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Operator: Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation's Second Quarter Fiscal 2026 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an analyst question and answer session. I would now like to turn the conference over to Mr. Greg Secord, Head of Investor Relations. Please go ahead. Greg Secord: Thank you, operator, and good afternoon, everyone. Welcome to OpenText's second quarter fiscal 2026 earnings call. With me on the call today are OpenText Executive Chair and Chief Strategy Officer Tom Jenkins, together with James McGourlay, our interim Chief Executive Officer, and Steve Rai, our Executive Vice President and Chief Financial Officer. Today's call is being webcast live and recorded with a replay available shortly thereafter. Just look on the OpenText Investor Relations website at investors.opentext.com. Earlier today, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can also be accessed on the OpenText Investor Relations website. Now turning to some upcoming investor events. OpenText will be participating in the Scotiabank Technology Media Telecommunications Conference in Toronto. It's on March 4. We look forward to meeting with you there. And now on to reading of our safe harbor statement. During this call, we will be making forward-looking statements relating to the future performance of OpenText. These statements are based on current expectations, assumptions, and other material factors that are subject to risks and uncertainties, and actual results could differ materially from the forward-looking statements made today. Additional information about the material factors that could cause actual results to differ materially from such forward-looking statements, as well as the risk factors that may impact future performance results of OpenText, are contained in OpenText's recent forms 10-K and 10-Q, as well as in the press release that was distributed earlier today. All of which can be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and the other materials that are available on our website. And with that, I'll hand the call over to James. James McGourlay: Thank you, Greg. And welcome everyone to our Q2 fiscal 2026 earnings call. Last week, we announced Eamon Antoon as our new CEO. Tom will talk more about Eamon later in this call. I wanted to take an opportunity to welcome Eamon to OpenText. And I look forward to working with him when I return to an executive role on the leadership team. In this past week, we announced that we had entered into an agreement to divest Vertica to Rocket Software for $150 million. I would like to recognize the dedication of our teams and thank our customers and partners for their continued trust during this process. The transaction places the Vertica solution with a strong committed steward, and I look forward to working with Rocket to support customers and to ensure a smooth and thoughtful transition. We ended off the quarter with a solid performance, beating our own expectations on total revenues, adjusted EBITDA margin, and adjusted EPS. Our results for this quarter and the 2020 demonstrate our commitment to deliver on our objectives and maintain a steady shift as we continue to implement our strategy of reshaping our business to focus on our faster-growing core businesses. Since August, our goal has been to ensure that our clients receive strategic support from OpenText as they progress through their cloud journey while rapidly advancing their AI readiness. Our clients are using our AI Aviator tools to gain additional value and insights from their contents. The secure information management capabilities that we have provided to our clients for the last thirty years deliver the same data that AI requires. Therefore, we are well-positioned whether our customers use AI or applications to meet their business needs. Steve or I will go through our quarterly results in more detail. However, I would like to highlight that in Q2, we generated total revenues of approximately $1.33 billion, led by overall cloud growth of 3.4% year on year. We continue to see strong enterprise cloud bookings of $295 million or growth of 18% year on year. Total cloud RPO is up 13.7% year on year, and we closed 53 cloud deals larger than $1 million. We introduced disclosure on the revenue performance of our product categories in September. And you can see that our total content business, which consists of 43% of our total revenues, grew 4.5% year on year in Q2. And if you look specifically at cloud revenue for content, it grew 18% year on year. I would like to call out that our revenues for our core business continue to grow at approximately twice the pace of total revenues. Content, which is our largest and fastest-growing business, continues to demonstrate strength, and it also leads to our cloud growth. There is no change to our F26 revenue target of 1% to 2% growth year on year. Steve Rai: I would like to turn to some of our customer wins in the quarter that highlight the growth trajectory of our core business. We secured a win from U.S. Bank, where it completed a full migration of its on-premise license to hosted architecture and cybersecurity. Salinas faced complex document management needs across their global operations, and they opted to integrate OpenText extended ECM with SAP for more streamlined and unified processes. We had another cybersecurity win with BNP Paribas. They needed a single integrated application security stack to help avoid production vulnerabilities and reduce remediation costs. They chose OpenText software since it delivered the best results after testing all major vendors. At OpenText World Conference last November, we received very positive feedback from our clients and partners on our new product cycle release. We had customers such as IBM and Honda join us on the main stage to speak about using OpenText AI solutions. IBM spoke about using our content management and content aviator support for their 280,000 plus employees worldwide. United Airlines discussed why they chose our ITOM platform and ITOM Aviator to reduce critical incident resolution time, and Honda chose our business network trading grid business network aviator for autonomous supply chain issue resolution. At the conference, we also introduced the OpenText AI data platform, which will be shipping next quarter, as well as a host of new tools for orchestration of data, integration, and AgenTeC AI. Our AI data platform can facilitate any major LLM model and provide over 1,500 connectors to various ERP, CRM, ICOM systems such as Oracle, Salesforce, SAP, etcetera. Turning to our F26 outlook. As I mentioned, we are reaffirming our total revenue growth of 1% to 2% year on year. Our expectation for FY 2026 year on year customer support and ARR growth, as well as enterprise cloud bookings, also remain unchanged. As we look forward to the next quarter, we expect Q3 total revenues to be between $1.26 billion and $1.28 billion. To summarize, we are really excited about our cloud growth in our core product groups, especially in contact, our largest and fastest-growing business. Overall, we see opportunity for our core products to continue growing in the cloud as our clients make fundamental decisions on their cloud and AI needs. And with that, I would like to hand the call over to Steve. Steve Rai: Thanks, James. Good afternoon, and thank you all for joining the call today. I will also take this opportunity to congratulate Eamon on his CEO appointment and look forward to working together in a couple of months on this exciting journey. After my first full quarter with OpenText, I've gained excellent insight into the business. OpenText maintains a strong financial position, and I am very optimistic about the strategy we're executing. To pivot the company to higher growth, with a solid margin and free cash flow profile. We remain operationally focused and are making good progress on the major strategic initiatives that we've outlined in the last couple of quarters, including on our portfolio reshaping and business optimization plan. In Q2, our Content Cloud business continued to lead our growth. And we also performed well on margins and cash flow. As James mentioned, we generated total revenues of $1.33 billion. Cloud revenue was $478 million, up 3.4%, mainly driven by Content Cloud. As a reminder, please see our Investor Relations for further details of our core and non-core revenues by product category. Q2 represents the twentieth consecutive quarter of organic cloud growth. And our cloud net renewal rate remained consistent at 95%. Customer support revenue in the quarter was $582 million, down 1.5% and on track with our fiscal 2026 outlook. Our customer support net renewal rate also remained consistent at 92%. Annual recurring revenue or ARR was $1.06 billion, up 0.7% year over year. And ARR as a percentage of total revenues was 80%, which increased by one percentage point. Regarding profitability, GAAP gross margin was 74% and non-GAAP gross margin was 77.6%, both up 70 basis points and 40 basis points respectively. This was mainly driven by the increase in cloud and customer support gross margins, partially offset by the decline in gross margins for license and professional services. Adjusted EBITDA was $491 million or 37% margin. This was down 2.1% and 60 basis points respectively. The decline was driven primarily by investment in the sales team, including commissions, partially offset by savings from our business optimization plan, which remains on track. Regarding that, we still expect to realize this year approximately one-third of the total estimated savings of between $490 million and $550 million. Please see slide 34 in our Investor Relations presentation for more details. GAAP net income was $168 million, down 26.9% year over year. The decline was largely due to FX on acquisition-related derivatives. Non-GAAP net income was $286 million, down 2.4%. Q2 GAAP diluted EPS was $0.66, down 24.1%, and non-GAAP diluted EPS was $1.13, up 1.8%. And free cash flows were $279 million, down 8.9%. On a year-to-date basis, total revenue was up 0.4%. And cloud revenue grew 4.7%. License was also up 1.3%, partially offset by a decline of 1.5% in customer support and 10.2% in professional services. First half fiscal 2026 adjusted EBITDA margin was 36.7%, up 40 basis points. Non-GAAP diluted EPS of $2.18 was up 7.4%. And our free cash flow was $381 million, up from $190 million for the same period last year. We announced the divestiture of Vertica for $150 million in cash before taxes, fees, and other adjustments. Vertica is part of OpenText's on-prem analytics product group. It contributed approximately $80 million annual revenue in 2025. OpenText intends to use the proceeds from the sale to reduce outstanding debt. Under the terms of the agreement, the software customer contracts and associated services and employees will be transferred to Rocket Software. The transaction is expected to close during fiscal 2026, subject to customary approvals and closing conditions. Turning to our full-year fiscal 2026 outlook that James touched on earlier. Our expectations remain unchanged at 1% to 2% for total revenue growth. While not impactful to the overall percentage range, we are reminding investors and analysts to reduce their revenue models for the remainder of the fiscal year by approximately $15 million to reflect our divestiture of eDOCS, which was completed in January. All other previously announced outlook remains unchanged. We continue to watch global currencies and are being slightly more specific that in fiscal 2026, we expect our core business total revenue to grow in constant currency terms. Turning to Q3, we expect total revenue between $1.26 billion and $1.28 billion. This number reflects a $7 million reduction for the eDOCS divestiture. Q3 adjusted EBITDA margin is expected to be between 33% and 33.5%, which as in prior years is a seasonally lower margin quarter. We continue to expect total revenue in 2026 to skew higher from Q3 to Q4. Last November at our OpenText World investor briefing, I provided an illustrative example of how we anticipate our total revenue mix could change and grow in the coming years as our customers move faster to the cloud. For reference, we included this on Slide eight in our Investor Relations presentation. In the longer term, OpenText will benefit as we expect to see cloud revenue, ARR, and RPO increase significantly. This is a classic strategy utilizing the same modeling as for all other software companies experienced as they experienced through their cloud transitions. We closed the divestiture of eDOCS in January and used the proceeds to pay down our debt. We continue to execute on our previously announced $300 million share buyback program, and we have repurchased for cancellation half of this on a year-to-date basis so far in fiscal 2026. Subject to customary regulatory approvals, we intend to further increase the amount of our existing buyback program, particularly given recent valuation levels. We are also looking to do small tuck-in M&A as opportunities arise. Our robust cash flow engine provides us with the scale and flexibility to continue investing for growth within our core enterprise information for AI market. With that, I will hand it over to Tom. Tom Jenkins: Thanks, Steve, good afternoon, everyone. It's been a busy six months, but I'm happy to see solid results for the second quarter and first half of the year, thanks to the leadership of James and Steve and the rest of the executive leadership team. The company has been operating smoothly while we continue to move forward with our strategy to pivot OpenText to higher growth while maintaining a solid margin and free cash flow profile. Last August, we made some promises, and I'm happy to say we've met all of them. We've completed our hiring and performance targets. We're moving forward with some solid milestones in our portfolio shaping activities. Let's review what we've done so far. As Steve and James have highlighted, we've had strong Q2, had a strong Q1 before. The first half of the year is going well. We're on track to meet all of our F26 outlook targets as we promised. We appointed Steve Rai, who's now fully immersed and focused deeply on strategy, operations, and financial reporting. On the portfolio shaping, we've announced the sale of Vertica as well as the closing of the eDOCS divestiture, but we're not done. We've set a cadence of one divestiture per quarter, and we're working towards streamlining our portfolio to get to our core business. We've elected two new Board members at our AGM in December, which brings to a total of five new Board members in the past year alone. We provided additional transparency with quarterly reporting of our product category revenues so everyone can track our progress every ninety days as we move to our core business. And lastly, we appointed our new CEO, Eamon Antoon, a software industry veteran. I'd like to echo James and Steve's warmest welcome to Eamon. He won't be on this call since we just announced his appointment last week. But Eamon will be ready to participate in next quarter's earnings call. The Board is very pleased to welcome Eamon to OpenText, and as we look ahead to the company's future, the Board believes that he's the best leader to drive shareholder value by growing organic revenue in our core enterprise information management business to train AgenTeq AI. Eamon brings more than three decades of global technology operating discipline, transformation leadership to OpenText. Built over a seasoned career in the information technology industry, most recently as President of IBM Americas, he led the company's largest and most complex business unit across U.S, Canada, and Latin America, about $30 billion in revenues all told. During his tenure at IBM, he drove major advancements in cloud, infrastructure, cybersecurity, cognitive solutions, digital modernization, as well as divestitures such as Crendrall. We're also welcoming Eamon back home as he went to high school and university a few blocks from our headquarters office in Waterloo. James continues to serve as Interim CEO until Eamon officially joins us in a couple of months. Upon that transition, James will move into a role within the executive leadership team. I'd like to thank James for his steadfast leadership as Interim CEO and for the strong results we're realizing by his continued commitment to our clients. Part of our portfolio shaping strategy, we recently agreed to divest Vertica to Rocket Software for approximately $150 million, and this comes shortly after we announced the closing of the eDOCS divestiture for $163 million. We're executing to our strategic plan, focusing on our core product offerings, our expertise in secure data for enterprise AI, that provides strategic choice where you can choose LLMs and flexibility for our customers. We're moving quickly but methodically to ensure that we obtain the best market value for our assets and do it in a way that will not disrupt our sales and operations. By rationalizing these non-core assets, we're strengthening the portfolio, reinforcing our capital allocation framework, and positioning OpenText to invest more deeply in our cloud businesses. That will drive sustainable long-term growth and shareholder value. The rise of AI has confirmed our thesis that providing data to train AI is the best choice for our core business. I'd like to turn our attention to some changes we made at the Board level. We held our AGM last December, and we welcomed two new Board members, John Hastings and Margaret Stewart. Of course, Eamon will be joining the Board as well in April. As I mentioned before, that brings a total of five new members joining the Board just in the past year. We announced back in August that the company will be focusing on our core markets anchored by our largest and fastest-growing content cloud business. This requires us to reshape the current product portfolio. With the announcements that we've made so far at Vertica and eDOCS, we're pushing forward at a methodical pace to sell one business unit or product category per quarter. This timing is approximate and can vary depending on the size of the transaction that we're working on. As OpenText moves towards a leaner content cloud and AI-focused software company, it's important to be reminded of why we are doing this. OpenText is positioned as a leader in the information management space, particularly for training AgenTeq AI. Our product strategy remains focused on the need of our customers to organize and curate their data to use with AgenTeq AI. And our core businesses, and especially content, couldn't be better positioned in this market. We're managing, organizing, and securing data, critical steps in training and deploying AgenTeq AI tools. As you all know, OpenText for thirty years has been making this information management for applications that our customers used in regulatory industries. Because they needed permissions to access sensitive information. And it just so happened that when AI was invented, it needed the same kind of information management to train the enterprise AI, also known as AgenTeq AI. So we're very fortunate that we were ahead of the curve and that all of our technology that we developed over the last thirty years is immediately usable to an AI through our Aviator Connector. The focus of our development has been on making Aviator Connector to as many popular large language models as possible. That are being used to train as agents within organizations using sensitive data. So we're doing what we said we would do. There are more milestones to come, and we're operationally ready to support further portfolio reshaping. And I'm confident in our leadership team and the existing operating model. The core of OpenText is growing while management remains disciplined on margin and focused on growing adjusted EBITDA dollars. We appreciate the patience given to us by our shareholders while we evolve into a higher growth content cloud and AI-focused software company, and we're excited by what lies ahead. With that, this concludes our prepared remarks. And could the operator please open the line for questions? Operator: Certainly. We'll now begin the analyst question and answer session. Star then two. Our first question is from Richard Tse with National Bank. Please go ahead. Richard Tse: Tom, you sort of touched on this a little bit, but in light of the events over the past few weeks in software around all the philanthropic news, given where you sit and sort of your background, can you maybe elaborate a little bit in terms of why AI cannot disrupt OpenText and content management? You know, we're getting we'll serve a lot of inbound questions from investors to serve you know, articulate this a bit better from a technical perspective. Tom Jenkins: Yes. Thanks for the question, Richard. Well, the simple answer is OpenText doesn't make applications. We feed content into applications. So we feed content into training AgenTeq AI, which then can go and replace certain application software. But you still need the content whether you're providing the content to a human being using an application on a console or you're providing the content into a robot, that's being trained to do the same thing, it's the same thing. You still need to train it and use the content. So we're in one of those fortunate positions where all the content that we've created and managed and curated over the years is the same thing. Okay. Thanks for clarifying that. And my other question has to deal with divestitures. It looks like you've got some pretty good pricing on the recent announcements. Are you still confident that you could do one per quarter? And are the valuations kind of holding here relative to your initial expectations going into this? So the short answer is yes and yes. And why are we saying yes and yes? Well, first of all, can see the pipeline of the various auctions going on and there's lots of interest. So there's no shortage of people interested. And it's because they're very high-quality assets. The only reason we're getting rid of them is because we got something better to do. It's not a problem with any of these product lines. The second reason is that the buyers are generally financial buyers. And so these are really driven valuations by discounted cash flows. And so all of these factors that go into the market really come out as a DCF analysis. And so all of our forecasting is based on the same approach that they would make. So, yeah, we're pretty confident that the answer is yes and yes. Okay. Thanks. I'll pass the line here. Operator: The next question is from Raimo Lenschow with Barclays. Please go ahead. Raimo Lenschow: Perfect. Thank you. Congrats from me as well. One for you, like within enjoyment, well, first of all, you for giving us the extra disclosure on the different on the revenue breakdown for different divisions. What we can see is that the core businesses is doing valid compared to the other parts of the business. If you think about Eamon starting now, like, how broad is this mandate in terms of being able to do more here in terms of divestment focusing on the core business. Can you speak to that please? And then I have one follow-up. Yeah. The recruiting of Eamon came with a full discussion about what the strategy was at the company and we had pretty strong congruence between the board and Eamon. Think we see the situation the same way. So I don't think you'll see any difference. Now, of course, Eamon coming in as CEO once he gets into the chair, he's going to look at it and work with his ELT and then come back to the board. So things change all the time tech as you know. But no, we've got good congruence. We're blessed with Damon's wonderful background. In all of the product categories. So he he's got a very, very good inside view of all of the both core and noncore. So we're blessed with someone that understands all the different pieces. So, yeah, we're pretty pretty satisfied with the congruence. Raimo Lenschow: Okay, perfect. Thank you. And then I know revenue is backwards looking for some of that, but like if I look at the quarter, some of the numbers these a little bit from a growth perspective. Could you on a constant currency basis, you speak a little bit how the quarter played out for you guys? More on the bookings side, what you saw on the field Thank you. Tom Jenkins: Yes. So we actually we had a good quarter. As as we're going through the quarter, you know, the the deal shift from sometimes from quarter to quarter, but as we're coming through, we saw some strong bookings in our license towards the end of the quarter. We had a number of deals that were in different parts of the year that came into into Q2 for us. You know, you gotta keep in mind that we run an annual business. And as we run that annual business, deals can move around. So we've got a strong pipeline going forward, and we're very excited about the year coming up. Raimo Lenschow: Okay. Perfect. Thank you. Operator: The next question is from Kevin Krishnaratne with Scotiabank. Please go ahead. Kevin Krishnaratne: Hey, there. Thanks for taking the question. Tom, maybe just to follow-up on some of your comments on and customers training agents. Is there any anything you can share for us in terms of, maybe usage or or customer penetration or, you know, adoption of Aviator across different business units? Maybe, you know, if not quantitatively, just sort of, like, what you've been seeing, you know, over the past couple of quarters. Just trying to get a sense of where you're at and how rapidly consumers are In fact, you know, training using your the the data on the platform. Tom Jenkins: Yeah, thanks for the question. Again, we are so early. It's you can't even say we're in early innings. We're really at the first batter. This is so early. Most of our customers are anticipating the need. So they what they're doing is they're actually getting their content in order. They've run some prototypes but this is a long way to go. This is the reengineering of decades of industrial software. So I think everyone should realize that if you were a CIO in a large organization, you're running a pilot with an agent, but in background, what you're really doing is getting ready with your content, making sure that you've got it curated and assembled into a way that you can train the agents with permissions because you have to remember that if you're subject to something like GDPR or you're subject to any kind of restriction on your customers' information or the corporation's information that AI that you create is also restricted. So it's not like you can train something and then just put it up on the web. Have to be very careful how you do the deployments. So most of the activity because we're training and so the content is being prepared to then train each of the LLMs. So this is a nontrivial exercise. And I think you'll see this unfold over many, many years, but where we see a lot of the activity right now is people getting ready. Kevin Krishnaratne: Gotcha. Okay. Thanks for that color, Tom. Maybe one for for Steve. Just on the bookings and the cloud bookings stated, CRPO grew 6% in Q1, 9% Q2. The cloud revenue growth guide 3% to 4%. I'm wondering if we could just talk about sort of the dynamics there, a little bit of the disconnect. I don't know if there are elements of the business or transactional piece that are offsetting. But maybe just talk about sort of the strong bookings to start the year, but then the revenue guide, maybe what you're seeing from customers? Steve Rai: Yeah. So on the James touched a little bit on on the bookings topic. I mean, we've got I mean, cloud bookings which obviously, you know, kind of flows in into the RPO have been kind of nice double-digit growth there. And you know, there's you know, obviously, that that flows into, you know, the the bookings number is gonna have both current and longer-term components to it. So from a revenue profile, I mean, terms of the overall mix, there's other things at play, right? So when you look at the breakdown of the product categories that we've got that we now disclose, you can kind of see that that interplay there. And there's from a second half standpoint, I mean, there's a bit of seasonality here that's typically at play. So in terms of the outlook, and, you know, the 3% to 4% guide, I think you you that you referenced. We're holding to that, but Q4 as I said, there's the results the activity is, somewhat skewed to Q4. And it'll kind of depend on the mix that comes through there. So but it's it's tracking you know, in a on a continuing to track on a healthy trend. Kevin Krishnaratne: Got you. Thanks a lot. I'll pass the line. Thank you. Operator: The next question is from Stephanie Price with CIBC. Please go ahead. Stephanie Price: Hi, good evening. Last quarter, you talked about accelerated cloud migration. Just curious if you can talk a little bit about what you're seeing in terms of the demand environment and client moves to the cloud here. Tom Jenkins: Yeah, thanks for the question. I'll turn this over to James, but I have to say as we started with our user conference, we're getting a lot of positive feedback. We're quite pleased with how customers are reacting. I think you're going to see that there's two parts to our go to cloud. One is the install base and one is our first-time sales. And I think as we mentioned last time, we're very aware of how other software companies have done this and we're simply going to follow in their tracks. And that's what we're trying to say last quarter is that, you'll see a much more vigorous cloud campaign from us, which started within a few weeks of the call. Last time. James or No, I'd agree with you, Tom. I think the thing I'll add is about the response from our customers. We are seeing our customers actively engaging with us and building out plans to migrate their installations into the cloud. The deals do take time, as you know, or deals have a longer cycle time. So these deals are forming up, and we do expect to see them really kicking in over the next few quarters. We have had some great success in Q2. With some large cloud deals coming in as we talked about the number of deals that were over $1 million. I think the other important thing that's part of our modeling going forward we do not anticipate a dip in revenue. This is a very encouraging development for us as we've talked about the value that we're bringing in the cloud transition, it turns out that we're able to benefit from the more mature models that other enterprise software companies went through the learning curve. I guess in a simple way, we're not gonna follow the pattern that others did about five, six years ago. Because we get the benefit from that learning curve that they went through. So we're anticipating just pure growth from it. Stephanie Price: Great. Thank you. And then maybe a bit on capital allocation, just given what's going on in the market the last few weeks. I think Steve mentioned an increased buyback program. How do you think about buybacks versus dividends versus M and A here? Tom Jenkins: The board always reviews. In fact, just recently the Board met and reviewed all of that as a basket. And as you say, it's very market specific and also strategy specific. So as Steve mentioned, the company is now seeking approval from the authorities to expand its buyback program. And once we receive that authority, we'll communicate that further to the street. Clearly, we are quite robust in our dividend program. Steve also mentioned that you should be anticipating that we'll continue to do tuck under acquisitions and also as we do the divestitures we're paying down debt. So we hope that we're meeting all of shareholder needs that we are doing a blended approach to capital allocation, very thoughtful, board meets on it, has fulsome discussions about the right balance. We are blessed with a substantial cash flow. And so we have lots of capital to be able to execute right across all four dimensions. And I think you'll see us continue to do that in a thoughtful manner. Operator: Thank you very much. The next question is from Thanos Moschopoulos with BMO Capital Markets. Please go ahead. Thanos Moschopoulos: Hi, good afternoon. Just to clarify, with respect to the cloud migrations you're seeing from the installed base, are those more weighted towards being hosted on OpenText infrastructure or is more of that going towards cloud infrastructure that you're managing? Tom Jenkins: No. We're going to hyperscalers. In general. Thanos Moschopoulos: And that's despite the, I guess, the growing interest in sovereign cloud, might skew it bit the other way? Or Tom Jenkins: Sure. Yeah. So we're working with the hyperscalers really across the world as the majority of our are looking at where they want to go to the cloud. Many of those hyperscalers have installations. All the hyperscalers have installations in geographically distributed areas. At the same time, we are at options as we continue to work out sovereign cloud strategy. And I think if you recall from the user conference, we published a book on how to deploy enterprise AI. And in chapter seven of that book, we outlined a hybrid strategy because we think clients that are concerned about sovereign data would be best served to do the majority of their workloads that do not require a sovereign data on hyperscalers because it's the most efficient most effective way of deploying what they're trying to do. And then where they do have to have a sovereign data stack, we can also deliver that and do that in an alternative way either through our own data network system or a third party as the case may be. It's an evolving area I think if you read chapter seven, of the book we put out, you'll understand what we're doing. And at the end of the day, like everything we do, we give the customers the choice. Thanos Moschopoulos: Thanks, Tom. And looking at the product segments, good to see the sustained growth in the content business. I guess, I stuck out as a bit of a delta from last quarter was cybersecurity enterprise, being more challenged this quarter. Just lumpiness or anything particular to call out there? Tom Jenkins: Yeah. I think you got it right on the head. You know, As I mentioned earlier, we run an annual business. And when you look at Q2, it looks a little lumpy. Keep in mind, last Q2 2025, we had a strong cyber quarter, which makes it a tough compare. We had a strong quarter in Q3 Q1 of this year. So we're kind of just a little flat there, but we do expect to improve as we go forward. We've got a strong pipeline. In coming deals in the next two quarters with some large deals out there. So we do expect it to continue to progress towards growth. Thanos Moschopoulos: Great. That's the one. Thank you. Operator: The next question is from Paul Treiber with RBC. Please go ahead. Paul Treiber: Thanks and good afternoon. Just a follow-up question. Tom, you mentioned earlier that customers are very early in getting their content in order. How is that impacting software budgets? Are you seeing that drive an increase in software budgets at the moment? Because on the other hand, there's a lot of budget going to LLM. So is that are you competing against the budget going to LLMs? Or is it are they continuing on an independent path? Tom Jenkins: No, I think what you're going to find is an evolutionary path. I think, and again, I can't speak to the entire industry, only the things that we're seeing. As you deploy an LLM you're going to start first with public models. It's the easiest. They're the most mature. You can get your fast bang for the buck, if you will. What we're going to be playing in and are playing in now is where you start to get into that sovereign data, the permissions. Once you train that AI, you have to now start to stay within a regulated environment. That's a whole different kettle of fish. And so that's what I'm referring to. The public models that's a very limited area for OpenText. Think of it as if you had a public search engine versus a search engine, which is scanning private financial information or private healthcare information. If you recall, OpenText began in both the public and the private markets. But as we matured, and enterprise content became a thing, we used to refer to it, it's a bit of a trite way to refer to it. We refer to it as behind the firewall. So as you start building AI behind the firewall, oh yeah, you've got to have a lot of that content, and then you gotta control the AI. Because remember, an LLM cannot forget. If you expose an LLM to data that has to be secure that LLM is now also under the same regulatory restrictions. So it's that part of the industry that I think you'll see evolve. The first part is clearly around the publicly available information with publicly trained LLMs. If you're a CIO, that's where you're going to go to first. It says you get into the more nuanced things which involve proprietary data, that takes a lot more thought, a lot more time and quite frankly a lot of enterprise information management. Paul Treiber: Excellent. Helpful to understand. Just a question about Steve mentioned potential tuck in M and A. Are you taking into account AI risk in your M and A strategy? Is that something that you're factoring in at this point? Tom Jenkins: Well, as we've related in the last couple quarters, the tuck-ins we're referring to is capacity to deliver training to AI. We're actually not focusing on, let's say, software application products and things like that, we're actually focusing on subject matter experts. That's what we need to be able to deploy faster. And so that's what you'll see. And generally that's why we refer to them as tuck under. They're not going to be very big. They might be a couple 100 experts in automotive or in pharmaceutical, etcetera. They're really subject matter experts that can help us deal with some of the things we've been talking about on this call, which is as you get closer to the coal face and you're starting to train AgenTeq AI, you need to have people that are subject matter experts in that particular area of industry, that particular application, because you really do have to test the AI to make sure that what you've trained is really effective. So you need quite a bit of subject matter expertise to be able to go through that process. Operator: The next question is from Steve Andrews with Citi. Please go ahead. George Michael Kurosawa: Great. This is George Kurosawa on for Steve. Thanks for taking the questions here. I wanted to touch on the product segment the segmentation side. The license revenue came in nicely ahead of what we had modeled. I think, Steve, you alluded to maybe some deal timing if you just double click on you saw the strength and with your more aggressive move into the cloud here, how we should think about that line going forward? James McGourlay: Thanks, James. So as I said, we had some large deals that came in. They came in specifically, you know, call it the government sector, but it was across the board, really. We had a couple of good ones that had been in the pipeline for a quarter or two, and they came in in this quarter. So think as we're going forward, we'll continue to see those deals move around. In the quarters, but we do expect that we do expect to be in line with what we're forecasting here. And along the lines we have in the last two quarters. George Michael Kurosawa: Okay, great. And then I just wanted to clarify the commentary on guidance as it relates to eDOCS. You maintained the full-year guidance. Is it right to think about this as the headline number is maintained including eDOCS. So this is sort of an effective raise on an organic basis or more of an organic number maintained and so therefore the headline number is coming down by the eDOCS number, if that makes sense. Tom Jenkins: Yes. We're not from an accounting point of view, we can't declare eDOCS as a discontinued business. So there's not a simple way for us to do it when we're mid-fiscal this way. So it's just a simple recognition that the eDOCS business is no longer in OpenText. So we're maintaining the same fiscal year and it's not just eDOCS, it'll be anything else we divest. In the quarter that we divest, it'll no longer be there for the future. We're not guiding down the business, but we are highlighting the logical that it's a divested business. We're just not allowed to do it from an accounting point of view. So when you compare year over year, it'll look like it's going down, but it's not. The business is not going down. It's just that we divested it. And it's just it'll be like that for the next three or four quarters. Steve, is that fair? Steve Rai: Yeah. That's exactly it. George Michael Kurosawa: Okay. Understood. Thanks for the color. Operator: The next question is from David Kwan with TD Cowen. Please go ahead. David Kwan: Good afternoon. Just looking at the guidance for the year just obviously implies a pickup in growth as particularly in Q4. So I assume that content's going to be a key driver for that expected strengthening of the growth in the coming quarters here. Was wondering to what extent though, do you expect Business Network, ITOM and cybersecurity on the enterprise side to contribute as well? What do you expect these other core products to get to a sustainable positive year over year growth in Q4? James McGourlay: Yes, do. We do expect the other product groupings to contribute to positive growth as we go through this year. David Kwan: That's great. And then just on the enterprise cloud bookings, pretty strong quarter, up 18% year over year. Again, seems most of that's just kind of driven by content, but were there any other products in particular you wanted to flag is also seeing stronger demand? James McGourlay: No. The content is leading the charge at the moment. And as I said, we're continuing to invest and continuing to build pipeline in the other product areas. At the moment, it is content that is leading the charge and we do expect even though we will see growth in the other products, do expect that it will continue to be content as we go through the remainder of this year and into next. Tom Jenkins: If you go back and look at the slides from Analyst Day, you'll note that the other product lines that are in core we believe they will be dragged along with content over time. Cause if you go back and look at the slides, you'll see that they represent other kinds of content. Machine content, transactional content as AgenTeq AI matures it's going to start dragging along a lot of these other content components. That's why we define it as core. It's just that they will drag along later. Think of sovereign data. Sovereign Data is based on our content but as more attention is made to the proprietary nature of that data more attention will also go to cybersecurity. So there is a logic to it all. It's just got to play out over time. And if you look at the slides from Analyst Day, it'll sort of give you a bit of the architecture. And if you read the book that we published at the Analyst Day, it goes through all these component pieces and why they're part of a logical set for a training AgenTeq AI. David Kwan: I appreciate the color. That's it for me. Thanks. Operator: The next question is from Seth Gilbert with UBS. Please go ahead. Seth Gilbert: Yes, thanks for taking the questions. Maybe just to follow-up on the enterprise cloud bookings grew 20% in 1Q, 18% in 2Q against guidance of 12 to 16% for the year. Looks like maybe a tough comp in 4Q, but anything else in the second half that you're anticipating would slow the momentum down here? James McGourlay: No. We continue to have a strong pipeline. Across the board on content really. So we're looking to continue to see that rate of growth continue. Our customers are continuing to invest in the cloud and ask us for solutions and work with us on building out those solutions we're going forward. And I'll leave it at that. I think you'll also see the benefits of this company starting to focus on a single theme. Every quarter that goes by, it gets more efficient, more effective and you'll see the results of that into the next fiscal year. Tom Jenkins: Operator, we're coming up on the hour perhaps we can take another question and then we'll close it off. Operator: That is the end of the queue. So I'll hand it back over to Mr. Jenkins for closing remarks. Tom Jenkins: Well, thanks everyone for joining us. We had the full hour there. So hopefully it was helpful for everyone. We look forward to reviewing Q4 in our fiscal year and also welcoming Eamon to our next call and look forward to seeing you at the various investor events through the quarter. Thank you. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Operator: Good afternoon, and welcome to the Digital Realty Trust, Inc. Fourth Quarter 2025 Earnings Call. Please note that this event is being recorded. During today's presentation, all participants will be in a listen-only mode. Following the presentation, we will conduct a question and answer session. Callers will be limited to one question, and we will aim to conclude at the top of the hour. I would now like to turn the call over to Jordan Sadler, Digital Realty Trust, Inc.'s Senior Vice President of Public and Private Investor Relations. Jordan? Please go ahead. Jordan Sadler: Thank you, operator, and welcome, everyone, to Digital Realty Trust, Inc.'s fourth quarter 2025 earnings conference call. Joining me on today's call are President and CEO, Andrew P. Power, and CFO, Matthew R. Mercier. Chief Investment Officer, Gregory Wright, Chief Technology Officer, Christopher Sharp, and Chief Revenue Officer, Colin McLean, are also on the call and will be available for Q&A. Management will be making forward-looking statements, including guidance and underlying assumptions on today's call. