward to updating you on our first quarter 2026 results in April. Thank you. This concludes our call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0 and a member of our team will be happy to help you. Welcome to the Vestis Corporation Fiscal First Quarter 2026 Earnings Conference Call. At this time, all participants have been placed, and the floor will be open for your questions following the presentation. I would now like to turn the call over to Stefan Neely with Fellum Advisors. Please go ahead. Thank you, Operator. Thank you all for joining us on the call this morning. Stefan Neely: Leading the call with me today is James Jay Barber, President and Chief Executive Officer, and Adam Bowen, Interim Chief Financial Officer. Also with us on the call today is Bill Seward, Chief Operating Officer. James and Adam will offer prepared remarks, and then we will open the line for questions. Before I turn the call over to James, I want to remind everyone that today's discussion includes forward-looking statements about future business and financial expectations. The Private Securities Litigation Reform Act of 1995 provides the safe harbor from civil litigation for such forward-looking statements. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release and corresponding supplemental materials, which are available at ir.vestis.com. With that, I would like to turn the call over to James. James Jay Barber: Thank you, Stefan, and good morning, everyone. Thanks for joining us. We started fiscal 2026 with disciplined execution and a clear focus on our business transformation framework. I want to walk you through what we have accomplished in the first quarter across our three pillars: operational excellence, commercial excellence, and network and asset optimization. Before that, I want to briefly touch on the financial performance for the quarter. Adjusted EBITDA was $70,000,000, improving sequentially from fiscal Q4 2025, which represented a low point in our profitability. This improvement is exactly what we set out to achieve with our transformation, reflecting early tangible progress from actions to bend the cost curve and drive better utilization of our people and our network. Now turning to the first pillar of our business transformation, operational excellence. In a route-based, asset-intensive business like ours, operational excellence starts with the basics: consistent service and a network that runs reliably every day. When we execute well in our plants, we improve productivity, enhance service quality, and unlock operating leverage across our network. In the first quarter, we made progress in the leading indicators that matter most to our customers. On-time delivery improved 300 basis points versus 2025. Plant productivity improved 7%, and customer complaints declined 12% year over year, and our average weekly lost business in Q1 declined 15% from the fourth quarter. These are not just statistics; they are leading indicators of operational efficiency and profitability. We expect the benefits to show up in customer retention, lower cost per pound, and stronger operating leverage. This is the kind of progress that builds momentum because when the network runs better, we can serve customers more reliably and create capacity for the right growth. Going forward, operating leverage is going to be our primary scorecard for value creation. In the first quarter, we saw a $0.02 improvement in cost per pound over fiscal Q1 2025, which translates to roughly $10,000,000 in adjusted EBITDA at our current volume and mix levels. We expect to see continued improvement in this trend throughout the year. And let me be clear, this is not a one-quarter effort. This is about building repeatable processes and a culture of accountability that produces better performance quarter after quarter. Given our operational priorities, I have asked Bill Seward, our Chief Operating Officer, to join us today, and he is prepared to provide additional context on our operational execution and key priorities in response to your questions after the conclusion of our prepared remarks. Moving on to the second pillar, which is commercial excellence. In the first quarter, we advanced the decision support tools we need to execute our strategy and improve revenue quality. This work lays the foundation for stronger commercial engagement, a more favorable product mix, a strategic pricing model, and better customer penetration. We have also begun strengthening local customer engagement, including the introduction of market development representatives to help deepen relationships and expand penetration over time. This approach brings more discipline to how we grow and how we create value, helping our team make informed decisions on mix, pricing, and how we serve customers, shifting the organization to growing value for Vestis. The third pillar is network and asset optimization. During the first quarter, we undertook market studies and analyzed where we see the best opportunities to grow profitably and serve customers reliably over time. In addition, we are actively marketing several non-core properties for sale as part of optimizing our asset footprint, and we intend to use the proceeds from any non-core property sales to repay debt. Stepping back, the key takeaway from the first quarter is that we are improving operating consistency while building the analytical foundation required to make better commercial and network decisions. That is how we expect to unlock the operating leverage that is embedded in this business. We have also taken steps to connect deeper with the decision makers driving actions across our business. For the first time since going public, we have assembled a comprehensive training program delivered in person here in our corporate office to educate our key leaders on operating leverage. As we look to the second quarter, we are beginning to advance pricing and product mix strategies, building directly on the operational progress already underway. We will continue to manage the business through the lens of cost per pound because that is where the operating leverage will show up most clearly, with every penny of improvement in cost per pound being worth approximately $5,000,000 of adjusted EBITDA on our current total volume and mix levels. And while we are encouraged, I will emphasize this: we are still early in the transformation. We are laying the foundation now so we can drive more consistent value creation over time. To wrap up, I am pleased with the progress we have made in the first quarter. Going forward, we are managing Vestis as a pennies business. The compounding effect of small, disciplined decisions on mix, pricing, delivery, plant, and SG&A is how we build sustainable, profitable growth and shareholder value. When we get that right, it allows us to not only improve financial performance, but to grow the business and create jobs in a way that is durable and supported by the economics. That is the standard and that is the focus of our entire team. With that, I will turn it over to Adam to walk through the financials. Adam Bowen: Thank you, James, and good morning, everyone. Revenue for the first quarter was $663,400,000, a decline of $20,400,000, or 3%, versus 2025. Rental revenue declined $17,900,000 and direct sales declined $2,700,000, offset by a $200,000 benefit from the positive impact of foreign exchange on currency related to our Canadian business. Importantly, while revenue was down, total volume was flat when measured by pounds processed through our market centers. However, the product mix of those pounds has shifted meaningfully year over year. To measure volume, we calculate the weight in pounds of uniforms and workplace supplies processed by our plants at a category and subcategory level. Approximately 95% of our total revenue is related to products that are reflected in the volume of pounds processed. And we saw meaningful shifts in other workplace supply subcategories towards more linen-adjacent products such as towels and aprons, which are significantly more costly for us to process than a uniform. While our revenue dollar mix has only shifted 1% to workplace supplies from uniforms year over year, our volume product mix has shifted more dramatically, representing a lowering of revenue quality and a limiting of top-line operating leverage despite stable overall throughput. The shift in our product mix has negatively impacted revenue per pound by $0.04, or 3%, which equates to roughly $20,000,000, or the total amount of our year-over-year decline in revenue. Quite simply, Vestis has not experienced a diminishment in sales volumes, but the pounds we processed in 2026 carried lower revenue quality and thus lower revenue per pound than the prior year, which, when combined with other commercial practices that were in place prior to the beginning of our strategic business transformation, has negatively impacted total revenue. Improving our revenue quality and revenue per pound is directly in line with the commercial excellence priorities James discussed earlier. Our revenue focus is to drive a more favorable product mix, supported by stronger decision support tools and a more strategic approach to price and customer penetration over time. As we continue to execute these initiatives throughout the year, we expect the year-over-year quarterly changes in revenue to narrow in line with our full-year revenue guidance. Our cost of service was down $3,000,000 year over year on a combination of lower merchandise and delivery costs. Even though plant costs were up year over year related to shifts in product volume mix that I discussed previously, we saw a 3.7% improvement in our average weekly plant cost in December when compared to November, a financial improvement tied to the plant productivity gains James mentioned in his remarks. SG&A was down approximately $900,000 over the same period on a reported or gross basis. However, in 2026, SG&A expenses were impacted by approximately $7,800,000 in third-party support costs and $5,500,000 in severance related to our strategic business transformation. When adjusted for these items, SG&A was down approximately $11,000,000, or 12%, year over year, as we have taken aggressive action to improve our total operating expenses. Our cost per pound improved by $0.02 compared to the prior year, with cost measured as those operating expenses directly impacting adjusted EBITDA. At our current volume and product mix levels, $0.02 per pound equates to roughly $10,000,000 in adjusted EBITDA, the amount of cost offset we saw against our revenue decline of $20,000,000 year over year. First quarter adjusted EBITDA was $70,400,000, representing an adjusted EBITDA margin of 10.6%, compared to $81,200,000, or 11.9%, in the prior year. First quarter adjusted EBITDA margin is higher by 150 basis points than our fiscal fourth quarter 2025, driven by lower cost per pound of approximately $0.01 on consistent overall volume and revenue per pound when comparing the two quarters. Our first quarter stand-alone effective tax rate was 25.3%. We expect our full-year 2026 effective tax rate to be in the range of 25% to 30%. Now moving on to cash flow and our balance sheet. During the quarter, we generated $38,000,000 in operating cash flow and $28,000,000 in free cash flow, including a $12,700,000 benefit from working capital improvement, largely driven by more disciplined steps taken within our procurement and supply chain functions, positively impacting our inventory. As a reminder, our fiscal 2026 free cash flow guidance was neutral to the impacts of working capital. When excluding working capital improvements, our first quarter 2026 free cash flow would have been $15,600,000, in line with our full-year guidance of $50,000,000 to $60,000,000 spread evenly throughout the year. Our first quarter capital investments were $9,400,000, below our baseline target of $15,000,000 per quarter due to longer lead times for industrial laundry equipment investments we are making in our plants, which we expect will come in future quarters throughout fiscal 2026. Our strong operating cash flow of $38,000,000 in 2026 represents a $33,900,000 increase in operating cash flow year over year and a $39,000,000 increase in free cash flow over the same period. Improvements in working capital management are attributable to $27,000,000 in cash flow improvements year over year. Looking at our strategic business transformation impacted free cash flow, during 2026 we spent $9,000,000 in cash for third-party expenses and $5,600,000 in cash for severance. Excluding those transformation-related cash expenditures, adjusted free cash flow was $43,000,000, which reflects the strong cash-generative capabilities of our business. On the balance sheet, at the end of the first quarter, net debt was $1,290,000,000, and our principal bank debt outstanding was $1,160,000,000, including $19,000,000 on our revolving credit facility, which declined $7,000,000 from 2025. Our liquidity position is strong, with no debt maturities until 2028, and $317,000,000 of available liquidity, including $275,000,000 of undrawn revolver capacity and $42,000,000 of cash on hand. Our capital allocation strategy is to maintain a strong balance sheet and allocate capital towards high-return opportunities, with a firm focus on delevering. Our prudent balance sheet management and working capital actions are providing a stronger foundation from which to support our business. As James discussed, we are actively marketing several non-core properties for sale, all in various stages of the real estate disposition process. We intend to use the proceeds from any non-core property sales to repay debt. We anticipate delevering actions taking place in the fiscal second quarter, our current operating quarter. Today, we are reaffirming our outlook for fiscal 2026. We continue to expect that revenue for the year will be between flat to down 2% as compared to fiscal 2025 revenue on a 52-week basis. We also continue to expect that adjusted EBITDA for the full year 2026 will be in a range of $285,000,000 to $315,000,000, with 5% successive quarterly improvements beginning with the second quarter. Additionally, we continue to expect fiscal 2026 free cash flow to be in the range of $50,000,000 to $60,000,000, assuming capital expenditures are generally consistent with 2025. As it relates to our free cash flow guidance for the year, we continue to expect working capital to be generally flat on a full-year basis. With that, Operator, please open the line for questions. Operator: Thank you. The floor is now open for questions. Our first question is coming from John Ronan Kennedy with Barclays. Please go ahead. Your line is open. John Ronan Kennedy: Hi, good morning. Thank you for taking our questions. For the revenue per pound, declined at 2.8%. I think it was due to an element of mix in legacy commercial practices. Can I confirm how we should expect that to trend for the year? And then I understand there may be a lot, but what would be the most important drivers from a pricing mix action or the commercial initiatives to improve that? And when should we think about how that could potentially inflect and show in results? Adam Bowen: Yes. Ronan, it is Adam. Thanks for your question. With respect to the remainder of the year, you can expect this on a full-year basis to be flat to down 2% comparing to FY 2025. We are reaffirming that guidance this morning. So generally, expect to see kind of consistent trends in revenue per pound throughout the year as we work towards the midpoint of that guidance. And some of the most important levers, which I would let James talk to in more detail here, are going to be focusing on shifting that mix, strategic pricing, and a couple of other initiatives that he will dial in, in more detail. James Jay Barber: Thanks, Adam. So look, the plan is to improve revenue per pound throughout this year. A lot of that is going to be timing based. We have already started in the first quarter. We will continue each quarter to add to that, to turn revenue per pound up that supports the plan. I would also, though, tell you really quickly, I would not do revenue per pound in isolation. I would do it in concert with cost per pound. It is super important because that is going to reset the basis of what good revenue per pound looks like in this business. So, we will continue to adapt going forward. John Ronan Kennedy: Thank you. Appreciate it. And then on the sequential EBITDA growth assumptions, I believe it was guided to 5% sequential adjusted EBITDA growth for each remaining quarter, and I know you touched on some of these key metrics. How should we expect those to play out sequentially? And what are, again, the most important operational and commercial assumptions underpinning that sequential progression? And any upside or downside risk to that, please? Adam Bowen: Yes. Ronan, I can talk a little bit to how that is going to flow off through the year as far as our guidance goes on adjusted EBITDA. Remember, for FY 2026, we are guiding to $285,000,000 to $315,000,000 adjusted EBITDA on a full-year basis. So if you plan that out sequentially across the quarters, looking at that 5% sequential improvement, you will be able to see kind of the differences that are coming through in adjusted EBITDA through Q2, Q3, Q4 successively. And if you work back to that cost per pound calculation that James mentioned, you will be able to get there. Of course, use Q4 2025 exit rate as your benchmark when you do those differences to be able to get the incremental uplift that we are going to see throughout the year. And just to be clear, from Q4 to Q1, that is about $5,000,000, and remember, there was $40,000,000 in-year benefit from our transformation, and we saw $5,000,000 of that in Q1 from an improvement in $0.01 per pound between the two quarters. Operator: Our next question comes from Stephanie Moore with Jefferies. Please go ahead. Your line is open. Stephanie Moore: Hi, good morning. Thank you for the question. Maybe just start, could you comment on what you are seeing from a general macro standpoint or customer demand standpoint? Any slowing or maybe reduction in overall demand that can be pointed to just more of a macro standpoint? Be helpful. Thank you. Adam Bowen: Stephanie, it is Adam. I can comment a little bit there. We are still concentrated in the same key verticals that we have been concentrated in year over year. So we have seen no shifting in our macro vertical concentration. We are seeing really no waning in demand. And as I mentioned in our remarks, our volume is consistent on a pound basis year over year. So we are putting the same amount of work through the network that we put through last year on a per-pound basis. The difference is that mix shifting, which is a part of our commercial excellence aspect of our transformation. James Jay Barber: I would add, Stephanie, it is James, that I think that as we start out this transformation, the concept of the macro is really secondary in our business right now. It is getting the foundation of this right so we can grow as we need to grow for all the stakeholders. That will outweigh anything macro in this business in the near term. But that is how I kind of think about it. Operator: Absolutely. No. And I think well understood, and that is a good segue into just my follow-up question there. So maybe James, as you think about your time the last, I guess it is not a year, let us just say nine months roughly, now if you look at the transformation underway, how would you calibrate your progress thus far? Are you ahead of schedule, aligned with schedule, and as we think about the next, let us just say, twelve months, where do you think we should see the biggest change from an operation standpoint? Thanks. James Jay Barber: So a couple, I need to bifurcate it because second half I am going to get to Bill Seward to talk a little bit about the operations as well. So depending on what sport you think about, if I am in baseball, I would say we are in the first inning right now. That is where we are. And this is a continual move quarter over quarter over quarter, and it will be a blend of cost per pound improvement and revenue per pound improvement. There are multiple layers behind it of opportunity in this business, which is why in the opening comments we made it is embedded in this business. The value is there. We just have to unlock it going forward to plan to do so. It will be both of those levers. That is why we are going to bring operating leverage in the business, so we can keep score on that. And I will have Bill talk for a second about one of the service metrics in the operations that we have put in on plant production, kind of where we are. Bill Seward: Yes. Thanks, James. I think the way I think about your question is that the service comes along with the cost and the revenue per piece as well. So what we are seeing is, sequentially, month over month since we have kind of leaned into the