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC. This call will contain certain non-GAAP financial information. Reconciliations to the most directly comparable GAAP measure are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to Andy, let me offer a few key takeaways from our fourth quarter results. First, we posted $1.86 of core FFO per share in the fourth quarter and $7.39 for the full year 2025, up 10% over 2024. Our initial guidance for 2026 implies nearly 8% bottom-line per share growth at the midpoint, despite outperforming our original 2025 guidance by almost 500 basis points. Second, we concluded our second consecutive year with more than a billion dollars of total bookings at a 100% share, leaving us with a record backlog of nearly $1.4 billion at a 100% share. We also posted another record quarter of zero to one megawatt plus interconnection bookings and a record year in 2025 as our team demonstrated its resolve to meet our goal to double digital. Lastly, we ended the year with over $3.2 billion of LP equity commitments to our inaugural closed-end fund, marking our official entry into the private markets and evolving Digital Realty Trust, Inc.'s funding strategy to support the growth of hyperscale data center capacity. With that, I'd like to turn the call over to our President and CEO, Andrew P. Power. Andrew P. Power: Thanks, Jordan. Thanks to everyone for joining our call. 2025 was a pivotal year for the data center industry and for Digital Realty Trust, Inc. Centers moved firmly into the global spotlight as AI adoption accelerated, cloud platforms continued to scale, and power became the industry's primary constraint. Against that backdrop, the Digital Realty Trust, Inc. team delivered exceptional execution. We closed the year with record financial performance, exceeding the full-year guidance we laid out last February and finishing ahead of the targets we set for ourselves across revenue, EBITDA, and core FFO per share. Just as importantly, the strategy we articulated over the last several years focused on a global full-spectrum connectivity-rich platform and operational excellence with disciplined capital allocation is clearly gaining momentum. Throughout 2025, demand remained robust across our full product range, and our leasing reflected that breadth. For the second consecutive year in our history, Digital Realty Trust, Inc. signed over a billion dollars of new leases with $1.2 billion of bookings in 2025, representing a pace that is nearly 70% above the average bookings achieved over the preceding five-year period. Our zero to one megawatt plus interconnection product set continued to outperform and take share, posting nearly $340 million of bookings, easily a full-year record and 35% above 2024 levels, as customers sought proximity, scale, and dense connectivity in the critical tier-one markets that we serve. This segment benefited from the continued expansion of PlatformDigital into 31 countries and 56 markets at year-end, as well as the evolution of our product set. Our high-density colocation offering enables customers to deploy more compute in the same footprint while maintaining efficiency and reliability. Service Fabric adoption also accelerated meaningfully during the year, now enabling access to over 300 cloud on-ramps and more than 700 interconnected data centers globally, further strengthening the network effects of PlatformDigital. These dynamics helped drive a robust inflow of new logos with nearly 600 added for the second consecutive year. Grayson and Megawatt bookings got off to a great start early in the year when we signed the largest lease in the company's history. Momentum continued through the fourth quarter with solid hyperscale activity across our footprint, particularly in The Americas. On a 100% share basis, hyperscale leasing exceeded $800 million in 2025, highlighting the underlying strength and durability of hyperscale demand. Also in 2025, we saw early but encouraging customer adoption of our private AI exchange platform, a growing set of AI-driven networking use cases that enable enterprises to connect the compute data and models privately and dynamically across clouds, campuses, and partners. By leveraging the scale of earning the connection portfolio, customers are beginning to move beyond static architectures to support low-latency, secure, and cost-efficient AI inference workflows that span multiple environments. With inference expected to scale in 2026, we see continued expansion of these private AI exchange use cases as a durable driver of interconnection demand. Building on this momentum, our data and AI strategy is centered on delivering AI-ready infrastructure in the tier-one metros where performance, adjacency, and sovereignty matter most. Our roadmap positions us to meet accelerating inference demand with preinstalled liquid cooling capacity, higher density deployments, and a unified platform that provides the coverage, capacity, connectivity, and control enterprises require for long-term AI execution. Finally, we continue to expand our footprint in the APAC region. Last March, we expanded into Indonesia through a joint venture that owns a robust connectivity hub in Jakarta. In January, we announced our continued Southeast Asian expansion with the acquisition of one of Malaysia's most highly connected data centers. Together, these investments further strengthen our presence in fast-growing APAC markets and extend the reach of PlatformDigital into regions where digital demand is accelerating. We continue to believe that not all data centers are created equal. Different types of data centers can be thought of as different tools for different jobs. Our portfolio is largely focused in locations that matter most to our customers and their stakeholders. Interconnection hubs in or near where clouds and data converge create network effects, making the platform more valuable for every participant. The value generated by these network effects, together with our ability to support hyperscale requirements and higher power density workloads, underscores the advantage of Digital Realty Trust, Inc.'s connected campus approach. The key to these network effects is interconnection. Digital Realty Trust, Inc. has continued to enhance the value that we provide to both physical and virtual products available at our data centers. Customers can use this connectivity to connect to others within the same data center via cross-connect or another data center across the globe via Service Fabric and everything in between. Customers can connect with their business partners in our data centers and expand their connectivity when they add sites or deepen their integration with cloud, data, and AI ecosystems. The importance of this connectivity grows as enterprise AI and use of inference accelerates. Inference drives where data and networks meet. Our position in major population and GDP centers, together with our robust and diverse connectivity, makes us particularly well-positioned to host and scale inference workloads as enterprises continue to operationalize AI. The introduction of ChatGPT a few years ago and the ensuing race between Gemini, Claude, Grock, and others marked the beginning of a new chapter in the digital age, one defined by the convergence of AI, cloud, data, and interconnection at a global scale. Cloud platforms continue to grow at remarkable rates even at their extraordinary scale, underscoring the depth and durability of this demand. Looking ahead, cloud and AI demand are expected to continue to compound, with AI-specific services growing even faster as generative and inference workloads become embedded directly in the business processes. We are positioned for the next phase of infrastructure enablement, where enterprise AI demands infrastructure that behaves like the cloud, reliable, secure, and always on. As cloud and AI demand scale, a combination of power availability and ability to execute have become the defining constraints across global digital infrastructure, shaping the timelines for how new data center capacity comes online. In most of our core markets, new supply will continue to arrive gradually as both generation and transmission upgrades continue. Hyperscalers are increasingly making leasing decisions based on who can secure and deliver power capacity on a predictable schedule. As a result, customers are prioritizing operators with verified visibility into the future supply of power and a track record of on-time or even accelerated delivery. Digital Realty Trust, Inc. continues to leverage its global footprint, twenty-plus year track record, and five-gigawatt power bank to position incremental capacity for development in some of the world's most power-constrained markets. Before I move on, let me highlight a few recent wins that show how customers across the globe are using the connectivity in our data centers to deploy critical workloads to create value for their enterprise. A technology services company and new logo is leveraging PlatformDigital in four US locations to create a distributed AI inference-ready ecosystem to support advanced artificial intelligence workloads for growing enterprise demand. A leading technology and communications company is expanding its footprint to two additional European markets on PlatformDigital to enable network-optimized platforms leveraging the interconnected digital infrastructure to reach customers faster and at scale. A global industrial technology and engineering company based in Germany, and a new logo for PlatformDigital, is enabling advanced data analytics and AI initiatives leveraging the high-performance digital ecosystems available in a Dallas data center. A leading European AI company and a new logo for Digital Realty Trust, Inc. is deploying an edge inference mode on PlatformDigital, leveraging the network and emerging AI ecosystem available on our Paris campus. And a leading multinational manufacturing company is expanding its footprint on PlatformDigital to enable advanced data and AI workloads leveraging high-density and interconnected digital infrastructure available on our Seoul campus. These wins demonstrate the continued momentum of our enterprise offering and the value of deploying critical workloads within our connected global communities. And with that, I'll now turn the call over to our CFO, Matthew R. Mercier. Matthew R. Mercier: Thank you, Andy. As Andy noted, 2025 was a transformative year for Digital Realty Trust, Inc. Over the last twelve months, we posted record financial results and saw a meaningful acceleration in top and bottom-line growth. In the fourth quarter, Digital Realty Trust, Inc. again posted strong double-digit growth in revenue and adjusted EBITDA, reflecting the momentum in our zero to one megawatt plus interconnection business, commencements from our substantial backlog, strong releasing spread, modest churn, and continued strong growth in fee income. We achieved these strong results while keeping our leverage below five turns and maintaining significant liquidity to invest in data center projects across our five-gigawatt runway of buildable IT capacity. Core FFO per share grew by 8% year over year while leasing posted a top-five quarter in DLR history, with the zero to one megawatt plus interconnection category setting a new quarterly leasing record. During the fourth quarter, we signed leases representing $400 million of annualized rent at a 100% share, or $175 million at Digital Realty Trust, Inc.'s share. Demand for data center capacity continues to be robust, both for larger capacity blocks to support growth in cloud and AI, and smaller, but also scaling colocation capacity which often supports enterprise digital transformation workloads. Data center supply remains tight, especially within our footprint. New leasing activity was particularly strong in The Americas, representing 65% of DLR share bookings in the quarter. Our zero to one megawatt plus interconnection product set continued its strong momentum, posting a new leasing record of $96 million, 7% higher than the previous record set in February '25. Over the course of 2025, we've averaged $85 million of quarterly leasing in this category, a reflection of our growing value proposition and the consistency of our team's efforts. Leasing was driven by regional records in North America and EMEA, led by strength in the smaller zero to 500-kilowatt deal tranche. Zero to one megawatt plus interconnection product continues to be a significant focus for Digital Realty Trust, Inc., and we are encouraged by the growing strength and momentum of our execution. Interconnection bookings approached last quarter's record at $18.9 million. Strength in the quarter was driven by record bookings in EMEA and momentum within our Service Fabric product. Interconnection bookings stepped up noticeably in 2025, resulting in a 22% increase year over year. We signed $78 million within the greater than a megawatt category at our share, with continued strength in The Americas. Pricing in this product segment remains strong, averaging over $180 per kilowatt in the quarter. Manassas, Virginia was the top contributor to the greater than a megawatt signings this quarter, while hyperscalers also signed leases in Tokyo, Osaka, and Paris. Availability across our 800 megawatts in-place portfolio in Northern Virginia remains very limited, with strong demand queuing for the 300 megawatts of capacity we are readying for delivery in the 2027 to 2029 time frame. Our total backlog reached a record at year-end of nearly $1.4 billion, reflecting the robust data center fundamentals we are experiencing and our ability to capitalize on this demand. Many remain understandably focused on the pro-rata share view of leasing that we have historically provided to enhance transparency and modeling, but we feel it is important to understand the complete picture. The total backlog is a better representation of the aggregate demand being captured across PlatformDigital, and in turn, an important driver of the overall economics enjoyed by DLR shareholders. While the evolution of our funding strategy has impacted some items on our income statement, bottom-line economics remain paramount. This evolution has enabled us to more than double our fee income in 2025 while expanding our operational reach to better serve our customers. At Digital Realty Trust, Inc.'s share, the backlog was $817 million at quarter-end, as $209 million of commencements exceeded the $175 million of new bookings in the quarter. Looking ahead into 2026, we have $634 million of leases scheduled to commence somewhat ratably throughout this year and then another $152 million of leases to commence in 2027 and beyond. Our backlog provides us with strong visibility and predictability. During the fourth quarter, we signed $269 million of renewal leases at a blended 6.1% increase on a cash basis. As usual, renewals were heavily weighted towards our shorter zero to one megawatt leases, with $175 million of colocation renewals at a 4.3% uplift. Greater than a megawatt renewals totaled $88 million at a robust 8.1% cash releasing spread, driven by deals in Northern Virginia, Chicago, and Dublin. For the full year 2025, cash releasing spreads were 6.7%, surpassing the high end of our guidance range. As for earnings, we reported core FFO of $1.86 per share for the fourth quarter, up 8% year over year, reflecting strong core growth and continued growth in fee income, offset by seasonally higher expenses. For the full year, we reported core FFO per share of $7.39, just above the high end of our guidance range and 10% higher than 2024. Same capital cash NOI growth continued to be strong in the fourth quarter, increasing by 8.6% year over year, driven by 8.2% growth in data center revenue. On a constant currency basis, same capital cash NOI rose 4.5% in the quarter. For the year, same capital cash NOI also grew by 4.5%, consistent with our most recent guidance increase. Before going any further, I want to inform you of some upcoming disclosure enhancements that we expect to make beginning next quarter to better align our reporting with how we manage the business. While we have long provided both power and square footage metrics in our disclosures, we will be transitioning the focus toward power-based metrics. Key elements of our reporting, including leasing and development activity, are already based on power, and we will now bring occupancy in line by highlighting it on an IT load basis. Based on square feet, same capital and total portfolio occupancy ended the year at 83.7% and 84.7% respectively. However, on an IT load basis, same capital and total portfolio occupancy was approximately 91% and 89%. Both improving over 50 basis points year over year. We believe that this update will better reflect the dynamics of our current business while providing a clear and more consistent view of the utilization across our platform. We also expect to make some modest updates to our quarterly supplemental, pruning unnecessary data points. The objective is to retain our industry-leading transparency, better align reporting with how the business is managed, and improve the overall digestibility of the supplement. Moving on to our investment activity, we spent $930 million on development CapEx in the quarter, net of our partner share, bringing full-year spend to $3 billion. Recurring CapEx increased to $169 million in the seasonally high fourth quarter. During the quarter, we delivered about 90 megawatts of new capacity, 75% of which was pre-leased, while we started about 135 megawatts of new data center projects, increasing our total development to 769 megawatts under construction. At quarter-end, our gross data center development pipeline underway stood at just over $10 billion at an 11.9% expected stabilized yield. For the full year, we delivered approximately 289 megawatts of new capacity, reflecting strong execution across our development pipeline in support of customer demand even as labor and supply chains got tighter. During the fourth quarter, we sold a non-core facility in Dallas for $33 million and acquired land near Portland, Tel Aviv, and Lisbon for future development. Turning to the balance sheet, we were active again in the capital markets during the fourth quarter, raising EUR1.4 billion in a dual-tranche green Eurobond offering. The first tranche was for €600 million at 3.755% due 2033, and the second tranche was for €800 million at 4.25% due 2037. We used a portion of the net proceeds to redeem $1.075 billion of Eurobonds carrying a 2.5% coupon that was scheduled to mature in January. The 160 basis point spread between the new and redeemed issues will cause a modest interest expense headwind starting in 2026. Our only remaining debt maturity for 2026 is a modest 275 million Swiss franc note that matures late this year. Looking further out, our maturities remain well-laddered through 2037. Leverage remained at 4.9 times, well below our long-term target of five and a half times, while balance sheet liquidity remained robust at nearly $7 billion. In addition, we maintain approximately $15 billion of dry powder to support hyperscale data center development and investment through our private capital initiatives. As a quick update surrounding the fund, by year-end, we had closed $3.225 billion of LP equity into our inaugural closed-end fund, and we anticipate the final $25 million closing prior to our next call. In late December, we contributed another 40% stake in the five stabilized seed assets into the fund, increasing the fund stake to 80% and resulting in an additional $427 million of net proceeds to Digital Realty Trust, Inc. We are excited to move on to the next stage of our private capital strategy as we work to further support the perpetual capitalization of hyperscale data centers alongside Digital Realty Trust, Inc.'s public shareholders. Our balance sheet is positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy. Let me conclude with our guidance. We are establishing a core FFO guidance range for the full year 2026 of $7.90 to $8 per share. The midpoint represents 8% year-over-year growth, reflecting underlying strength in our business balanced by continued ramp in new investment spending that is geared toward extending our runway for growth. On a normalized and constant currency basis, we anticipate total revenue and adjusted EBITDA growth of more than 10% in 2026. Same capital cash NOI growth is expected to grow 4% to 5% on a constant currency basis. We also expect cash renewal spreads of between 6% to 8%, with upside partly mitigated by the high mix of zero to one megawatt leases expiring together with a portion of fixed-rate renewals in our greater than a megawatt portfolio. Power-based occupancy should improve by another 50 to 100 basis points from the approximate 89% at year-end 2025. CapEx net of partner contributions are expected to rise to between $3.25 billion and $3.75 billion, with development yields expected to remain in the double digits. And we will also continue to recycle capital with $500 million to a billion dollars of dispositions and JV capital expected this year. This concludes our prepared remarks, and now we will be pleased to take your questions. Operator, would you please begin the Q&A session? Operator: Certainly. We will now open the call for questions. In the interest of time and to allow a larger number of people to ask questions, callers will be limited to one question. And our first question for today comes from the line of Eric Luebchow from Wells Fargo. Your question, please. Eric Luebchow: Hi, great. Appreciate you taking the question. Andy, I think you mentioned early in the call that, you know, you're starting to see a pickup in activity, especially in The Americas with some of the hyperscalers. So maybe you could just kind of give us the landscape of what the bookings conversations look like earlier in the year. Are you starting to see the hyperscalers look a little bit further out for power than they perhaps did in 2025? Maybe just give us a rundown of some of the key campuses where you're starting to see that large footprint demand. Thank you. Andrew P. Power: Sure. Thanks, Eric. So we're really happy about how we ended this year, which was a great year overall. Back-to-back north of a billion dollars of total signings. Third highest total signings fourth quarter, $400 million. And hyperscaler was a big contribution to that. The same suspects are keeping recurring here. So Northern Virginia, incredibly sought-after capacity. Beyond that, you have the likes of Charlotte, Atlanta, Dallas, as called the top of the list here in The Americas. Although particularly, towards the US, I can tell you that we're seeing more globalization of the demand, and you could see that in the contributions from Europe having a bigger contribution greater than megawatt category. As the year went on and as we continue moving to 2026, what is quite attractive is the diversity of demand. As it relates to our numbers, I think now we're seven straight consecutive quarters where our largest signing is from a different hyperscaler. Different customer. Excuse me. And when we're looking at customers looking at those larger capacity blocks in those markets I just referenced, I can tell you it's you're seeing more customers coming called for the same capacity blocks. There's the consistent looking at the front end, the nearest deliveries the most popular. But they are looking out a little further on the horizon than they had certainly, six months or even twelve months prior. Operator: Thank you. And our next question comes from the line of Michael Rollins from Citi. Your question, please. Michael Rollins: Thanks, and good afternoon. Andy, you mentioned earlier the expectation for inference to scale in 2026. I'm curious if you could put some further context around what you're seeing and what that's going to look like both for the industry and for Digital Realty Trust, Inc.? Andrew P. Power: Sure. Thanks, Michael. So I think we're seeing that play out on both our hyperscale and our enterprise business. Certainly, on the hyperscalers, the desire for the capacity blocks in the cloud zonal markets that I've just referenced is certainly becoming more and more of a priority. I can tell you the dialogue on the designs with our customers, the latest evolutions of cloud, is a mix-up of cloud and AI. Inside the same exact building. So they're looking at cooling that's a mixture of air and liquid. And using blending both use cases together in the same locations, which certainly leads towards inference. I believe we're still a good ways away from what inference really called proliferates in a corporate enterprise context that have the same service level agreements and uptime requirements that cloud exists today. But as AI rolls into much more, call it, time-sensitive and critical applications, be it robotic health and safety, research and science, I don't see why the use of AI is not gonna be just as critical as cloud data. In our enterprise business, we had a fantastic year. Capped we had multiple records record fourth quarter that was up over the prior record two quarters before that. We were, call it, 35% higher in the enterprise category year over year. Great mix of new logos and existing customers. And now two quarters doesn't make a trend, but I would say the contribution within that zero to one megawatt interconnection category was again called just over 18%, nearly 19%. So you're seeing more enterprises coming to Digital Realty Trust, Inc. and think about AI use cases. But I think this is gonna be a long tail demand to evolve. Operator: Thank you. And our next question comes from the line of Timothy Horan from Oppenheimer. Your question, please. Timothy Horan: Thanks, guys. The hyperscale is giving pretty incredible guidance for CapEx next year. It looks like the outlook is not going to change much. Are you seeing any what does that kind of mean for the business model? Are you seeing any bottlenecks that are really kinda impeding your growth at all or any changes to bottlenecks? And what do you kinda think that means for your pricing power the next few years? Andrew P. Power: Thanks, Tim. So maybe I'll let Colin expand on the hyperscale or demand, and then I'll talk to the come back on the bottlenecks. But, I mean, what's called happening here is less of the waves of one customer ramping and another customer, called on the sidelines, and there's more consistency and diversity of the all seeking capacity. And you're seeing that in the commitments to accelerating their build-outs for this infrastructure, from their earnings calls, and we're seeing it in terms of their interest growing for our large capacity blocks. But I'll let Colin touch on that, and I can circle back to some of the bottlenecks we're seeing in the business. Colin McLean: Thanks, Andy. Tim, regarding the interest from our hyperscale partners, you saw a strong contribution in Q4 in terms of performance. Our largest booking being nearly 100 megawatts. And I can tell you wherever we have large capacity blocks, whether it's Northern Virginia or Paris or Osaka or Tokyo or Atlanta, or Charlotte, there's keen interest from our hyperscale partners to deploy in that infrastructure. So, really, over 2026 through 2028, you know, we're seeing continued conversations where we have that continuous blocks of capacity for our hyperscale partners. And, again, as Andy's talked about multiple times, this is not just AI. This is also zonal cloud deployments that continue to be resilient as it relates to the demand profile that we're seeing. And just on the bottlenecks and the cost equation, Tim, there's no question this race for scaling critical digital cloud computing, support AI, comes with a cost. And it's a cost labor. It's the cost it's the cost of in our build costs. And listen. We pick our spots to where we think we can have the greatest value to our customers. Those hyperscalers in particular. And that's based on our track record, our supply chain, our runway for growth. And that's been able to garner significant interest and attractive rates and ultimately return. Operator: Thank you. And our next question comes from the line of Richard Choe from JPMorgan. Your question, please. Richard Choe: Hi. I just wanted to ask about the recurring CapEx and capitalized leasing costs that kind of had a big move up for this year from three last year to over 400. What's going on there? Matthew R. Mercier: Yeah. Thanks, Richard. I think you're referring to to be clear, I think you're referring to '25 and then versus '26 guide. So we came in for '25. We came in a little bit light in terms of where we were in guidance towards the low end. So, you know, despite our typical Q4 pickup. And so some of that increase in for '26 is a carryover of some of the projects that didn't complete in '25. And the rest is basically us looking to continue to build out our space and improve our portfolio for what has been a strong enterprise leasing as we talked about for as part of the call in terms of putting up records in our zero to one. And I would say it's all, within I think, around 7% of our revenue, which is, I think, pretty well in line with where the industry is on that metric. Operator: Thank you. And our next question comes from the line of Irvin Liu from Evercore ISI. Irvin Liu: Congrats on the nice set of numbers and your outlook. Just in the context of your greater than one five gigawatts of developable capacity, any sense on the timing of when we should see this capacity become available for lease? If I'm comparing your development life cycle on page 25 of your supplementals, versus a quarter ago, I think the implied availability seems to be kind of consistent on a quarter-over-quarter basis. So should we be expecting a step function increase in sellable inventory as we progress through the year? Thank you. Andrew P. Power: Thank you, Irvin, for the kind words. So that schedule is consistent like a conveyor belt of activity. So we are delivering great projects often ahead of schedule for our customers. I think that's another defining reason our customers are picking us in this environment where it is not easy to bring on infrastructure. And then at the same time, we are green-lighting suites into now a record 10 plus billion of projects underway at attractive double-digit returns. We're activating shells and we're adding all the way to the left of that schedule with incremental land capacity. And so we are continuing to call replenish as fast as we deliver, if not faster. And something in one column can very expeditiously move to the right column I. E. Activating the new shell on land that is pad ready, or going live with suites and shells that either are completed or underway. And obviously leasing and delivery at and so on. So I would not interpret anything on that schedule other than we'll continue to accelerate our runway for growth for, yes, both our enterprise customers that are small amount of those megawatts, but certainly our hyperscale customers, that are seeing those large capacity blocks in numerous markets around the world, as very attractive. Operator: Thank you. And our next question comes from the line of Aryeh Klein from BMO Capital Markets. Your question, please. Aryeh Klein: Thank you. Following up on zero to one, how much of the strength in that business do you think is from share gain versus underlying demand strength? And then curious, you expanded the lens a little bit to zero to two, zero to three. Does it look any different? Or maybe how are deal sizes evolving and do you think that increases with enterprise AI, adoption or inference? Andrew P. Power: Thanks, Ari. I'm gonna have Colin Todd unpack that answer for you. Colin McLean: Ari. I appreciate the question. So just a quick reminder, record quarter in Q4, that's three of the last five record quarters in zero to one. Strong contributions on the channel side, which is really driving that business forward. Strong contributions from new logos, which was really a big piece of the pie. So as it relates to your question on the demand cycle as well as taking market share, we are unquestionably taking market share with our focus around execution. We started the year saying this is a big part of our go-to-market, and we were successful in that. Undoubtedly, the ability for us to deliver high contiguous capacity in a mixed density environment. We're seeing more and more enterprises have larger pieces of their pie and high-density oriented solutions as absolutely a core part of our value proposition. They also have commented consistently on the ability to support the full spectrum of capabilities, so cabinet, suite, hall, building is of significant across a global scale. Because that's where they have to serve their needs is really effective, supported by a strong interconnection story. Which we can be second highest quarter on record. So that's coming together, producing results and consistency that can be seen now quarter over quarter. And then, Ari, your two other pieces of your question. I mean, we're always dissecting the bands here of business. And, obviously, the trend has been to larger capacity blocks. You certainly see that up in the hyperscale level, but, also, it's playing out in a smaller level in enterprise. More power density, all these things, I think, are incremental wind to our sales to take more market share which has been playing out for some time over the last several quarters. If you look at just, like, the last eight quarters, at, let's call it, a megawatt to three megawatts, you probably average, like, up to $10 million of gap that could fall in that category, but it's ranged. It's been as low as, like, just under $2 million, and it's been as high as, call, $15 or $16 million. So there's always scenarios where an enterprise customer wants north of a megawatt to land with Digital Realty Trust, Inc. and there's definitely been a gradual densification, and it's been increasing the size of the deal bands. Operator: Thank you. And our next question comes from the line of Frank Louthan from Raymond James. Your question, please. Frank Louthan: Great. So if we look out past '26, there's a amount of capacity coming on in the industry in '27 and '28. I just wanted to see what your thoughts are on how that might affect your bookings and demand. And then how far out have you secured the labor for your capital growth that you have under contract now? Thanks. Andrew P. Power: So Frank, we so go in reverse order. Anything that we're essentially building we've called got some type of security around workforce supply chain etcetera. So that is certainly the entirety of that 10 plus billion under construction projects. As well as shells, that may not be part of that live data hall delivery piece of the equation. And it's the labor I will confess. It's getting challenging more challenging by the day. I think we're a great partner to work with given our consistency. We just didn't show up yesterday to build a data center. We've been doing this for years. We try to bundle our work for our customers. We try to give it make it consistent so they go from one building on our campus to the next. And so I think that makes us a very attractive partner for the vending landscape. When we look at 27, and 28, we're not seeing a tremendous amount of competitive unleashed capacity. We are seeing that those 27s are pretty exceptional and sought after for our customers with multiple customers seeking those capacity blocks. And I think 28 is gonna be at that same level of attractiveness. The thing to remember here, Frank, is we're probably one of the few in the industry actually called taking a little bit more risk in the development of this and getting pad ready, long land, green-lighting shells, even green-lighting suites before we have a customer in hand. Most of all the other private capital folks are waiting for that lease to get signed. Right? Because that lease secures the financing and the lion's share of their of the dollars of their project. Right? That is accrued to our benefit because customers have come and said, I need this desperately. Can you help me? And we're able to deliver that because we didn't wait for them to say, here's the ink on my lease. Way, way back in time when you would have had started. So I think we're still looking at an outlook here that is attractive demand, rational and ration supply, and great places where we could help our customers. Operator: Thank you. And our next question comes from the line of Nick Del Deo from MoffettNathanson. Your question, please. Nick Del Deo: Sure. Hey. Thanks for taking my question. You know, there have been a couple of high-profile data center transactions recently. Know, very attractive valuations, to the extent that we can tell based on info that's leaked out. And debt securitizations from private players imply really rich valuations too. Do you think there's a meaningful disconnect between public and private data center evaluations? And if you do, like, are there steps that you can take to narrow or capitalize any gap? You know, like, lean on your private capital initiatives harder? Andrew P. Power: Thanks. Just why I let Greg give his view on that answer? I've got my out of my own view, we'll see if it's the same. Gregory Wright: Sure. Thanks for the question, Nick. Look. I think there's a couple things you have to look at and one is the mix of the asset base because where this pricing really becomes distorted, it's the on the asset that's being purchased, how much of it for example, land versus cash generating asset? And that obviously is gonna skew the multiple. So that's not necessarily a disconnect between public and private market pricing. It can just be the, you know, the mix of assets, if you will. But we would agree. We think our valuations continue to be strong, but look, I think what's driving that, when you look at the underlying dynamics of the business right now, you're looking at a demand profile that's expected to increase two and a half to three times over the next five years, and you're looking at a supply environment. And this is across the globe, whether it's power, whether it's nimbyism, whether it's zoning, whatever it may be, it's severely constrained. So those things are gonna drive, you know, value for existing product in the market. So, you know, look. I'm it's hard to say that there's a big disconnect because you haven't you haven't had, for example, you know, one stabilized asset versus another stabilized asset, we'd go back and make those adjustments for risk premiums and the like. So, you know, look, I think, think it depends on the mix of the assets. Some are obviously are more expensive than others depending on where it is geographically. But most of the differential in multiple has to do with asset mix. And just to add on to that, Nick, what are we doing about it? Well, that goes back to called evolving our financing strategy or funding strategy. Right? So the, successfully oversubscribed initial fund on the back of other private capital partnerships totaling 15 plus billion of data center investments at our ready in addition to our strong liquidity and balance sheet, essentially lets us call pull in both private and public capital levers to fund the growth of our customers and our balance sheet for specifically hyperscale. And I think you look in totality, we now have record backlog $1.4 billion of backlog for our customers. We are executing well above expectations in our zero to one. We just had a record year and have the momentum carrying in. And all those things are now flowing to the bottom line. They flow to the bottom line throughout quarter by quarter in 2025. And set us up for a strong 2026, and we wanna keep that acceleration going. Operator: Thank you. And our next question comes from the line of Jonathan Petersen from Jefferies. Your question, please. Jonathan Petersen: Okay. Thank you. Hoping you could talk a little more about the investments in Malaysia, Israel, and Portugal. Those look like smaller, more interconnection-focused facilities. But I know maybe in some of those markets, there's also some larger hyperscaler projects that are going on. So maybe just talk about the decision-making when you enter a new market on going with more, like, interconnection-focused colo versus building larger hyperscale data centers? Gregory Wright: Yeah. Thanks, Jonathan. This is Greg. Look. I think look, you're highlighting the point that acquisitions remain a key component of our growth strategy across the globe. And two, you've highlighted here, like, we're continuing to execute on strategic APAC acquisitions, for example, in Malaysia. Well, as you know, we play across the product spectrum and getting these we've always said getting network highly connected assets in key markets is a key component of our strategy. So if you take a look at the recent Malaysia transaction, right, that's a key emerging market strategically located in Southeast Asia. Know, Cyberjaya is about 25 kilometers south of Kuala Lumpur. You know, it's a traditional data center hub. You know? And the asset we acquired is the most well-connected asset in the market. And not only do we buy the initial asset, we bought expansion land immediately next door that'll give us 10 times expansion capacity for the existing assets. So that's Malaysia. Not materially different than what we did in Indonesia. I mean, the team's been busy in APAC here over the last year when we went into Jakarta. Slightly different, but we went in and we partnered with a group that had, you know, one of the most highly connected assets in the market, with significant expansion potential. So when we look at that, you know, that as you know, buying those kinds of assets has always been a key component of our strategy. And, again, as you go over, you know, until May, same thing. Right? Portugal. It's a highly connected asset. Know, terminations from subsea cable landing stations and the like. You know, with the ability to grow. Israel, same thing. Most highly connected asset in the area of Pitiktivah, which is, you know, the most highly connected area of Israel. So, again, there's a similar theme there, and that stream plays into you know, how we play across the product spectrum and go for those kinds of assets. Now, you know, finally, the last market, and even in The US, if you look at it over the last year, right, we've had strategic, colo slash enterprise acquisitions in downtown you know, in Charlotte, in LA, and the like. Now that's all on you know, obviously, that all touched on you know, colo and network-dense highly connected assets. That doesn't exclude hyperscale. Right? If you look in The US as well, you know, over the last year, we acquired multiple land parcels in The US you know, in tier-one markets that's supporting our hyperscale business in areas as Andy and Colin mentioned earlier, Atlanta, Charlotte, Dallas, Portland, and Chicago. So I would say, you know, our strategy is consistent with playing across the globe and across the product spectrum. Operator: And our next question comes from the line of John Hodulik from UBS. Your question, please. John Hodulik: Hey, great. Maybe two quick ones. First, a follow-up to the last comments. Just given how strong demand is for AI compute infrastructure, including, we just heard tonight, $380 billion just between Amazon and Google alone this year. Any updated thoughts on potentially building out some large footprint sites and say, more remote power-capable markets? That's number one. And then seem to be a growing list of efforts to reduce the impact of the data center industry on consumer electric rates? Either requiring behind-the-meter solutions or deprioritization? Does this change your guys' view on reliance on the grid for power in future developments? Thanks. Andrew P. Power: Thanks, John. So I think some of the names that Greg just ran out at the end of his called world tour of where we're making strategic acquisitions both to support our interconnection enterprise customer and our hyperscalers. The theme of called cloud zonal markets that are numerous cloud customers numerous sources of demand is consistent. That's a Charlotte up and coming. That's Atlanta. That's a Dallas, Chicago. Hillsboro, most of which we already had either the leading interconnection or enterprise footprint and supported some form of hyperscale and now growing. They're all getting bigger. So whether it's 200 megawatt, land sites, 100 megawatt land sites, and they're gonna continue to get bigger. And that's where I think we have a major role to help our customers where it's tougher, where the stakes are raised for what the utilities are requiring, where the size of the dollars are just getting much bigger and beyond what many can fund. That ties into your second comment here, We as an industry are facing a tremendous amount of nimbyism or pushback on data centers. And I think it's unfair, and I think it's not the right it's not reality when it pertains to Digital Realty Trust, Inc. in particular. We've been long-term major contributors to the communities that we live, build, and operate in. Our investments in the grid are stabilizing the grid. We often do demand response for those customers. In those utilities, which those hot summer days or those cold winter nights benefit those also on those same grids. We've not given up on the grid utility source and we are thinking anything we're thinking about quote, behind the meter, is some form of bridging of some form of duration and could be various sizes. To help the grid as it brings the reinforcement for transmission, for distribution, I think, in times like this, we're doing our best to clear up the misconception make sure our story is told, our impact, whether it is the jobs I think it's six to one jobs come from a data center that benefit the local communities, whether it is a limited use or impact on water. I think Digital Realty Trust, Inc.'s 300 plus data centers use less than 18 California golf courses worth of water. I think there's close to 16,000 golf courses in just The US. So we need to fix with the misconception. It's when it's times like it's hard like this, this is where our customers value what we do. Right? Our value add shines and we'll continue to deliver. Operator: Thank you. And our next question comes from the line of Michael Elias from TD Cowen. Your question, please. Michael Elias: Great. Thanks for taking the question. A lot of focus on hyper demand, but I'd take it a different way and ask about enterprise. Andy, you were talking about the bands elongate or widening in terms of enterprise. You know, one of the themes that, you know, came up, more recently in the industry was enterprise AI demand, more specifically, call it the five to 15 megawatt capacity blocks. Just curious, what are you seeing there? Are you seeing a pickup in that kind of activity? And maybe as part of that, do you think that that is a leading indicator potentially in some more inference specific demand? Andrew P. Power: Thanks, Michael. Let me touch on for a second. I wanna call into really dig in on that. Was that I think that and I was just talking to a CTO of a major financial institution a couple days ago. I think that lends it to our sweet spot here. We are about building an attractive community of interest or ecosystem for 5,000 plus customers, and rapidly growing. That certainly includes the hyperscales of thirty forty fifty sixty locations. But it also includes enterprises in all sizes, shapes, and forms around the globe. We are unlike a lot of the private competition that would rather build one data center and lease the whole thing to one customer, because the financing's easier, etcetera. We wanna curate our buildings in our campuses with multiple customers that can grow. We think that's the best way to deliver for all the customers, as well as drive long-term value. But I'll turn it to Colin to talk a little bit about some of that enterprise engagement. Colin McLean: Yeah. Thanks, Michael. Appreciate the question. So just, again, highlighting record performance in Q4 and continued strong pipeline. So we have as strong a pipeline in zero to one. As we've seen and that's made up of larger contiguous blocks unquestionably. So our enterprise clients are seeing more and more value in contiguous blocks above 500 kW. And there's emerging conversations to your point around that kind of five megawatt block as inference starts to emerge. So we feel like that we're well set up for that, again, coming from our heritage and the ability to support mixed densities across the globe. 