transformation, that we are getting better outcomes on cost and, really importantly for our customers and for our shareholders, our service levels are tracking with that. So I agree with James, early innings for sure. Operator: Thank you. Our next question comes from Tim Mulvaney with William Blair. Please go ahead. Your line is open. Tim Mulvaney: James, Adam, Bill, good morning. Just digging into some cost KPIs here. So I wanted to ask about that plant productivity metrics, which showed a 7% increase. Looks like you measure it in terms of pounds processed, pounds processed per what? Per hour? Per day? You just help me understand that— Bill Seward: I am sorry to interrupt you. Per operating hour. And the idea there is that we have had some tools and some pathology in place in the past that was kind of underutilized, I would say. We are leaning in on it with really good visibility, daily visibility to what our productivity levels are, as I mentioned a moment ago, also daily visibility to what our service levels are to make sure that we do not just get the cost, but we maintain service and improve outcomes for our customers at the same time. Tim Mulvaney: Got it. So that 7% improvement in plant productivity, is that directly related then to that $0.02 we see in cost per pound? Can you connect those ideas for me? And can you also talk a little bit about, you know, the things that you are doing that drove those efficiency gains? And I guess where you think you are along this journey to get that wash alley efficiency up to stop? James Jay Barber: So, this is James. Let me put a couple of things together for you. And I like the line of questioning too because that is kind of where we are going with the whole thing. The first question you asked was, is it related to the $0.02? And the answer to that is no. No, not in the first quarter. But we also made the point that December is where it started to move forward, and so that is where it started to move and more impactful going forward so far. It will show up. And so even in the second quarter, it has picked up pace in the cost per pound going forward. There is no question about that. I think the other piece is that coming from a long-time UPS background that we had an army of engineers behind us doing time measurements and working on all these things. Vestis already had some really good technology, in my opinion, in it to actually take each building in the network and define what good looks like, what a 100% effective of a building should be. They just had not quite pulled it together yet to move it into this transformation mode and convert it to cost per pound, and that is what is going on. And so you will get that in each step of the way, we will continue to optimize the buildings, and that opens up more capacity and opens up more ability to grow as upon the way they can flow those pounds through the network. Adam Bowen: And let me add one thing there to what James mentioned. The way we are doing cost per pound, you look in our materials, you will see that it is those costs directly impacting adjusted EBITDA, which is essentially operating expenses adjusted for the add-backs for adjusted EBITDA. If you take a look at that calculation, you will be able to see kind of what is driving that cost per pound. Operator: Thank you. We will move next with George Tong with Goldman Sachs. Please go ahead. Your line is open. Anna (for George Tong): Hi, everyone. This is Anna on for George. Thank you for taking our questions. Just wondering if you, sorry if I missed, a quick confirmation. How much of that $75,000,000 has been realized in the first quarter? And how should we think about the cadence of cost saving realizations over the remainder of the year? And what are the puts and takes there? And I have a follow-up on if you are seeing any increasing traction in the open data market and how is that growth in white space trending compared to last year? Thank you. Adam Bowen: Yes. Hey, Anna, it is Adam. I will answer the first part of your question, then I am going to get you to repeat your follow-up just to make sure we are giving you the right answer. So on the cadence of your point about the $75,000,000. Now keep in mind, the $75,000,000 is a full-year number. That is going to be realized after our transformation in FY 2027. So FY 2026, it is $40,000,000 in-year, and that $40,000,000 becomes $75,000,000 on a full-year basis moving forward. So the way you get to the $40,000,000 is essentially by taking kind of where we landed in Q1 compared to Q4. That is about $5,000,000 increment. That is that $0.01 per pound that I mentioned earlier. That gives you $35,000,000 of additional savings to get to $40,000,000 that is going to run off between Q2 and Q4. And the way you calculate the way that is going to phase in, you take the Q2 5% uplift from Q1 and subtract it from our exit rate of $65,000,000 from Q4. That is going to get you roughly $9,000,000. And then you will have $13,000,000 in Q3, and they are approximately about the same kind of in Q4, so that is going to run off. That is going to, that is super helpful. And just so we are clear, that is going to largely be focused, as we have talked about earlier on the call and Q&A, on cost per pound savings. Anna (for George Tong): Perfect. That is super helpful. Thank you so much. I guess my second part of the question is more about if there is any increasing traction in penetrating into the unbranded market like more programmers market and how is that growth in the white space trending for you guys? Adam Bowen: Yes. Anna, hey, that is a great question. Thank you. We are still roughly on our new business side, 40% of them being non-programmers, 60% of them being programmers, and have not seen a dramatic shift there. James Jay Barber: I would add to Adam's response, it is James, that we mentioned in the prepared remarks that we are introducing market development representatives into our growth model. And very clearly, they will have more feet closer to the frontline where the customers are, and they will be focused on continuing to grow both sides of that growth equation, both non-programmers and those that are already in the industry. Operator: And this concludes the Q&A portion of today's call. I will now turn the call back to Stefan Neely for closing remarks. Stefan Neely: Thank you, Nikki, and thank you everyone for joining us today. We appreciate your time and your interest in Vestis. If you have any questions, please do not hesitate to contact us at ir.vestis.com. We look forward to speaking with you again next quarter. Have a great day. Operator: Thank you. This concludes today's Vestis Corporation First Quarter 2026 Earnings Conference Call. Please disconnect your line at this time. Have a wonderful day.
Operator: Good day, and welcome to Spotify Technology S.A.'s Fourth Quarter 2025 Earnings Call and Webcast. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead. Bryan Goldberg: Thanks, Operator, and welcome to Spotify Technology S.A.'s fourth quarter 2025 earnings conference call. Joining us today will be our Founder and Executive Chairman, Daniel Ek, our Co-CEOs, Alex Norström and Gustav Söderström, and our CFO, Christian Luiga. We will start with opening comments from the team, and afterwards, we will be happy to answer your questions. Questions can be submitted by going to slido.com and using the code #SpotifyEarningsQ425. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. If for some reason you do not have access to Slido, you can email investorrelations@iratspotify.com, and we will add in your question. Before we begin, let me quickly cover the Safe Harbor. During this call, we will be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed on today's call, in our shareholder deck, and in filings with the Securities and Exchange Commission. During this call, we will also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck, the financial section of our Investor Relations website, and also furnished today on Form 6-K. And with that, I will turn it over to Daniel. Daniel Ek: Alright. Hey, everyone, and thanks for joining. As a short counting exercise has just shown me, this is my thirty-second earnings call. And as you know, this was the last one that I did in the role as CEO. Alex, Gustav, and Christian will give you an overview of the business and cover the quarter. But before I hand it over, I wanted to share a few thoughts. First, I want to say gratitude to the incredible teams at Spotify Technology S.A., to the artists, creators, and authors we build for, the more than three-quarters of a billion people listen with us daily. Thank you. And thank you to all of you as well. I can say that I have generally valued these conversations with our investors, with analysts, and even the tough questions. Getting to build a company like this and to share that journey with people who care about where it is going, it has been a real privilege. From day one, our focus has been simple, build the best experience for listeners, be the best partner for artists and creators, and do it in a way that scales globally. And that remains true almost twenty years in. And for those participating on the call, I know a huge portion of your role is scoring the companies you cover. So if you want a framework for evaluating Spotify Technology S.A. going forward and what to hold us accountable to, I would point to three key things. And then you must also layer on the culture that makes them possible. First, we solve problems at the intersection of consumers and creators. This is where we focus. If something is good for the consumer and also good for the creator, that is where you will find us every time. Discover Weekly, Wrapped, Spotify for Artists, our new mobile free tier, these are not just features, they are proof points. We build tools that help artists reach listeners they would never find otherwise, and in turn, help listeners discover music they did not know they loved. And we built an ecosystem where artists, listeners, creators, authors, and advertisers reinforce each other. That intersection is where we have always won and it is where the next decade gets built. Second, we are first and foremost a technology company. We have said for years that we aim to be the R&D arm for the music industry. If I may say so, nearly twenty years in, I think we have earned that. Drove the shift from downloads to streaming and subscription, and we proved the model could work at scale. But here is what excites me the most. Our capabilities now extend far beyond music. Today, what we built is a technology platform for audio and increasingly for all the ways creators connect with audiences. And this identity will matter even more going forward. The next wave of technology shifts, AI, new interfaces, wearables, new ways of interacting with content, these will reshape how people discover and experience audio and media. The hard problems ahead in music, in podcasts, in books, in video, in live, in things we have not even built yet. We are going to keep building the technology to solve them. Third, play the long game. When we went public in 2018, I talked about long-term value creation. While I know many of you focus quarter to quarter, that is not how we grade ourselves. And it never has been. We chose growth over profitability for many years, and I know that was painful for some of you, but in order to scale, it was the right thing for consumers and creators. And ultimately, for the business we are running today. We acquired The Echo Nest back in 2014 when most people did not understand why a streaming company needed a machine learning AI company. And that bet gave us personalization, something that is now core to everything we do. We built our ubiquity play that is called Spotify Connect starting in 2011, right as we launched in the US. At the time, every major tech platform was building their own walled garden for audio. The conventional wisdom was pick an ecosystem and live inside it. We bet the other way. We decided Spotify Technology S.A. should work everywhere, in your car, your speaker, your TV, your gaming console, regardless of whose ecosystem you are in. Apple’s, Google’s, Amazon, Samsung, Sonos, all of them seamlessly. And today, Spotify works across more than 2,000 devices from over two. And you can start a song on your phone, and you can finish it on your TV. That does not happen by accident. It happens because we choose ubiquity over control. Openness over lock-in, and we stuck with it for over a decade. These were not obvious calls at the time, but they compound. And that long-term orientation will continue to guide Spotify Technology S.A. Which brings me to talent because we take a long-term view there too. At Spotify, we built a culture that tries to build and reward trust. Trust to take risks, trust to fail and learn, trust to challenge each other, and share the thinking behind our decisions. And here is why that matters. Moving fast is not just about how much you ship, it is about shipping the right things. A culture of trust gives you both. People dare to try, but they also dare to debate, to push back, to find the better path together. That is how you iterate quickly without losing direction. If there is trust, most processes are easy allowing you to move very fast. A culture of trust is hard to replicate. It is why we develop leaders from within. And I think Alex and Gustav are great proofs of this. They have been at the center of nearly every major shift in this company, mobile, subscription, machine learning, podcast, audiobooks, marketplace, etcetera, etcetera. They did not inherit Spotify. They really helped building it. And of course, I am not going anywhere. I will be here as Executive Chairman focused on the long term, but this is their moment to lead. And I have deep confidence in them, not because everything will go perfectly, of course it will not, but because I have watched them solve problems that looked impossible. And then do it again and again. And they are not here to protect what I built, they are here to build what we have not imagined yet. And their success is our success and I am rooting very hard for them. And with that, I am going to hand it over to Alex, Gustav, and Christian. Bryan Goldberg: Thank you, Daniel. And congratulations on a legendary run. Wow. Both Gustav and I thank you for the encouraging words and your trust. Alex Norström: And we closed out what we dubbed as the year of accelerated execution with another solid quarter, delivering a strong finish to 2025. In Q4, we met or exceeded guidance across all the key metrics. We marked our highest quarter ever for MAU net additions. It is just incredible to think that we now serve over three-quarters of a billion people around the world. And since going public, I have been touting the importance of our flywheel and it all starts with MAU growth. Which in turn fuels the growth of our overall business. A driver of MAU outperformance is Wrapped, which was also record-breaking this year. While we saw impressive engagement back in 2024, we also got feedback on the user experience. So this year, we turned up the dial. And the response was redeeming. At the end of the campaign, more than 300,000,000 users engaged, which was up 20%, and we saw more than 630,000,000 shares across social media, up 42%. Even more, day one of Wrapped marked the highest single day of subscriber intake in Spotify Technology S.A. history. Lots of learnings and we take our responsibility seriously to deliver on this much-anticipated moment every year for our users. We are also driving significant business growth for creative industries and in 2025, we paid out more than $11,000,000,000 to music rights holders. Once again setting a global record for the highest annual payment from a single source. This takes us to nearly $70,000,000,000 since our founding. In podcasting, video podcast consumption on Spotify has increased by more than 90% since the launch of the Spotify Partner Program or what we call SPP. There are now more than 530,000 video podcast shows on our platform. And I hope you all caught the watershed moment at the Golden Globes where Spotify and The Ringer’s Good Hang with Amy Poehler won the first-ever Best Podcast award. This milestone underscores podcasting's impact on culture. And we are proud to have been a key part of it. Now rounding things out with audiobooks, we expanded audiobooks in Premium to more markets where we are already finding some of the world's most passionate listeners. As we continue to scale this, leading global publishers have credited us with bringing in new listeners and driving double-digit growth in audiobooks. Now you should expect Gustav and I to continue to optimize for and be relentless about creating value for users. Because when people spend more days in a month with us, across more moments, more devices, and more verticals, it proves our product is working. It means our investments into personalization and AI are paying off. It means we are doing a great job sharing the art made by our artists, podcasters, authors. What this ultimately translates into is greater engagement and retention. Which unlocks more revenue growth. And as our revenue grows, we bring back more value back to our partners, artists and creators. And with scale comes more opportunity for innovation and margin expansion. Disciplined reinvestment of this pushes growth even further. This is our formula. Rinse and repeat. And as we have mentioned before, we have one of the greatest TAMs in the world. That is because everyone has a relationship with music. And podcasts and audiobooks, it deepens that connection even further. We proudly count 3.5% of the world as subscribers. There is still lots of room to grow. It is not impossible to imagine us converting 10 or even 15% of the world's population to subscribers. With strong performance across all metrics, including user growth, revenue, gross margin, operating income, and cash flow, I am confident about our position. And I am optimistic about 2026 and beyond. We expect continued healthy MAU and subs growth throughout the year, while maintaining our consistently low churn. We will also make further progress on driving top-line growth and expanding gross margin. In closing, you might be wondering about our focus for 2026. We are framing it as the year of raising ambition. We were founded to solve what we felt like the impossible and ambition has been the driving force behind our success from our earliest days. And ambition will be a guiding principle of our next chapter. We are looking forward to telling you more about it at our Investor Day in May. Though what I am certain about is that Gustav will take the opportunity to tease some of that, hopefully not giving away all of it. And with that, I will pass it over to Gustav. Bryan Goldberg: Thank you, Alex. I will try to contain myself. Gustav Söderström: In 2025, we launched more than 50 new features and innovations. Shout out to Prompted Playlists, Page Match, About This Song that all launched very recently, actually, in the last few weeks. So I think it is fair to say that we more than delivered on our bold ambitions of last year. Pushing every boundary and driving engagement even higher. Now I think it is important to zoom out as I know there has been a lot of commentary around AI over the last few weeks and actually last several months. Like any significant global shift, we know that there would be winners and losers. But there is no question in my mind that we will continue to be one of the big beneficiaries of AI, I am expecting a lot of questions on AI in the Q&A, so let me share a bit more upfront. My view is that new technology is seldom disruptive on its own. Significant disruption happens when new technologies enable new asymmetric business models. For example, this is what Spotify Technology S.A. did to music downloads. This is what Uber did to taxi service. So the question everyone should be asking is, does this evolution create new business models? Or are we mostly just seeing new technologies? For example, in SaaS, there is currently a lot of fear that the perceived business model will be challenged by more outcome-based models, which is reasonable. However, in the consumer space that we are in, we believe the dominant business model will continue to be ads plus subscription. Both places where Spotify excels. This puts Spotify in an outstanding position. Because we already have the right business model. Our job then just becomes leveraging these new technologies to our benefit. Which is something that we have done consistently for the last eighteen years. Another reason that we are in a strong position is that we have been building for this moment for some time, potential of AI that would be able to think and speak at the level of human. So we acquired AI voice platform Sonantic in 2022. And this put us on an early path to introduce agentic experiences to Spotify users. One example of this is the wildly popular