300 plus data centers. So those conversations are very active. I would say the ability to deliver that connectivity scale as well. We've announced our private AI connectivity story, which is really helping the narrative. I think with the enterprise client who really value our expertise and how we can deliver that consistently across the globe. I will add, though, just in terms of contributions, within zero to one, we saw a really strong continued push under 500 kW in Q4, which again speaks to resiliency of ability to scale up and down the platform, whether it's large footprint contiguous or smaller, more network-oriented deployments across our portfolio. Operator: Thank you. And our final question for today comes from the line of Michael Funk from Bank of America. Your question, please. Michael Funk: Yes, great. I just have one question, Andy. So, you know, based on the strong releasing spreads that you've reported in your forecasting for 2026, what is your capacity and interest to go shorter duration on contract and or maybe shift to higher, you know, higher rates each year for the escalators? Love to hear your thoughts on that. Andrew P. Power: Thanks, Michael. Maybe I'll let Matt pick that up here. I can just at a high level, I can tell you we've been pushing on the escalators, and we're living in an inflationary environment. We're working through that. Right? And I'm not talking on a national state. I'm talking about data centers are racing to deliver infrastructure and that is inflationary to our cost base and our operating model. But this is critical what we're doing. And we've essentially I know if we have that stat off top of our hands, but pushing the escalators of, call it, minimum 3%, as high as 4% or just above that, CPI linked. So that's certainly something that we've been trying to push through to our base upon renewals on new deals. Given the broader environment. Matt, anything else you wanna add there? Matthew R. Mercier: I mean I mean, I think Andy covered, but I mean, just to maybe round out you know, and I know your commentary is, I think, more directed towards or greater than a megawatt, But, you know, our zero to one megawatt, you know, is typically we're closer to market. Those are shorter-term contracts. Typically rolling at rolling up ad inflation or CPI. So we generally have you know, an opportunity to do that on a more recurring basis. And then for our larger contracts, you know, those don't come up that frequently in terms of the amount of volume the churn given that they're already long-term leases. Some of those also have embedded renewal options, but I think, you know, we're looking at ways to continue to make sure that we're getting the right price for the value that we're delivering to our customers you know, each and every year as we look in not only new deals, but our renewals. Operator: Thank you. And our next question comes from the line of Vikram Malhotra from Mizuho. Your question, please. Vikram Malhotra: Thanks for squeezing me in. I just wanted to clarify two things. I guess you've like, record pipelines in the zero to one megawatt. Maybe you can just expand upon that for the larger segment. And if you can just marry that with, like, what's available capacity that you have to leave in bringing on over the next two years and some of your major markets by megawatt, that would be helpful. Thanks. Andrew P. Power: Thanks, Vikram. I mean, I think the commentary is called record pipeline, was called both across both segments and obviously then into TAP. Totality here. And this is coming off the back of, like, a really strong year. When it comes to zero to one, up 35 Space and we lost there for a second. Up 35% on a year-over-year basis, and back-to-back billion plus years of new signings. I think the major markets I ran through hundreds of megawatts in Northern Virginia that are prized possessions for our customers, Charlotte, Atlanta, And let's not forget, again, this demand is globalizing with the hyperscalers. I think you're gonna see a continuation of demand growing into Europe, South America, and Asia has been a great contributor as well. So we're really delighted to be able to help these customers support their long-term growth here. Operator: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to President and CEO, Andrew P. Power, for any further remarks. Andrew P. Power: Thank you, Jonathan. The fourth quarter capped a very strong year for Digital Realty Trust, Inc. Delivered record financial performance for our investors while with the reliability that our customers expect. We posted another year with over a billion dollars of total leasing including record performance in our zero to one megawatt plus interconnection business, an 800 plus million backlog that provides tremendous visibility throughout this year and into next. We continue to expand our footprint and evolved our funding strategy, with the successful raise of our inaugural hyperscale data center fund. Operationally, we remain in a very strong position to serve our growing roster of nearly 6,000 customers with a three gigawatts of in-place data center capacity and another five gigawatts of development capacity in our core markets around the world. Digital Realty Trust, Inc. has never been better positioned, and I owe that to my fellow Digital Realty Trust, Inc. teammates who have worked hard to deliver these results. And have already started 2026 off on the right foot. Thank you all. And thanks all of you who've joined us today for the call. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Claus Jensen: Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for 2025. My name is Claus Jensen, and I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Cecile Hillary. We aim to keep this presentation to around 20 minutes. And after the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten. Slide 1, please. Carsten Egeriis: Thanks, Claus, and I would also like to welcome you to our conference call, where I'm pleased to share the highlights of Danske Bank's financial results for 2025. Although the geopolitical situation overall continues to be challenging, the macroeconomic backdrop for our customers and thus our business in the Nordics continued to be stable and slightly improving during the year. This is clearly reflected in our financial results as 2025 has been a year of solid performance for Danske Bank. Measured in terms of profit before impairment charges, 2025 represented the best result ever. Net profit for the year came in at DKK 23 billion, equivalent to a robust return on equity of 13.3%. The result was based on improved income due to higher customer activity and furthermore evidenced by positive volume development. I'm pleased to see that despite the sale of our personal customer business in Norway and several rate cuts during the year, we were able to maintain net interest income at the same level as in 2024. The slightly lower net profit in 2025 was solely due to a more normalized but still a low level of loan impairment charges compared to net reversals in 2024. When comparing to the preceding quarter, core income came in better as a result of higher NII from an increase in lending and deposits and significantly higher fee income based on growth across all fee categories and in particular, from record high performance fees within Asset Management. Operating expenses came in line with expectations and credit quality remains strong. And as a result, net profit for Q4 amounted to DKK 6.3 billion, up 14% from the preceding quarter. And Cecile will comment on the details of the financial results later in this call. Let me talk about our strategy execution. It remained on track. And as we continue to see robust commercial momentum and invest in our business also as laid out in our strategy plan. During 2025, the scaling of our digital and our GenAI technological capabilities across the bank has been in focus, and we are now starting to see tangible results in our workflows, leading to improved productivity. And I'm really looking forward to presenting a more comprehensive update with our strategy update in connection with the presentation of our Q1 results on the 30th of April. And then I would like to comment on our capital distribution. Based on our strong earnings and our solid capital position, I'm pleased to announce the distribution of the full net profit for 2025. Ordinary dividend will account for 60% in accordance with our dividend policy. In addition, we propose an extraordinary dividend of 20%, taking total dividend per share to DKK 22.7 and a new share buyback program of DKK 4.5 billion in total, a payout ratio for 2025 of 100%. And then finally, on the financial outlook for 2026, which Cecile will elaborate on later, we expect a net profit of between DKK 22 billion to DKK 24 billion, driven by growing core banking income from continued efforts to drive commercial momentum. And then let me continue with the performance on the business units, and that's Slide 2, please. At personal customers, the financial performance has been solid with total income up 2% relative to the same quarter in 2024 and up 3% quarter-on-quarter. The performance was based on good customer activity that led to higher lending and deposit volumes, up 1% and 5%, respectively, relative to the level in 2024. The uplift in activity and volumes came from all our Nordic businesses, driven in particular by private banking and also home loans in Denmark and Sweden. In the Private Banking segment, 2025 was a year of strong momentum based on the continued execution of our strategic priorities. The investment business was supported by strong net sales, which helped lift assets under management to record high levels with Danske Invest retail funds reclaiming the market leader position in Denmark. In the housing market, activity improved in 2025. In Sweden, lending increased 1% in local currency with improving momentum towards the end of the year. The better traction in Sweden came from higher customer activity supported by a strengthened customer offering. In Denmark, housing market activity also improved in 2025, especially in the larger cities. Total lending was stable year-on-year, but our bank home loan product, Danske Bolig Fri grew another 12% compared to the preceding quarter and 44% year-on-year. The product now accounts for more than DKK 70 billion in lending, and the positive development is a testament to our flexible loan offering and ability to cater to the changing customer preferences. Furthermore, total income in Q4 was supported by a 14% increase in fee income, driven primarily by high refinancing activity for adjustable rate mortgages and by investment fee income. Costs came in higher in Q4 due to expected higher seasonal expenses, which explains the higher cost/income ratio. And then Slide 3, please. At business customers, 2025 was a year of solid financial performance based on strong customer activity that continued throughout the year. Total income was up 8% compared to the same quarter in 2024 and 5% quarter-on-quarter. And this was driven primarily by a positive development in net interest income based on a strong uplift in volume and activity-driven fee income. Lending as well as deposit volumes were up 5% based on growth in all countries. The increase in business momentum reflects the continued execution of our growth agenda as we welcomed new corporate customers. And as a result, we gained market share across all four Nordic countries. Return on allocated capital as well as cost/income ratio were in line with our targets. The increase in ROAC was supported by reversals of loan impairment charges on the back of continued strong credit quality. Business customers continues to be a key strategic focus for us. And in 2026, we will continue to strengthen our advisory capabilities, for instance, by investing in analytics to generate leads for advisers and improving the One Corporate Bank digital platform. And then Slide 4, please. Turning to our large corporate and institutions business. We are pleased that our continued focus on advisory solutions for our customers and our sustained efforts over the years to improve our business offering have shown positive results in 2025. Thanks to strong execution and customer focus, 2025 was a record year for LC&I. Firstly, we continue to see strong volume growth with corporate lending up 14% from the level in the fourth quarter of 2024, which supported a 15% increase in NII. Deposits, which by nature are more volatile, have seen a healthy overall trajectory, but also sizable fluctuations related to large corporate transactions. Secondly, in line with our strategy of growing our Nordic footprint, we are expanding our One Corporate Bank concept in the Nordic region. In 2025, we continue to win new house bank mandates within daily corporate banking. And in addition, 2025 has been an exceptionally strong year for our investment solutions. Assets under management grew 16% relative to last year and reached all-time high. Besides higher asset prices, we have successfully been able to grow net inflow and add new customer mandates within the institutional as well as the private banking segment. The impressive investment performance in asset management enables us to recognize performance fees of DKK 0.9 billion, up 27% from last year, which was already a year of strong performance. And then with respect to profitability and cost efficiency, the strong performance in 2025 has enabled LC&I to deliver significantly better compared to our targets. And then with that, let me hand over to Cecile for a walk-through for our financial results for the group, and that is Slide 5, please. Cecile Hillary: Thank you, Carsten. 2025 was a year of solid financial performance. Net profit for the group came in at DKK 23 billion compared to DKK 23.6 billion the year before. Total income improved mainly due to a 3% increase in fee income, reflecting increased customer activity and strong performance in asset management. NII was unchanged as the positive effects from increased volumes and a positive contribution from our structural hedge were able to mitigate lower rates. Operating expenses were in line with the level in 2024. Loan impairment charges came in at a more normalized but still low level, whereas we had net reversals in 2024. The results for Q4 came in at DKK 6.3 billion, up 14% from the level in the third quarter, mainly due to higher core income. NII benefited from positive volume effects. When excluding the tax-related contribution, NII was up 2%. Fee income was up 39% quarter-on-quarter as all fee income categories contributed positively with performance fees in asset management as the single most important source of fee income in the quarter. Trading income saw a decline in Q4, mainly due to seasonally lower customer activity in fixed income markets. Income from insurance activities was impacted by a model recalibration for the health and accident business that led to a net negative effect of DKK 200 million. The impact follows the annual update of model parameters as well as adjustments following an inspection by the Danish FSA. When looking at the net financial results in isolation, we saw a positive development from a better investment results. We continue to focus on repricing, preventive care and reactivation initiatives in the health and accident business to improve the financial outcome of insurance contracts and respond to current market trends related to long-term illnesses. Operating expenses came in higher in Q4 due to year-end seasonality related to performance compensation and severance costs. And finally, as credit quality continues to be strong, loan impairment charges were kept at a very low level. Slide 6, please. Let us take a closer look at the key income lines, starting with net interest income. NII for the full year remained stable as the headwind from deposit margins due to lower Central Bank rates was mitigated by an increase in lending and deposit volumes as well as improved lending margins and a positive contribution from the structural hedge, which grew to circa DKK 180 billion at the end of Q4. Relative to the preceding quarter, NII increased more than 4%, supported by a DKK 200 million tax-related effect. As interest rates were stable during the quarter, the impact from margins was insignificant; however, NII benefited from a continually positive development in volumes, particularly evident on the corporate side, whereas the impact from the structural hedge was similar to that in Q3. With respect to the deposit margin development, as I mentioned in Q3, the increase observed in Q3 relates to changes to our funds transfer pricing framework implemented in Q2 with the objective of allocating NII from the structural hedge to the business units. It is important to note, it is not driven by changes to customer pricing and does not impact group NII. Our NII sensitivity remains unchanged quarter-on-quarter. With respect to the outlook for 2026, we expect NII to grow, supported by stable rates and structural growth, particularly within lending. The outlook is, as always, subject to markets and balance sheet developments. Now let us turn to fee income. Slide 7, please. In 2025, fee income amounted to over DKK 15 billion, corresponding to a 3% increase compared to 2024. This represents a record high level for Danske Bank based on high customer activity and strong performance in asset management throughout the year. Relative to the third quarter, fee income was up 39% in Q4, mainly driven by sustained strong performance in asset management that led to record high performance fees, up 40% from the same quarter in 2024. In addition to higher performance fees, fee income was supported by continued growth in assets under management with positive net sales for all categories of clients. AUM ended the year at an all-time high of over DKK 1 trillion. Income from financing had a positive effect in Q4, driven by higher corporate activity and a seasonally solid refinancing activity at Realkredit Danmark. Within our Capital Markets business, fee income in Q4 benefited from a continuation of good DCM momentum and a rebound in activity in ECM. Next, let us look at net trading income. Slide 8, please. Overall, we have seen a stable development for trading income in 2025. With positive value adjustments in treasury, the headline number was up 8%. Stable customer activity, mainly within fixed income, further contributed to the results. In Q4, trading income came in lower due to seasonally lower customer activity at the end of the year. This concludes my comments on the income lines. Let's turn to expenses. Slide 9, please. Looking at the development for the full year, operating expenses are in line with our full year guidance of up to DKK 26 billion. We have managed our cost base as expected and mitigated the impact of inflation, which supported a slightly improved cost-to-income ratio of 45.5%. Relative to the level last year, costs were in line as the intended structural cost takeouts and the lower contribution to the resolution fund mitigated the impact of wage inflation and performance-based compensation. The relatively modest increase in digital investments in 2025 should be seen in the light of the significant ramp-up we made in 2024. Furthermore, we executed structural cost takeouts within our Financial Crime Prevention division. Going forward, ongoing efficiency in that division will mainly come from technology improvements with a limited reduction stemming for post-resolution rightsizing. Relative to the preceding quarter, Q4 costs were impacted by year-end seasonality, including performance-based compensation, severance costs and investments in our tech transformation. We intend to maintain the same focus on cost discipline in 2026 whilst continuing to invest in our digital and commercial agenda in line with our growth strategy. Accordingly, we expect expenses in the range of DKK 26 billion to DKK 26.5 billion in 2026. Slide 10, please. Turning to our asset quality and the trend in impairments. Throughout 2025, our well-diversified and low-risk credit portfolio benefited from a benign macroeconomic environment, particularly in Denmark, with sustained low unemployment, real wage growth, improving household finances as well as strong corporate balance sheets. In Q4, our strong credit quality underpinned another quarter of low impairment charges amounting to DKK 35 million, which took full year charges to DKK 294 million, equivalent to 2 basis points of our loan portfolio. Actual single name credit deterioration remains modest, and we continue to benefit from modest stage migration. Charges related to our macro models were negligible in the quarter, and we continue to apply both the downturn and a severe downturn scenario. With reduced external uncertainties in the commercial real estate sector, including lower and stable rates, our post-model adjustments review resulted in net releases of DKK 300 million in Q4. Although the PMA buffer has overall been reduced, we have bolstered the buffer related to global tensions further, and we continue to apply a prudent approach to cater for potential risks and uncertainties that are not captured through our macroeconomic models. We will continue to review the PMA buffer sector by sector going forward. I would also like to emphasize that our impairment guidance for 2026 of around DKK 1 billion remains below our normalized level but is not predicated upon significant PMA releases. Slide 11, please. Our capital position remains strong and has consistently been supported by a healthy capital generation throughout the year. At the end of Q4, the fully phased-in CET1 ratio was 17.6% when including the effects from the adoption of the new conglomerate directive that took effect on January 1. Furthermore, the ratio includes the full deduction of the additional 40% distribution of the net profit for 2025 announced this morning in addition to the already accrued dividend of 60%. The increase in risk exposure amount in Q4 relates to higher operational risk REA, which as per normal practice, is subject to an end-of-year calibration that reflects a higher top line and profitability as well as lending-related credit risk REA. We continue to operate with a healthy buffer to the regulatory requirements as we steadily execute towards our capital target of above 16%. We will provide more detail on our capital trajectory with our strategy update in connection with the presentation of our Q1 results. With that, let me turn to the final slide and outline our financial outlook for 2026. Slide 12, please. We expect total income to be around DKK 58 billion. This will be driven by growing core banking income and the continued commercial momentum and growth that we see in our markets. Income from trading and insurance activities remain subject to financial market conditions. We expect operating expenses in the range of DKK 26 billion to DKK 26.5 billion in 2026, reflecting our growth ambitions and continued investment spend alongside a sustained focus on cost management. Cost-to-income ratio is expected to be around 45%, in line with the target for 2026 announced at our strategy launch. We expect loan impairment charges to be around DKK 1 billion below our normalized loan loss ratio as a result of continued strong credit quality. We expect net profit to be in the range of DKK 22 billion to DKK 24 billion. Slide 13, please, and back to Claus. Claus Jensen: Thank you, Cecile. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by e-mail. A transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session. Operator: [Operator Instructions] We will now take the first question from the line of Gulnara Saitkulova from Morgan Stanley. Gulnara Saitkulova: So my questions are on NII evolution. You saw a negative contribution from the structural hedge this quarter as well as the strong positive contribution from other income. Could you walk us through the key drivers behind the higher contribution in other income? And how should we think about it going forward? And looking ahead to 2026, how should we think about the main moving parts of NII, including the expected impact for structural hedge? And my second question also on NII. You mentioned that NII expected to grow in 2026. Based on current visibility, do you think the consensus estimates for this year NII are appropriately calibrated or the market may be over or underestimating the outlook? Carsten Egeriis: Thanks for that. Let me take the first more general question, and then I'll hand over to Cecile for the other income and the moving parts on NII evolution, including the structural hedge question. I think overall, we're guiding to higher core income. So we expect to see an increase both in NII and in fees and the higher -- the total income we've guided to around DKK 58 billion. So I think you can sort of roughly calibrate that against current consensus. Cecile, do you want to talk about the moving parts of other income and then the structural hedge? Cecile Hillary: Yes. No, absolutely. So obviously, beyond these effects that Carsten mentioned, I'll talk about the structural hedge and then I'll talk about the other income. On the structural hedge, look, the lift that you've seen year-on-year is obviously the one to focus on. I wouldn't focus too much on the quarterly effect in the sense that, look, we've got obviously a roll-off from our bond portfolio and those roll-offs happen in different quarters, right? So you might have slight ups and slight down in one quarter. But the overall effect for the year is the one to focus on, which leads me to talk about the structural hedge for 2026, and then I'll take the other income question. So the structural hedge for 2026. We will continue to provide lift. So year-on-year, you can expect a positive contribution from the structural hedge. I would note as well that you've seen that we've increased the structural hedge notional from DKK 170 billion as at end of Q3 to DKK 180 billion. So that's on the structural hedge. On the other income, and you can see indeed the other, including treasury of DKK 262 million from Q3 to Q4. Look, this is mainly the tax effect of DKK 200 million. And then the remainder -- so obviously, that tax effect is by definition a one-off, right, which you shouldn't assume going forward. And then the rest is a treasury effect. And obviously, we see ups and downs mainly down to the sort of market value impact of derivatives year-on-year. That's typically linked to the hedging we do on the cross-currency side. So that's on the other income. So obviously, again, 2026 in terms of your expectations, you should see an NII that is slightly up compared to the 2025 results overall. Operator: We will now take the next question from the line of Shrey Srivastava from Citi. Shrey Srivastava: Two for me, please. The first is, I believe you were at DKK 150 billion notional in Q2, and now you're at DKK 180 billion. So you've increased the size of the hedge quite significantly. Could I ask first for the rationale for this? And secondly, do you have a target notional for the structural hedge in terms of a percentage of stable and operational deposits? Or how do you think about it? And my second one is you've obviously done fairly well in large corporates. You've had double-digit loan growth for the year. And you previously remarked how you maintain -- you remain below your natural market share in certain segments. Can you talk a bit about what specific areas you expect to drive growth in the future? Carsten Egeriis: Yes. Thanks for that. Let me take the second question, and I'll hand over to Cecile for the for the question on the hedge increase and the target hedge and rationale. On the loan growth side of things, and now I talk across the sort of corporate banking business, so both our business customers and our large corporate institutions business. Our strategy is to continue to build a leading Nordic wholesale bank and a leading bank for business customers with more complex needs. That was the strategy we launched back in June '23. And we've seen solid growth and continued market share gains in those segments. And it's really all about how we bring to life our total One Corporate Bank and institutional platform, utilizing our strong product factories, utilizing our strong advisory capabilities and combined with our strong digital and technology platforms. And really, when you look at all the Nordic countries, we still believe that we have plenty of growth opportunities. Our market shares continue to be relatively small outside of Denmark. So we have much more opportunity to grow across Norway, Sweden and Finland. And then at the same time, we also believe that with a strong and growing economy in Denmark, we have opportunity to continue to grow there as well. And I think just again, in terms of like whether there are sectors, industries, et cetera, I mean, I would say it's pretty broad-based growth we've seen. There is no question that we believe that we're going into one of the larger investment cycles of our time, driven by energy transition, by defense, by the changes happening in technology. But at the same time, also, again, a pretty robust and healthy Nordic economy more generally. So broad-based growth, but clearly also some pockets of extra opportunity. Cecile? Cecile Hillary: Great. So I'll take the -- your structural hedge question, Shrey. So you've asked two questions. One about the rationale for increasing the hedge to DKK 180 billion in Q4? And then secondly, what is the target notional. So on the rationale, well, look, the structural hedge is well, exactly what it says, which is there to really hedge our stable deposits and liabilities. You've seen the increase on the deposit side, particularly in the retail sector, which is obviously part of our stable deposit base and the strong performance there, right, with 5% year-on-year on the deposit side in the PC sector. That increase in deposits and that stability allows us to continually look at the size of our structural hedge notional and that has led to the increase alongside our objective to be hedged for NII and provide the NII stability or NII uplift that you can expect in the current rate environment. So that hedging focus on the one hand and also the trajectory of our deposits explain where we are. On the target notional, look, I think at DKK 180 billion for the bond portfolio, we are well hedged. Having said that, I would also point out that we obviously have a loan hedge portfolio in addition to the bond hedge portfolio. The loan hedge portfolio is about DKK 200 billion. I would also point out that, that loan hedge portfolio has got some optionality. It's not as perfect a hedge as the bond hedge portfolio, which itself has a 3.5-year average life, but these are the details I can give you. So going forward in terms of the target notional, we're pleased with DKK 180 billion. Where will the trajectory go? Look, I'm not calling for any increase at this stage, although we may see some modest increases in 2026, but it will be either stable or potentially slightly increasing. We also have to see the trajectory on our deposits, of course. Operator: We will now take the next question from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So my first question would be, we have elections in Denmark, if I'm not mistaken, in the second half of the year. There has been some noise in the local press about, I think one of your ministers is kind of suggesting that maybe the fees that the banks are charging are too high. Do you see any risk for any fee caps to potentially be introduced in Denmark? And what could that potentially mean for Danske Bank? And then my second question would be on price competition. We saw, I think, last week, both Nykredit and Danske cutting some of the pricing on the mortgage products. Could you just walk us through the competitive environment? What does these price cuts that you announced last week mean? And how should we think about the margin evolution in 2026? Carsten Egeriis: Sure. Thanks for that. I don't expect that there will be any intervention in terms of sort of price or usually caps. I mean the discussions in -- by the Business Minister has been around competition and increasing transparency and increasing ease of moving bank accounts. And those are all things that, in fact, we support in Danske Bank. So we continue to deliver very competitive products, continue to focus on how to make it even more transparent and easy to move banks. So we're not concerned about any intervention in terms of caps or the like. On the price competition in mortgages, we, in fact, continue to be very focused on competing in the segments where we believe that we can differentiate for our customers. And the mortgage market in Denmark is an important market in the sense that it's an important product for our customers, and we continue to be focused on delivering sort of a broad banking relation for our customers. And therefore, we have chosen to -- on a more sort of focused and targeted competitive approach to lower pricing on some of the fixed rate interest-only mortgage products. And we don't -- again, keep in mind, this is a relatively small pocket of the -- of our overall lending. And therefore, we don't see that this will impact margins. We -- looking into '26, I think at a very high level, we continue to believe that margins, and I'm talking overall now margins across deposits and lending will be fairly stable. Operator: We will now take the next question from the line of Tarik El Mejjad from Bank of America. Tarik El Mejjad: I just want to come back on your growth opportunities and with a focus on Sweden. In the past, you've been giving some snippets on -- hints on where you would grow. Can you tell us a bit where -- how do you see the corporate actually competitive environment in Sweden and how a franchise like yours can actually fit within this competition? And then second question on capital return. I know you will present all this with Q1. So it's more on the on the way you would think about distribution, not the quantum. A few banks now have moved into -- start to distribute the ongoing earnings earlier, like by executing buybacks earlier, which shows as well of confidence on earnings delivery. Is that something you would consider? Or it will be, let's say, '26 earnings with execution in '27? So just to understand whatever distribution you announced with Q1 results, how quickly this could be implemented? Carsten Egeriis: Thanks. Let me take the first one and then, Cecile, I hand over to you for the capital return dynamics and distribution dynamics. On Sweden, we have, over the last few years, increased our market share steadily across all of corporate banking and the institutional business for that matter as well. And we have seen since the launch of the new strategy, a larger inflow of new cash management customers than what we had targeted back when we launched the strategy. This is a very focused part of our strategy is to grow our customer base to get new cash management customers in and then again, to deliver our total One Corporate Bank for our clients in Sweden. The customer intake is really broad-based. There is some customers that are growing and therefore, need a second or third bank, and there are also some customers where we become their first bank. And also when I look at sector and industry, it's broad-based. We've continued to invest in advisory capabilities and talent in Sweden as well as continue to invest, of course, in our One Corporate Bank platform, which, of course, benefits all of our customers. So we see our strategy working. We see it in the market share. We see it in the activity. We see it in the customer satisfaction, where we're also strongly positioned on the Prospera customer satisfaction, not only by the way, in Sweden, but also across the Nordics. Cecile Hillary: So let me take your question, Tarik, on the capital return and the distribution. And let me outline how we view our regular capital distributions. Indeed, in terms of split, it's a 60-20-20. That's in line with last year, 60% ordinary dividend and 20% extraordinary dividend, 20% share buyback. As far as the rhythm of this regular capital distributions are concerned, they're annual. And really, this is not something that we've got any plan to change at this stage. Operator: We will now take the next question from the line of Mathias Nielsen from Nordea. Mathias Nielsen: Congratulations on the strong end to '25. So my first question goes a bit about cost and cost inflation. Like obviously, it seems a bit high in Q4, but I also understood the comments about compensation and seasonality. But you also guide for a bit higher cost inflation next year of between 0.5% and 2.5%. Is there anything that has changed there? And like how should we think about the point in time where we start to see productivity from AI investments and so on offsetting the investments, so to say, so like you get back on that? And then secondly, related to this and maybe a bit on private banking in general, it seems to lag a bit on the cost income target versus where you want to be. It also seems like the lending growth is a bit subdued compared to what we see in the other segments. Is there anything structurally that is not well working at personal customers yet? Or is it just a matter of time? Or how should we think about that before that is also on the same trajectory as we see in the other segments that you have? Carsten Egeriis: Thanks for that. Let me start by personal customers. In fact, since we launched our strategy, we see the following sort of really positive momentum, and that is we see customer inflow in private banking. We see customer inflow in the personal customers with more heavy advisory needs, and we typically segment those as customers with potential wealth above DKK 1 million that really require not just the product set, but also the advisory capabilities. So we see customer net flow in those areas inflow. And we also see market share gains on the investment side, and we overtook -- again, we took our first position as the largest investments market share in Denmark, which, of course, also has a very close link to the fact that both our private banking and the higher end of the personal customer segments are doing more business with us. We're also seeing increased insurance, Danica insurance penetration into those customer segments. And you see that really reflected, of course, in the solid fee income progress. Where we'd like to see more progress is on the mortgage side and is on the sort of mass retail flows. And there, you're right, it is something that takes a little bit longer. There's both sort of rebuilding reputation, continually being out there in the market from a marketing and positioning perspective. But we believe that our digital and technology platform, all the investments we've made, both on Panorama, which is our sort of comprehensive advisory platform to our mobile banking platform, including the housing portal in the mobile bank to our rollout of, for example, our AI chatbots, which provide a better customer experience. All those things, we believe, position us to be able to increase not only the growth in the focus segments, but also in the mass retail. Just a comment on cost, and then I'll also ask Cecile to comment on it. It is true that you see slightly higher costs into '26. '26 will be the largest investment year we've had. So we are investing heavily in our business, in technology, in advisory, in digital. At the same time, we are seeing beginning impact on productivity. I mean we've seen impact from productivity over the last few years, but we're seeing increasing impact of productivity as we roll out various different AI solutions. It is also something we'll talk a little bit more about when we get to our strategy update. So important to say we're investing heavily in the business. We are seeing productivity. We're also seeing continued benefits from lower costs on financial crime and other remediation. But perhaps, Cecile, you also want to comment on the costs. Cecile Hillary: Yes. Let me comment on the -- on the cost, Mathias, and I'll take your questions, which were about 2025 and Q4 specifically. And then, of course, the outlook into 2026, and I'll try and unpack a bit this guidance as well to give you more information there. So on the 2025 side, clearly, we're pleased to have ended the year on expenses in line with our guidance of under DKK 26 billion at DKK 25.85 billion as we guided all along. And as we guided as well in the last quarter, Q4 would be higher. You can see that we've had an increase of about DKK 350 million versus Q3 with respect to the staff costs, including severance and performance-based compensation, which obviously allow us to adapt our workforce to the new skills that we require and the new services that our clients also expect from us as well as beyond the staff costs, obviously, the investments, including digital investments, which you can see as well of above DKK 270 million, which we've done quarter-on-quarter. So as Carsten mentioned, our growth and our transformation strategy obviously require these investments, but also these staff costs, particularly when it comes to severance and performance-based compensation. So that's Q4. Now let me talk a little bit more about 2026 and our cost outlook. So you will see that we've provided effectively a dual guidance. One, we reiterate our circa 45% cost-to-income ratio. for 2026, which is the same as we guided at the launch of our strategy. So that hasn't changed. And then we gave a further range of DKK 26 billion to DKK 26.5 billion in terms of the cost outlook because we thought it would be helpful to effectively range bound the lower and upper bound of our costs for the year. So let me give you a little bit more insight into this cost range. So firstly, you can assume an inflation headwind around our cost from 2025 of about 3%. That inflation headwind will be fully mitigated by the efficiencies under the 428 strategy from our investments, which Carsten was mentioning. And as Carsten mentioned, we will go into these efficiencies and the tech and AI impacts, in particular, a little bit more during our Q1 update on the strategy side as well on 30th of April. Then beyond this inflation headwind of 3% mitigated by efficiencies, we, of course, have costs linked to our growth. So we assume growth in the business. But the rest is really investments, digital, including tech and AI as well as nondigital. And the approach that we have, which is why we wanted to show this range is a stage-gating approach. So effectively, depending on the momentum in the business, we will adjust our costs and our investments to be within this DKK 26 billion to DKK 26.5 billion and obviously meet our cost/income ratio target as well. Mathias Nielsen: Maybe just a follow-up on the Personal Banking. So when we look at the cost income like moving a bit above where you want to be, do you see that as an income issue or mainly a cost issue? How -- didn't really come across like Super clear, what is the delta to reach the target from your perspective? Cecile Hillary: Yes. No, absolutely. Look, a couple of things I would say. I mean, firstly, obviously, I would point you to the ROAC, which is extremely strong in that business. I mean you can see that it's actually above our target. And in terms of run rate in the fourth quarter ended up at 31%. So we're obviously very pleased with the profitability in that segment, which is led by all the initiatives and outcomes that we've seen, including in private banking that Carsten went through earlier. When it comes to the cost to income, look, we are investing, obviously, heavily in that area. These investments are clearly digital. We've upgraded our mobile app. For instance, we've provided some very significant tools that are already showing a very good amount of traction in terms of our relationship advisers and the tools that they have for their clients. And we will continue to invest. And that obviously is something that we're doing with an eye on the overall group costs, as I mentioned earlier, and again, on the ROAC of the area. Operator: We will now take the next question from the line of Martin Gregers Birk from SEB. Martin Birk: Just coming back to one of the last questions on volume growth and especially volume growth in this quarter and perhaps zooming in on large customers and also business customers, a quarter where you should have had quite decent benefit from FX. And it seems like Q-on-Q volume growth is fairly muted and it sort of breaks the trend from the previous three quarters. What's happening in this quarter specifically? And then also coming back to asset coming in -- talking about asset quality. Your impairment guidance is for lower than your normalized next year. I appreciate that you have reduced PMAs by roughly DKK 1.3 billion over the recent two years, but the DKK 5.4 billion still seems relatively high, both in Nordic and in a European banking context. Where would you see this go? Or what is it normalized level for this given your positive outlook on impairment charges? Carsten Egeriis: Thanks for that. I think on the volume growth Q4, on BC, in fact, we continue to see growth quarter-on-quarter. So pretty solid continued momentum. It's true that in LC&I, Q4 was more flattish, but it's not something that concerns us. I mean we -- when we look into 2026, we believe that pipeline and activity looks good. And again, of course, the stable Q4 is on the back of a growth rate of 14% year-on-year. On the asset quality, we see very solid asset quality. And as you also see in the staging, very solid sort of trends in Stage 2 and 3. So it is true that although we do have a little bit of release on the post-model adjustment side, it is still a high level of post-model adjustments that we have. If I sort of look at it through the cycle, that is very much driven, of course, by continued macro and geopolitical uncertainty. But as I've also said before, you should expect those PMAs to come down gradually as we get more certainty and visibility. That's, in fact, also what you've seen, particularly in commercial real estate as inflation and rates have come down and that, that has normalized more. So again, yes, continued view that it is on the higher end and that with the current economic environment, our base case, you should expect that to continue to come down somewhat. But again, also being very clear that there is an exceptional amount of geopolitical uncertainty. And therefore, we're also being cognizant of that, which is reflected in the PMAs. Martin Birk: And you wouldn't say that the volumes development that you see in Q4 is a function of particularly one player increasing its appetite on Swedish SME and corporate markets. I didn't hear that, sorry. Carsten Egeriis: No, no, I wouldn't say that. Claus Jensen: Operator, can we have the last question, please? Operator: We will now take the last question from the line of Riccardo Rovere from Mediobanca. Riccardo Rovere: Two, if I may. The first one is on the capital target. You technically have more than 16%. That is unchanged, but your common equity Tier 1 ratio stays more or less in line with the rest of the Nordic bank anywhere between -- in the range of 17.5%. So I was wondering how should we read the more than 16% because I would guess that this is interpreted at maybe 16.5%, but your common equity is way ahead of that. The second question I have is not clear to me if you have -- if your guidance on losses includes the use of PMAs or some of the use of PMAs in '26. And then if I may, a final one, the new conglomerate direction gives you some more headroom or some regulatory advantage in -- for bolt-on acquisitions in the asset management or insurance space eventually? Carsten Egeriis: Yes. I mean just a short comment on the last one. It's not something that we are looking at actively. Of course, we have a life insurance company in Denmark. But otherwise, it's not something that we're actively looking at, but there could be benefits in the future from accounting, but it's not something we're focused on. On the loss guidance, the loss guidance excludes any changes for post-model adjustments and the loss guidance of DKK 1 billion, much in line with last year is our best view given kind of the benign macro environment that we're looking into and the benign asset quality that we're seeing. And then Cecile, maybe you can comment on the capital targets. Cecile Hillary: Yes, absolutely. So on the capital targets, obviously, Riccardo, it hasn't changed, right? So it's still above 16%, and we're not going to -- we're not planning to change it at this stage. You are right that at a CET1 of 17.6%, we obviously have excess capital, which is something that we've obviously discussed and it's a regular topic of discussion with analysts and investors alike. We are planning to address this topic and the glide path when it comes to our capital in the context of our Q1 results. So that will be on the 30th of April. So I will ask you to bear with us until then. But look, I mean, I think in terms of capital, obviously, we benefit from a very strong capital generation year-on-year. That's been the case certainly since we launched our strategy, and we've been constantly quarter-on-quarter hovering between the sort of 250 and 300 basis points annualized capital generation, which is obviously a positive thing. So the 17.6%, just to confirm, obviously includes fully loaded, so the impact of the conglomerate directive as well. And I will also -- just one last thing. Obviously, you know that our capital requirement is 14.8%, right, on the risk side. So above 16% is obviously the target. Carsten Egeriis: Okay. Well, thank you very much, everyone, for your interest in Danske Bank and your questions. Much appreciated. And as always, please reach out to Claus and our IR department if you have any other questions. Thanks very much.