interactive DJ. Which we introduced in 2023 and have continued to enhance since then. About 90,000,000 subscribers have used AI DJ so far. Driving over four billion hours of time spent on Spotify. And this keeps growing. More recently, we also launched Prompted Playlists. A new tool that has instantly taken off with power users. So if Interactive DJ is the chat-in interface to Spotify where you can talk casually, Prompted Playlists is the deep research mode of Spotify. It lets you describe and set rules for your own personalized playlists. Literally writing your own algorithm. It taps into your entire Spotify listening history. Reflecting not just current obsessions, but the full arc of your music taste and integrates up-to-the-minute culture pulled from the Internet. There is nothing else like it. So all of this teases the next evolution of Spotify. Delivering the world's most intelligent, agentic media platform. One that you can literally talk to. That fully understands each individual listener and puts them in the driver's seat. It is about moving from a passive experience to an interactive one. This is a stark contrast to most media services today. Innovation like this drives retention and time spent on Spotify. Enhancing customer LTVs and monetization potential. And the momentum is undeniable. Looking at the US alone, monthly streaming hours per user have grown more than 20% in the last five years. And we feel well positioned to make continued gains here. Another example of interactivity is the smashing success of our new mixing tools. We recently hit a milestone of 50,000,000 mixed playlists. And listeners are now making more than 1,000,000 transitions per day. Building yet another unique dataset improves our experience. People do not just want to listen. They want to actively participate in the music. They want to shape it. This is now becoming possible in ways that were previously unimaginable. So on that note, there is obviously a lot of conversation around AI in music right now. So let me just share how we think about it. We see two distinct categories emerging. One, artists making original music from scratch and two, new versions of existing music, like covers or remixes. The first category means a lot of net new music, and more content than ever being delivered to Spotify. Importantly, a growing catalog has always been very good for us because it attracts new users, drives engagement, and builds fandoms. As more artists incorporate AI tools, the lines around making music are blurring, but while the music may be generated on various AI platforms, the point is that regardless of where the music is made, the cultural moment always happens on Spotify. That is where all music charts and finds an audience. This is because Spotify has long been the place that delivers both the largest reach and monetization opportunities. The second category is derivatives. New takes on existing music. Everything we see tells us listeners want to interact with their favorite music. And many artists want to let them, creating new revenue from their existing catalog. In other media, like movies and TV, existing IP is incredibly valuable. But in music, artists have not had a real way to monetize existing catalog through AI. Because the absence of a rights framework has kept AI mostly focused on the first category, net new creation. We want to work with the industry to fix that. If you are an artist looking to unlock this potential upside, you would want to do it on the world's leading music platform. Your fans and the largest royalty pool are already there. We have the technology and capabilities ready to unlock this in a way that is additive for both IP rights holders and Spotify Technology S.A. And as we have said before, we intend to do this in the right way, with artist support not around them. In fact, many artists and industry partners see this opportunity. We are already working with them on realizing it. With so much out there, you may be wondering if we can keep up this pace in shipping. In fact, we think we not only can, but we think we can increase. We have been embracing and investing in this technology evolution for some time. And it is allowing us to move with much higher speed. As a concrete example, an engineer at Spotify on their morning commute, from Slack on their cell phone can tell Claude to fix a bug or add a new feature to the iOS app. And once Claude finishes that work, the engineer then gets a new version of the app pushed to them on Slack on their phone, so that he can then merge it to production. All before they even arrived at the office. We call the system internally Honk, and we have been told by key AI partners that our work here is industry leading. Now as Daniel said in his remarks, we are a tech company. And we consider ourselves the R&D department for the music industry. Our job is to understand new technologies quickly and capture their potential. Which we have done time and again. The entire industry stands to benefit from this paradigm shift, but we believe that those who embrace this change and move fast will benefit the most. Now I will pass it over to Christian to take you through the numbers. Thanks Gustav and thanks everyone for joining us. I will cover the quarter four results and provide some perspective on our outlook. Christian Luiga: Unless otherwise noted, all referenced growth metrics are presented on a year-on-year constant currency basis. Overall, we are pleased with our strong quarter four finish. Total revenue grew at an accelerated 13% to $4,500,000,000. Premium revenue rose 14% versus 13% last quarter and was primarily driven by subscriber growth. Our advertising business grew 4% versus flat last quarter. On a like-for-like basis, excluding the effects of our podcast optimization strategies, we had roughly 7% advertising growth. We are encouraged by the progress we are seeing in terms of market adoption of our new advertising tools and continue to expect improved growth in 2026. Moving to profitability. Gross margin came in at 33.1%, expanding just over 80 basis points year on year. Our outperformance here was primarily driven by content cost favorability. Operating income of €701,000,000 was €81,000,000 above forecast, of which social charges had a positive impact of €67,000,000 due to share price movements. The remaining variance to guidance was driven by the gross margin outperformance. Finally, free cash flow was $834,000,000 in quarter four, and we ended the quarter with $9,500,000,000 in cash and short-term investments. We repurchased $433,000,000 worth of shares in quarter four and will continue to opportunistically return capital via share buybacks. In summary, quarter four capped off another year of healthy growth, profitability, and cash flow improvement for us. On a full-year basis, 2025 revenue grew 13%, gross profit grew 20%, and operating income grew in excess of 50% to deliver a full-year margin of 13%. And our free cash flow generation improved by approximately $600,000,000 to a record DKK 2,900,000,000. Looking ahead to quarter one, we are forecasting 759,000,000 MAU, an increase of 8,000,000 from quarter four, and 293,000,000 subscribers. In quarter one, which is seasonally our smallest quarter, our subscriber outlook implies net additions of 3,000,000. This is within our historical range for quarter one. The effects of new pricing implementation in quarter one are considered in our forecast and as Alex mentioned, the churn with respect to these price increases is in line with our expectations. In addition, we remain very encouraged by the early benefits we are seeing to our funnel, thanks to the enhanced free tier that we rolled out in late quarter three. We are well positioned for conversion and continued healthy subscriber growth in 2026. We are also forecasting $4,500,000,000 in total quarter one revenue, representing an improved growth rate of approximately 15% versus the 13% we just delivered in quarter four. We are forecasting ARPU growth in the 5% to 6% range. Our revenue outlook also incorporates the effects of unfavorable currency movements which results in an incremental €35,000,000 headwind when compared to prior-quarter exchange rates. We expect a quarter one gross margin of 32.8%, and operating income of $660,000,000. While we do not give full-year guidance for gross margin and operating margin, we are expecting both to improve in 2026. For gross margin, we expect our recent pricing adjustments to help drive revenue growth that outpaces the net content cost growth in 2026. That said, the quarterly progression of our margins could again be variable depending on the timing of disciplined investments in our core and monetization activities. Finally, we expect our free cash flow generation to meaningfully exceed what we generated in 2025, while reflecting progression towards a normalized long-term tax rate. In conclusion, we are confident in our path into 2026 and will make further progress on driving top-line growth, disciplined reinvestments, and expect improved margin and cash flow. With that, I hand it back to you, Bryan. Bryan Goldberg: Alright. Thanks, Christian. Again, if you have got any questions, please go to slido.com, #SpotifyEarningsQ425. I will be reading the questions in the order they appear in the queue with respect to how people vote up their preferences. We will now open for questions. And our first question today is going to come from Jessica Reif Ehrlich on AI opportunities. Across all sectors, the market is acutely focused on AI and its impact on current business models. How is Spotify planning to use AI tools and applications, new and evolving product offers, and will this eventually lead to new tiers of service? Gustav Söderström: Thank you, Jessica. This is Gustav. I will take this. And this is a big question. I will try to keep the answer to under thirty minutes. Just kidding. I will try to answer some of this upfront in my prepared remarks, but I want to say one additional thing. If we just zoom out, and look at what is happening right now is the typical example of what is called a macro change, right? Spotify has lived through many macro changes. And I think it is important to know that while many people are scared in times of change, this is when there is the most opportunity. If you look at Spotify, it was born out of a macro change, which was ubiquitous cheap broadband. That is how we got to scale. And then this next huge wave came across us called the smartphone. What happened? Spotify accelerated and started growing faster. Then the next macro wave came, which was called personalization. What happened? Spotify embraced it and grew even faster. Then the next thing came, which was the connected home. We all forgot about it now, but it was a big deal. What happened? Spotify started growing faster. Over 2,000 integrations with hardware partners. The thing about macro change is that if you capture it, it is an opportunity. Not a headwind. This is what we are focused on, and we feel very well positioned for this opportunity. As I shared in my initial remarks, the first thing to look at is do you even have the right business model? You look at the AI companies, the business model is subscription and increasingly ads. That is what we excel at. We have the right business model. And I do not see that changing for the consumer space. So we feel very well positioned from a structural point of view. On top of that, as I shared, we have been investing towards this opportunity for many years now. Because while it has happened faster than many people think, it was not impossible to foresee that this would happen. If you just believed in the exponential, we would get here. This is why we are leading in the market with these interactive natural language-based services in terms of media platforms. So to be specific, about what I am excited about, I am excited about us being the first truly intelligent agentic media service that you can literally talk to. And this is not just a pipe dream. You can already talk to Spotify through the AI DJ casually, but also through Prompted Playlists in sort of a deep research way. We are going to keep investing in that. What that means structurally for Spotify is that we are building a dataset that never existed. It is the dataset of language to music, language to podcasts, and language to books. We have had the song-to-song dataset, but no one had the language-to-song dataset. And I want to drive home a point here, which is this is a very specific dataset. You may think it is a canonical dataset, meaning there is a factual answer to, for example, what is workout music? There is no factual answer to what is workout music. In fact, it turns out that taste is not a fact. It is an opinion. If you look at something like workout music, on average, for an American, it is usually hip hop. For a European, it is usually EDM. For many Scandinavians, it is something like heavy metal or even death metal. Then again, for a lot of Americans, millions at least, it is also death metal. There is no canonical answer to what does workout music mean. You cannot just have an LLM commoditize it as a fact, the way you can commoditize Wikipedia. You actually need to have many, many hundreds of millions of listeners across the world's markets constantly telling you what it means for that specific person. This is a dataset that we are building right now that no one else is really building. It does not exist at this scale. And we see it improving every time we retrain our models. This is what I am excited about. I think I will stop there, or I will take the whole Q&A. Bryan Goldberg: Alright. Our next question is going to come from Doug Anmuth on gross margin. What are the drivers of gross margin expansion in 2026 and do they shift at all from recent years? Alex Norström: Hey, Doug. I will take that. Alex here and then Christian, you may jump in. I am confident in our gross margin trajectory. In terms of making progress towards our long-term goals that we have talked about before. We intend to do it in a steady and sustainable manner. And the way we are really managing our gross margin is to balance a couple of different things. One is thoughtful monetization. Two, we want to be disciplined with reinvestment and our cost of revenue. And of course, we are going to innovate to create even more differentiation for our platform. And if you think a bit about the last few years and look at our trajectory, I think we have got a pretty good track record in striking this very balance. Christian Luiga: Okay. Christian here. I just want to fill in, I mean, start with just going back a bit to my own script. We do want to invest, and we will invest in future value when we see we have that opportunity. And that is what we are doing. And creating long-term value is what we are looking for every day. But looking at the gross margin pace here in quarter four going into quarter one, also for next year and the things that drive that, I mean, what I said was that the price increases that we have done here are going to outpace the net content cost in 2026. Remembering also that we are improving our ads business slowly as we go forward, and we feel that will pick up in 2026. We have a marketplace that added both to gross income and margin in 2025 that is also a good tool for us. And finally, as we expand new verticals within the countries that we are in and also to new countries, that is also a good support for our margin development. Bryan Goldberg: Alright. Our next question is going to come from Jessica Reif Ehrlich again. This time on advertising. You have spent the last two years building out your ad tech platform. Can you provide a progress report? Where are you seeing the most progress and where do you have more work to do? And will it be a step change in advertising growth later this year? Alex Norström: Thanks, Jessica. It is now one and a half years since we decided to reengineer Spotify Technology S.A.'s ad stack and really move off of a rented stack. And we did this primarily to better match what our clients asked of us. The way they would like to buy on Spotify. And frankly, we did this also to meet and exceed the standards of what is a high-performance self-serve and biddable stack. It was a tough call back in that moment since it meant that I knew it meant that we had to take some pain as this was going to be deep surgery for us. We now have, I am happy to say, record levels of advertisers on the platform. And that increased density means much better yield and as a result, revenue growth for us. We are positive on ads. We still have work to do. But we are definitely making good progress and seeing very positive signs. Bryan Goldberg: Okay. And it looks like one more question from Jessica. This time on capital allocation. Christian, can you provide an update on your views on capital returns given your extremely strong balance sheet? Christian Luiga: Thank you, Jessica. Yeah, well, it is a relevant question. We have now a good cash flow and we also have a strong balance sheet. I mean we have said that before. Our primary goal is to reinvest in the business. And as we do that, we actually can increase our growth levels. And when we increase our growth levels, we can get more money to invest back and do that flywheel that Alex talked about in his script. And that is the thing that you have to always remember, that is our first thought every day in this company, to grow the company. And as we have said, if we are going to have room for also returning something to the shareholders, we can do that. And in 2025, we did $510,000,000 in buybacks in the market. That is still an option for us also going forward, especially to cover up for dilution. In addition to that, as you know, we have SEK 1,500,000,000 falling due or plus in convertible note now in March, which we will settle in cash. Bryan Goldberg: Okay. Our next question comes from Eric Sheridan on AI opportunity. Can you discuss your latest thoughts with respect to AI on one, its role in product and platform evolution for the company, two, its effect to transform your internal processes, and three, the broader audio content creation and distribution landscape. Gustav Söderström: Thank you, Eric. This is Gustav. I think I touched on a lot of this in my opening remarks but I will summarize it briefly. In terms of its role in product development, as I said, you can actually already see that we spent a lot of last year rebuilding the company for an agentic age. So that you can launch these services where a user can now ask Spotify a question in English that would have required you to be a senior developer at Spotify to be able to answer before. A year ago, only a very senior developer at Spotify could answer the question of what was the first track I ever listened to on Spotify. Please take the ones I listened to more than three times and match them against what was popular at the time. Now anyone can do that just using English. We have been spending time rebuilding the company for this age before. It is a little bit late to start now. You should have started about two years ago, which we did. Now you are starting to see the products on top of this roll out. And as I teased, we really want to be the world's first truly intelligent media platform. You will hear us talk more about this at the Investor Day. So I will not share many more details now, but stay tuned for that. In terms of transformation of internal processes, I did briefly share in my prepared remarks this tool called Honk. Where you can, using Claude Code, literally on the bus or the train, just ask Claude to add a feature or a bug to, for example, the iOS code base. It will push a QR code back to you so that you can actually try the app with that feature. If you like it, you can merge it to production without even getting off the bus. This is speeding us up tremendously. Now we foresee this not being the end of the line in terms of AI development, just the beginning. I am not going to give away more secrets about how we are going to capture it, but you can be sure that we are capturing this. We are retooling the entire company for this age. It is going to be a lot of change. But as I said before, change if you capture it is opportunity. Bryan Goldberg: Our next question is going to come from Rich Greenfield on AI music. What percentage of music on Spotify today is AI generated? How much AI-generated content is being uploaded daily? What is your policy on the uploading of AI music? Gustav Söderström: Thanks, Rich. This is Gustav again. We do not share a percentage of music uploaded on Spotify that is AI generated. But I will talk to you about how we think about it. The way we think about it is from a creative point of view, Spotify should not decide what kind of tools you are allowed to use. Are you allowed to use an electric guitar, a synthesizer, a digital audio workstation? Or AI or, more complicated question, a bit of AI. 1% AI, 15, 20, 100. I do not think it is