Operator: Good morning, everybody, and welcome to the FirstWave shareholder update. Our presenters today will be Roger Buckeridge, Danny Maher, and Sharon Hunneybell. I'll now hand over to Roger to open the call. Roger Buckeridge: Good morning or good evening to all members of the FirstWave family. It's both staff and shareholders. This is the regular quarterly update, and I'll hand over straightaway to Danny, who is appropriately speaking from Mexico City in the geography, where more than half our sales originate. Danny? Danny Maher: Okay. Thanks, Roger. All right. I'll get straight into it. Good morning, good afternoon, wherever you are. So yes, as Roger mentioned, I'm in Mexico at the moment. So pleased to join you all, and I'll get straight into the updates. So next slide, Ruth. So Q2 is what we're recapping, but of course, looking to the future as well. And Q2 was very much focused on a restructure of the business, a capital raise, and a pivot of the company towards AI-powered compliance management. As we all know, a focal point for that is the monetization of our Open-AudIT user base, but it is not the only thing that we're doing to pivot the company towards compliance management. All of our products are involved in that. So a summary of what happened in the quarter, which would be of note was we had key renewals of key agreements with NASA, Claro Dominican Republic, Telmex, and other renewals as well. All those ones had increased revenues. As I mentioned, we have further restructuring to align our resources with what we want to do and where our revenues are. That restructuring is $1.8 million per annum in savings. So it was fairly large. And of course, there's on costs on top of that, which are further savings. We released very pleasingly the first version of Open-AudIT with AI-powered compliance management. I know you're all keen to hear how that's going, and Sharon will update you on that later. And we've been working on evolving the relationship with AWS and Ingram Micro. I know we can't get this call without commenting on the share price. So it's been an interesting quarter for the share price, which for all of us as investors and shareholders, it's painful to watch share prices go backwards. For me as an invested CEO, it's painful for me from an investment perspective, it's also strange to see a business improving with the share price declining. So we're trading now at basically 1x ARR plus our working capital, which being our receivables plus our cash, which is just extraordinary, I believe. So I just did want to let you know that, obviously, we're not in complete control of the share price, but the Board is considering actions on how we support the share price, how do we get our news out there, how do we get more eyes on the stock, that type of thing. Definitely, number one is we want some key news and sales from the business to announce, but these things can change very quickly. So I am in North America for February and March, so Mexico City, where I am at the moment and the U.S., to try and help with our sales and planning and general business as well. So looking forward to bringing some news, working with the team. Of course, the teams have been working in these geographies already. So hopefully, they can help me bring some news while I'm here. In terms of financial performance, so historically, we've provided information on our ARR revenue and GP. So we simply continue this format for Q2, and you can see the data here. The company's ARR increased 2%. Nice to see an increase. Of course, we want to see a higher increase. This came from uplift. So that's -- obviously, it's increasing above any churn. And it's mostly from uplifts from our existing customer base and a few small new customers. I do want to mention that we no longer see material churn in the cyber business, as the previously disclosed Telstra closure of the CSX2 platform has all materialized as have other changes in the Telstra contract, and we now have a new 1 plus 1-year agreement with them. So that business has now stabilized, and that's been where we've seen reductions in our ARR previously, and we've just seen the last changes come through in the first half of this year. In terms of the revenue reduction, it's simply due to a large one-off perpetual software license sale. It was $380,000 in Q1. It's the same with the gross profit. It's just because we had a one-off deal in Q1. As we can see, it's not our recurring revenues because they've increased. We can see that our gross profit margin is at 95%. So that reflects both the high margins in our NMIS and Open-AudIT businesses and the increased profitability in the CyberCision business. So a lot of the ARR that's gone away there was unprofitable business. So on the next slide, looking forward -- looking to the highlights for Q2. Q2 was a down cycle in our cash usage, but that is completely in line with our expectations, okay? It's always a down cycle. Q3 will be cash positive, okay? The company's cash is cyclical and predominantly customers renew their contracts at either calendar year-end, which is the financial year end in most countries or in Australia, our financial year. So June and December are our big months for renewal. So -- taking that into account, when you have the renewals come through in December, as we did, it brings the cash into Q3, which makes Q3 a cash positive quarter. So as at December 31, we had $2.5 million in receivables, and we expect to receive all of that in Q3. We've already received over $1 million of it. The company raised some money, $2.6 million, as you know, net of costs. And we secured a $2.5 million loan facility with partners for growth. This is a 3-year facility and the loan maturity date of 17th of December 2028. So it's a longer facility than the one we had with Formue Nord, and we used the funds primarily to repay the Formue Nord convertible note. So in summary, Q2 was a quarter of restructuring and capital raising, an exciting new product launch and enabling us to invest in the future of the business. I'll come back with a little bit of an outlook at the end. But for now, I think the thing most of us want us to hear is a bit of a product update from Sharon. So I'll hand over to Sharon. Sharon Hunneybell: Thank you, Danny, and good morning, everyone. So I thought I would start today with the CSIRO and University of Sunshine Coast collaboration because that was announced yesterday and provide a little bit more detail on how this supports the next phase of our broadest product strategy. So the regional university industry collaboration program is run by CSIRO and funded by the Queensland government. And what this project is going to do is allow us to apply machine learning to the operational data that gets generated by NMIS deployments, with a focus on delivering production-ready analytics and automation at the close of the project. So through the program, we are going to be provided with a full-time AI/ML expert, who will be working directly with our team. And we also have an access -- we also have access to a team of additional identified AI designers, developers, and advisers from within the university, who have specific expertise in the field of AI and ML in networks. We also will have access to their state-of-the-art cyber labs. So this is really exciting because this is access to talent and resources that we wouldn't normally have, and it will really allow us to accelerate our growth and sort of begin implementing our vision of what we want to do with AI and ML with those massive amounts of NMIS that we generate or our customers generate. We are recognizing this as an initial project because there's opportunities to expand this project into another term. There's also opportunities to work together with the cyber labs across our other products. But most importantly, I guess, this work forms part of the broader shift towards our AI-driven compliance and automation focus across the whole software suite. We do see Open-AudIT as an entry point to the broader suite of FirstWave products. And so as we are building up the commercial interest and usage of the Open-AudIT products, they'll be able to then extend into this real-time monitoring, predictive risk detection and proactive planning across network infrastructure. So that's a little bit about the long-term AI capability, but I will now move over and update you guys with the most relevant near-term commercial and product performance, which is the Open-AudIT 6 release. So we launched Open-AudIT 6 to early adopters in November, and we had -- we went full public launch on the website on the 1st of December. As a recap, alongside releasing that new software version, we also introduced a revised licensing model, which centered on a new free tier license, which was designed to bring users into the commercial platform while maintaining a clear pathway to professional enterprise capability. So when they are using the free license rather than open source software, we get additional usage data, and it also allows us to guide them towards the commercial products within this version. So when we launched, it was intentionally measured to protect the existing global user base and to allow us to observe adoption behavior, integration stability, and the activation patterns that were occurring with these free users moving on to trials and things like that. So we really wanted to prioritize a sustainable enterprise conversion rather than trying to get any short-term burst of activity and position ourselves to scale and to sort of visibly be able to see how we can move people through to trial activation once they've adopted the free new tier. We're really happy with the way that's going. We're seeing really good uptake of the free tier. And so now we're really focused on growth. So the next slide, I'll talk a little bit about when we launched Open-AudIT 6, we also launched a brand-new website, a commercial website that focuses on all of the commercial features within the product and also allows people to purchase licenses directly from the platform or from the AWS marketplace. So the new openaudit.com site, with that launch, grew from fewer than 200 users prior to launch to around 20,000 users, with lots and lots of engagement events across the 2 months. Across the legacy websites, activity shifted from roughly 26,000 users before launch to about 19,000 afterwards. So we're seeing this more as a reflection of migration to the new platform rather than any real structural loss of demand. So in total, we've had 39,000 active users across both platforms across the course of those 2 months, which is a 50% increase on what we were getting prior to this launch. Most importantly, engagement is with the new website is really concentrated with the U.S., Europe and ANZ, which are our sort of target markets, and it's really improving the commercial relevance of our audience as we move into this enterprise conversion. So looking beyond the engagement with the website and on to user commitment, we're seeing an improvement of conversion following the Open-AudIT 6 release. So we had 5,991 explicit downloads of Open-AudIT 6. We also did 2 minor product releases within that time to deliver some small improvements based on observations that we have with the product and some feedback. Commercial trials are currently sitting at 6% from free users. Strongest uptake again is across Europe and the U.S. We currently have 194 open leads in nurture. We are seeing the first few professional enterprise license purchases emerge alongside our normal renewal activity, which was -- so we've had 2 activations in Europe and 1 in Australia. So while we're still very early in enterprise sales cycle, the combination of improving the conversion and the initial paid uptake is fairly encouraging, and I think it's showing real indicators of future commercial growth. So in closing, our focus is now shifting to the ongoing monitoring of key metrics and ongoing execution. Commercially, we are increasing targeted marketing activity. We've enabled marketing automation to strengthen the pipeline development, license adoption, and new enterprise contracts. From a product perspective, we continue to expand our compliance capability within Open-AudIT. We're deepening that integration across the broader product platform and of course, the advanced machine learning and predictive analytics within NMIS as we'll be starting with that project, and it's all very exciting. So together, these initiatives position us to convert early engagement into sustained enterprise growth and recurring revenue. Thank you. I'll pass back to Danny. Danny Maher: Okay. Thanks. So this is just a simple slide with the outlook. And I'll say in opening that we've got a real thirst from investors and prospective investors for information, and we understand that. And that speaks to the fact that we're really changing our path for a different future. Historically, on these updates, we've given focus very much on the financials and looking backwards. So thanks, Sharon, for your update, and we're trying to get you guys a little more information about what we're doing as a business and what the future looks like. But certainly, it's about the company pursuing its path of AI-powered compliance management, right? So this is going across all our technologies. We've got a bunch -- we've got an enormous amount of intellectual property that plays into this space. And inside our products is an enormous amount of data, right? And it's the new developments in AI is what is very powerful for us because it gives us the ability to do things with that data and our customers. That data is not on the Internet. It's not in a cloud anywhere. So the only ones that can do it are us. We're the only ones with the user base. We're the only ones with the data. So we're very excited to be in this position, nervously excited. And obviously, we're pursuing this path, which will be safari, not a train journey, right, but it's an exciting safari, and it's underpinned by blue-chip customers with recurring revenues. Open-AudIT 6 release is going well, as Sharon outlined, and we continue to adapt and push the metrics. We've got sufficient funds to pursue our goals for the foreseeable future. We'll be generating cash this quarter. And the cash burn last quarter, as mentioned, is largely due to restructuring costs and because our R&D funds shift from last quarter to this quarter. And then on top of that, it's always a down quarter for us because our cash is cycled. So we're not concerned about that. We will hold an AGM to approve the share options will be issued to PFG. We've already released to the ASX what those options are under their agreement. The AGM is going to focus -- so you'll see the notice of meeting come out. The AGM will focus on the specific resolutions, okay? And the process is around getting those resolutions done. So it's encouraging -- and there won't be online voting at the AGM. So there won't be remote voting. So if you want to vote on those resolutions, then you need to vote by proxy before the meeting or attend in Sydney. But we do intend for that meeting to be very procedural. We won't be doing company updates or anything like that. We'll just be running through the resolutions. So I want to let you know about that because you see that notice of meeting in a week or two. Other than that, I'll hand over for any questions that you guys have. And we've got myself; Sharon; Roger, our Chair; and our Head of Finance, Tony De Polignol, available to answer any questions. If you have any, you can post them in the -- there's a Q&A session or you can post in the chat, and we've got a few here. Danny Maher: So we have from Justin, how is the commercial conversion of Open-AudIT compared to targets set? What is the Q3 target for conversion, i.e., ARR and customers? Very valid question. The -- so we're on target. We want to see a kind of larger customer come on board this quarter. We're not putting the revenue. We obviously have our forecast and our budgets, but we're not putting them out there because as a public company, as soon as you put them out there, it becomes a public target. And the journey is a bit of a safari, right? So we've got to watch what's happening and adjust and maximize it. We -- I could say we're slightly behind our revenue target. We wanted a few more customers in January, but we're in front of other metrics. And we are stunned at the number of leads that we have. And we -- what was the number we had there, 190 or something. And so it's an incredible number of leads. And the fact we had a huge amount of activity around this product. And for it to -- for that activity on the website to up 50% over launch was very unexpected. And so there's different metrics, many of which are ahead of target. Why we not yet produced a share price re-rating? I don't know. Roger, I don't know if you want to turn your camera on and address this one? Sharon -- can we all turn our cameras on, Sharon and Roger. The share price -- so we had -- look, it's throwing a dart at why these things happen. But I can say as some facts, there's been a few dynamics. One, we did a capital raise. Two, the -- but we're below the capital raise price. Two, Perennial Value who were a major shareholder institution, they sold their fund. So nothing to do with us. They sold their entire fund and all the stocks that we hold in it to another group called Balmoral and Balmoral exited. So that created an overhang on stock. Perennial owned about 12%, 13% of the company at the time. So it was a pretty significant overhang. And there have been a few other things like that. And so to me, the business is a lot better. Stock price is interesting. Everyone tells me to focus on the business, but of course, I care a lot about the stock price. But it's pretty painful to see the stock price at 1x ARR plus working capital. I mean to me, it's ridiculous. So go and buy some. But you probably see announcements, I've been moving my stock out of my personal into my super to crystallize tax at these low levels. So we are looking at different investor relations initiatives and things like that. But ultimately, we need to do some deals and show some results and some growth. I don't know if you got some comments on that, Roger. It's an important question. Roger Buckeridge: Yes. The reason why I'm happy that Danny is located to North America for February and March is that's where the future value of the business is being generated today in terms of sales revenues, new key clients and a focus on acquisition of new large-cap corporate clients. As well, we're very happy with the renewals that have come through. So there's plenty of support from the work that's been done in recent years. But we've got a new value proposition, which under Danny's leadership needs to be taken really through enterprise sales through dedicated business development relationships with large corporates. And most of that opportunity -- because we're a small company, most of that opportunity is in the Americas. It's not to say there isn't opportunity in Europe, and we've got an eye on that and some ideas about how we might be able to access and support more European large cap clients. So that takes a while, but we'll be able to report on progress, I think, in those endeavors at the next quarterly update, which will come after really a couple of months of very hard work and focus under Danny's leadership. So I'm confident about that progressing well. The share price is as it is. Yes, there's been a couple of overhangs, which have been dealt with, one of them being the Perennial/Balmoral thing, and that was the largest that's passed. Another small one to do with the final settlement with the former senior debt provider from Denmark, and that's being dealt with also. And so I think those things are very short term and tactical and not related at all to the progress of the business, utterly unrelated to the progress of the business. So we think we've just got to aware that for a while. And yes, this is a buy-and-hold investment as our corporate objective, and that's where the management team and a brilliant technical team, I might say, in terms of the software development with just outstanding performance. I think they're backable. So over to you, Sharon or Danny. Danny Maher: Yes, that's good. I think so we got Justin -- what steps are being made to strengthen Investor Relations and market visibility? We have a couple of proposals in front of us from different IR firms that we are considering. The biggest thing is we need to get some news out there about commercial activity. But when you're inside the company like we are, you can see the leading stuff and you know the conversations and you know you can see the deals progressing and you -- if I'm here in Mexico, I can go and talk to the customers, which we expect to be doing deals with and generating news items. So you get a bit more visibility and you can kind of feel the business going forward better than external parties. But we definitely need to do some of these deals and get the news out there. And of course, we want new eyes on the stock, and we are looking at IR. We've got Joel there as well, which kind of taps into this, will directors buy on market. We look at that as well, like when you have employee share schemes in place and things like that. And I want to be clear, we don't hand out stock to most employees who -- and if you look at previous announcements about -- most employees who have bought the stock, they salary sacrifice. We don't go around printing stock and handing it out to people. We value it very, very highly. And when those mechanisms are in place, it doesn't really make sense for employees or directors to buy on market when they can leverage these other mechanisms, which are much more tax effective. And of course, each person needs to consider their own positions as well, like I already have a lot of stock myself, for example. But we understand direct to buying on market can help support the stock, and we do discuss it. We've got the pricing model-- what is the pricing model for Open-AudIT and the strategy behind it? Is it possible to make it relatively small to accelerate a high percentage of conversion to paying customers and then ratchet up price going forward? Sharon, do you want to take that one? I can add a bit if you want, but people get sick of hearing my voice. You're on mute. Sharon Hunneybell: Yes. That's better. Okay. So Open-AudIT is -- has 2 pricing tiers, so you can buy professional and you can buy enterprise. It's charged out by a number of devices that you discover and actively audit and manage in your environment. There actually is -- it is actually quite a low price if you've only got a few devices. So for the smaller businesses, there actually is a free 100 device license. That was originally under a 1-year term, we've actually reduced that down to 3 months because we are seeing that people are activating the software and really getting it up and running pretty much within a day within -- or usually even within an hour is the average. So we've really improved the installation process. So the question about making it relatively small, the interesting thing is that the people that are looking at buying the software seem to actually be the bigger ones. So it still seems to be falling into a bit of an enterprise sales cycle, which is why we've got the 194 leads there, even though there's an ability for them to get up and running themselves and to buy the licenses online. So we are actively like monitoring the way that people are interacting with the software to try and get it will be great to get more just sales just straight off. They've activated themselves, they press the button, they buy the license. One of the licenses that sold last month was just very lightly assisted by our customer service lady in Mexico. So it's a good sign that we're sort of -- I think the pricing is right. I actually think that the pricing is right. I think we just -- I don't think reducing the price would make it any more likely that it will be bought. I think it's just a little bit of a slow buying cycle because it's really enterprise software. Yes. Danny Maher: So there's a free version, right? So you can't get lower than that. And then there's -- unless we pay them. And then there's the tiers above that. It is reasonably low cost. And remember, it's an entry point to our other products. So we want to get in there with Open-AudIT compliance, get them as commercial clients paying us, talking to us, and then we want to sell them our other products that help compliance, in particular, our configuration management products and then our other management products and then STM, Secure Traffic Manager to, handle their traffic compliance and cyber decision for e-mail and web security and compliance. So we really want to use this. Open-AudIT is a lead generation machine. It is very attractive to other -- when we get approaches from other companies that want to acquire us or invest in us, often usually, they're from the U.S. And it's commonly because of this massive user base around Open-AudIT, it is a lead generation machine, and it's highly valuable and yet we're trading at 1x ARR like that. You can put lots of different valuations around that user base. To generate that amount of activity would cost an enormous amount of money and time. Roger Buckeridge: Danny, it might be worthwhile just speaking about where we are most competitive with the NMIS product suite. I've heard you talk about the stress recently, the fact it's UNIX-based that it appears -- that is very competitive with very large enterprise customers rather than small, medium. Danny Maher: Yes, that's right. With -- and it's interesting, and Sharon made the comment, we've seem to end up in enterprise sales with Open-AudIT as well. So I think what happens with these open source products is the lower end of the market just want to use the free stuff. So we end up in enterprise sales, which does require humans and does take time. If they don't -- no one's going to swipe a credit card for an enterprise sale. So it takes time. And the AWS relationship helps because we can have our software build on an invoice on an AWS invoice. So that's good. But it's the same with NMIS. It's the upper end of the market. The more complex or the larger the IT environment, the less competitors we have. It's as simple as that. So -- that's why we have customers like Microsoft, NASA, Telmex, Services Australia. They're all pretty blue-chip high-end customers. And the lower-end ones have a lot of choices of what they can buy. There's a lot of stuff that works, not for audit actually, but for network management, they do. And -- but as you move up that chain, there's less technology that will work at that scale. All right. We're getting near wrap-up time. Has Trump America's First policy been a negative, positive, or neutral impact on the company's sales? Interesting. I would say that here in Mexico, there would be a lower likelihood of people buying from an American company. So it's great that we're Australian. And I hope there's tariffs that get put on American products coming into Mexico because that would certainly be helpful for us. Overall, it's a bit of a mixed bag for us because there are certain organizations in the U.S. that like we've got customers like John Deere, their supply chain is disrupted enormously. Customers like NASA, their whole funding was thrown up in the air and became very uncertain. So uncertainty is not great for business in general, and there's a lot of uncertainty in the U.S. A lot of that seems to have settled down from our -- we just renew -- I think no, we haven't quite renewed John Deere yet. That's coming up. But NASA, we did. But NASA wasn't even sure what budget they were going to get. So that was a bit of concern for us, but we seem to get through it. Overall, I would think neutral to positive. But it's definitely a mixed bag. You notice the impact. It's a very interesting question because you really do notice the impact. Roger Buckeridge: The other thing to say is that our products are largely priced in U.S. dollars. Obviously, we've got a cost base in AUD, but it's very, very, very competitively managed in terms of keeping a very lean organization with very seasoned developers who are very -- totally in control of the use cases and in touch with the customers. So if you think about just the currency shifts, yes, having our products priced in the U.S. dollar is probably good for us. It will cost a little more in terms of our Aussie cost base, but you've heard the story about the margins. So from that point of view, I think the currency sort of marketplace probably favors us right now. Danny Maher: Yes. Well, yes, we rarely exchange money, right? We use investment dollars to pay Australian bills, and we get investment in Aussie dollars, and we use customer revenues in U.S. dollars to pay our U.S. bills. So we've got a nice little natural hedge there, and we very rarely exchange money. So it does change our financial results, but it's on paper. It doesn't actually -- financially, we're spending in U.S. and spending in Aussie dollars, so it doesn't really do much. But it does change what the results look like on paper. Roger Buckeridge: Danny, can you just briefly talk about the recent strengthening of our U.S. business development sales team given that that's really based out of San Francisco. Danny Maher: Yes. So we bought back Craig Nelson, who was CEO of Opmantek into San Francisco. So that's only recent. But we've got a big focus on those geographies. The stats that Sharon put forward about the -- over 50% of these commercial trials and therefore, you can estimate the same in terms of the number of leads are in U.S. and Europe. Europe is quite large for us. So we have to consider about how we address that, whether it's through partners or what we do there. We're not really funded to go opening new offices and things like that at the moment, but we are getting a lot of activity there. But yes, big focus on sales right now and good to have Craig back. He's looking after all sales globally other than Latin America. We got a ton of questions here. We have to filter them. Okay. So it's about revenue growth, share price growth. We're working hard on it. I expect to see some news this quarter, okay? So the amount of news and the size, we don't -- we're not putting forecast out there because we're very much embarking on a new journey. So we can't do that. Then we've got here from Matt. Thanks, Matt. Congratulations, Dan on the launch of Open-AudIT 6. Sounds promising and exciting. Also well done on the restructure, capital raise and refinancing in Q2, which no doubt was a significant distraction and had significant cost of business. Looking forward, I hope the business now has a much clearer runway, can be laser focused on execution. Can you provide more insight into Q3 and what a conservative expected closing cash balance? Wasn't clear in the 4C, and what is the business funding requirements beyond Q3. Okay. Actually, there's a question I skipped before -- sorry, from Dean, sorry, which was -- will you be operational cash flow positive this quarter? Or is it because of government grant timing operation slowly? And Tony, I don't know if you're there, I want to chime in on this. Tony De Polignol: Yes, I'm here, I can answer that one pretty easily, I think. So as Danny said about Q2, how it's a down cycle, I suppose, in cash usage, the fact is Q3 is conversely an up cycle, right? So we do get a lot of those renewals that will come in, in Q3. So short answer is yes, it will be definitely a cash flow positive quarter even without the R&D. But in saying that, I'll also caveat with the fact that that's the period or the quarter where we do get most of the cash from our renewals. Danny Maher: Yes. So Yes, it's a strong cash quarter for us Q3 and... Tony De Polignol: It always is. Like for me, it's my favorite quarter. Danny Maher: Last quarter -- this last quarter is the white knuckle ride every year, depending on how much cash you got in the bank. So it's gone, and we now enter into a cycle of positive cash and the R&D will make it even more so. I'm not sure that Tony, we would be cash positive without the R&D though in Q3. Tony De Polignol: Yes, it's pretty good. It's going to be -- there's another question about the cash balance at the end of Q3. I won't answer that, but I'll just say it's going to be... Danny Maher: Okay. What's the strength of SCT's AI offering in the absence of the USC-CSIRO collaboration? I'll kick that off and you can add, Sharon. So our real strength is in our data, right? So when you have products that are used as much as they are, they're on-premise, not cloud. And nobody is going to -- nobody will ever put all their -- the list of all their IT assets and the configuration out in the public domain, which means they'll never be able to use AI to leverage that enormous amount of data, which is in our products. So that's our real power. Our power is that we have the data that we can apply the AI to and nobody else does. So it doesn't have to be necessarily AI, our AI. And that's what I want to make the point. So we can leverage other developments in AI into our technology and other people can't because they don't have access to our data, okay? So that's a really important thing that I wanted to say. So it's not just about what AI we develop, which we are doing, and we have AI patents. We've been doing AI before it was trendy. So we've got patents and we released our first AI 10 years ago. So and then I'll hand over to Sharon for the second part on what the USC-CSIRO collaboration adds. But that also tells you why they're collaborating with us, right? So you can tag on to that, Sharon, because of the data we have, right? So if they want to develop AI and they want to research, they don't -- they can't do it without access to our data. Sharon Hunneybell: Yes. So look, we -- as Danny said, we do already have some machine learning built into our NMIS products. We have actually got some work undergoing at the moment around dynamic thresholding and trending data. So in this quarter, we're working on bringing some of that into our opCharts modules. But what -- but what this really brings is because it's -- so because we have so much data, machine learning is -- basically relies on very complex mathematical models to be able to develop insights, but they're much more -- they're extremely accurate insights when you develop them. So the access that we get through this program are like top-tier mathematicians, AI and ML experts who've already built models. So they already have patented models in similar areas. And so I'm really excited about how we can apply some of the things that they've already built and shown to be effective, how we can adapt that to performance data, which is what we gather in NMIS. It is a really big opportunity to work with some very, very smart people who are well known in the machine learning space for networks and sort of let them with some performance data that previously they've been doing a lot more stuff with traffic data and things like that. So yes, it adds a huge amount of strength. And the people within our team as well, development team are really excited. We are a small team. And so having these external brains to sit there and problem solve on the best way to develop more like deeper levels of machine learning into our software and then just have our guys be able to implement that is also -- it's huge. They're working every day. They don't get a lot of time to step out into the think tank to dream out the best ways of doing these things. Roger Buckeridge: Sharon, would you mind just reassuring anybody who is wondering about intellectual property control? Sharon Hunneybell: Yes. Yes. So we do -- all of the intellectual property that's developed during this project is owned by us. So that's very clear in the project. So yes, it's -- this will be our IP to commercialize. Roger Buckeridge: I think it's fair to say collectively, we're all fairly experienced at dealing with universities and CSIRO in Australia in these kind of contracts. Sharon Hunneybell: Yes. Danny Maher: Okay. I think that wraps it up. Sharon Hunneybell: Ashton had his hand up for a little while as well. I don't know... Danny Maher: We can't take... We work on written question. All right. Well, I think we'll have to wrap it up. Well, thanks, everyone. Interesting times, a lot of pressure on the share price, I know, and we care about that greatly. Appreciate your support. Hopefully, some news in the next month and 2 months -- and some other things we can do can help restore the price -- share price to where the business is because the business has a lot better opportunities than it ever has. The costs are down. The cash is under control. We're entering a cash flow positive period. We've got new products out there and great new collaboration there with AI and with CSIRO and USC. So a lot of good stuff happening, and I hope it's reflected in the share price soon because I know that's what you guys care about the most. You're not in this because you care about network management, cybersecurity, and artificial intelligence. You're in it because you hope those things deliver you a return on your investment. So we're focused on that and care about a lot. So hopefully, some good news this quarter. Anything else? We'll wrap it up there. Roger Buckeridge: Thanks, everybody. Sharon Hunneybell: Thank you, everyone.
Unknown Attendee: Welcome to Lesaka Technologies' results webcast for the second quarter of fiscal 2026. As a reminder, this webcast is being recorded. [Operator Instructions] Our press release and investor presentation are available on our Investor Relations website at ir.lesakatech.com. During this call, we will be making forward-looking statements. And I ask you to look at the cautionary language contained in our press release, presentation, and Form 10-Q available on our website. As a domestic filer in the United States, we report results in U.S. dollars and under U.S. GAAP. However, it is important to note that our operational currency is South African rand, and as such, we analyze our performance in South African rand, which is a non-GAAP measure. This assists investors in understanding the underlying trends in our business. I will now turn the webcast over to Ali. Ali Zaynalabidin Mazanderani: Good morning and good afternoon. Thank you for joining us for Lesaka's Q2 and half year results presentation. The first half of the year represents meaningful progress in executing our strategy in building the leading independent fintech in Southern Africa. Dan will address our financial performance shortly. In addition to the numbers, 2 strategic milestones during Q2 are worth calling out. First, we received Competition Tribunal approval for the combination with Bank Zero. This is a significant step forward. We continue to engage with South Africa's Prudential Authority regarding their approval process. Second, we announced and commenced the consolidation of all our operating brands under a single One Lesaka. Lesaka is a fintech business, but human connection is at the center of what we do. We operate where our customers work, live and trade. We design solutions alongside them, not at a distance. That philosophy is captured in our promise, where you are, we are. The launch of One Lesaka marks a new chapter for the group. It moves us beyond the collection of individual brands to a single strong challenger brand, combining digital capabilities with physical presence by reaching consumers and merchants where others do not. Our new visual identity reflects this. It embodies the essence of a company built on connection, movement and progress. The logo is inspired by a footprint, symbolizing presence, partnership and purpose. It represents a business that is human, grounded, African and leading its mark. This is a material evolution in how we position, operate and scale the business. And I'd like to show a new brand video that represents this. [Presentation] Ali Zaynalabidin Mazanderani: Our purpose is clear: to provide financial services and software to underserved consumers and merchants across Southern Africa. This is more than a rebrand and is embodied in a representative set of values we launched to our employees last month, integrity, collective wisdom, entrepreneurial drive, ownership, bias to action, resilience, empathy, customer first, efficiency and meritocracy. One Lesaka is a commitment, one platform, one brand and one shared mission, expanding financial access through technology delivered with a human touch. Aligned with our One Lesaka strategy, in June, we will consolidate multiple Gauteng offices into a single location in Johannesburg. This will deliver cost efficiencies over time, but more importantly, cultural efficiencies, enabling closer collaboration, faster decision-making and stronger integration across teams. We are also making progress consolidating our offices in Cape Town and Durban. Lesaka employs approximately 3,750 people across Southern Africa. Technology underpins our platform. Within the markets we serve, distribution is a key differentiator. Close to half our workforce are focused on growing Lesaka's footprint through sales and marketing. A further 23% focused on servicing and operations, engaging directly with customers and merchants every day. Last mile reach matters. And our teams operate daily at our clients' workplaces in townships and rural communities, delivering financial services on the ground to the underserved. At the same time, continued innovation is essential. Around 20% of our employees are in technical roles, building platforms, developing products and supporting our frontline teams. We also benefit from a young, energetic workforce with roughly 60% under the age of 40 with a demographic and gender mix reflective of our society. We continue to simplify the group and ensure capital is deployed where it delivers the greatest return. During the period, we exited our Cell C stake, receiving ZAR 50 million. We also successfully concluded what we believe to be the final outstanding matter relating to the legacy CPS contract, resulting in the release of ZAR 65 million of accrual. Both items contributed positively to our Q2 results on a once-off basis, but more importantly, they represent the progress towards a simplified One Lesaka going forward. It's pleasing to note that group adjusted EBITDA grew 47% year-on-year, which represents a largely organic growth rate as Adumo transactions contribution is represented in both periods. Additionally, our adjusted earnings per share, which excludes the one-off profit contributions mentioned earlier, has increased by more than 6x. As previously communicated, we have also simplified how we represent the business to focus on the structural drivers of revenue. Lesaka operates through 3 complementary divisions: Merchant, Consumer, Enterprise. The growth in our number of engaged customers is a function of our product value proposition and effectiveness of our distribution, whilst ARPU is a function of the level of product penetration per customer and pricing dynamics. 95% of consumers' revenue and 88% of merchants' revenue, respectively, can be explained by these core drivers for this quarter. As a reminder, the consumer ARPU is a function of 3 products: transactional banking, lending and insurance, while the merchant ARPU is a function of 5 products: acquiring, ADP, lending, software and cash. Enterprise follows a different core driver model, predominantly based on TPV and take rates. These core drivers are a function of corporate billers on the platform and individual commercial arrangements with different channel partners. The Enterprise division has 3 main product offerings: ADP, Utilities and Payments. We hope that this gives you as investors a clearer view on how to view the business and how the group generates sustainable value. We will continue to disclose these drivers going forward in an effort to simplify our story and show how we are tracking against our objectives. I will now hand over to Dan to take us through the financials for the period. Daniel Smith: Thank you, Ali. Good morning, and good afternoon to everyone joining us today. I'm pleased to report that we have delivered on our guidance for the 14th consecutive quarter, underscoring the consistency of our operational execution and the resilience of our diversified business model. Net revenue for Q2 was within our guidance range, reaching ZAR 1.6 billion, a 16% year-on-year increase. Group adjusted EBITDA came in at ZAR 304 million, landing at just above the midpoint of our guidance and reflecting a robust 47% year-on-year increase. Our earnings profile is now approaching like-for-like comparability with the contribution from our Recharger acquisition being the only item not reflected in last year's base. Adjusted earnings, which we regard as the most appropriate indicator of our underlying performance, grew more than sixfold to ZAR 111 million for the quarter. Similarly, on a per share basis, our adjusted earnings has grown from ZAR 0.21 to ZAR 1.34, a very pleasing result that demonstrates the accretive impact of our acquisitions over time and ability to integrate and improve operational performance. Our leverage ratio stands at 2.5x, flat on last quarter and significantly down from the 2.9x at year-end. As a reminder, our medium-term target remains 2x or lower, which we believe is appropriate given our current structure. You will also see that we have received Competition Tribunal approval for the Bank Zero transaction, which will deliver meaningful funding and balance sheet benefits once integrated into the group. Net revenue as a whole came in at ZAR 1.6 billion, up 16% on the previous year. Our Merchant division net revenue pulled back 2%, primarily due to our refocusing of the merchant distribution force on clients with a high potential for cross-sell and integration as well as ongoing pricing pressure in the market. As mentioned in previous quarters, Merchant is on a transformative journey. Consumer delivered another standout quarter with net revenue rising 38% year-on-year to ZAR 567 million, marking another record performance for the division. Enterprise continues to show solid progress, delivering ZAR 217 million in net revenue, a 67% year-on-year improvement. This reflects the business' post restructure base and includes inorganic benefits from the Recharger acquisition. Lincoln will unpack the drivers behind each division in his operational review. Group adjusted EBITDA grew 47% year-on-year to ZAR 304 million, slightly above the midpoint of our guidance. Merchant segment adjusted EBITDA was ZAR 170 million, a decrease of 6% from last year. The current fiscal year is transformative for Merchant. As outlined in our Q1 investor presentation, we are building the foundations for future growth with a focus on 3 aspects in particular: bringing several businesses together, unifying our Merchant brand and investing in new product offerings to clients and rationalizing our infrastructure in order to capture efficiencies. Successfully combining Merchant's numerous products and companies into a cohesive go-to-market strategy requires thoughtful planning and disciplined implementation. Our new management team is making good progress. And we look forward to driving growth in an industry that is ripe for disruption. Given the transformation, we expect the growth profile of Merchant to be flat for the rest of the fiscal year with a return to growth in FY '27. Consumer achieved yet another excellent performance with segment adjusted EBITDA more than doubling to ZAR 159 million. With ongoing improvements in distribution and strong cross-sell momentum driving ARPU, we believe Consumer remains well positioned for continued growth. In particular, following the strong performance of our lending activities, we expect strong earnings growth in Q3 and Q4. Enterprise delivered ZAR 24 million in segment adjusted EBITDA. We continue to invest in our platform. And we expect stronger earnings contributions later this year and into FY '27 as new product platforms come online and we internalize merchant acquiring volumes. A quarterly run rate of approximately ZAR 40 million to ZAR 50 million remains our short-term expectation. Our group costs were ZAR 50 million this quarter, a pleasing reduction over the previous few quarters and closer to our anticipated long-term run rate. Adjusted earnings per share continued their upward trajectory, rising more than sixfold to ZAR 1.34, reflecting the success of our combined organic and inorganic growth strategy. Cash flows from business operations continue to be healthy, totaling ZAR 419 million for the quarter and in line with the EBITDA evolution. ZAR 385 million of that cash flow was reinvested into our lending operations and ZAR 101 million to fund our interest costs. Capital expenditure for the quarter was ZAR 84 million, of which ZAR 48 million was spent investing in growth. This consists primarily of the continued expansion of our Smart Safe product, capitalization of software development costs and funding additional merchant acquiring devices. Our leverage ratio came in at 2.5x, in line with Q1 despite funding required to grow our lending book. We anticipate our leverage ratio to trend lower through FY '26. As mentioned earlier, the Bank Zero transaction will allow us to fund expansionary cash flows from our lending activities with customer deposits, further deleveraging our balance sheet. This will materially increase our cash conversion rate relative to our current funding structure. Over the last 5 quarters, we are beginning to see the emergence and impact of the platform business we are building. As our business continues to grow through our wide distribution footprint and product innovation, we see a pleasing increase in operating margin from approximately 15% a year ago to 19% this quarter. Post the transformation of Merchant and the acquisition of Bank Zero, we anticipate that our operating margin will trend towards 30%. Reflecting on our CapEx, we are seeing a similar trend. As stated in previous presentations, we expect our CapEx to be below ZAR 400 million a year. On an LTM basis, we see CapEx as a percentage of EBITDA decrease from approximately 46% a year ago to 33% this quarter. These metrics give a clear indication of our improving fundamentals as we scale our platform. I will hand over to Lincoln, who will take you through the revenue drivers and KPIs for Merchant, Consumer and Enterprise. Lincoln? Lincoln Mali: Thank you, Dan. Good morning, and good afternoon, everyone, on the call. I'll begin with the Merchant division. As Dan mentioned, the division is in the midst of a significant transformation. We are integrating our businesses, unifying our brand and offering, streamlining cost and infrastructure and operating under a new leadership team. While this is a period of meaningful change, I'm encouraged by the energy across our teams and by the early benefits we're seeing from the restructure. Before turning to performance, there are 2 terminology updates to note. What we previously referred to as micro merchants, largely serviced through Kazang in the informal market are now called Community Merchants. In the future, Community Merchants will also include sole proprietors and micro merchants such as hairdressers, food vans and other owner-operated establishments. The formal sector historically serviced by Adumo, GAAP, and Connect is now referred to as corporate merchants and will be geared to serving medium and large businesses with a focus on hospitality, fuel and retail. This more closely aligns to customer needs in terms of product and distribution focus. This quarter also marks the first like-for-like comparison for the Merchant division in several quarters. As Ali mentioned, we have standardized how we present merchants. We now show a single overall active merchant base, a single aggregated ARPU and a single product penetration metric. This reflects how the division is managed operationally, particularly as we evolve into One Lesaka, as Ali referred to in his opening remarks. Active merchants increased 8% year-on-year to just over 130,000 merchants. We have moved away from reporting points of presence and now focus on active merchants, which better reflect revenue generation engagements and our monetization strategy. For clarity, an active merchant is defined as a merchant who has made at least one customer-initiated transaction in the past 90 days. Merchant ARPU is down 10% to ZAR 1,835. This was primarily driven by lower airtime volumes and continued margin compression with the ADP product. We also saw some margin pressure in acquiring, driven primarily by our strategic push into the target market and simultaneously upgrading our terminal estate for community merchants. These hardware upgrades are an investment in our customer experience, improving reliability and strengthening our competitiveness over time. Similar to Consumer, we are now showing our penetration rate for our multiproduct merchant offering, which we use to measure our product layering success. At the end of quarter 2, we had 46% of our merchants using more than one of our products. Turning to our volumes processed. Card acquiring TPV grew 7% year-on-year, reaching ZAR 12.1 billion for the quarter. Active acquiring merchants increased 8% to 73,500. We are actively focusing on our on-platform acquiring merchants and actively moving away from non-acquiring corporate base. Our go-to-market focus remains on expanding and deepening ISV partnerships as we see a compelling opportunity through this distribution channel. Following the launch of a proprietary switch by our Enterprise division, over 40% of this quarter's card TPV were processed in-house. While this will lead to improved profitability and greater retention of value in the group over time, it has already significantly reduced our reliance on outside parties, materially improving our ability to innovate and to more effectively service our clients. Cash TPV reflects a continued contraction in the corporate market and growth in the community market, resulting in an overall TPV growth of 5% with device numbers broadly flat. Community bond TPV increased materially year-on-year, underscoring the momentum in this segment. While cash deposits are typically smaller and more frequent and therefore, have lower margins on a stand-alone basis, they play a critical strategic role in delivering an ecosystem of products. Cash deposited into vaults immediately funds merchant's digital wallets, enabling prepaid purchases, supplier payments and EFTs and directly supports growth across our broader ecosystem. This cash-led strategy is clearly reflected in ADP's performance, where we have seen the knock-on effects. ADP's TPV grew 27% year-on-year with active merchants up 8% to 102,000. Supplier payments within ADP continued to perform strongly, growing 48% year-on-year, supported by traction from the cash solutions and targeted vault placements by our sales teams. We now have more than 1,900 suppliers on the platform, materially reducing cash handling risk and improving administrative efficiency for both merchants and suppliers. Within prepaid solutions, TPV increased by 2%, with ongoing pressure on airtime volumes, offset by sustained demand for electricity and vouchers consistent with the trends seen in quarter 1. Corporate lending originations reached ZAR 205 million for the quarter, representing 35% growth year-on-year. While our credit scoring criteria remains unchanged, the reduction in the minimum loan sizes has expanded our addressable market. The loan book grew 28% year-on-year to ZAR 389 million. And although penetration remains modest, the growth opportunity is encouraging. In our software businesses, which include GAAP and Masterfuel business, active merchants increased 5% to just over 10,000. We continue to drive the adoption of our cloud-based Unity platform in the hospitality vertical. While Unity may result in lower initial subscription fees, it significantly improves customer lifetime value, supports long-term growth and enables the merchant acquiring and software cross-sell. This strategy positions us as the partner of choice for restaurants seeking to modernize and scale. We would like to give slightly more color into the corporate versus community split and how we categorize our merchant base. In our Corporate segment, we have the historic Connect and Adumo businesses, which comprise approximately 25,000 merchants with an ARPU of circa ZAR 5,900 per month. The distribution model is largely driven through corporate channels at a franchise level and through ISV partnerships. The sales cycles generally take longer as the product offering is more complex. On the community side, we have approximately 105,000 merchants using our services. The sales process is driven by our boots on the ground sales force with our teams going into townships and rural markets and engaging directly with merchants. The sales cycle is much shorter and the implementation is simpler. However, ARPUs are lower at circa ZAR 800 per month. We have spoken a lot recently about layering our products and services as we deepen our merchant relationships. From a financial perspective, the impact is profound when we get this right. For an example, in corporate, when we add an acquiring solution to a typical software client, we can see an ARPU uplift from ZAR 3,000 to ZAR 5,000. In the Community segment, adding acquiring to a typical ADP merchant can see an uplift from ZAR 550 to ZAR 950. With our comprehensive merchant offering, layering and cross-selling solutions to deeper relationships supported by continuous product innovation is the core pillar of our strategy going forward. I will now move on to the Consumer division. I am pleased to report another record quarter with improvements across all our primary KPIs. We achieved a significant milestone in quarter 2 with our active base exceeding 2 million customers, representing a 21% increase over last year. In another first, for quarter 2, Lesaka recorded the highest net new additions in the grant beneficiary market, surpassing Capitec and other competitors for the first time. As I mentioned in the last quarter, we believe these results are due to our focus on delivering relevant products with an appropriate value proposition through convenient distribution channels for our consumer. The core drivers of this significant growth include continued research and development in our proprietary technology platform, Bonngwe, which enables our frontline staff to efficiently onboard and provide full-fledged operational account in under 5 minutes. Our ARPU has increased by 15% year-on-year to ZAR 91 per month, driven by continued engagement and cross-sell success for our lending and insurance products. Our penetration rates have improved consistently as account holders recognized the value propositions our products offer relative to our competitors and the ease of access with which we provide. At the end of quarter 2, 19% of our active consumer base has a transactional account, a loan product and an insurance policy, up from 14% at this point last year. Combining our base of consumers beyond just a transactional account, we have circa 50% of our base engaged. We believe that this is a clear demonstration of our product market fit within this segment, but also leaving room for continued growth. Our lending product has been a key driver of the Consumer division's recent success. And quarter 2 performance has continued and accelerated this trend with record originations and book size. During quarter 2, we originated circa ZAR 1.2 billion in loans, an 88% increase over last year, with the outstanding book up 106% at circa ZAR 1.5 billion at quarter end. This is a milestone achievement as we've disbursed more than ZAR 1 billion in the quarter for the first time. These growth rates have been supported by the new loan product launched last year, which increased the loan size from ZAR 2,000 to ZAR 4,000 and the maximum tenure from 6 months to 9 months. The new lending product with the increased tenure of 9 months represents 40% of our originations during this quarter. Our investments in distribution, technology and training has also supported this growth. We are seeing increased use of our low-cost digital USSD channel, which allows customers to originate loans digitally with immediate disbursements. This not only improves customer convenience, but also our unit economics. 8% of new loans originated in the last quarter came through USSD channels and we are seeing steady increase in this trend. Encouragingly, our borrowers' profile reflects deepening relationships with our consumer clients with 78% of originations being to repeat borrowers and 80% being to clients of over 2 years. This is important from a credit risk perspective as we gain a deeper understanding and gather richer data sets on our customers' borrowings and repayment behavior. This facilitates improved credit scoring, provisioning and product development. As a reminder, we provide for default at 6.5%. We continue to actively manage the credit risk of our portfolios and we will adjust our provisioning methodology as required. Turning to our insurance business. We delivered another very successful quarter. We have tailored our insurance offering to provide funeral and pension insurance policies customized and priced for the grant beneficiary market. Gross premiums written increased by 38% to ZAR 134 million. And the number of in-force policies increased by 29% to 641,000. Promisingly, our collections ratio remains unchanged at a very high 96% for this end of the market. As mentioned in the last quarter, given the success of our insurance products, we are now piloting selling insurance policies in the open market and beyond the Lesaka consumer base from quarter 3 onwards. We are currently focused on a number of exciting strategic initiatives, which should continue this trend, including the migration to Bank Zero, the One Lesaka rebranding, growth of our digital capabilities and channels and our expansions beyond our traditional grant beneficiary base. Turning to our Enterprise division. As a reminder, this segment comprises 3 core businesses: Alternative Digital Products, Utilities and Payments. Starting with ADP, this business provides the integration technology that enables customers across South Africa to purchase prepaid solutions such as airtime and electricity and to make bill payments through multiple channels, including major retail networks. We are one of the largest aggregators in the country. The ADP ecosystem brings together collectors and receivers. Collectors are the enterprises that act as sales and payment channels, allowing consumers, merchants and businesses to access our platform, whether through a banking app or at a large retailer. On the receiving side, our partners includes all major mobile network operators, electricity providers, insurers as well as gaming and money transfer services companies. Lesaka sits at the center of this ecosystem, efficiently processing bill payments for a fixed fee per transaction and facilitating the buying and selling of these prepaid solutions for a commission on volume. In quarter 2, total ADP TPV reached ZAR 11.9 billion, representing 18% year-on-year growth. Bill payments account for over 75% of ADP volumes. Turning to Utilities. This business sells prepaid electricity meters and prepaid electricity vouchers. Meters are distributed primarily through large national retailers such as Builders Warehouse, Leroy, Merlin and Buco, while prepaid vouchers are sold across retail outlets, apps and online platforms. Utilities total payment volume increased 15% year-on-year to ZAR 465 million in quarter 2, continuing our positive growth of both inflationary pass-through of electricity pricing and organic volume growth. We now have over 500,000 registered meters with 357,000 active meters, up 6% year-on-year. We define active meters as those that have recorded a top-up within the last 90 days, akin to our definition of active consumers and merchants. We recently launched our proprietary payment switch and moved from the pilot phase to full migration of internal acquiring transactions. As mentioned earlier in the merchant overview, 40% of our merchant card acquiring volumes were switched in-house this quarter through the Enterprise division. This will retain more value within the group, but more importantly, reduces reliance on third parties, which greatly improves our flexibility and responsiveness in servicing clients and product innovation. More broadly, the Enterprise division has made significant progress over the past year in reshaping its operations to focus on core capability. This included the exit of several legacy businesses, while at the same time, accelerating expansion of our collectors and receivers network. Growth on the collector side is particularly powerful through a forced multiplier effect with a single partnership unlocking thousands of distribution points. We've been successful in a number of key partners over the past few months. These include airtime products through Shoprite stores, which add over 2,500 distribution points to our network as well as Investec's clients through its native app and website. On bill payments, we've partnered with Spar, adding another 850 sites to our network. That concludes the operational overview for quarter 2. I will now hand over back to Ali to take you through our guidance. Ali Zaynalabidin Mazanderani: Thank you, Lincoln. Turning to our third quarter guidance. For net revenue, we are providing a range of ZAR 1.65 billion to ZAR 1.8 billion, the midpoint implying a growth rate of circa 27%. Group adjusted EBITDA is expected to be between ZAR 300 million and ZAR 340 million, with the midpoint implying growth of circa 37%. For the full year guidance, we are pleased to reaffirm our net revenue range of ZAR 6.4 billion to ZAR 6.9 billion and ZAR 1.25 billion to ZAR 1.45 billion for group adjusted EBITDA. As a reminder, these exclude any impact from Bank Zero should the acquisition complete in this financial year. Group adjusted EBITDA includes all costs associated with office moves, but excludes potential once-off marketing costs associated with the new brand launch. These imply growth rates of 21% to 30% in net revenue and 36% to 57% in group adjusted EBITDA. We are excited about the second half of the year and the earnings momentum we expect to take into FY 2027. Thank you for attending our earnings presentation. We will now address any questions you have for the team. Unknown Attendee: Thank you, Ali, Dan and Lincoln. Chorus Call, please could you open the line for Theodore O'Neill from Litchfield Hills Research. Operator: Theodore O'Neill's line is now open. Theodore O'Neill: I have a question about the Consumer segment. In the 10-Q, you cited an increase in transaction fees, insurance premiums and lending revenue for the year-over-year growth. Is the increase in transaction fees an annual event? And on the insurance and lending, I want to understand the growth there. Is this an underserved market or do you have to take share from competitors? Ali Zaynalabidin Mazanderani: I think Lincoln, I'll let you answer that. Lincoln Mali: Thanks, Theo. Yes, we do review our transaction fees on an annual basis and some of those increases are there given on an annual basis. But I think what's important to understand is that on the transaction side, we are taking market share from an existing competitor, largely the PostBank and from other banks. We are growing net additions customers more than our competitors, and that gives us the edge. When it comes to loans and insurance, these customers are underserved. Many of them do not have any formal institutions that are able to provide them with loans or provide them with insurance. On the loan side, many of these customers are being given loans by unscrupulous and unregulated micro lenders. We are able then to give them loans that are fair, transparent and they're able to afford and hence, the growth in that loan portfolio. Insurance, there are other competitors, but I think that they are not as penetrated in this market as we've got now. Unknown Attendee: Chorus Call, please, can you open the line for Ross Krige from Investec. Operator: Ross, your line is now open. Ross Krige: I have 5 questions. I'll just ask the 3 on Merchant first and then pause for you to answer. So just on Merchant, the decline in ARPU, if you could just -- I think Lincoln mentioned a few of the drivers. Just in terms of the run rate going forward, how much of the impact is still going to come through there? Like how do you see ARPU trending, I guess, over the next 6 to 12 months? Then, in terms of the cross-sell in Merchant and the decline over the last year in product penetration. Just wondering, is that a timing issue? When do you expect that to start moving the other direction? And then thirdly, on Merchant, just the acquiring cross-sell, which pretty show the impact on ARPU. Just wondering, is that sort of a key opportunity in the short term? And I wonder if you would comment on where you see that penetration going across the different parts of the business. Ali Zaynalabidin Mazanderani: Thanks a lot, Ross. Okay. So firstly, on the ARPU, the principal driver is ADP, and as Lincoln said, airtime within that dynamic. How do we see it? I think that we expect that ARPU to stabilize and then ultimately increase over the coming 12 months. And the driver of that increase is not individual product's ARPU, because remember, that ARPU is a composite of the 5. It's effectively as a consequence of the collective. In terms of cross-sell. So the product penetration rate is a percentage. So the number of customers who have more than one product or more than 2 products has not declined year-on-year. It's increased marginally. But the main driver of active merchant growth has been through the ADP product in the community segment. And there, the strategy is a land and expand one. We hope to ultimately be cross-selling additional products into that base, notably, as you mentioned, acquiring. And yes, acquiring is a core cross-sell offering in both the community and the corporate segment. The most common attachment rate is ADP and acquiring in community and software and acquiring in the corporate segment. It's one of the sort of principal areas of focus in that respect and one where we believe we have a moat that enables the ARPU to be sustained. Does that answer those questions? Ross Krige: On the -- sorry, 2 more, just one on Consumer, one on general. On Consumer, the lending growth or originations is obviously picking up quite a bit. If you could just maybe talk to some of the drivers behind that. And then again, if we think about the outlook over the next year, is that a lever that you expect to continue or an opportunity that you expect to continue to execute on? Like what sort of growth rates and originations should we think of going forward? And then on the marketing costs related to one brand that you mentioned would be excluded from adjusted EBITDA. I don't know if you could talk -- give us an idea on the level of that. Ali Zaynalabidin Mazanderani: Sure. So on Consumer lending, I'll go to Lincoln. Lincoln Mali: I think one of the important things that we highlighted a couple of quarters back was we had made a change in the loan sizes that we were given to our clients based on the certain engagements with the clients. So we increased the loan size from ZAR 2,000 to ZAR 4,000. And we also increased the tenure from 6 months to 9 months. That we call the medium-term loan. That has been so well received by the market to a point where 40% of the originations that we've got in this quarter come from this medium-term loan. And we see opportunities for more growth in this medium-term loan. The second thing that is also interesting is the investment we made in our digital channel, the USSD channels that enables people not to come to a branch, but be able in the comfort of their home or workplace to make a loan application. 8% of our new loans in this quarter are originated from that USSD channel. We see that as another potential for growth. When we look at the quality of the book and the quality of the lending that we're doing, we must remember that 78% of the originations are to repeat borrowers. These are customers that we know and understand. And 80% of those clients have been with us for over 2 years. And that gives us a very good insight from a credit risk perspective and also gives us better understanding of the repayment capabilities and behavior of the clients. So we do see opportunities for these clients to grow with us and then new clients that we are taking on board as we grow our customer base on the EPE side to also take on lending with us. Ali Zaynalabidin Mazanderani: And then maybe on the marketing question, Dan, do you want to go first? Daniel Smith: Yes. So specifically rebrand costs, we estimate them for the next 2 quarters, somewhere between ZAR 50 million and ZAR 75 million. Ross Krige: Lincoln, thanks for that explanation. Just if I can follow up on the rate of growth going forward, what should we expect? Lincoln Mali: I think that I would see the same level of growth because we are still at an early stage of the evolution of this loan product. As I say, 40% are taking up this. We think that the larger group will take that in the near term. So there's more upside going forward. And as the book also is well managed and the book is behaving well, we think that there's good prospects for more lending in this market in the future. Unknown Attendee: I'm going to move to the questions from the webcast now. What is the rand amount of deposits estimated to be transferred to Bank Zero in terms of current Lesaka customers once the merger is complete? Ali Zaynalabidin Mazanderani: Thanks. I'm not sure where the question was from... Unknown Attendee: From [ Johan Baes ]. Ali Zaynalabidin Mazanderani: Okay. Thanks, Johan, for your question. So we stated that we expect as a consequence of the Bank Zero acquisition that we would be reducing the gross debt of the business by north of ZAR 1 billion. I would say that, that is the lower bound of that. As a consequence of that, you should expect, obviously, that the deposit base in the business would be substantively more. I wouldn't wish to provide a specific number at this stage, though. Unknown Attendee: Thank you, Ali, Lincoln and Dan. Thank you, everyone. We are going to wrap it up here. As a reminder, there will be a replay of the webcast on the Lesaka investor website. The IR team will reach out to anyone with unanswered questions. Thank you, everyone, for your participation.
Tiffiany Moehring: Good afternoon. I'm Tiffiany Moehring, and I'm the Director of Communications and Marketing at the American Battery Technology Company. We would like to welcome everyone to our second quarter fiscal 2026 earnings call. On behalf of the entire team at American Battery Technology Company, we would like to thank everyone for taking the time to join our call today. Following this presentation, a recording of this call, along with our press release and our quarterly SEC filings will be made available on our website. This presentation does include forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigations Act of 1995. These statements are subject to risks and uncertainties that can cause actual results to differ from those anticipated. Additional information regarding the factors that may cause actual results to differ can be found in our annual filings. On today's call, our CEO and CTO, Ryan Melsert, will provide remarks regarding our two lines of business, which include our lithium-ion battery recycling business and our primary claystone to lithium hydroxide business. It is now my pleasure to turn the meeting over to Ryan. Ryan Melsert: Thank you, and welcome, everyone, to this meeting. As we've discussed beforehand, we at American Battery Technology Company, have our two main business units, and we are working to implement the closed-loop infrastructure shown on the right. So first, we have our lithium-ion battery recycling technology that we have developed over the past several years. We built our first commercial scale facility about 3 years ago and are in the process of designing and constructing a second facility. We work closely with each of the partners and the other sectors of this closed-loop economy. We received waste streams back from each of them as well as end-of-life material to process in our battery recycling plant, where we then manufacture critical mineral products to sell back to our domestic customers to work to close that supply chain. Implementing this closed loop is very important. And if the amount of batteries in the field was fixed, battery recycling alone could supply just about all of the minerals needed. However, as the amount of batteries in the field is growing, in addition to closing the loop, we also need to fill the loop the first time. So that's why here at ABTC, we also have our own critical mineral resource, and we've developed our own technologies for how to extract the critical mineral lithium from the ground here in the U.S., how to extract it, how to purify it and how to make it into a final battery-grade critical mineral product. So we are happy to be joined by a new executive in the company as well. So Alex Flores, as our new Chief Financial Officer, has joined as of this coming Monday. He has over 20 years of experience, leading financial organizations in both the battery and the automotive sectors throughout North America. He's worked leading significant projects and proposals with the U.S. government, supporting different types of financing and has significant experience driving operational improvements through large organizations. So we're excited to welcome him this coming Monday as we ramp our business units to their next levels. As far as our financial summary for the previous quarter ending in December, we're excited to highlight that we have broken all of our records and achieved record high level of revenues for this facility. So we sold about $4.8 million worth of products just in the quarter ending December. And additionally had about $300,000 in our interest from income. So a substantial amount of $5.1 million we generated in that revenue and interest income for the quarter. While we substantially scaled operations at our first recycling facility through a lot of operational efficiencies, our operating costs actually increased by a much smaller factor than our revenue. So as we're operating now going forward, that $5.1 million in revenue and interest income, during the same corresponding period, we had about $4.9 million in cash expenses to operate that plant. And when including noncash costs, including depreciation and stock-based compensation, about $6.4 million. So we were getting to the point where the amount of revenue and interest income we're generating is very close to the amount of cash costs it requires to run this plant. We have additional ramp-up operations in place for this facility, additional operational efficiencies to put in place. And we're excited to be passing through the breakeven point on this plant and continuing to grow our margin as we move forward. We also are at one of our highest cash positions we've been at in years through strong market actions last fall as well as many of our existing shareholders electing to exercise their warrants. We had a cash balance of $48.7 million as of the end of quarter in December. So as we have this cash balance, we'll be using that to continue to scale operations at this first recycling plant, continue to add additional value-add processes and also work to move our two new facilities forward. Just as important, we were able to pay off any remaining debt or convertible notes in the past quarter. And as of now, we, as a company, have absolutely 0 debt. So very strong balance sheet as we move forward. Some of our largest cash positions in history, no debt, significantly increased revenue and only a minor increase in operating costs for this quarter ending December. And that ramp of revenue is, again, more revenue generated in this quarter ending December than the previous 4 combined. So this is much greater than linear growth as we work to scale this facility. Some of the highlights from the past quarter. We are receiving quite a bit of material from the automotive sector, but an increase in amount from the stationary grid Battery Energy Storage System field as well. Several large projects we have announced, we continue to receive material from each of those sectors. And again, increasing these operational efficiencies in the plant as we continue to scale operations, have reduced cost through economy of scale, but also lessons learned that we have an ever more trained workforce and keep offering the plant in more efficient manners. As mentioned, we have received our CERCLA certification. We are able to receive this type of material that is generated from different types of stationary facilities throughout the country. It's a rare certification we have. We have a strong relationship with the EPA to manage this certification and are proud to be receiving these types of materials from different types of applications throughout the country. As far as our recycling operations, we have announced that in addition to our first recycling plant near Reno, that we are moving forward with the design and construction of a second battery recycling facility in the Southeast U.S. So even just the past few months, we've had several team members at our site in the Southeast U.S., really working with local partners, a lot of our strategic partners in the area as well and moving the second recycling facility forward. In our second business unit, we are manufacturing this lithium hydroxide from our claystone material. Again, we are continuing to move this Tonopah Flats Lithium Project forward. This is one of the few lithium projects in the country that has been identified at this scale and is actually moving through the maturity steps. We built our integrated demonstration scale facility about 2 years ago, have had that running and actually demonstrating a much larger scale than is conventionally seen how we take our actual claystone from our own mine, how we move it through each of the operating steps through our extraction, our purification, our conversion, and our crystallization into a final battery-grade lithium hydroxide product. We were proud to be selected last summer and fall by the Trump administration as a priority project. So we have been assigned essentially a liaison from the FAST-41 Permitting Council, holding weekly meetings, really working to drive each of our federal permits forward to accelerate the commercialization of this critical mineral facility. So we're excited to have a lot of that status on the public dashboard on the FAST-41 website, and we continue to move through these permitting steps at an accelerated rate after becoming a priority project. We have completed all of the steps for submitting the baseline studies are now going through the NEPA process with the Department of Interior and the Department of Energy. And have been working on that process since the spring of 2023. So we're excited as we move forward and keep taking steps with the federal government. We did publish our Pre-Feasibility Study last fall, showing the technology and financial road map for bringing this mine and refinery to market. So this is for the 30,000 tonne per year facility. We modeled it with a 45-year life-of-mine, showed very attractive returns with a net present value after-tax of about 8%. And one of the most competitive portions is the production cost at just over $4,300 per ton of product. This would make it one of the most competitive commercial scale facilities in the world and is really an artifact of us designing these processes internally from the ground up with a blank page system as we work to bring one of the first and only claystone mine and refineries to commercialization. We've updated our lithium resource and reserve estimate several times. Within the PFS, we showed about 21.3 million tonnes of lithium hydroxide that is accessible from this report, included a substantial portion that has been upgraded beyond our resource into proven and probable reserves. As we've published that PFS last fall, we are now working diligently on the Definitive Feasibility Study to be published shortly. This really is the last step to having a bankable design as we engage with each of our investors for the investment in the refinery mine itself in addition to finalizing the offtake agreements for the product out of this facility. For the financials, again, in summary, we're excited to show about $4.8 million of revenue from selling our product, an additional $300,000 in interest income for the quarter. The cost of goods sold increased by a much lower factor than our revenue increased, showing our approach on the margin for this recycling facility. We continue to receive funds from each of our government grants that we have contracted that are supporting the operation and construction of these facilities. And again, on our cash balance, substantial investments were made in the fall in this quarter ending December to bring our total cash balance up to about $47.9 million. So again, that balance is being used now to expand our current facilities and to break ground on our new facilities. So again, thanks to our stakeholders, our shareholders, our partners, and we look forward to continuing to inform you as we scale up each of these operations moving forward. And I believe we may have 1 question or 2 from the audience now. Tiffiany Moehring: Yes. We do have one question by Jake Sekelsky, who is the Managing Director and Head of Metals and Mining Research at AGP. He has the following question for you. Can you discuss progress related to the ramp-up of the $30 million EPA cleanup agreement? Ryan Melsert: Yes. That's in reference to the Moss Landing project in Northern California. That has been going through decommissioning for many months. We have been receiving material from that facility since the end of the summer. That represents a substantial portion of the feed into our factory, but we do have several other sources from the stationary market as well as the automotive market and the consumer electronics field. So we received large amounts of material from that project. We are still on pace to receive substantially more material and are happy to be working with them as partners. I believe that's our only question for today. So again, thank you, everybody, for joining this webinar. Our actual 10-Q financials are being published now as well. And thank you, everyone, for your support.
Operator: Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Mr. Grover, you may begin your conference call. Matthew Grover: Thank you, operator, and welcome to AvalonBay Communities Fourth Quarter 2025 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at investors.avalonbay.com, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben? Benjamin Schall: Thank you, Matt, and good afternoon, everyone. I'm joined today by Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. Looking back on 2025, I want to begin by thanking our nearly 3,000 associates across AvalonBay for their dedication and commitment. It was a year that required us to be nimble, disciplined and highly focused on execution. Our teams rose to that challenge, consistently demonstrating our core values of integrity, continuous improvement and a genuine spirit of caring. As summarized on Slide 4, our operating results in 2025 reflect the quality of our portfolio, the proactive steps we've taken to optimize our portfolio's growth and the strength of our operating teams. Keeping existing residents satisfied and engaged was a clear priority, and that focus showed up in our results with high levels of retention and strong renewal acceptance serving as a ballast to overall revenue growth of 2.1% during the year. In fact, our turnover rate of 41% in 2025 and was the lowest in our company's history. My particular thanks to our operating teams for delivering a near all-time high Mid-Lease Net Promoter Score of 34, one of the metrics we utilize to measure customer engagement and with clear connections to retention and renewal outcomes. Our regional development, construction and operating teams were also successful last year in sourcing attractive development opportunities using our strategic capabilities and balance sheet strength when many competitors were on the sidelines. All in, we started $1.65 billion of projects with a projected initial stabilized yield of 6.2%. Funded with capital that we previously raised at a cost of roughly 5%, this investment activity sets the foundation for strong earnings and value creation in the years ahead. We have one of the strongest balance sheets in the industry and also pride ourselves in remaining nimble in capital sourcing and capital allocation. Among our peer set, we were the only one to raise equity capital in size in 2024, having raised almost $900 million of equity on a forward basis at an implied initial cost of 5%. And at the end of 2025, we are one of the only to repurchase shares in size, having acquired almost $490 million at an average price of $182 per share and an implied yield north of 6%. These repurchases were funded with incremental debt and the sale of lower growth assets, which in turn improves our long-term growth profile. In total, during 2025, we raised $2.4 billion of capital at an initial cost of 5%, positioning us to continue investing in our existing portfolio and in new development in 2026, which transitions us to this year with our key themes for 2026 summarized on Slide 5. First, on the operating side, while we expect fundamentals to improve as the year progresses, we are forecasting modest revenue growth of 1.4%, given the current job and demand backdrop. Given the supply backdrop, particularly in our established regions, we will not need much incremental demand to facilitate stronger revenue growth than assumed in our budget. And irrespective of the macro environment, we will continue to utilize our scale, particularly our investments in technology and centralized services to drive incremental growth from our existing portfolio. We're now 60% of our way towards a target of $80 million of annual incremental NOI from our operating initiatives, with an incremental $7 million of NOI slated for this year. In terms of development earnings, we will have a meaningful uplift in development NOI as projects lease up during 2026, with earnings partially offset by the funding costs from the $1.65 billion of profitable developments we started in 2025. Kevin and Matt will further detail this dynamic. In terms of new starts, we are restraining activity to $800 million, consisting of 7 projects with an average development yield of between 6.5% and 7%, providing a strong spread to both underlying cap rates and our cost of funding. And finally, our Board approved an increase of our quarterly dividend to $1.78 per share, which after the 1.7% increase continues to position us with one of the more conservative payout ratios in the industry. Delving a little deeper into the setup for 2026, our outlook assumes a job growth environment that is slightly stronger than 2025 but still relatively modest. As shown on Slide 6, NABE is currently forecasting 750,000 net new jobs in 2026. As the year progresses, enhanced economic and policy certainty, the benefits from recent tax legislation and the potential for further Fed easing are among the catalysts that could translate into higher levels of business investment, improved consumer confidence and stronger hiring in our key resident industries. Turning to Slide 7. Demand for apartments will also be supported by rent-to-income ratios, which are now below 2020 levels in our established regions, given that incomes have grown faster than apartment rents over the past few years. Demand will also continue to benefit from the relative attractiveness of renting versus home ownership, which is particularly acute in our established regions, where it's over $2,000 per month more expensive to own a home, given home price levels, mortgage rates, and the increases in other cost of homeownership, such as insurance and property taxes. And then there's the supply outlook with supply in our established regions expected at only 80 basis points of stock this year, levels we have not seen since the period coming out of the GFC. And given the challenges of getting entitlements and how lengthy the process is in our established regions, we expect this supply backdrop to serve as a tailwind for us for the foreseeable future. Balancing these series of dynamics, Slides 9 and 10 provide our outlook for 2026. We entered the year with a high-quality portfolio concentrated in suburban coasts with historically low levels of supply, a differentiated development platform and one of the strongest balance sheets in the REIT sector. And while our guidance assumes modest growth in 2026, we are well positioned to generate meaningful earnings and value creation as operating fundamentals improve and development earnings ramp into 2027. Sean will now walk through our operating outlook in more detail. Sean Breslin: All right. Thanks, Ben. Moving to Slide 11. The primary driver of our expected 1.4% same-store revenue growth is an increase in lease rates with incremental contributions from other rental revenue and underlying bad debt. We're expecting year-over-year revenue growth in the second half of the year to exceed what we produced in the first half, with slightly better job growth and improved mix of jobs, the cumulative effect of lower supply and softer comps supporting better rate and revenue growth. Our forecast reflects like-term effective rent change of 2% for the full year 2026, with the first half expected to average in the low 1% range and the second half improving into the mid-2s. In terms of recent leasing spreads, while Q4 performance was modestly below our expectations, it improved in January compared to both November and December. We expect continued sequential improvement in February and March, and renewal offers for those months were delivered in the 4% to 4.5% range. For other rental revenue, we're continuing to drive incremental growth from our various operating initiatives, but it will be partially offset by lower income due to select legislative actions in 2025. Excluding those headwinds, other rental revenue growth would have been closer to 5% versus roughly 3.5% reflected in our outlook. Turning to Slide 12 to address regional trends. Revenue growth of roughly 2% in New York, New Jersey is primarily driven by healthy contributions from New York City and Westchester, which are projected to be in the mid- to high 3% range. Demand in Boston has been impacted by job losses in the back half of 2025. Our outlook reflects a projected year-over-year decline in occupancy of approximately 40 basis points, the majority of which is expected to occur in the first half of 2026, given our very strong occupancy