our decision to make. What we do think though is that consumers would like to know and understand what tools were used in the creation of their music. So we have been working with the industry to allow creators and labels uploading music to put in the metadata how it was created so that we can surface this to users. You just recently saw a feature called About This Song that we launched that literally tells you about the song, what the Internet is saying. But as creators start adding this data, we can also tell the consumers how this song was made because we think people want to know. So that is how we think about it. I also want to mention that one thing that AI can do is to accelerate the amount of spammy tracks. I want to be clear that there has always been people trying to abuse Spotify because it is a big economy. Using spammy tracks. AI is a tool that could help accelerate that, but because it has been a problem for a long time, we have been investing more than anyone else in the industry to curb this problem. So for us, spammy AI music is not a new problem. It is just more scale on an existing problem that we actually feel we are leading. In general, as more content gets created with ever more advanced tools, this is a good thing for Spotify. As more content gets created and uploaded, the personalization problem becomes more important. Because now there is a bigger catalog. You need to understand individual users' taste even better. So we see this development, and this is nothing new. When Spotify started, I think there were at most tens of millions of tracks. Now there are hundreds of millions. So the 10x explosion has already happened over the last twenty years. So this is something that we are used to. That is how we are thinking about it. Bryan Goldberg: Looks like we have got a follow-up and a related question from Rich. Is Spotify playing to win in AI? The bear thesis is that Udio, Suno, Clay, and Stability not only enable consumers to create AI music, but also become DSPs that take share from Spotify. With Spotify taking a more cautious approach. Any comments on that? Alex Norström: Hey, Rich. Alex here. It is good to hear from you. So I spend a lot of time with the industry, the music industry, and with artists. And there is not any doubt that everyone is optimistic about the future. And that AI is an important moment for all of us. And at Spotify, we provide a service to rights holders, artists, and songwriters. A service to distribute and monetize their art. And the key point here, this is a scaled service with a working business model. This is where you go to put your new songs. Whichever technology or instrument or tool you use to create it. And, you know, I have done the rounds and no rights holder is against our vision. We pretty much have the whole industry lined up behind us. And like Gustav mentioned before, we want to do it in a controlled way respecting artists and the community and we will not do deals that are not good for artists and ultimately Spotify Technology S.A. Bryan Goldberg: Alright. Question from Justin Patterson also related to AI music. If you could expand a bit more on Spotify's role in AI music, do you need to invest in content creation tools? How are you helping human creators build audiences and income streams in this environment? Alex Norström: Justin, my friend, you have heard Gustav talk about how more catalog and interactivity is good for users and also good for the industry. So we sort of partially answered your question already, but I will talk to you about how AI really enhances the value of our platform. So we have in the past, including Daniel, talked about optimizing the lifetime value for our subscribers. And that is ultimately when you accumulate all of that what builds enterprise value for Spotify. And so the question is how does AI do that? Well, one powerful way to drive lifetime value is to increase retention. And, you know, the best way to increase retention is to increase engagement. And the number one reason to engage more with Spotify, and happens also to be something that drives willingness to pay, is personalization. And AI, whether it is general recommendations or reinforcement systems, it just takes personalization to a whole new level. And thus, you have a domino sequence of how really we enhance the value of our platform as we continue to invest in AI. AI leads to better personalization, better personalization leads to more engagement, more engagement leads to more attention. More attention leads to lifetime value. And boom, more lifetime value leads to more enterprise value. Gustav Söderström: And I would just add to this. To your question of do we need to invest in content creation tools, we have all the technology and capabilities that we need since a long time. This is a tech company. So we are working with the industry to enable these opportunities. Bryan Goldberg: Alright. Our next question is going to come from Batya Levi on Premium pricing. Following the recent US price increases, how do you see the price-to-value relationship of the service relative to your competitors? How do you expect churn to play out versus prior rounds of price increases? Alex Norström: Thank you, Batya, one of my favorite topics. I am really happy with the price increases we implemented back in January. There have been really no surprises at all. Churn is low and in accordance with our expectations. And just as a reminder, this $1 increase is the same magnitude as the US price increase that we implemented back in, I think it was June 2024. The one important thing to point out though is that price increases as you know is one of several levers we pull for growth. And when we adjust price, we do it from a position of strength. And you noticed already, but I will say it anyway, we evaluate pricing on a market-by-market basis and we optimize for the long-term value of our platform. And you have seen it in the last few years, we do not apply a one-size-fits-all approach to this. And to your question, ultimately, what we strive to do is to always create more value than price. So, and that happens while we are adjusting the price points as we go. This is the kind of value-to-price ratio we believe in. Bryan Goldberg: We have got another question from Rich Greenfield, this time on Spotify culture. Curious, what has changed at Spotify in the early days following Daniel stepping back from the CEO role? Gustav Söderström: Well, this is Gustav. I will take a stab at this. From one point of view, not that much has changed because we have kept growing market share and leading. But structurally, some things have changed because first and foremost, Alex and I are two people. So we had two direct reporting teams, and we thought long and hard about how we were going to do that. Were we going to sort of split the thing down the middle? Manage our own teams, have our own meetings. We decided not to. We decided to run this as a single direct reporting group. Something that we run weekly for three hours called eTEAM. So that changed. We focused even more on synchronization than I think Daniel did. So we have the entire decision layer of Spotify. Sort of the VP/SVP layer, in this room three hours every week, deciding and running and unblocking the entire company. So there has been a shift in how we operate and we focus even more on synchronization and planning. And I want to touch on this because in this age of AI, I think many companies are making a mistake. Maybe I should not reveal this, but I will anyway. People feel like when you have AI, you do not need to plan anymore. I think it is actually going to be the opposite. You have productivity on tap, what you need to have are very good plans so that these agents are highly utilized and stay busy. So being a company that can plan well and know what you want to do is actually going to become more important not less important. So I will lay into that a little bit. I think this shift really began more than two years ago. It was carefully planned and to Gustav’s point, we now not only synchronize across the company with all of the different teams and their leaders, but we also set targets and we land planes that are important. We are very deliberate about how we target and manage the outcomes that we want for the company and our P&L and balance sheet. And if you look at the past three years, you have seen us compound revenue growth at 17% FX-neutral. We have grown gross profit by 20% on a compounded basis for three years. And what is more is that we have added 18 percentage points of operating margin and we are now generating almost €3,000,000,000 for 2025 in free cash flow which is a 17% cash margin. So all of us are super happy about this run, and we are in a very strong position as a team to continue to invest and grow the future of Spotify. Bryan Goldberg: Alright. And another one from Rich Greenfield. This time, about books. Can you help us understand why you want to be in the physical book selling market? Gustav Söderström: Thanks, Rich. This is Gustav. The reason that we are in the—first of all, I want to say that we are not holding inventory or anything like that in this business. The reason we want to be in the physical book market is because we think that is not a separate market. It is the same book market. So one of the most common feedbacks we heard when we talk about audiobooks was people saying that, yeah, I like it, but it is not enough. I really like reading at night or in the morning. I do not want to lie and listen to my audiobook in bed because if I fall asleep, I miss it, etcetera. So we realized that while it technically and financially looks like a different market, we tend to focus on the consumer. And from the consumer, it is the same book. Whether it is a physical book, it is on their Kindle, or their audiobook. So this is what drove us to it. It was really the consumer that drove us to enabling this as well. So that is how we think about it. We want to do books. And that requires being in physical books as well. It does not really matter if the consumer bought the book themselves and then synced to the audiobook. But we want to make it super easy. If you find the book on Spotify, then not say that I am not going to listen to this book because I also want to read. If that is the case, we are right there. You just click buy. It arrives in your home. And then you can sync it back and forth. So this is really a consumer-led innovation. Alex Norström: And we are so bullish on