level in the first half of 2025 and another 40 basis points from a projected year-over-year decline in rent relief payments. New apartment deliveries are projected to decline by about 30% to 4,000 units in the market, which will support better revenue growth when demand picks up. In the Mid-Atlantic, job losses in the back half of 2025 were the highest of our established regions. Our outlook reflects just under 1% revenue growth for the year, with negative net effective lease rate growth during 2026, offset by a roughly 20-basis point improvement in occupancy, approximately 30-basis point reduction in underlying bad debt and 30-basis point contribution from other rental revenue growth. New apartment deliveries in the market are projected to decline by roughly 60% to 5,000 units. So the outlook could turn more positive in the second half of 2026, if we see an improvement in job growth. Moving to the West. Northern California is projected to produce mid-3% revenue growth, supported by built-in lease rate growth of 1%, relatively stable occupancy at approximately 96% and continued healthy rate growth throughout 2026. New apartment deliveries are also projected to decline by about 60% to 3,000 units in that region. In Seattle, total employment was flat for the last 6 months of 2025. Our outlook reflects modest net effective rate growth throughout 2026, an approximately 20-basis point reduction in occupancy and a 40-basis point contribution from growth in other rental revenue. New unit deliveries are projected to decline by about 50% to 5,000 units, which will support improved performance as we move through the year. And in Southern California, our outlook reflects revenue growth in the mid-1% range, driven by stable occupancy and approximately 20-basis point contribution from lower bad debt, driven primarily by L.A., and incremental effective rate growth projected primarily in Orange County and San Diego. Unit deliveries in the region are projected to decline by about 40% to 11,000 units, with the most meaningful declines projected to occur in the L.A. market. And lastly, in our expansion region, Southeast Florida will remain the strongest region with revenue growth of roughly 1.5%. Denver suffered from the combination of 0 net job growth during 2025 and the delivery of approximately 16,000 new apartments. The outlook for '26 reflects a challenging environment with modest job growth and another 9,000 new units being delivered into the market. Built-in lease rate growth is minus 1%, and rents are projected to continue to decline throughout the year. And then moving to the outlook for operating expense growth on Slide 13, we expect same-store operating expense growth of 3.8%, 130 basis points above our organic growth rate of 2.5%. In terms of the items projected to drive growth higher in 2026, the phaseout of property tax abatement programs will add roughly 70 basis points. In addition, we settled a very favorable property tax appeal in Q4 2025, which established a much lower assessment and led to a meaningful refund, but is creating a 50-basis point headwind for 2026. In addition, the net impact of operating initiatives is contributing about 10 basis points as the added costs from our AvalonConnect offering is mostly offset by incremental labor efficiencies. And then in terms of the quarterly cadence of OpEx growth, we're expecting heavier growth in the first half of the year before it moderates in the second half, driven primarily by utilities, including the impact of credits received in the first half of 2025, benefits costs and maintenance-related costs given our lighter spend in the first half of 2025. Now I'll turn it to Kevin to go deeper into our earnings outlook for the year. Kevin O'Shea: Thanks, Sean. Turning to Slide 14. We show the building blocks of our 2026 core FFO per share. For internal growth, our guidance reflects a projected $0.04 increase from same-store NOI, partially offset by a $0.03 decrease from overhead, management fees and JV income. For external growth, there are a few components. We expect a $0.10 increase in net development earnings , which I'll discuss further on the next slide as well as a $0.07 increase from our Structured Investment Program and 2025 share repurchases, which consists of $0.02 from our SIP program and $0.05 from our recent buyback activity in 2025. These sources of external earnings growth are offset by a $0.07 decrease from refinancing activity across 2025 and 2026, and a $0.10 decrease from transaction activity. Here, I've emphasized that our recent elevated transaction activity and associated impact on earnings reflects our having acted on some unique opportunities last year, including the timely sale of a portfolio of assets in a challenged submarket in Washington, D.C., and acquisition of a tailored portfolio of communities at a very attractive cost basis in Texas. We don't execute meaningful trades of that nature very frequently, but we do take advantage of them when opportunities arise. Of this $0.10 in earnings headwinds for transaction activity, $0.06 is timing related, driven primarily by the impact of selling assets in late 2025 and in early 2026. And the remaining $0.04 is the result of selling slightly higher cap rate assets, including in D.C., in order to better position the portfolio for stronger growth over time. Turning to Slide 15. Development is expected to contribute $0.10 or 90 basis points to earnings growth this year. This is lower than is typical for us and is driven by 2 factors. First, due to lower completion and ramping starts last year, the proportion of communities generating development NOI as a percentage of the total development underway is lower than normal. This is reflected in $0.33 of expected earnings growth from our 2026 development communities as well as a handful of other communities that stabilized in 2025 and are now in our other stabilized bucket. And it compares to incremental funding costs of $0.33, attributable to the 26 communities that are under construction today as shown on Attachment 9 of our earnings release, and 8 communities that are expected to start construction in 2026. The second factor relates to a projected $340 million increase in construction in progress or CIP, for 2025 to 2026. This temporarily dampens earnings growth in 2026 because our 5% initial funding cost exceeds our required capitalized interest rate under GAAP during construction, which is currently 3.7%. Therefore, we project a capitalized interest benefit of only $0.10 this year, which is a few cents lower than if our capitalized interest rate equaled our initial funding cost of 5%. Nevertheless, our decision to lean into accretive development does set the stage for further outsized earnings growth in 2027 and beyond as current development projects are completed and stabilized at yields in excess of 6% and accretion steps up, which Matt will discuss more fully. Matthew Birenbaum: Exactly. Thanks, Kevin. As shown in the chart on the left on Slide 16, we started $2.7 billion in new development over the past 2 years at yields 110 to 130 basis points higher than the cost of capital sourced to fund those new projects, and we expect an even wider spread on the $800 million in starts we're planning for 2026. Because our development activity can vary substantially from year-to-year in response to market opportunities and capital market conditions, the flow-through of this activity to earnings can also vary in any given year. The majority of the earnings benefit is realized once all those new apartments are occupied. And as shown in the middle chart on this slide, we are still early in this ramp-up in 2026 with occupancies growing from 1,812 homes in '25 to roughly 3,175 homes this year. We expect that to grow further still to over 4,100 occupancies in 2027. As you can see on the chart on the right, this translates into $47 million of development NOI this year and an incremental $75 million of additional NOI next year. Slide 17 takes a closer look at the expected 2026 lease-up activity, over 90% of which is coming from 11 communities including 8 where we have already achieved first occupancy and have active leasing underway and another 3 set to open in Q1 or Q2. All of these assets are in suburban submarkets and more than half of the occupancies are coming from the New York, New Jersey region and South Florida, 2 of our most stable regions with above-average expected same-store performance for the year. In addition to the earnings boost we expect from these communities in '26 and '27, we're excited about their long-term positioning for future cash flow growth as brand-new assets built and designed by us to respond to future demographic trends. We are including more larger format homes designed for working from home in our unit mix, including 8 communities with a BTR component and many feature excellent infill locations walkable to nearby retail. And with that, we're ready to open up the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Eric Wolfe with Citi. Eric Wolfe: You mentioned that renewals are going out in the 4% to 4.5% range. I guess, first, could you talk about whether you expect to achieve 4% to 4.5% on these renewals or the take rate will be lower? And then second, what changed between now and the 2.5% you achieved on renewals in January? It just feels like there's been a bit of a jump over the last month or 2. I'm just wondering what caused that. Sean Breslin: Yes, Eric, I can talk a little bit about how we see the rent change forecast playing out throughout the year. But to your specific question, what I indicated in my prepared remarks is that the renewal offers for February and March were out in the 4% to 4.5% range. As you probably know, they always settle at something less than that, the historical range. The settlement is probably 100 to 125 basis points of dilution or something like that depending on the market environment. But that's what's happening with the renewal offers and where you think they might settle. In terms of the overall forecast, just to provide some commentary for '26, we're expecting it to come in around 2%, which is only about 30 basis points above what we actually realized in 2025. Our assumption is that the renewals will basically average about the same as 2025 sort of in the mid-3% range. And we're expecting move-ins to improve by roughly 70 to 80 basis points in 2026 as compared to 2025 so that it comes in instead of being modestly negative, it comes in around flat for the year 2026. And for context, and Ben referred to this as well, we are expecting a relatively similar economic environment as '25, but about 40% less supply. So we are forecasting sequential improvement quarterly until we get to Q4. So that kind of gives you the broad picture of the full year. And then as it relates to the first half versus the second half outlook, we are expecting the first half performance to be pretty similar to what we experienced in the second half of 2025, which was roughly basically 1.2%. We're basically about the same level as we come into the first half of 2026. And then in terms of the expected improvement in the second half versus the first half, it's really driven by 4 factors. First is, as Ben noted, a slight uptick in job growth, which is expected to occur in the second half of the year and a slightly better mix of jobs, but also importantly, sort of the cumulative effect of 40% less supply and the absorption of some of the standing inventory from the end of 2025 carrying through the first half of '26. And then lastly, it's just some softer comps as we get into the back half of 2026, given what we actually achieved in the back half of 2025. So tried to provide a little bit of an overview as to how we're thinking about it overall. And hopefully, that's helpful in terms of the trends we're expecting. Eric Wolfe: Yes, that's very helpful. I guess the question really is sort of how predictable do you think that sort of ramp is because it's just a bigger ramp right from the first half to the second half. And so we've seen supply, I think, linger a bit longer than people expected, especially in some of these Sunbelt markets, which you're not in. But I guess the question is, how predictable do you think the sort of this impact from supply is going into the second half of the year? And how much the supply or the impact of supply really drop off in the back half? Sean Breslin: Yes. No, I mean that's what our forecast reflects. And in part, why we're expecting the first half to be a little bit weaker is some of that lingering standing inventory in some markets that's carrying over from the back half of '25 through the first half of '26, even though deliveries will be down meaningfully in both the first half and the second half, there is some standing inventory to absorb. And once that occurs, then there are just much fewer options for people to choose from. And as I noted, particularly on the move-in side, which is where we expect 60, 70 basis points of improvement relative to 2025, that's where you're going to see it the most. We expect renewals to be relatively flat, if you think about it for '26 relative to '25. So I think that's -- in terms of our confidence in that, that's what our models reflect at this point in time. And certainly, we'll be able to update you as we go through the year. But that's part of the reasons why we -- part of the reason why we look at it that way in terms of first half versus second half. Benjamin Schall: And Eric, on the demand side, just to give you some more color there, we're not assuming a huge pickup in terms of job growth this year. If you look at the NABE figures, ended the year at roughly 20,000 jobs per month. That is a similar place as we come into 2026 and then builds into the range of 70,000 to 75,000 jobs as we get into the back half of 2026. Operator: Our next question comes from the line of Steve Sakwa with Evercore ISI. Steve Sakwa: Look, I know in '25, you guys had to take a couple of bites at the guidance and make some reduction. So as you thought about setting guidance for this year, maybe what lessons did you learn in '25 that you carried over this year? And when you kind of look at Page 14, I guess, is the building blocks, are there some of those figures that you have more confidence in their upside? And I guess, which ones are you a little bit more worried about having downside risk? Benjamin Schall: Sure, Steve. I'll start on the kind of guidance approach question and then others can weigh in on the upside, downside scenarios. Our approach to guidance remains as it has been. We go through a very detailed process, particularly at the beginning of each year, and it's also as part of our midyear reforecast. And we're looking at the best data that we have available at that point in time. We naturally think through upside scenarios, downside scenarios, but we use all that to come up with our best estimate looking forward out over the next 12 months. And then importantly, provide that transparency to investors so that you understand what's underneath those assumptions, and we can discuss those as the year unfolds. Yes. In terms of looking at Slide 14, the development earnings, I put that very much in the concrete category. These are -- and Matt talked about this in his commentary, the earnings coming online this year, those are projects that are under construction. A lot of them are already in their initial phases of lease-up. We've got pretty good clarity about how that income will roll in over time. We've prefunded that activity. So I put that in the category of fairly baked in earnings to attribute to investors as the year progresses. Sean Breslin: Steve, the only thing I would add is, for the most part, as it relates to sort of the core same-store portfolio, I think the main question is the demand question. And depending on how you look at the outlook from an economic standpoint, the upside to downside is really tied to demand there. And so we saw job growth accelerate more quickly with the reductions in supply, like I mentioned, in the Mid-Atlantic with supply coming down to 60%, that could give you a little bit of a springboard to better performance sooner than the second half. If that were the case, then you start to see more of that benefit accrue into 2026 as opposed to 2027. And obviously, the downside scenario is if we saw a significant weakening in the environment from where we are today, then that would be sort of your downside case. Steve Sakwa: Okay. And then I guess a follow-up on the development, maybe just for Matt. I know you guys kind of cut the starts number in half this year, and you sort of raised the hurdle rate a bit. Is the reduction more a function of enough deals don't pencil at that 6.5% to 7%? Or was it more of a conscious decision to just say, given the choppy environment, we just don't want to start $1.5 billion of projects even if they make the hurdle, just given the uncertainty in the environment today? Matthew Birenbaum: Steve, it's Matt. It's a little bit of both. I mean we look at it very much -- it starts bottom up, where are the deals, what's going on in our pipeline and kind of how big is that opportunity set? And then there is a top-down piece as well, which is does that align with kind of our funding capacity and cost. So usually, particularly now that we have this DFP, the developer funding program, we can see our AvalonBay starts coming a year or 2 in advance or 3 years -- 4 years in advance in some cases because of the entitlement process. But then we also have the ability to fund other developers through our developer funding program. Those deals come more quickly. And so the last couple of years, our starts list has included both deals we know about in our pipeline and kind of an allowance for quick start business, which could be DFP or it could be in this environment, deals that other developers just can't get capitalized and have given up on and are now willing to sell, sometimes selling the land at a loss. We've done a few of those deals, too. So a lot of it is just we're going to the year expecting less of that quick start business to underwrite. And then some of it is, yes, I mean, we are looking at demanding higher yields, and we are seeing that. So some of that's in the geographic mix as well. The starts we plan this year are much more heavily weighted to our established East Coast regions. Last year, it was maybe 40% West Coast, 40% expansion, 20% established East. This year, it's like 70%, 80% established East and a little bit of expansion and really nothing on the West Coast. So -- and those regions tend to have higher yields. Operator: The next question comes from John Pawlowski with Green Street. John Pawlowski: Matt, I want to continue that conversation. The $800 million in starts this year, how much have you had to lower pro forma rents just given the softness in market rents over the last 6 to 12 months, even in those established East Coast regions? Matthew Birenbaum: Yes. It's interesting, John. There are a couple of deals. Some are pretty much even. What we've seen in a couple of cases, actually, we just started a deal in Q4 in Northern New Jersey, Kanso Parsippany. And that deal is a high 6s yield and when we underwrote it kind of in due diligence 1.5 years ago, 2 years ago, the rents were higher and the costs were higher. And what we saw is when we went to our final, what we call Class III budgets, the hard cost came in and the rents are down a little bit. And those 2 more or less washed out so that the yield kind of stayed the same. So that's what we're seeing for the most part with that particular mix of business is a little bit less rent and a little bit less cost. And in some cases, the cost reduction is more than the NOI reduction and, in some cases, not. John Pawlowski: Okay. Just what I'm getting at is I'm very surprised about how high the yields are. And I know you guys are very good at what you do. But if there's high 7% yields versus, I don't know, maybe low to mid-5 cap rates in these markets, if that's true economics, we should expect to see development start to reaccelerate across your markets. So is there anything idiosyncratic in this $800 million pipeline that's not representative of market yields? Or do you think that it's a representative sample size? Matthew Birenbaum: It is more select. I mean it's hard -- there aren't as many deals that we're finding that can achieve that spread, but I'll say, we're finding more than our share and it's been our view for a while that we can get an expanding share of a shrinking pie here. A lot of these, John, are deals we've been working on in the entitlement process for years. And there are kind of unique factors there. There may be an affordable component. There may be a pilot, not a New York City pilot, but a long-term pilot. There may be other things there that are difficult for folks that haven't been in this business and in these markets on the ground for years and years to kind of reconstruct. So I do think we're seeing a little more supply in some of these more supply-constrained East Coast jurisdictions, but we're getting a bigger share of it. And our volume is dropping, too. So I'm not overly worried that we're going to suddenly see a flood of supply that a lot of people can recreate it. Benjamin Schall: And John, just for the broader listening audience out there, I just want to correct, we're targeting for those $800 million of projects, yields in the 6.5% to 7% arena relative to cap rates in and around sort of circa 5% today. John Pawlowski: Okay. Last question for me. Should we expect additional pressure from property tax abatements in 2027 or any other pressure from utility costs in AvalonConnect? Or is 2026 the peak of the pressures, if you will? Sean Breslin: Yes, John, this is Sean. In terms of the abatements, yes, we do expect some level of headwind from abatements to continue, but it does move around from year to year, but we do expect that for the next few years here in terms of that element. In terms of AvalonConnect, there's 2 components there. There's this bulk Internet piece, there's a smart access piece. The bulk Internet piece, we pretty much have stabilized. There's a little bit of lingering cost there for 2026, and that pretty much phases out. The smart access component, which is far less impactful, will continue for probably another 18 to 24 months, but it's relatively modest as compared to the bulk side of it. Operator: Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: When you guys think about the remaining gains capacity, are share buybacks or paired trades from the established regions into your expansion regions more attractive today? And does the pullback in development funding needs provide any additional capacity for you for share buybacks without either levering up or evaluating paying a special dividend? Kevin O'Shea: Austin, this is Kevin. I'll start. Others may want to jump in here. What I'd say is, this year, our capital plan contemplates only modestly sourcing capital from disposition activity. So that does leave us with a healthy level of asset sales capacity to fund incremental investment activity, whether it's for a share buyback or incremental development activity before we have to worry about a distribution obligation. So we do have capacity to sell a very healthy level of additional assets and retain the capital for future investment purposes. Benjamin Schall: I'll add. Kevin, just to clarify, in our baseline budget, we're not assuming any share buyback activity. We do still very much see it on the menu of potential opportunities for this year. And to your question and comment, the potential opportunity of selling slower growth, higher CapEx assets out of our existing portfolio and then redeploying that capital into share buybacks in today's range in sort of the low 6s, one, not only accretive, but also helps position the go-forward portfolio for stronger growth. Austin Wurschmidt: And then can you share what the cap rate was on the asset sale in San Francisco in January and then provide an update. I think you had another $235 million or so of pending sales that were previously under agreement as of late last year. Matthew Birenbaum: Yes. Austin, it's Matt. So the asset we sold in San Francisco last week actually, that's the low-5s cap. There's a bigger spread there between the cap rate and the yield given that we've done that for a while. So there's a Prop 13 overhang there. But that's also an asset that had some pretty heavy CapEx needs in front of it. So you kind of have to factor all that into kind of what I'd say is the economic cap rate, so to speak, kind of in the low-5s. The ones that we -- we have a couple of others either in the market or working that are -- some are a little bit higher than that in terms of the economic cap rates, some are a little bit lower. We'll see where they clear the market. We have at least one more that we expect to close here this month, it's probably around the same kind of low 5s cap rate, a little bit less of a spread there. So the yield is probably not as high as that Sunset Towers. And then we have a couple of others in the market working where we'll see there. It really is -- varies a lot based on what market you're selling into and I will say this, everything we have either planned for sale this year or currently in the market are all older high-rise assets and most of them are in urban jurisdictions. So they are very much aligned with our longer-term portfolio goals. Sean Breslin: Yes, Austin, one thing I'd add on that San Francisco assets specifically, is that's a 50-plus year old high-rise asset with some heavy CapEx subject to rent control. So it's a little bit of an outlier for our portfolio, not necessarily representative of the rest of the assets that we own in the city. Operator: Our next question comes from the line of Jana Galan with Bank of America. Jana Galan: Following up on the renewal rates in the fourth quarter in January, were there any specific markets that kind of drove the decline versus the third quarter? I know you mentioned layoffs in Boston. I'm just curious if there's any markets where you're willing to maybe negotiate a little bit more to protect occupancy? Sean Breslin: Yes. Good question. It's Sean. I would say, in general, what we see is a little bit of moderation in Q4 because seasonally, you're seeing the asking rents for move-ins come down, and there is a correlation between the renewal rates you can achieve and what -- think about it, what people see on the website for the deal down the street. So as you had softer move-ins, and usually a little bit softer in Q4 of this past year, you see it trend down. So it was more broad-based than individual. I would say the markets where we probably negotiated more are some of the softer markets that I mentioned earlier in terms of the Mid-Atlantic, as an example, Boston and then Denver probably the outliers to the weaker side as compared to the average. Operator: The next question comes from the line of Jamie Feldman with Wells Fargo. James Feldman: Can you talk more about the other income drag from the legislative activity last year? And then also, I guess, along those lines, I mean, it's a midterm election year, affordability is a hot topic. Any other initiatives you guys are watching closely? I know there's a Massachusetts potential ballot initiative. Just what should we keep our eyes on this year from the political front? Sean Breslin: Jamie, it's Sean. First, on the other rental revenue side, there's really 2 or 3 drivers to it are probably the ones that are most meaningful to call out, legislation passed in Colorado that is impacting the ability to charge certain fees or cap certain fees that's flowing through other rental revenue. In addition to that, by the way, we didn't call this out on the OpEx slide, but it also limits our ability to recover some utility components as well, which is about a 15-basis point drag in terms of OpEx growth. It wasn't something, again, we called out on the slide. And then the other one is new legislation in California, AB 1414 that provides residents with the option to opt out of a bulk Internet program to the extent there is another offering available at the community. We don't know exactly how many people will opt out, but we have looked at other programs for residents who have an opt-out right like rent control program, et cetera, and modeled it to reflect that type of outcome. Those are the 2 primary ones that are dragging. There's a couple of other small things, but those are the 2 big ones. And then as it relates to kind of the forward looking in terms of the election, what I'd say is, yes, we're keeping an eye on Massachusetts. I think I mentioned on the last call, the way that ballot initiative was drafted is pretty onerous. And so onerous enough that already various political leaders in Massachusetts have already come out and said that they are opposed to it, completely opposed to it. So we will have to go through a process here to potentially defeat it, but we do believe that relative to other initiatives we fought like in California, this one probably is set up to be a little bit easier to defeat. And then other things we're keeping an eye on are things that are similar to what happened in Colorado or California, where people are being thoughtful about not going directly at things like rent control, but wanting to make sure there is increased transparency and disclosure around the fees that you're charging for different things, how do you recover utilities, et cetera. Those are the ones that we're keeping an eye on and the National Multi-housing Council as well as a lot of the various associations around the country are very engaged in those types of activities to make sure people are aware of what's good legislation versus not. James Feldman: Okay. And then I guess just going back to the comments on New Jersey, I think you had mentioned rents are lower, but costs are lower on new developments. You've got a decent amount of lease-up in those markets. And I think your latest start is also in New Jersey and then your stats over the year on the weaker side of your markets. Can you just give more color on your expectations both on the lease-up side, timing of getting those projects done and even the new start? What gives you confidence to start there, given there is so much supply coming in that market? Matthew Birenbaum: I guess I can start and then maybe Sean can talk as well about the stabilized portfolio. On the -- there's not necessarily that much supply coming there, maybe a little more than what we've seen in the past. But it is still one of our strongest markets. And it's not as strong this year as New York City, but it tends to be within New York City as a core bit, obviously, particularly Northern New Jersey. So our lease-ups there are doing fine. They're generally tracking on plan. And in general, our lease-ups actually picked up a little bit here. We saw in Q4 across our whole lease-up book, which includes 3 or 4 in New Jersey, average leases in Q4, which is a slow quarter, was about 20. And in January, we actually did 26 across the 9 deals or 8 deals -- 7 deals, whatever we have in lease-up. So we're continuing to get good traction. We basically will price to get the communities full before we have our first renewal. So typically within a year to 15 months. And we'll kind of adjust the pricing if needed to meet the pace that we're looking to meet. What we are seeing is, like last year, we had a completion in New Jersey that finished, I think, 20 or 30 basis points above pro forma. That's what we've seen in general over the last couple of years. I'd say where we are today, the deals that we have currently in lease-up, they're tracking on pro forma. So not necessarily beating pro forma anymore, but we still feel good that the initial spread that we underwrote is holding. Sean Breslin: Jamie, just in terms of the specific deals, we had 3 deals with lease-up activity through Q4 into January. So through Q4, kind of average monthly pace was around 20 a month. When you get into January, the 3 deals, Avalon Parsippany did 32, West Windsor did 20, Avalon Wayne did 24, which are pretty good numbers in January, where it was also pretty darn cold. So those are pretty good numbers in our view, above what we would have expected in January, frankly. James Feldman: Okay. That's good to hear. It's better to be indoors than outdoors, I guess, leasing space. Sean Breslin: Very true. Operator: The next question comes from the line of Rich Hightower with Barclays. Richard Hightower: Curious if you can give us an update on your views around the D.C. market and surrounding markets and the DOGE impact. I think maybe it was a little bit understated as of a quarter ago. So where do we sit today with that? Sean Breslin: Yes, Rich, it's Sean. I can start and then others can add, if needed. I mean the fundamental issue has been you had lots of jobs. If you look at the last 6 months actual, with the data trued up and everything, we lost about 60,000 jobs across the Mid-Atlantic. Yes, that's the primary driver of the softness. So I think the question that people have asked, and there's not a 100% clear answer is, is there more to come or not? When we were talking about this earlier in 2025 back in Q2 and even Q3, the data was certainly lagging and it takes time for it to filter through. So we think we got '25 relatively captured, but there could be another revision here soon, but we'll have a good feel for that. I think the way to think about the Mid-Atlantic is, obviously, the impact of that has been meaningful in terms of demand in the market. What we feel a little bit better about is, one, as I mentioned earlier, about a 60% reduction in deliveries in 2026 as compared to 2025. That is a very large number. So if we start to see at least some stabilization from the federal government and other major employers or even some modest growth, without that kind of supply, particularly as we get to the back half of the year, things should start to look better. And if we see an uptick in job growth beyond what we've already forecasted, then it's potentially a market that could have some upside to it. I think what Ben noted is there needs to be a little more business confidence as it relates to making investments in a stable environment. And consumer confidence as well, just so they feel comfortable making those commitments. But I think it's a little bit of a TBD, but we're expecting basically the first half of this year to look a lot like the second half of last year. Richard Hightower: Okay. That's helpful, Sean. And then I guess the second question is just maybe more general about the transaction environment. When we hear on your call and some of your peers calls that market cap rates, in many cases, are 5% or even in the 4s in certain markets. Just curious what is driving that if we sort of segment it between capital flows, debt availability or underlying optimism around fundamentals. What do you think is sort of driving that cap rate compression where we sit today? Matthew Birenbaum: Yes. This is Matt. I guess I can take that one. It is a little bit surprising, but we've been saying that really for the last couple of years. So I think you've got a couple of different crosscurrents here. I know a bunch of folks were just out at NMHC last week. So probably the biggest recent shift in favor of supporting cap rates where they are is the debt markets, which has become very competitive, very deep and liquid. And so spreads have come in quite a bit. And so for buyers out there, they're levered buyers, they definitely have access to lower cost and larger check size debt than they did a year or 2 ago. That is, to some extent, counteracted by a little bit of headwinds in the numerator, which is obviously the NOI being capped with relatively flattish NOI growth, positive in some markets, negative than others. And then the third piece of it is just investor sentiment and equity, and there is a lot of equity that's on the sidelines that's anxious to get in. And we've seen that really growing for the last couple of years. There's dry powder out there. It's looking to be deployed. There's a lot of people whose livelihoods depend on it. So what we continue to see is this bifurcated market where for the assets that check the boxes, the bid is deep, the bid is robust and buyers are optimistic enough that they will underwrite through another year or so of operating softness to what they expect to be a pretty robust recovery 2 or 3 years from now. But then there are another subset of assets where they're only going to transact if there is a wider spread between the debt rate and the going-in yield or cap rate and a lot of those are the deals that are not transacting. Benjamin Schall: Rich, maybe one addition to it, just to give you a little bit more market color. I mean we're not overly active on the buying front right now, but obviously, we're attuned and do selectively look at deals and the types of assets that we would focus on, people are still stepping up and paying cap rates that are in the [ 4.7%, 4.8% ] type of range. Operator: The next question comes from the line of John Kim with BMO Capital Markets. John Kim: I know it's not your biggest market, but when you look at your expectations for same-store revenue in Denver, it's noticeably lower than other expansion markets and what you have delivered last year. So I'm wondering what's driving that for you? Sean Breslin: Yes, John, this is Sean. As I mentioned in my prepared remarks, I think 2025 was a tough year for the Denver market. Essentially 0 job growth and significant deliveries. This year, what we're expecting is very modest job growth, consistent with the outlook that Ben provided earlier but there's still another 9,000 units to come. So you've got some hangover inventory from 2025 that was delivered but not absorbed. And then you add another 9,000 units to that with very modest job growth, that's a simple story of just too much supply given the relatively anemic demand and that's the near-term outlook for that market. John Kim: And is this market more vulnerable to tech layoffs than others? Sean Breslin: I'm not sure on a relative basis, it would be, given the concentration of tech jobs in Denver is below some other regions we're in like Seattle and Northern California per se. It would have exposure, but I'm not sure that it punches above its weight class in terms of exposure to the tech. Operator: Our next question comes from Nick Yulico with Scotiabank. Nicholas Yulico: I just wanted to go back to the decision to have lower development starts this year. How much of that was driven by a focus on improving your FFO growth given some of the sort of near-term dilutive aspects of development? And I guess, specifically, I think, Kevin, you're kind of saying that there was some benefit then to 2027 from doing that. So if you could just flesh that out. Kevin O'Shea: Sure, Nick, it's Kevin. I'll offer a few comments. Others may want to add some additional color. I'd say, really, it wasn't a factor at all in our decision about the development start volume for this year. Our decision in that regard, as we discussed earlier, was really, as Matt outlined, driven by our own sense about the opportunity set that we have within our own portfolio, what we think we might be able to achieve through our DFP program and the related funding costs in terms of the economic value add that, that activity will provide for our shareholders over time. I think in terms of the dynamics that I referenced in my scripted remarks in regard to kind of Slides 14 and 15, I think what we're trying to provide there is a little bit more transparency to investors on the -- really the several dynamics that determine development earnings, which is not merely the NOI yield and development NOI that we received from development activity as it stabilizes and the associated funding costs but also the impact of capitalized interest as it flows through. That seems to be a dynamic that based on our own discussions with investors hasn't always been uniformly well understood. And so we thought we'd use this as an opportunity to provide a little bit more clarity on that for investors. But in terms of informing our capital allocation decisions, that's not really a factor at all. It's been a dynamic that we've had to reflect in our GAAP financials really over our 30-year history. And it's kind of sometimes it's been a plus and sometimes it's been a negative, but at the margin, it all washes out and really what drives our core FFO growth over time is not only what happens to the same-store book, but importantly in this regard, the underlying profitability of our development activity, which continues to be quite attractive. And so for us, I think it's really just looking at the incremental yields versus the incremental funding costs and the opportunity set that's driving our sizing of the opportunity for development starts this year. Nicholas Yulico: Okay. And then I guess my second question is if we stay in this higher interest rate world where you're having that impact from capitalized interest versus borrowing cost, harder to raise maybe common equity where you want to raise it. Is there an approach perhaps of going towards, I don't know if the company has considered doing a fund, doing more JVs as a way to source capital and also minimize some of this earnings dilution that is coming from the development on the balance sheet. Benjamin Schall: Nick, it's Ben. Less your last point there about dealing with the earnings dynamic, but in terms of your broader question, is private capital something that we think about? Yes, we -- I do think about private capital as being a tool in our toolbox. We actually have a large joint venture via Invesco with a state pension fund for a number of our New York City assets. People remember back long enough in Avalon-based history, we did have funds at that point. Nothing we're actively working on at this point, sort of the channels that we've generally thought about. One would be in and around a portfolio allocation objective where there could be a pool of assets where we want to monetize a portion of those assets, but importantly, retain the operating density in the market. Those could be a pool that we look to put into a joint venture or a private capital vehicle. And the second bucket would be in and around external growth, right, as we think about funding potentially a larger pie of activity with capital that's in addition to our mothership capital. Kevin O'Shea: And maybe, Nick, just to kind of add a little bit more color on what we can do year in, year out from an investment standpoint without accessing the equity markets or levering up. The way we tend to think about our capacity is in terms of what we describe as the leverage to fund capacity through the sum of free cash flow, leveraged EBITDA growth and asset sales before we hit our distribution obligation. That typically averages around $1.25 billion a year. So if you think about what we can do on the investment front each year typically is around $1.25 billion of development starts, more give or take that we can do year in or out of the opportunity set there. So by starting $800 million this year, we are quite deliberately allowing ourselves room and capacity to do more if it makes sense either in the form of our buyback activity or development activity. So we do have that flexibility. Operator: Our next question comes from the line of Anthony Paolone with JPMorgan. Anthony Paolone: First question relates to just the series of initiatives and announcements coming out of the White House to prompt more for-sale housing activity, it seems. Any of those that you think might have teeth or that you're watching more closely in terms of it impacting your portfolio and potentially prompting move-outs or having implications back on rents? Benjamin Schall: Something we're monitoring, watching. But the short answer to your question is no. Really, our focus at the national and federal level is working with trade associations like NHC (sic) [ NHMC ] to support supply-based solutions. We very much see ourselves as a creator of housing, most of our developments, we provide 20% to 30% affordable housing as part of that, that typically comes with the approval requirements. So finding ways that we, both individually at AvalonBay and as an industry can help support further supply is where we've been focusing our efforts. Anthony Paolone: Okay. And just second one, can you give us bad debts in 4Q and '25 and then also the -- what's in your guidance for '26? Sean Breslin: Yes, Tony, happy to do that. Essentially, where we ended up is right -- you said fourth quarter specifically? Anthony Paolone: Yes, 4Q and then the full year in order to get some sense as to what '26 is and whether that's a headwind, tailwind? Sean Breslin: Okay. Got you. Yes. So at a high level, so basically, for 2025, we ended at 1.6%. Our forecast is 1.4% for 2026. As it relates to the fourth quarter, which is normally a slightly higher quarter than average, that came in like 1.63%. Operator: Our next question comes from the line of Haendel St. Juste with Mizuho Securities. Haendel St. Juste: Two quick ones here. So first, wanted a little bit color on San Francisco, Seattle. Maybe you could talk a bit more about your expectation for tech employment growth there near term, lots of layoff announcements of late, AI headlines, software cons in the market. It seems like the situation is still evolving. Maybe it gets better, maybe not, but curious how you factor that into your employment outlook and rent expectations for those markets? Sean Breslin: Yes, it's Sean. What I would say is the pace that we saw in the back half of 2025 is sort of what we expect to continue, particularly through the first half of '26. And then as Ben noted, a slight uptick in job growth for the forecast from NABE in the back half of the year, Seattle lost jobs in the back half of 2025. And then across the Bay Area, it's relatively flat. San Francisco was ahead, but San Jose and East Bay were a little bit behind. So that's sort of what's embedded in the forecast right now. What's important to note, in addition to actual job growth is wage growth, though, and wage growth continues to be pretty good. It's moderating a bit, but still pretty healthy, certainly healthier than what you might expect that's implied by our move-in rent change, but it's probably more consistent with what you would expect on the renewal side. So that's a key component that we monitor to make sure that existing resident capacity is there to pay higher rents. Haendel St. Juste: That's good color. I appreciate that. One more, if I would. It sounds like one of the messages from this call is, this year is a bit of a transition year. The setup for next year looks more exciting, at least at this at this point. You mentioned inflection in your rent into the back half of the year, more development contribution. So I guess, overall, fair assessment. Is that a fair assessment? And would you say or how excited are you about the earnings inflection potential for the portfolio into '27? And then maybe some comments on the Sunbelt expansion market, how you expect those to play out in the course of this year and next year? Benjamin Schall: There's a lot in there. I'll comment on part of it. And just given time, we can circle back with you, Haendel. In terms of the year, I really would bifurcate it in terms of sort of the internal growth aspects of it, the operating fundamentals are softer than we expected 6 months ago. Supply is, for sure, going to be a tailwind. And in a soft/uncertain demand environment, our view is markets that are going to be the relative winners are going to be those with the lowest levels of supply and we feel well positioned there both in the near term and for the foreseeable future, particularly given our suburban coastal concentrations. And then on the external growth side, yes, I mean you -- we consciously did provide more visibility to investors in our presentation about the ramping of activity, both development NOI and development earnings as we progress through 2026 and 2027, and that was intentional. Operator: [Operator Instructions] Our next question comes from the line of Michael Goldsmith with UBS. Michael Goldsmith: Can you kind of provide a breakdown of the performance between urban and suburban. And does that vary by the East Coast, West Coast and the Sunbelt markets? Sean Breslin: And Michael, just so I understand what you're referring to. You're talking about revenue growth? Are you talking about rent change. Kind of what are you exactly thinking there. Michael Goldsmith: Yes. Just the rent change, I guess, just trying to understand the kind of the performance in these markets. Sean Breslin: Yes. What I can tell you in terms of, call it, submarket type for rent change, for the last couple of quarters, the urban portfolio has outperformed our suburban portfolio. One thing you have to keep in mind in that regard is it doesn't mean in absolute sense that those markets are healthier. You have to look at each one because in some cases, what's inflating that rent change in some of the urban submarkets is that they are less bad than they were a year ago. You have concessions for 3 months, another 2 months, that's an 8% effective rent change right there. So I would just keep that in mind as you think about it. So some markets are pretty healthy. San Francisco is looking very healthy. Some of that is concession driven, but it's also good lease rate growth. New York City is quite positive. But then there are places probably like Seattle, where it's still pretty soft, but concessions aren't as bad as they used to be. So just keep that in mind. Michael Goldsmith: Got it. And my follow-up question is starts in the fourth quarter included a Kanso and a townhome community. So could there be more opportunities in these types that may be a competitive advantage for AvalonBay over other builders? Matthew Birenbaum: Yes. It's Matt. I would say, yes. I appreciate the call out there. We do -- in our '26 starts, we do have another townhome BTR community planned, and we give another Kanso planned. So we are -- we have a wider variety of product offering to the market than what a typical merchant builder would provide. And as I mentioned in my opening remarks, we are trying to build to where we think future demand is headed and also access some of those maybe underappreciated niches, which also gets a little bit of an earlier question about kind of are we able to generate yields higher than maybe others, and that's all part of it. Operator: Our next question comes from the line of Alex Kim with Zelman & Associates. Alex Kim: Just piggybacking quickly off of that last one. You've highlighted BTR as a strategic growth channel. Just curious if you could provide more color on some of the yield differentials between townhome product versus traditional multifamily? And then how do operating metrics like rent growth, turnover, occupancy compare? Matthew Birenbaum: Yes. It's Matt. I can speak to that a little bit, and Sean may want to as well. It's really too early to tell kind of longer term. I don't think the product's been around there long enough. We have a subset of our portfolio of its rental townhomes that we've had for quite a while, and those have generally tended to perform as well as or maybe slightly better than the communities to which they're attached. We have a number of communities where we might have 20, 30, 40 townhomes and 200, 300 flats. We have a few that are 100% townhome. But it does open up additional sites. And it also, we believe, is aligned for future growth better. One of the things we've said going all the way back to our Investor Day is, in some ways, we feel like our portfolio is better positioned for the next decade's worth of demand than the last decade's worth of demand. So there's not a whole lot of long-term history yet. The yields are kind of similar. The expense profile is different. It's less at the community level, more at the home -- individual home level, if you've got an actual dedicated BTR community. But we do think that it is a niche, which is kind of where the puck is headed in terms of future demand. And so we are very consciously trying to increase the proportion of our portfolio that will access that demand. They do tend to be older residents that do tend to stay longer. And over time, that should drive greater profitability. Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Kevin, just a question for you on your commercial paper program. Traditionally, you guys have kept your credit line balance at 0. You've done prefunding for the development program. But since you launched the CP program a year ago, it's really definitely you've taken advantage of it, and it was -- it sort of jumped about $500 million from third quarter to fourth quarter. So is this sort of what you're using to help fund the development program? Or is this more like a warehousing for future bond deals? I know you guys just did a bond deal, but just trying to understand the CIP -- the CP program, which you're actively using versus traditionally the line of credit, which was almost always 0 at quarter close. Kevin O'Shea: Sure. Thanks, Alex. So it's Kevin. Yes, we -- in terms of our commercial paper program, we've had it for a little while. As you may recall, we increased the size of it when we renewed our line about 9 months ago. And we did so very consciously because not only because of the relative attractiveness of short-term debt costs today, but importantly, because we felt there was room in our debt capital structure, particularly at this point in the cycle for more floating rate debt. And our other floating rate debt in our capital structure has slowly whittled down to about $400 million to where it is today. And we'd like to have more in commercial paper. It just happens to represent the most attractive form of floating rate debt. So our view was that we wanted to make more room in our capital structure for a little more than $400 million of floating rate debt and the commercial paper was the most efficacious way of getting that. And so we upsized our commercial paper. And so you're seeing us probably run with a slightly higher level of persistent commercial paper balances as a consequence of that. So it's probably going to run at least in the $400 million to $500 million range, most every time, flex up a little bit more or less depending on what's going on in our -- in funding the business. Alexander Goldfarb: Okay. And then the second question is on stock buybacks versus development. I think in our numbers, we have you trading at sort of a high 5s implied cap, and you spoke about sort of low 6s on a development yield basis. It would almost seem like right now, the stock buyback is the more accretive use of capital. But as you mentioned in the guidance, there is nothing planned for stock buybacks. So can you just talk a little bit more about that, especially given your liquidity, would just seem like stock buybacks would be more advantageous in the near term given the current math, the spread between the 2? Kevin O'Shea: Sure. So Alex, I'll say a couple of things, and Ben may want to chime in. Just from our point of view, our shares are terrifically attractively priced right now, probably an implicit cap rate in the low 6% range. If you look at our development start activity that we planned for 2026, the expected yields on that are higher at 6.5% to 7%. So for us, the opportunity to development or buyback activity isn't necessarily binary for us. We can do both. And as you saw last year, we did exactly that. So we do believe that the $800 million that we programmed in for this year starts are attractive. We also recognize that potentially doing additional buyback activity may make sense for us. But we've not woven into our plan for this year. It's something we'll look at as we proceed further into the year. But it's hard to sort of estimate what exactly you're going to get in terms of volume, price and so forth. And so our approach to that is likely to be more opportunistic, but we have the flexibility and the capital capacity to do both here. Operator: Our next question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Just a quick one. I wanted to go back to Haendel's question about the expansion market. And again, just given your outlook for those markets, how quickly you still think you might be growing over the next kind of 1 to 3 years in regard to exposure to those markets? Benjamin Schall: Yes, it's a multiyear journey for us. As you know, we've been growing in our expansion markets now for 7 or 8 years. We're about halfway towards our target of 25%. And then there are certain years where either because of deal opportunities or more importantly, the relative trade as we think about redeploying capital from our established regions into our expansion regions, that has looked more attractive. So last year, we were pretty active on that front in terms of repositioning part of the portfolio. For this year, as you've heard, we're planning generally less transaction activity. On the buying side, it would be very selective, particularly given the opportunities of using disposed proceeds to buy back our stock. And then from a development perspective, as Matt mentioned earlier, this year, we have a heavier weighting towards our established East Coast region. So not expecting this year to be sort of a meaningful movement, but we'll continue over a multiyear period headed in that direction towards our targets. Operator: As there are no further questions at this time, this now concludes our question-and-answer session. I would like to turn the floor back over to Ben for closing comments. Benjamin Schall: Thanks, everyone, for joining us today. We appreciate the questions and look forward to seeing you soon. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Good afternoon. Welcome to the Affirm Holdings Second Quarter Fiscal 2026 Earnings Call. Following the speakers' remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded. And a replay of the call will be available on our Investor Relations website for a reasonable period of time after the call. I'd now like to turn the call over to Zane Keller, head of investor relations. You may begin. Zane Keller: Thank you, operator. Before we begin, I would like to remind everyone listening that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including those set forth in our filings with the SEC, which are available on our Investor Relations website. Actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of today, and the company does not assume any obligation or intent to update them except as required by law. In addition, today's call may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. For historical non-GAAP financial measures, reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our Investor Relations website. Hosting today's call with me are Max Levchin, the firm's founder and chief executive officer Michael Linford, Affirm's chief operating officer and Rob O'Hare, Affirm's chief financial officer. In line with our practice in prior quarters, we will begin with brief opening remarks from Max before proceeding immediately into Q and A. On that note, I will turn the call over to Max to begin. Max Levchin: Thank you, Zane. Not a lot to add to the results, which were excellent once again. It's a biased opinion. I did want to take a moment to announce that we will convene our next investor forum on May 12 this year. Once at the event, you'll hear from a larger subset of our management team where we'll talk about our commercial and product initiatives and update our medium-term financial framework. Plenty of references. Please look for additional information, registration details, on our investor relations website as we get closer to the event. Back to you, Zane. Zane Keller: Thank you, Max. For those of you that are interested in attending the upcoming investor forum in person, please reach out to us and we will do our best to accommodate your request. Now let's get to your questions. Operator, please begin the Q and A session. Operator: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. And our first question comes from Andrew Jeffrey with William Blair. You may proceed with your question. Andrew Jeffrey: Thanks. Appreciate it. Great to see the solid results here. Max, could you talk a little bit about the dynamics of your growth, namely the tie top five 23% and blending down as of concentration. As I recall, they had been growing faster than overall GMV. Can you just talk a little bit about what you're seeing? The new merchant adds look great. The transaction per active look great. Is the business truly widening out? Is that the right way we should do should be interpreting those results? Max Levchin: You know, might offer Rob up as the interpreter of these results just because to be completely transparent. I well, I mostly look at the growth of the business through the lens of things like transactions per user, active consumers, active merchant numbers are really important to us. Generally speaking, of course, we want to have less concentration, more diversity, but we also are frequently driven or drafting behind the growth and promotional initiatives of our big and small partners. So I think it's a little bit difficult to sort of piece it out, but I'm I imagine Rob has a much more detailed answer. Rob O'Hare: And tactically, Andrew, I would just point you to the fact that the top five that we disclose for '26 is actually a different subset of five merchants that we're comparing to in fiscal twenty-five in the same period. So I think all the more reason not to read too much into that stat. Obviously, there's it's been well publicized that we have a large merchant partner that was transitioning off of the Affirm integration. And so that that weighed on that metric. You we have a new top five as a result of that. So I think that that's really the the the crispest answer we can give there. But otherwise, I mean, we're the business is growing quite well, and and we're quite happy with the diversification, as Max alluded to, that we see in the GMV. Andrew Jeffrey: I appreciate it. Thank you. Operator: The next question comes from the line of Ramsey El Assal with Cantor Fitzgerald. You may proceed with your question. Ramsey El-Assal: Hi, guys. Thank you so much for taking my question. I was wondering, Max, if you could give us an overview of what you're seeing out there in terms of consumer trends, credit trends, overall economic health. It's such a tumultuous moment. Maybe also comment on what you've seen sort of quarter to date. Max Levchin: So the one liner answer is the consumer we see today is quite healthy. So they're they're able and willing to pay us back. They're borrowing money. Obviously, the growth numbers are out there. In the sprint. So we we are not seeing again, our consumer is now reaching quite a large subset of North Americans and growing nicely in The UK, but we're not everyone. We don't always say yes to alone. So it it's it's a little bit selective, but we feel pretty good about both the demand and the ability and willingness to repay. I don't have anything dramatic or alternative to offer on the state of affairs. In the current quarter either? I think we're we're we're not seeing a big deviation from what I just said about the past. Ramsey El-Assal: Great. I think no news is good news. Appreciate your comments. Thank you. Operator: The next question comes from the line of Will Nance with Goldman Sachs. You may proceed with your question. Will Nance: Hey, guys. Appreciate you taking the question. Very nice results. This one might be for Rob, but I was just hoping we could unpack sort of puts and takes in the ROTC margin just looking at back over the last year or so. Know, there have been a ton of tailwinds, you know, both of structural to the company as well as sort of outside of your control, very favorable funding market tailwinds. And wondering if you could kind of talk to the trajectory of margins as as you see them from here. It seems like if we look at the guidance in the remainder of the year, it seems like you're kinda still expecting to be hovering around four. You know, as we think about, you know, you had a very large beat on gain on sale this quarter, 0% loans have been increasing with the percentage of the mix. And so maybe wondering in your perspective, like, should we be anchoring you know, more to kinda the the the 4% range that that you're kinda talking about for the second half of the year versus being comfortably above four over the last couple of quarters and just any kind of meaningful puts and takes as you see it from here. Thank you. Rob O'Hare: Yep. Sure. I mean, as we outlined in the guide, I mean, we we do expect to see our LTC take rates that are slightly above four. I think that's that's true in both Q3 and Q4 in the guidance that we provided. So gonna stick to that, obviously, and that that's the plan that we'll execute against. I think to your point, on the puts and takes, I mean, I would probably frame it, very closely to what we saw in Q2, to be honest. We we did see benefits on the transaction cost side, particularly on funding costs as we've we've seen cost of funds come in particularly within the ABS market. So we would expect that trend to continue We typically don't guide to specific transaction cost line items or even revenue line items, but in total, you know, I think the take rates and the and the dynamics will be pretty similar to what we saw from a trend perspective in Q2 where there is a little bit of softening on a year over year basis in terms of revenue take rates. Again, it's important to remember that we've driven a lot of 0% mix, and we think that's really good for the network. And then we are seeing really nice benefits on the transaction cost with funding cost being the the clearest example there. Will Nance: Appreciate the commentary. Operator: Our next question comes from the line of Jason Kupferberg with Wells Fargo. You may proceed with your question. Jason Kupferberg: Yeah. Hi, guys. Great numbers. Here, and it feels like some others in the space are trying to play catch up and maybe get a little bit more aggressive over the past couple of quarters. In terms of pursuing more prominent presentment, you know, looking to win new merchants in some cases offering cash back incentives to consumers. So I'm just wondering what you're actually seeing in the field. Is this having any discernible impact on Affirm's merchant pricing, just in terms of like for like take rates? Your go to market strategy, anything along those lines? Because I think there's a big debate in the community on that right now, but your numbers seem to speak for themselves. Max Levchin: We do. We like to speak with numbers. Your answer to the question is no. I think this is like a social science theory, so discount appropriately. But we're probably in one of the noisiest environments as far as information headed for consumers' heads maybe ever, certainly in my lifetime, Like, there there's news every day, and some of it reads, like, science fiction and some of it is science fiction or at least slop. So the you can have a deal and here's five paragraphs of explanation when it's valid. And it's 5%, but only if it's Tuesday. And, like, all those are promotional go to market that we're seeing from a lot of our competitors. Just doesn't seem to make a dent in what we sell, which is always, like, on the nose, brain dead simple. You are getting no interest. If you buy this thing, you can split it into 12 parts or 24 parts or six parts, and you'll pay no interest at Like, 0% sells as well as they do, not just because it's you know, free money or free loan, It's because it's so easy to understand. And the thing that we've built over the last decade plus is a firm says, no interest, we actually mean no interest and there's no asterisk. There's no explanation as to what might happen if you are a penny short or a day late. And so our calling card has kind of become our moat has become associated with us. Which is a inherently defensible position. We don't get into conversations with merchants around what if it's zero, but it's not really zero. Like, there there's a lot of sort of details to hash out if your offers are not super crisp and transparent, and that that's exactly what we do. So no, we had we saw no effects. In the sort of the some of the more ultra aggressive, you know, whatever it was, 50% cashback or I lost I lost track of the exact offers, but we we did not see any Jason Kupferberg: And just a quick follow-up. I'm looking at the GMV categories, and that that other category, you're now up to 15% of total. I think it's basically your second largest vertical, Tide three, your second largest. It's growing triple digits. Can you unpack what's actually in there? What some of the major pieces? Are any of them getting to the size where you'd maybe start breaking them out on their own? Max Levchin: Sure. That's actually a great question, although Rob is rolling his eyes. Sorry about that. We anticipated it because it is a juicy number, and yet it is nondescript. So it's actually if if you wanted to look for diversification in the business, I wouldn't look at the top five. I would look at the other. So if we broke it out into categories, you would see all sorts of cats and dogs of really exciting categories like know, I have a fledgling sticker empire, and you know, you you really can't classify that other than novelty or other. And that's the that that's where you see there. It's a huge number of relatively small merchants that are realizing that they're at a disadvantage if they do not offer a firm. And so as that knowledge spreads across the merchant base, it becomes somewhat more difficult to invent new categories for them and if you decide, well, we're gonna have to be very, very precise, then either end up in a giant bucket called other, which is what we chose, or you start doing things like stickers and either novelty items or something like that. So it it just really is the long tail, and we're we're excited to serve them all. And, you know, as we've seen certain categories get to a critical mass within other, we we have broken them out. So services is a good example. We started breaking that out, I believe, two quarters ago now. And so, you know, if and when we get to critical mass within other, we'll we'll continue to be very disclosive there. If my sticker store really takes Jason Kupferberg: Thank you, guys. Operator: Our next question comes from the line of Nate Svensson with Deutsche Bank. You may proceed. Nate Svensson: Hey, thanks for the question. Know, of exciting press releases from Affirm, Infra quarter. I guess I wanted to ask on the bank charter news. I think that was pretty interesting. Just hoping you could talk more about the decision to potentially go down that path. It seems like there's been some evolution in your thinking on that particular topic over time. So maybe just more color on what you see the benefits from that being, what new product and services can be unlocked, and then, I guess, any sense on the time frame or hurdles to clear as you as you have to get that secure? Max Levchin: Sure. I would quibble with the evolution of thinking merely because we've answered this question a bunch of times, obviously, before we disclosed that we have applied. We've always been pretty clear. There kind of one a reason to have a bank charter is regulatory certainty. You operate as a bank partner. You want to know that your bank partner is on footing, that there are no hidden rocks for that particular bank. And if you own subsidiary, you would presumably understand a lot better, and that's the primary motivation of why we applied. Obviously, the climate at the regulatory bodies that issue such approvals is changed, and that's, you know, something that we track very carefully. The timeline is certainly years, so I would step away from any model modifications. You know, we don't know if we get approved. We don't know exactly when we do, if we when we would, if we did. And there are all sorts of timelines that are prescribed by the approver. sort of with with To prepare, then to open, then to stay in a de novo period, and then finally to operate fewer restriction. So it's definitely a long-term investment in regulatory certainty, Down the road, you can start imagining products that are only possible with a bank charter in your available tools. That's so far away is really not worth talking about right now. But it is a great investment in our regulatory stability. For the years to come, assuming end up in the approved category. Nate Svensson: Thanks, Mac. And point taken on the, evolution of thought. Appreciate it. Operator: Our next question comes from the line of Dan Dolev with Mizuho. Please proceed. Dan Dolev: Hey, team. Great results as always. Just a quick question on the ABS deals. The execution there seems to be really, really strong. Maybe if you can make a few comments. And if I can squeeze just a very quick one. On the AI, that was a big surprise. It's wanna know how much of this AI boost is actually contemplated in the guide and if fully rolled rolled out. Thanks again, great results. Max Levchin: I think think Dan's asking about the guide. Rob O'Hare: Not allowed to speak to the guide. Yeah. I think the guide. In terms of, like, guide, we're not you know, we have a a pretty nice trajectory with those two product lines, but we haven't called out specifically how much is in the the GMV guide. There. Max Levchin: It it definitely early days for the Boost AI I was trying to sneak into the letter exactly how few merchants have adopted Boost AI. Adapt AI has been around for a couple of years. It's generally speaking, batteries included. Part of the product. Boost AI is new and it's super cool because it does automated AB testing. But it also has a channel it is a channel for incremental merchant dollars. Like, the the thing that's I try to describe in ultimately got edited down a little bit more. Boost AI allows a merchant to say, you know what? I have a 100,000 more dollars. I'd like to put into Affirm specific promotions, 0% or just reduced APRs, you guys go and AB test who would be the most likely to convert with that kind of offer in front of them? Go deploy. I don't need to know exactly what happens. I just wanna maximize my dollar for dollar investment into sales. So it it looks more and more like an advertising model versus a cost acceptance model, which is exciting because it just gives our machine learning engineers a lot more freedom to really do some amazing things for our merchant customers. So super excited about the product. It is pretty early. We're not breaking out what it does for our numbers. So it tells me, Rob. And then as for the ABS, deal we just did and just generally, the market is still very constructive and the team is executing really well out there. The last deal we just priced was done with a spread of under 100 basis points. It's really remarkable. We haven't done that since 2021. The weighted average yield in the deal was below 4.6%. Again, we haven't seen that kind of cost of financing since since the And so we're we're operating and executing in capital markets really the best we've seen post the rate movement of the world. A reflection of two things. One is just the continued vote of confidence that the market has and our ability to control credit outcomes and deliver the kind of returns that we sign up to deliver. And, of course, just really excellent execution. Dan Dolev: Thank you. Operator: The next question comes from the line of Moshe Orenbuch with TD Cowen. You may proceed. Moshe Orenbuch: Thanks very much. You know, the the first question kinda asked about, you know, growth and and and, you know, growth your specific But there's Max Levchin: you're really breaking up. Sorry. Really, really breaking up. We we cannot understand what you're saying. Moshe Orenbuch: Alright. Sorry. Can you hear me now? Max Levchin: We can. Much better. Much better. Okay. Moshe Orenbuch: Sorry about that. Please go ahead. Alright. You know, the the you talked about the growth in your merchants and both in the number of merchants and the know, the growth at the merchants, but the both the Affirm card and international expansion are kinda two areas in which you can get significant growth in addition to that. Could you just give us like some update? I saw the attach rate and and related stats on the Affirm card, but but I mean, can you just flesh that out for us as to how those are going and what you know, how you see the development over the course of the next several quarters? Thanks. And sorry for this background noise. Max Levchin: No worries at all. So the card is just continuing to grow very quickly. GMV year over year for the quarter reporting was up just under a 160%. Active cardholders went up 121%. 0% deals on the card went up 190% year over year. So, like, the the it's it's not the only growth engine, but it's a big growth engine for our metrics. And it's not a material to the overall business. It's no longer a kind of a cool novelty product for our die hard users, and it's it's it's helping us create more die hard users. So the card is doing really well. We have a lot more planned for the card, so I we we don't intend to slow it down, if you will. Probably my personal focus on the product side of things is still predominantly on the card and adjacent things. In the card. And then on the international I'm happy to to speak more. And there's there's definitely some stuff in the, in the letter. Just talking to those numbers, and and more on on the card specifically. International, I don't know if you saw we announced a couple of really nice deals in The UK specifically. A couple are US brands lighting us up or think that they will light us up soon in The UK. So we're we're and, obviously, Shopify announcement was a while ago. That's scaling. We're we're still actually not at sort of peak run rate there. So we'd expect to to improve those numbers. Wayfair, we just announced literally a couple days ago that we are live in The UK in the kind of a beta pre beta type thing, but that's gonna scale up, and they've been a partner in the for a very long time. We have a a bunch more. Vimeo two is a, you know, obviously, think it's the largest or certainly one of the one of first or second largest vice company the best selling company in UK, so we will announce that. We we have a whole long pipeline of sales happening there, and we're we're excited about that. So and then there's more countries to come for sure. So both international and the card are still significant drivers. The card is much larger than international. International is now growing consistently at a pace that excites us. Feel feel good about both. Operator: The next question comes from the line of Rob Wildhack with Autonomous Research. You may proceed with your question. Rob Wildhack: Hey, guys. One question on the updated outlook. As we see it now, you're kind of pointing to a slowdown in GMV growth to 30% in the third. 25% in the fourth quarter. I know a long time between now and the end of the fiscal year, but could you just talk us through the cadence there and if there are any specific callouts for the decel in the coming quarters? Rob O'Hare: No specific callouts. I mean, we we are obviously comping the transition with with a large retail partner obviously, we we had that that headwind from a comp perspective this quarter as well and and grew at 36%. So really nothing specific, to call out in terms of drivers for the D cell. Yeah. We'll leave it there. Rob Wildhack: Okay. And then, one more on on funding. You know, we see, you had the new forward flow deal, but we also see some of the headlines in concern around private credit, many of whom are affirm loan buyers. So just what's the current temperature from the forward flow and and loan buyer channel right now? Rob O'Hare: Yeah. I think it's still extremely constructive. Yeah. I think the conversations we're having with with our our partners is usually around having to disappoint them on how much allocation we can give them right now. And and that's into it's a qualitative read. But tends to be the conversation we're having today. The I think a lot of the conversation about the market more broadly really doesn't pick up the specifics of what a firm's asset creates and the kind of people that we partner with. We've been very selective about how and who we partner with, and that puts us in a position, we think, to have a a very durable set of partners who are really excited to continue to go deeper with us. Rob Wildhack: Okay. Thanks a lot. Operator: The next question comes from the line of Rayna Kumar with Oppenheimer. You may proceed with your question. Rayna Kumar: Good evening. Thanks for taking my question. Could you just comment on what you're seeing out there in the regulatory environment? Like, are you hearing anything about potential caps on BNPL rates? And know, if so, how would a firm react to that? Max Levchin: Not hearing about potential caps on BNPL rates specifically. Obviously, very dynamic set of conversations happening the federal level about credit card rates, One good rule of thumb about regulatory realities, if you will, whenever Republicans are in the White House, You can expect more attentive and act active attorneys general from all 50 states, both red and blue, because they feel that you would expect a more relaxed posture by the federal regulators. And whenever Democrats win, the White House the executive branch starts you know, puts puts more attention into various laws and and regulations at the federal level, and then the state attention typically fades a little bit. And it has as much to do with the employment of the people that work in these agencies both at state and federal level and and and the overall posture of the the the the various political elements we have. And so right now, just from a practical perspective, obviously, we're tracking all the things, both federal and state level, having an active conversation with all of our regulators. Generally speaking, have positive and relationships with them. Doesn't hurt that we don't charge late fees, don't screw our customers. Typically, do the right thing. And as much as we can and and then some. So nothing sort of too exciting to report. Obviously, we felt compelled to apply for a industrial company bank charter. So, clearly, we believe that the sort of really grown up regulators, FDIC in particular, would we we we expect them to see us as a good actuary that's prepared for for the big leagues or the beginning of the big leagues. So generally speaking, feel pretty good about it. But we are always regulated. So we're always regulated by 51 distinct entities, federal and 50 states in the that's part of the job. Rayna Kumar: Very helpful. Thank you. Operator: The next question comes from Dan Perlin with RBC Capital Markets. You may proceed. Dan Perlin: Thanks. Good evening, everyone. I just wanted to just wanted to jump in a little bit on the big nothing. And the the question really is on the derivative benefits You called out the Affirm card sign up, so I I kind of understand that. My bigger question is kind of the uplift in credit quality that comes with that consumer set. And then how do you apply those learnings to kind of everyday shopping for a firm? Because the clearly, the GMV uplift across the board was was pretty significant for those three days. Max Levchin: Yeah. And by the way, not to sort of I'll I'll take the compliment, but I will point out this is our first rodeo that particular one, and we expect to get better and smarter nothing. And we're planning the next one and we're we're super excited about all the things we're gonna do differently and just smarter. So it there's there's more more money that Banana stands. We're sure about that. In terms of I don't always refer to the big blue Sometimes I refer to the rest of the whole So on on the in the JV boost, the conversion boost is really powerful. It it's in a letter. You can see how how well it did for us. It does skew higher credit quality because of the self selection that always happens in reduced APR, 0% APR. It did have excellent second order effects. We saw outsized actually the the gains in cardholder growth were outpaced the gains in GMV. Is kind of interesting. I I think that's right, if I remember correctly. Think the card growth was to handle, GMV went up 15%. No. I I don't wanna I don't wanna perjure myself without looking at the cheat sheet, but the the the card grew even better than the GB. So all of that was really solid. One thing that's worth knowing, it it's not in the question, but it should be. We have really good evidence just lots and lots of, months of data showing that folks that come in through a 0% it APR loan are quite happy to use us for both interest bearing and non-interest bearing products. There's a sort of a industry myth that you self select into an APR, and then you react violently when it changes upwards. That is not the case with the Affirm consumer. And can sort of debate why, but it is factually correct that people who sign up with a 0% deal do not mind other offers that we give them. That's a because it's so effective, we're obviously very hard work telling merchants. About how effective this is and inviting them into the next big nothing, etcetera. Said lots of things. I feel like I may have answered the question. Dan Perlin: Yep. Nope. That's great. Nope. That's great. Thank you so much. Operator: Our next question comes from the line of Matt Code with Truist Securities. You may proceed with your question. Matt Code: One more maybe on, like, the other bucket in terms of, you know, new verticals that may enter that other bucket. There were some press releases over the quarter about entering b two b through the partnership with QuickBooks payments and then maybe moving into the rent vertical as well. I know it's kinda, like, early days for both. But I just was hoping that you guys could talk about, you know, the growth opportunity there. And then kinda how you think about underwriting. Especially in the rents and and how that may differ. From your current book of of payments and underwriting. Thanks. Max Levchin: Yeah. So I'll take it in the inverse order but super important. The rent test is a very, very small test. It is definitely not our MO to take what is essentially a subscription product and turn it into a differently contoured subscription product. So, like, the product cannot be wanna pay your twelve month rent over eighteen months. Like, that that doesn't help our consumers. It it's not the right product to build. That's not what this is. The test we're running is if we allowed you to time shift e g, you get paid on the sixteenth, but your rent is due on the fifteenth, that's a strain on your personal finances. What if we allowed you to move that or split it into two parts? So that that's the thing we're testing. Very small. The number of loans we are allowing through is countable on you know, several people's hands sort of thing, at least in the very first portion of this, and deliberately so. This is not a an area we think obviously gonna happen. So, you know, if we we we'll we'll find out. We'll test. But put nothing in your model for now. On the Intuit side, that's actually super exciting, and it's not b to b. What it is is there is a whole facet of the services world that gets billed through QuickBooks. And until just now or when whenever it launches, you would pay for the services with a credit card. The service provider would tell you, gonna cost you $5,000, and you know, off you go. You decide if you want it. As soon as we launch, which is, you know, in a fairly accelerated timeline. You'll the service provider will tell you, I can make this $5,000 over the course of six months All you have to do is use Affirm. You already know the name. It will be in your invoice. And so it is the usual Affirm, if you will, b to b to c. Intuit is a fantastic aggregator of small service providers, businesses that bill consumers. We will be included in those invoices and the consumer will be educated that they can pay overtime for these services. And we feel like we unlocked another side of transactions that, you know, until recently, we're just not exposed to buy now pay later at all. So super excited about that. And there's there's a lot more to do there, but that's the first step. Yeah. And then just the other the other point I would make on the other category to the to your first question, we do include our wallet partnerships in other. So there there is sort of the long tail of merchants, but then wallets would be another another part of other that is pretty high growth for us today. Matt Code: Really helpful. Thanks, guys. Operator: Our next question comes from the line of Adam Frisch with Evercore ISI. You may proceed with your question. Adam Frisch: Thanks, guys. Given the value you generate for merchants with the 0% offers, are your thoughts around the potential to continue to raise pricing there? It seems like there is an excess buffer between your fees to the and the lower revenues they avoid by not having to initiate a 25 or 30% off sale. It seems like pricing did tick up for the long term. Piece of this book, flat for the short term on at least on page 16 of the deck. So maybe some color there. On the mix between long term and short term and the potential to raise prices. Max Levchin: Great question. I I would say, know, I I think it does vary a bit by merchant size. And we have had nice traction with a couple of our our go to market packages that we use for some of the platforms that help us aggregate distribution into smaller merchants. We actually have seen uptick of merchants starting with a base package and then moving into a higher converting package that includes more 0% offerings in their financing program. So I I think that that is working for us in terms of the go to market motion. Rob O'Hare: And then, honestly, I think with some of the larger merchants, it's really on us to prove that 0% offerings drive conversion. And I think those conversations take time and, are gonna be function of the the success that we drive, and then it's on us to make sure that we're being compensated for what we're delivering to the merchant. Max Levchin: Yeah. And flat pricing in a declining rate environment is actually the the same thing as taking price. Adam Frisch: Yeah. What's the mix between short term and long term on the 0% book? Max Levchin: We haven't disclosed that. Adam Frisch: Okay. If I could just squeeze in one more. The last provisions ticked up a few basis points. Nothing crazy at all. I'm just trying to figure out why this stock might be down a couple bucks here in the after hour. Do you see did you see something in the quarter? Is it taking advantage of some strength this quarter and being proactive? Or just some color around that would be great. Max Levchin: I think I already said it. Consumer's healthy. We are not seeing any disturbances in the force. Which gives us freedom to optimize for our LTC. So you can see the ROTC number is just shy of the upper side of the long-term goal. We manage credit to a number. And if you look at the chart, of the NACO curves, you'll see that these are, like, super tightly run lines that are just one on top of the other. That's what I look at when I worry or don't worry about credit results. So that that's sort of the the north star is is NACo doing okay, and it certainly is right now. So I'm not I'm not sure I can help you interpret why the stock is down, though. So that that's not the that's I'm not I'm not interested. But we're we're we're we're we're we're managing credit very, very attentively at all times. Adam Frisch: I think you guys are doing a great job. Thank you. Max Levchin: Thank you. Operator: The next question comes from the line of James Faucette with Morgan Stanley. You may proceed. James Faucette: Actually, I have a follow-up with one answers you gave just a moment ago in terms of the behavior of those that are coming in for 0% promotions, versus maybe others. Can you give any more detail in terms of their frequency of engagement? What products they they're tending to to be attracted to. It seemed like you were suggesting that they would use also interest bearing and maybe gravitate towards the card. But just help us understand, like, where you're seeing success continuing to engage with those customers and and what that behavior looks like say, versus those that come in either through kind of a interest bearing or or very short duration 0%. Max Levchin: Everything you just said sort of answers your own question a little bit already. The the very last thing you said is not what I said, and I don't want to imply that. In other words, I would not encourage you to think of short term zeros as a great feeder into something else. What I was trying to say is zeros, writ large, short, and long term. And, obviously, longer term zeros are a higher form of value. If you're getting it 10% loan or 1210% loan, for a large ticket purchase, that's an extraordinary deal Like, that's exactly sort of the conversation with merchants around. Don't run at 25% off sale. Pay us 11% and offer twelve months plus or minus, 0% loans. On your large items. So and and you're right, though. I did suggest that a zero as the first loan does not preclude, in fact, does not seem to bear any relevance as to your propensity to take out an interest bearing loan. Which is mostly just a freedom for us to correctly price the transactions whenever merchant do or do not subsidize the, the interest rate. Because it's maybe the the shortest form of the summary here is consumers we sign do not fall by large into only transacts with x type of transaction, only transacts with y type of transaction. They cross pollinate nicely. To the sort of who's more engaged that's a great question. We're not I'm not sure I wanna talk too much about it, but a lot of our product strategy is shaped by the observations that consumers that come in through particular type of a transaction find us in more and more surfaces. And a lot of how boost.ai and adapt.ai actually work it's the fact that we are seeing consumers across multiple differentiated services. So you start typically the point of sale. You end up taking out the card. You might use from anywhere before that, which is sort of the cardless version of the card that know, was developed a couple years prior. As you start compounding, if you will, these different kinds of Affirm use, your engagement goes up, your transactions per user goes up, your overall annual spend on Affirm goes up, and that's exactly what we want. So we are absolutely very attentive to what else might meet might we offer you as you're increasing your transactions per user and your total Affirm spend. And the 0% deals of various kinds are super valuable because they have such an outsized impact on propensity to convert. James Faucette: That's really good color. Thanks, Max. Operator: Our next question comes from the line of Reginald Smith with JPMorgan. Please proceed. Reginald Smith: Hey, guys. Congrats on the quarter. Most of my questions have been answered. Did have one A question I get a lot from investors is whether you're expansion into some of these newer categories, home improvement, medical, auto repair signals anything about, I guess, your base your core retail BNPL business, whether it's competition or anything like that. Or maybe even a shrinking opportunity, I guess, what would be your reaction or response to those questions And then, you know, how did you decide, or or what was the signal that that confirmed that now is the time to kinda make