audiobooks. There is so much upside there. You saw us launch audiobooks in Premium recently in Sweden, Denmark, Finland, Iceland, and Monaco. And it is still very early days, but the publishers' reactions to our entrance into the market and the audience we attract and engage have been just super positive. You heard Gustav talk about audiobook recaps, Page Match just now and the partnership with Bookshop. You know, in just two years, which is short order, we have more than tripled our catalog to over half a million titles and expanded into 14 global markets, and there are so many more markets to go from here. Gustav Söderström: And I just want to say that we talked about raising our ambition. Now, Alex and I want to do something different. We want to build something that never existed before, rather than trying to copy something that exists. And I think books is a good example of this. Looking at a consumer problem that no one else really looked at and said this needs solving. We really want Spotify to be your media partner. If that requires us syncing to your physical book or your Kindle ebook, then let us just solve that. Bryan Goldberg: Right. Our next question is going to come from Steven Cahall on AI opportunity and priorities. With the stock down approximately a third over the last three months, the market appears to be implying Spotify will be negatively impacted from AI. What do you think the market is missing from how Spotify can benefit from AI, and what are your top priorities so you do not fall behind within this new industry landscape? Christian Luiga: Steven. Christian here. Let me start and then hand over to Gustav. But I think it has been notable listening to today’s discussion and also seeing the last quarter. Of course, AI has been something that has been hard to grasp for many people. We do not comment on our share price when it changes like in this short term and so on, and we will not do that going forward. But it is obvious from the recent months, but also from the discussion today, I would say, and all the questions we get, that AI is something that is interesting and will have an impact. I think, hopefully, we have discussed and explained why this is a great opportunity for us. And as Gustav said before, we did not start now. We started many years ago. And if you have not, you probably will have a tougher time. That is why we think this is a great opportunity. I hand it over to you, Gustav. Gustav Söderström: I will not say that much more, but Alex here told me that the Chinese sign for macro wind is opportunity. So we are going to try to capture that opportunity. I want to be clear. So we are going to invest, but we are going to invest with discipline when we see clear opportunities and returns. Correct me up, Gustav. Bryan Goldberg: Alright. We have got a question now from Doug Anmuth on our new free tier. When should Spotify see easing head subscriber conversions from the recent free tier announcements with a shift towards increasing conversions and subscribers. How does this impact the trajectory of both 2026 MAU and Premium subs. Alex Norström: Well, Doug, we just came off of a really good quarter when it comes to both MAU and Premium subs, so I am very, very encouraged about the 2026 growth of these two metrics. We are seeing strong engagement uplift not just in our new enhanced free tier around the world, but also generally for Spotify. And this was one of the major contributors to us adding 38,000,000 users in Q4. You know, when you fix the—it is sort of like a leaky bucket. When you start, you know, plugging the holes, the level of the water will just rise faster. And this is perhaps the most important leading indicator to growth at Spotify. It has been so in the past fifteen, sixteen years that I have been here. If engagement goes up, it means user growth will increase and ultimately this has downstream impact on the overall Spotify business including subscribers and other monetization. Bryan Goldberg: Right. Thanks, Doug. Another question from Justin for Gustav on AI. How is agentic coding changing product velocity? What do you believe GenAI could mean for engineer productivity and R&D investment needs? Gustav Söderström: Thanks for the question, Justin. Well, I would say that I think it is obvious to everyone, but over Christmas, Christmas this year was an event. A singular event in terms of AI productivity. Certainly, I spent my entire vacation coding rather than being on holiday, and I think most people in tech did. A lot of things happened in December, including Opus 4.5 coming out with Claude Code, and we crossed the threshold where things just started working. So a lot has actually changed very recently. And when I speak to my most senior engineers, the best developers we had, they actually say that they have not written a single line of code since December. They actually only generate code and supervise it. So it is a big change. It is real, and it is happening fast. Now, as I said, we have discussed for the last at least one and a half years not if this should happen, but when it should happen. And we have started building systems like Honk that I explained for this type of world. So I feel very well positioned to capture this. But I want to be clear. This is the beginning of the change. There is going to have to be a lot of change in these tech companies if you want to stay competitive. And we are absolutely hell-bent on leading that change. But it will be painful for many companies because I think engineering practices, product practices, and design practices will change. And the tricky thing right now is that if this was the end of the change, you could say this is what happened. Now let us retool for this. The tricky thing is that we are in the middle of the change, so you also have to be very agile. The things you build now may be useless in a month, because it may be provided by one of the big engines, etcetera. On the other hand, it is getting so cheap to write code, so you should probably do it anyway. So I think what it is going to mean at the end of the day is that software companies will start producing enormously more amount of software. Right? If you go back to—there is this fear that software companies are not going to exist anymore. Everyone rolls their own products. I certainly do not think that is going to be true for consumer products. I think what will happen is something more like what happened with the Internet. When the Internet came along, everyone thought that we would all have our own web pages. What actually happened was there ended up being very few web pages. In times of lower friction, things actually tend to aggregate, not disaggregate. That is the opportunity we see in front of us. I think companies such as us are simply going to produce massively more software. Up until our limiting factor is actually the amount of change that consumers are comfortable with. Alright. We have got time for just a few more questions. We are going to go now to Steven Cahall on gross margin. With Premium ARPU set to accelerate for much of 2026, should we think about Premium and total margin expansion? Your Q1 margin guide already implied improvement versus the typical seasonality. So can we expect a stronger year for margin expansion than we saw in 2025? Christian Luiga: So thank you, Steven. As you know, we have said already we do not give full-year guidance on our gross margin. But you are right. I mean, we move into quarter one with an ARPU growth of 5%, 6%. That is a bit faster than we have reported in quarter four, and it incorporates recently announced price increases in markets like the US. And that will flow through our P&L for a portion of the quarter and will improve a bit. But that said also, we have said it repeatedly, and I will say it again, which is very important, except for that we are not guiding on full-year gross margin, is that we actually do invest when we see an opportunity for long-term value. And that said then, the quarterly progression of our margins could again be variable depending on the timing of disciplined investments in our core and the monetization activities that I just mentioned. So keep that in mind. And as we say, we do believe that gross margin and operating margin will improve in 2026. Bryan Goldberg: Alright. Our last question is going to come from Batya Levi also related to AI opportunity. Back in October, you announced partnership with the major labels to develop artist-first AI products. With all the hype about competition and disruption, can you talk about how you plan to differentiate with these products, and is there an urgency to launch them? Gustav Söderström: This is Gustav. I will start, and maybe Alex wants to jump in. No. We are not going to ship ideas. We are not going to ship what we are going to do in the future. That would not be very good for all of you shareholders. But what I will tell you is that as I said in my prepared remarks, we think of it in two ways, net new music and derivatives. In terms of net new music, there are tons of companies that allow you to create music using AI. That is not where the music breaks. That music, if it breaks, breaks on Spotify. That is where charts—that is where the cultural moment is. We feel very comfortable about that position. A growing catalog has always been good for Spotify. Now, in terms of the derivatives, as I said, we think this is an untapped opportunity for artists to make money off of their existing IP. We have the technology and capabilities that we need, and we are very excited about it. And we are ready for the partners that are hungry to seize this opportunity. We think the ones that move first will benefit the most. So we are hungry and excited. We are not particularly stressed about it. But we are there for people who want to make money. Bryan Goldberg: Alright. Thanks, Gustav, and thanks, Batya. That concludes our Q&A session. I am going to turn the call over now to Alex for some concluding remarks. Thank you, Bryan. So from any vantage point at Spotify, there is a lot to look forward to. In March, we will kick off our twentieth anniversary at South by Southwest. And we are excited to share more about our year of raising ambition and a longer-term vision at our Investor Day on May 21 in New York. So please hold the date. Gustav, Christian, and I are looking forward to seeing you there. Bryan Goldberg: Alright. And that concludes today’s call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks everyone for joining.