that that move into those new verticals. And then lastly, is there any link or relationship between moves to those verticals and maybe getting a bank charter. I'm just curious whether the lower funding and the longer duration deposits played any any thinking or any role in that decision? Max Levchin: I'll go backwards, Reggie. So short answer to the last one is no. We are not figuring any sort of a short term reduction in cost of funds. Need to get approved. We need to go through de novo. We need to gather deposits. From which we could lend and, you know, any years into the future, we can talk about, hey. Now that we have a lot of deposits, can we leverage some of that to fund our own book? So that that's very, very far away. That's not even a little bit to these new categories. The way we choose new categories is entirely based on consumer pull. And because we have a card that works everywhere Visa is accepted, we get a really high fidelity daily print of oh, check it out. People are using this for this thing. Well, that's interesting. We should maybe talk to some of the people that sell whatever that thing is and we knew that auto parts and adjacent things has been a huge component of our growth for very, very long time. It made a ton of sense to go talk to people that sell a lot of parts and ask them So if we integrate it directly instead of having our consumers come through the card door what would that product look like? Would there be a reason for us to do something a little bit deeper? Would you be interested in sponsoring Xero, So that that's roughly how we pick new categories. And then the reason we went to new categories the very short answer is we're building a network. Like, Visa is accepted everywhere. Amex is accepted everywhere, etcetera. We are we we see ourselves as a twenty-first century version of American Express sometimes, and the goal is to be on every convenience store door and all the doors, all the online doors, all the offline doors, Affirm wants to be the universal acceptance mark. And so it's not a matter of which one do we choose. It's which one do we choose next. And, you know, some number of years from now, we hope to just be thing that consumers expect to see at any retailer big and small, online and offline. Reginald Smith: Makes a lot of sense. Great answer. Thank you. Operator: Our next question comes from the line of Mihir Bhatia with Bank of America. You may proceed with your question. Mihir Bhatia: Hi. Good afternoon. Thank you for taking my question. Just wondering if you could talk about the announcement with Fiserv earlier this quarter. Maybe just describe what you're trying to do there, the interest you're seeing in the product from banks, regional banks. Anything you can share on how the product would work in practice, unit economics? Thank you. Max Levchin: Definitely a little bit early. To talk to the unit economics given we've just announced a partnership there. It follows our partnership with FIS, and we're certainly not stopping there. We are seeing excellent interest, hence, the opportunity to partner more and broader in the community of folks providing services to such financial institutions. We think that we should not be the only people issuing debit cards with now, pay later capacity on them and there's already order of a half a billion debit cards in America, and many, many, many banks where people bank locally have a debit card, have a banking brand they love. And don't feel like switching out of, and would love to see Binopiliate capabilities from their bank. Their bank, on the other hand, does not have a software engineering team an underwriting team or capital markets team We do. We are excited to offer our platform to anyone who wants to be on it. The best way of reaching some of these folks given their technical limitations is through their core banking software providers and their integration teams. And that that's what we're trying to do here. At, you know, at at some point, we'll we'll start talking a little bit more about specifically who'll go first, who'll go second in the actual underlying financial institution customer. But we're just not quite there yet. Mihir Bhatia: Got it. I understand. And if can I ask you just to follow-up on Affirm card? Just generally? I was wondering, Max, if you're thinking on the card as evolved as you've seen customer usage of the card. I think early on, you certainly talked about it as wanting it to be, like, the customer's top of wallet everyday card. That how customers consumers are using it today? Any any evolution on that thinking? Thank you. Max Levchin: Actually, Michael said something a while ago, which sort of seemed obvious after I heard him say it. We have 25,000,000 active users, and we still keep on talking externally. But also kind of internally. As if we have exactly one product that fits them all. Like, no one at that sort of scale has, oh, yeah. We got this one thing, and everybody should just use that. And it it is true. The the the card is used fairly differently by different consumer categories. We have a category of consumers who's absolutely using card as a top of wallet, Every transaction, they're they're both power users, but they're also like, they they've completely been don't know. The the color of our logo is, I guess, kind of purple. So maybe they've been purple pilled. Is that the word? But I'm making this up as I go along, obviously. But the so that that group exists. It it's not small anymore, but it is a minority. Majority of our consumers still use the card as a considered purchase when the transaction really matters to them. They pull out their firm card. They also see a firm logo. They might just go through the integrated path. If they're active, Apple Pay, Google Pay, Chrome, Autofill, Shop Pay users, they're you know, have dozen huge wallets, partnerships that we power. And all of those are available to them. And so they don't always reach for their card even if they have it in their wallet. And that group certainly thinks of us as a considered purchases. But, again, within that group, there are people for whom $50 is a highly considered purchase. And they actually if you turn to the first page of my section of the letter, we broke out just for the big nothing the GMB lift merchants saw by size of basket which is kind of a really we don't really talk about it that much, but you can see there's, like, a nearly perfect linear curve As the size of the transaction increases, the GMV uplift by off 0% goes up as well. And that and that that explains a lot about the sort of the customer differentiation. And so we will at some point, start talking a little bit more about the customer segmentation that we have or consumer segmentation that we have internally. Definitely not prepared to give a lecture on this topic right now, but it's starting to bifurcate, trifurcate fairly rapidly into groups that we need to serve the differently. And we're actually very, very excited about that. Like, nothing is better than as a product person to know you have market pull and the market is teaching you, we need a card that does this. Then we have another group, and they want something else entirely, and know, building that is cheaper and cheaper thanks to all these programming techniques that we now have. So we're excited to build more software. Mihir Bhatia: Thank you. Operator: Our next question comes from the line of Darrin Peller with Wolfe Research. You may proceed. Darrin Peller: Hey, guys. Thanks. Last quarter, I know you mentioned you were in discussions with some key PSP partners to become a default payment method. And I think you're already live with one. So maybe just touch a little more on the benefits seeing from that PSP default method and how these conversations have evolved. Maybe just when you're in these conversations with PSPs, what what's the pitch like to really convince them? Thanks, guys. Max Levchin: Just goes right back to the thing I said earlier. Yep. Ten years ago, if you said Affirm should be right next to Visa, Mastercard, American Express, Discover, Your average payment processor would say what firm? Sorry. That's if you're on the phone or Zoom. That's not not the question anymore today. Fortunately, our name has now certain degree of weight. And, becomes a conversation of does this help my overall conversion? Does this does this change my economics? For yeah. As I pitch downstream merchant for my overall services. And so yeah, I I'm not sure I'm prepared to it out into a ton of detail, but the default on just means the consumer sees our logo as they select a way they're going to pay for a a thing or a service. And for a large percentage of the merchants both within these partnerships and outside, our logo is visible not just on the payment sheet, but up funnel where the consumer finds out that Affirm is available and Right. They can split their payments and expect no fees. Darrin Peller: Okay. Alright. I mean but I think that could be a key driver for you guys, assuming it's sticky and it actually resonates. I'm just curious if there's been progress. But anything more you could share on that. But then my other question is just about AgenTic. Max Levchin: Sorry. I mean, I think we think about platforms, really when we talk about PSPs as well. And so I obviously, the Intuit announcement is one that we're incredibly excited about. I think the the size of that platform is immense, and, you know, it's on us to make sure that we maximize opportunity and build the the biggest program there that we can. So that that's one that's been in the pipeline that you know, we're excited to have out. In the public today. Darrin Peller: Right. That makes sense. Thanks. I guess just quick follow-up would be on it. Any quick comments you can give us on your latest view around agent e-commerce? I know it's not a quick topic, but just given that it's it's gonna be it could become such an important part of the ecosystem. I'd be curious to hear steps the company is taking just to make make sure you're ready to capture this kind of spend. Max Levchin: Alright. I'm laughing because it's Michael's turn to roll his eyes. So we got the the meaning of life question, and Short answer is is a short answer. Let's see. Still bullish. Still think that it is usually accretive for our financial product flavor to have agents that judge whether financial service is a good one or a bad one. I think as the bots learn more and more about how things like different interests late fees, and compounding interest work. It's easier and easier to stand out because we don't do any of those things. So I think all of that sort of structurally, we benefit from that. In terms of just being there and making sure that we are in the mix, we certainly are very, very active. I mean, we're I can't always keep track of exactly what announcements we made, so I'll punt on saying exactly where we'll pop up next or first or second. But we we are certainly Okay. Very engaged with the industry trying to understand what's the best way of delivering our product. But, yeah, you you should absolutely expect us to be in all those stories. Think I continue to maintain from the sort of pure consumer product perspective that there are purchases that are more like entertainment, and they will continue being largely human driven and purchases that are more human computer partnership where AI will help you research the product you're gonna buy and maybe even serve up the final decision for you, and then you'll pull the trigger. But the person will still be human supervised. It'll be a large transition to transactions that just don't need humans anymore. And those will be wonderful. And you want to make sure that you're included in those too, and some form of a default selection is available, and that you know, some some of those conversations are certainly very active, not just between us, but the industry. Darrin Peller: Okay. Thanks, Max. Appreciate it. Operator: Our next question comes from the line of Brian Keane with Citi. You may proceed with your question. Brian Keane: Yeah. Hi, guys. Jumped on a little bit late, but but the spike in the the active merchant growth up to 42%, I know that was running in the low twenties for a while a few quarters and then moved up, last quarter and then again a significant move. Is that one relationship, or is that multiple relationships Just trying to get a better understanding of the growth there. Max Levchin: Yeah. I would say, the inflection in growth is being driven by some wallet partnerships that we have. We're including merchants from those wallet partnerships in that merchant count. So that that is that has been an accelerant from a growth perspective. Brian Keane: Got it. And how long does it take to get to corresponding volumes you know, from those merchants from those wallets. Max Levchin: Well, I mean, obviously or maybe not, obviously, I mean, we're only counting the merchant if they're active with us. We're not counting doors, you know, if if the merchant isn't taking transactions from Affirm. So we're only counting active merchants whether it comes through a wallet or or it comes through a more direct integration with Affirm. Right. Brian Keane: Yeah. That's what I was thinking about is how fast it takes to scale with those particular merchants, maybe they're not directly integrated. Okay. And then the other question just on that I had was on adjusted operating margins. Just thinking about the first half versus second half, obviously, strong margins in the first half. And then it looks like a slight deceleration in margin growth that you're just probably being a bit to think about in terms of the adjusted operating margins first half or second half? Max Levchin: No. I mean, I think we we did have a really nice trajectory over the course of last year. So to your point, you know, the margin expansion is a bit lower in in Q4, for example, in the guide than it was in Q2. But you know, we are we are approaching we're quite happy with the margin profile, and we're signing up for more FY '26 margin expansion in in this version of the guide than we had ninety days ago. So, yeah. I think it's just continued operating leverage and continuing to scale nicely, and most of that is driven by the strong growth that we're seeing in revenue less transaction costs. Brian Keane: Okay. Great. Thanks, guys. Operator: The next question comes from the line of John Hecht with Jefferies. Please proceed with your question. John Hecht: Afternoon. Thanks for all the color and details. Most of my questions have been asked. I guess, one thing I'm just curious about is you you're now you forward flow agreements with private credit counterparties are an increasing part of the funding source I know you've been selling, assets to off balance sheet partners over time. But I'm wondering, is the characteristic of what the private credit partners want in such a way that it changes the of what you end up holding on balance sheet, or is it all the same? Rob O'Hare: No. Definitely not. But still have an approach that says we we allocate loans to partners you know, on a vertical slice. And so the our partners generally want broad exposure to everything that we originate, and we're we're committed to not you know, selecting particular assets for on and off the only exception to that or asterisk is there's certain concentration limits or certain even test products that may be don't get into our normal funding flows. But for the vast majority of the stuff that we originate, it's randomly allocated to partners, and we just decide how much we're gonna gonna push to each partner. And I think the the reason for that approach for a lot of our partners is is when they think about partnering with us, they're not thinking about specific assets or assets turnover way too fast for that. They're really thinking about partnering with us as a source of origination flow. And they they spent a lot of time making sure that they have confidence in how the company will operate not thinking about, like, a pool of assets like you might see with the long longer dated longer duration personal loan company? John Hecht: Okay. That makes sense. Thanks very much. Operator: Due to time constraints, our final question will come from Timothy Chiodo with UBS. You may proceed. Timothy Chiodo: Great. Thanks a lot, everybody. So in AgenTek commerce, I want to circle back on the topic Darren brought up. So broadly speaking, we can think about three types There's using ChatGPT to search and then clicking off. There's using ChatGPT to search and then staying within the interface and using an instant checkout button, if you will, And then, of course, there's the full agentic with which Max, I think you were alluding to. If we just can find this kinda conversation to the instant checkout portion, When we go into ChatGPT today, we can see the the Apple Pay button. We can see the Stripe link button, and we can see pay with card. Is it possible that over time, we will see the Affirm button within that chat and other AgenTic platforms within that user interface for the let's call it, the instant checkout type of, transaction. Max Levchin: It's possible, but we're making no such announcements right now. I think I just think it's really important to note that this is very, very early. The entire agenda commerce thing is still super early. But, yes, I think there are there's absolutely room Let's go down that road. There's definitely room for a firm button in all possible forms of commerce, including agenda commerce. And if there's human supervision involved, you should hold us to the account to account of, hey. Did you place your button there? And if you have not, why haven't you, and when will you? Think that that's a reasonable expectation from our shareholders. Or our analysts. Timothy Chiodo: Excellent. You, Max. And also fully acknowledging that you can use virtual card, firm card in that channel as well, but, yeah, I was specific to the button. I appreciate your answer there. Thank you. Max Levchin: You can definitely I mean, last I checked, I actually haven't tried in a little bit, but I think you can find a firm on the Apple Pay in through the Apple Pay door if you go there. No. I think we're so it's but yeah. And and Leroy, who's not here with us, but I would be remiss without mentioning his mantra. We love channel conflict. If you believe that you are a network, you better be included in every wallet. Operator: Alright. This now concludes our question and answer session. I would like to turn the floor back over to Zane for closing comments. Zane Keller: Thank you for joining the call, everyone. We appreciate the wonderful list of questions you all submitted. Look forward to seeing many of you on the conference circuit, and talk to you again soon. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines and have a wonderful day.
Operator: Good afternoon, ladies and gentlemen, and welcome to Mitek Systems, Inc. Reports Fiscal First Quarter 2026 financial results. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for an operator. This call is being recorded on Thursday, February 5, 2026. I would now like to turn the conference over to Ryan Flanagan with ICR. Please go ahead. Ryan Flanagan: Thank you, operator. Good afternoon, and thank you for joining us today to discuss Mitek Systems, Inc.'s fiscal first quarter 2026 financial results. Joining me today are Chief Executive Officer, Edward H. West, and Chief Financial Officer, David B. Lyle. Please note that today's call will include forward-looking statements. Because these statements are based on the company's current intent, expectations, and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. A description of these risks and uncertainties can be found in our 10-Q filing dated 02/05/2026, and our other SEC filings. These forward-looking statements include, but are not limited to, our expectations around customer demand for our products and services, expansion of our Check Fraud Defender or CFD data consortium, the ongoing stability of our check verification business, our growth and investment plans, expected improvements in gross profits and unit economics, improvement to operating leverage and scale, expected free cash flow conversion rates, and our FY '26 financial outlook and guidance. Except as required by law, we do not undertake any obligation to update these forward-looking statements. This call will also include references to non-GAAP adjusted results. Please reference this afternoon's press release and our Investor Relations website for further information regarding forward-looking statements and reconciliations of GAAP to non-GAAP financial measures. With that, I'd like to turn the call over to Edward H. West. Edward H. West: Thanks, Ryan. Good afternoon, everyone, and thank you for joining us today. For those less familiar with Mitek Systems, Inc., we provide the verification, authentication, and fraud decisioning infrastructure that high-assurance institutions rely on to onboard customers, authenticate users and transactions, and, in essence, to protect what's real across digital interactions. Turning to our results, we delivered a strong fiscal first quarter and are raising our outlook as early execution against our Unify and Grow ethos continues to take hold in fiscal 2026. And with that as context, there are several key takeaways from this past quarter. First, generative AI is accelerating synthetic fraud globally, driving a growing need for our solutions. Second, fraud and identity revenue grew 30% year over year. Third, SaaS revenue grew 21% year over year, representing 43% of last twelve months' revenue. Fourth, check verification continues to be stable with 1.2 billion transactions annually. Fifth, we simplified the balance sheet by paying off our convertible notes and today announced a new $50 million share repurchase program. And finally, our Unify and Grow ethos is taking hold. One Mitek is working. Last quarter, I outlined our Unify and Grow operating ethos for 2026. The key elements of this plan are to fortify and unify our business and invest in key areas to accelerate growth. I'll touch briefly on how we're executing against each of the four pillars that I outlined last quarter. Starting with fortifying check verification. Our check verification portfolio continues to serve as a critical and convenient emphasis infrastructure for our customers. During the quarter, we sustained an annual run rate of approximately 1.2 billion mobile deposit transactions. While last twelve months' revenue remained stable at approximately $91 million. Even though the broader check market continues its gradual secular decline, mobile deposit volumes have remained resilient, reflecting deeper penetration as well as the embedded mission-critical role these workflows play across financial institutions. Check verification renewal activity and expansions were solid and came in at the high end of our expectations for the quarter. Overall, we are encouraged by the outperformance in check verification and its continued role as a durable, cash-generative foundation for the business. The long-standing relationships in this portfolio continue to open doors for broader senior-level fraud and identity conversations with partners and processors that historically engage with Mitek Systems, Inc. primarily through check verification. Now turning to our second pillar, which is unifying and scaling our fraud and identity portfolio, which now represents a majority of the business. As fraud accelerates its march towards being democratized as a result of generative AI, and attackers become more sophisticated, customers are moving away from siloed point-in-time towards more continuous, signal-rich decisioning. In response, we are going to market as one Mitek with unified workflows that combine documents, biometrics, liveness, and data insights into a single platform experience. Our first-quarter results reflect solid progress in executing against that strategy. During the quarter, transaction volumes experienced attractive growth levels as customers responded to the increase in fraud and activity. As fraud becomes more democratized and easier to execute at scale, customers are routing more transactions through our solutions to detect, assess, and mitigate risk in real-time. This reflects two structural dynamics taking hold across our platform. First, customers are running more journeys across more use cases. Existing customers are extending beyond onboarding into authentication and other in-life workflows, while new customers are coming to Mitek Systems, Inc. specifically for those journeys. Because authentication and in-life verification are persistent needs rather than one-time events, they apply across a much broader set of industries than onboarding alone, expanding the relevance of our platform beyond traditional financial services. Second, we're seeing more transactions per journey. As we continue to add additional capabilities, data sources, and third-party checks alongside our proprietary technologies, each journey becomes richer, more secure, and more valuable to the customer. That increased richness drives higher value capture per journey for us as customers rely on Mitek Systems, Inc. for more of the decisioning within a single workflow. Importantly, the momentum we're seeing is broad-based across geographies and customer segments, reflecting platform-led adoption rather than reliance on any single customer product or use case. In North America, performance was driven by large enterprise renewals and targeted expansions, including a new platform entry point at a top-five financial institution with clear expansion potential. In EMEA, we made tangible progress migrating several legacy customers onto MyVIP in Spain, enabling new digital channel use cases in expansion across various industries beyond core banking use cases, including telecommunications, insurance, mobility, and payments. Taken together, these wins reinforce two important themes. First, growth is increasingly being driven by more journeys and more transactions per journey rather than isolated point solutions or pricing changes. Second, MyVIP-led journeys are continuing to deliver higher gross profit per journey as richer, more secure workflows create greater value for our customers and improved economics as the platform scales. Now alongside this momentum, Check Fraud Defender continued to scale as a core component of our broader fraud and identity portfolio. While our identity solutions focus on verifying and reverifying who a customer is across the life cycle, Check Fraud Defender addresses a complementary problem: preventing payment fraud through consortium-based network intelligence. During the quarter, we continued to expand participation across the consortium with new institutions joining and existing participants deepening their engagement. As a result, annualized contract value across Check Fraud Defender now stands at approximately $17 million, up 44% year over year, reflecting continued momentum and growing confidence in the value of the network. Data sets compiled in the consortium now cover in excess of 50% of US checking accounts, including institutions in production and active pilots, representing billions in transactions annually. As coverage expands, detection accuracy and loss prevention outcomes continue to improve, reinforcing the network effects that underpin the model and strengthening the value proposition for all participants. Each transaction contributes behavioral and payment-related signals that enhance the intelligence of the platform over time, allowing risk models to continuously improve as scale increases. We believe this growing data asset will represent a durable competitive advantage that is extremely difficult to replicate through point solutions or isolated on-premise deployments. Taken together, our Check Fraud Defender product continues to scale as intended, expanding coverage, strengthening network effects, and delivering increasingly differentiated fraud prevention outcomes as participants grow. Now progress across fraud and identity would not be possible without deliberate targeted investment, which brings me to our third pillar, which is investing where we believe we can lead and differentiate. Our investments continue to be focused on innovation and strengthening the core of the platform and extending its capabilities in areas that matter most to customers and can create competitive advantages. During the quarter, investments included targeted work to improve platform infrastructure, automation, and model performance, as well as continued expansion of capabilities within MyVIP and our fraud solutions. The objective is to deliver more accurate insights and decisions while improving scalability and operating leverage over time. Equally important, we are investing in the organization itself. During the quarter, we reallocated resources towards higher value initiatives, upgraded key skill sets across product, engineering, and go-to-market, and sharpened accountability to improve execution, speed, and consistency. I feel good about the team's progress, and we all recognize that we must continue to execute to capitalize on the growing opportunity in front of us. I want to turn now to our fourth and final pillar, which is disciplined capital allocation. Execution and investment discipline ultimately show up in how capital is deployed. As we scale the platform and advance, unify, and grow, we are focused on ensuring that operational progress is matched by a strong balance sheet and deliberate capital deployment. At a high level, our approach is simple. We protect financial flexibility, we invest in high ROI organic opportunities aligned with our roadmap, and we return excess capital to shareholders, all with an eye towards maximizing shareholder value. We've also taken deliberate actions to strengthen Flex and simplify the balance sheet, including the retirement of our convertible senior notes. With that behind us, today, we also announced a new $50 million share repurchase authorization. This quarter reflects the operating cadence that we've been building towards, which is disciplined execution, hitting singles and doubles, and compounding progress as data participation and customer engagement reinforce one another across the platform, essentially creating a durable flywheel or network effect grounded in trust, long-standing customer relationships, and improving performance in highly regulated mission-critical environments. As AI lowers the cost of writing code and accelerates the pace and sophistication of fraud, these attributes become more valuable for us. Our customers are not simply buying software features. They are buying real-time risk mitigation and reduction, regulatory confidence, and a trusted intermediary with a long track record in regulated industries across multiple geographies. Mitek Systems, Inc. is uniquely positioned to aggregate signals, govern models, and continuously improve outcomes in ways that a single institution or point solution approach simply cannot. We believe this will lead to a strong competitive differentiation and business durability and ultimately translate into long-term shareholder value. Now with all that as context, I'd like to turn the call over to David B. Lyle to walk through our financial performance for the quarter and review our updated guidance. David B. Lyle: Thanks, Ed. I'll start with a review of our first-quarter financial performance. I'll then touch on our balance sheet and recent capital allocation actions, particularly in light of the fact that we retired our $155 million convertible senior notes in full, drew $50 million on our term loan, and authorized a new $50 million share repurchase program. Finally, I'll close with our updated outlook. For 2026, total revenue was $44.2 million, up 19% year over year, driven by strength across the portfolio. Led by 30% growth in fraud and identity, 21% growth in fraud and identity SaaS, and overall SaaS growth up 21%. Adjusted EBITDA was $13.3 million, up 9% year over year, representing a margin of 30% driven by revenue scale, mix, and incremental capitalized R&D. Looking at revenue by portfolio, fraud and identity revenue was $25.5 million, up 30% year over year, or $5.9 million. Growth was driven by $3.6 million of SaaS growth led by MyVIP and Check Fraud Defender, reflecting continued transaction volume momentum and broad-based adoption across the portfolio with the balance coming from standalone biometrics licensing primarily from volume overages. Turning to check verification, revenue for the quarter was $18.8 million, up 6% year over year. On an LTM basis, check verification revenue was approximately $91 million, consistent with a year ago, with annual transaction volumes remaining broadly stable at approximately 1.2 billion, reflecting the durability of the franchise. Within the quarter, performance was driven by renewals, strong services activity, and continued conversions from check reader to check intelligence with incremental license activity increasing late in the quarter. Non-GAAP gross margin was 82%, a decline of approximately 280 basis points year over year. The majority of the decline was related to early-stage Check Fraud Defender pilot deployments that incurred costs in the quarter ahead of associated revenue, which we expect to moderate as those pilots convert into full production. We also saw pressure from SaaS and service delivery economics as we supported higher volumes, onboarding activity, and customer implementations. Finally, revenue mix continued to impact margins as SaaS and services continue to represent a higher proportion of revenue. Despite this near-term pressure, underlying unit economics across the platform remain attractive, we continue to see more transactions per journey, and increasing gross profit dollars per journey as adoption scales, which we believe supports operating leverage on these costs as volumes mature. Total non-GAAP operating expense for the quarter was $23.2 million, improving 3% from last year. As revenue scaled, operating expense as a percentage of revenue improved by approximately 1,200 basis points to 52%. This operating leverage reflects a combination of revenue growth, the disciplined redirection of spend toward higher ROI investment, and an increase in capitalized software development consistent with the nature of the work being performed. Sales and marketing expense was $7.9 million, down from $8.7 million last year, with sales and marketing as a percentage of revenue improving by approximately 550 basis points to 18%. This improvement reflects a more focused platform-led go-to-market model where teams are selling the full portfolio in a more unified way across existing customers, partners, and new customer opportunities, allowing us to scale more efficiently while continuing to invest behind growth initiatives. Non-GAAP R&D expense was $7.6 million, up 6% from $7.2 million last year, with R&D as a percentage of revenue declining by approximately 215 basis points to 17%. This reduction as a percentage of revenue is fully explained by a higher proportion of development work that required capitalization in the quarter and reflects continued execution of our Unify and Grow strategy, including the realignment of R&D talent toward platform-level reusable capabilities that support enterprise-scale adoption. Capitalized development remains a low single-digit percentage of revenue, consistent with software peers operating in an investment phase. The full cash impact of these investments is reflected in free cash flow, which remains our key measure of underlying performance. Finally, non-GAAP G&A expense was $7.7 million, down from $8.1 million last year, with G&A as a percentage of revenue improving by approximately 430 basis points to 17%. This improvement reflects continued operating discipline and simplification across core corporate functions we cited last quarter, including more standardized contracting and procurement, increased automation across finance and administrative workflows, tighter vendor management, and continued consolidation of internal systems. Strong fiscal Q1 revenue performance and operating leverage translated into an increase in adjusted EBITDA of 69% year over year, or $13.3 million, representing an adjusted EBITDA margin of 30%, an improvement of roughly 900 basis points versus last year. Non-GAAP income tax expense was approximately 12% of pretax income, resulting in non-GAAP net income of $12.4 million and adjusted EPS of $0.26 per diluted share, representing approximately 80% growth year over year. Overall, first-quarter results reflect continued improvement in earnings quality with revenue growth, operating leverage, and earnings per share scaling together. Free cash flow for the quarter was $6.6 million and $60.5 million on a last twelve months basis, representing 102% conversion of LTM adjusted EBITDA compared to 83% last year. This elevated conversion reflects nonstructural tailwinds that will moderate over time, including interest arbitrage prior to the repayment of our convertible notes, a step-change improvement in working capital efficiency, and temporarily lower cash taxes in 2026 and 2027, following recent tax legislation. Over the longer term, we continue to view free cash flow conversion of approximately 70% to 80% of adjusted EBITDA as a more representative steady-state range consistent with recurring revenue software peers. Our capital allocation priorities remain disciplined and unchanged. We prioritize funding high ROI growth initiatives, maintaining balance sheet resilience, and returning excess capital to shareholders. We ended the quarter with $192 million of cash and investments and approximately $159 million of total debt, resulting in a net cash position of $33 million. Subsequent to quarter end, we retired our $155 million convertible senior notes in full and drew $50 million on our term loan. These actions were neutral to net cash, simplified the balance sheet, and extended our debt maturity profile to 2030. Turning to capital return. During the first quarter, we repurchased approximately $10 million of shares, which left approximately $11 million remaining under the authorization at quarter end. Since quarter end, through February 4, we repurchased an additional $7 million, leaving just over $4 million remaining under the current authorization. Given our confidence in the business and cash generation profile, today, we announced a new two-year $50 million repurchase authorization, which will become effective upon completion of the current program. At current equity levels, we believe disciplined share repurchases represent an attractive use of capital and a compelling opportunity to drive long-term per-share value creation. Turning to our updated fiscal 2026 outlook. We are raising our fiscal 2026 revenue guidance range by $2 million to $187 to $197 million compared to our prior range of $185 million to $195 million. This update reflects two distinct factors. First, we increased the lower end of the implied check verification range by $1 million, reflecting completed renewals and improved visibility into remaining fiscal year activity. Second, we increased the lower end of the fraud and identity range by $1 million and the upper end of the range by nearly $2 million, resulting in a new annual range of $102 million to $107 million. This increase reflects strong first-quarter execution, continued momentum into Q2, and improved visibility into deal timing and customer expansion early in the year. For the second fiscal quarter, we expect revenue to be in the range of $50 million to $55 million. The variability in this range primarily reflects the timing of check verification license renewals, where revenue can shift between quarters based on closing timing rather than changes in demand or execution. Q2 is typically our most active quarter for check verification, and a small number of large renewals can be recognized on a single day, resulting in a wider than usual quarterly guidance range. As visibility improves through the year, we currently expect second-half revenue to be more heavily weighted to fiscal Q3, driven by the timing of check verification license renewals. Turning to profitability. We are updating our fiscal 2026 adjusted EBITDA margin guidance to 29% to 32%, up from our prior range of 27% to 30%. The 200 basis points increase is driven primarily by a higher level of capitalized software development than we assumed when we set guidance in December. Following a complete quarter of execution, we now have greater confidence that a larger portion of our development activity requires capitalization. Importantly, on a cash basis, total R&D spend is higher year over year, reflecting our investment roadmap, and these costs are fully reflected in free cash flow. From a cash flow and modeling perspective, we expect capital expenditures to be approximately 3% of revenue and depreciation and amortization to be approximately 1% of revenue. And reflecting increased capitalization of R&D, and an overall increase in cash R&D investment year over year. We continue to expect gross margins to remain in the low 80% range, with operating expenses stepping up sequentially through the year as we invest behind our growth initiatives. More broadly, these outcomes reflect continued progress under our Unify and Grow ethos as the organization operates more cohesively as one Mitek. Execution across the platform is becoming more consistent. Investments are increasingly aligned to scale capabilities, and that discipline is increasingly showing up in growth margins and free cash flow. With that, operator, we are ready to take questions. Operator: Thank you so much. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, you'll hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the Q. If you are using a speakerphone, please lift a hand before pressing any key. One moment, please, for your first question. Your first question comes from Allen with Maxim Group. Allen, please go. Allen Klee: Yes. Hi. Good evening. For your broadened identity segment, can you discuss a little the competitive environment and why you think you're winning, and in what cases would you maybe be losing? Edward H. West: Good afternoon, Allen. Thanks for the question. So the way we see the environment, frankly, through the tight relationships that we have with many institutions around the world, the environment is growing, and the needs are growing driven by AI, generative AI, and the synthetic fraud that's accelerating in, frankly, all applications that we see across the board. That's creating more demand, more need, and I think we're pretty well situated because of our broad platform, the capabilities going back to our heritage as well as the capabilities around biometrics, the liveness, to detect synthetic fraud, deep fake detection, and other risk elements. And we're increasingly combining other data elements in this to make it a data-rich experience and detection and assessment for our customers. I think that's also unique in the market. When you combine it with our heritage with high-assurance businesses like financial institutions, that becomes a smaller and smaller group in the market, so we feel good about the position. And as I mentioned in my talks, the durability of the business by adding more and more data into the business. And the more customers that come in, the richer the environment becomes, and it's that network effect. And it offers richer signals. So again, we look forward to that and continue to build and grow. Allen Klee: Okay. Great. Thank you very much. Edward H. West: Thank you, Allen. Operator: Alright. Your next call comes from Jake. Jake, please go ahead with William. Jacob Roberge: Hi. This is Jacob Zerbib on for Jake Roberge, and congrats on the solid quarter. I wanted to ask, great to see the check verification business continuing to do well. I guess from a growth perspective, how are you thinking about the pricing lever for growth over the longer term? And then I have one follow-up after that. Thanks. Edward H. West: So, Lisette, thank you, Jacob. And we were very pleased with the outcome from this past quarter. So I've mentioned in my comments around the renewals. Renewals and expansions coming in at the high end of expectations. You know, the pricing, you know, continues. Orange is a very strong foundation that we have. And relationships with our core partners. We're also having broad discussions around expanding, particularly around fraud and identity. On the market. And bringing in the broader suite of solutions that we can bring forth to help support our partners' growth. Which, you know, we look forward to continuing to deepen those conversations. Overall in the market, as I mentioned, you know, checks continue to decline. But, fortunately, our solution clearly shows the convenience and the mission-critical nature for financial institutions. And, obviously, as a result, the penetration continues to deepen. And we still see stable activity with nominal prices. Jacob Roberge: Got it. Thanks. And then you talk a lot about the linking between fraud and identity. You called it out over the past couple of calls. Can you talk a little bit about what you're doing from a go-to-market perspective to help drive that value for customers? Edward H. West: Absolutely. It is, you know, because of the growing need, and it's why it was so important, you know, as we announced this past quarter around our focus, unify and grow. Bringing all of our capabilities and solutions together into a single platform approach, and that also includes our go-to-market team. From a sales standpoint, there were now showing up at customers and prospects as one business bringing forward the full suite, and we see both fraud solutions as well as identity as well as capabilities, deep fake detection, all being offered in an integrated way. And have trained our sales team to talk more broadly against that. And also another important aspect, I believe, is that we've moved way up the stack within our core customers in terms of who we're talking with and meeting with at our end institutions as, you know, head of fraud, head of product, you know, head of the retail bank because of the mission nature of what we're providing. Not only on new customer onboarding, but ongoing customer engagement through authentication, and synthetic fraud detection. So because we're bringing all this together, that has changed. We're also now been bringing in people looking at other markets, other verticals beyond the heritage financial and institutions and financial services. We now have relationships in business. Through other partner channels who are also taking us into other verticals as well, including government. Insurance, telecom, as well as our own hunters on that front as well. So a lot of investment is taken, and we'll continue to invest more because of the demand that we've seen in growing. Jacob Roberge: Got it. Thank you very much. Edward H. West: Thank you. Operator: Your next call comes from Mike with Northland Securities. Mike, please go ahead. Mike Grondahl: Hey. Thanks, guys. First question, just has there been any expansion of the Salesforce, like, in terms of headcount? Or marketing budget? Just kinda curious on those two after the last question. Edward H. West: Yeah. I'll start off with some, and then Dave can elaborate as well. Yes. We have expanded headcount. We've gone through a lot of changes, as I mentioned in the last question, in terms of consolidating the people and the training. Bringing on additional hunters and capabilities as we also expand into other markets. We brought in more on the channel partner side as well, expanding to the channel capabilities. As well as STRs and qualification delivering leads and opportunities into the sales team. The marketing dollars, I mean, that can be jumpy from quarter to quarter, you know, up and down. In terms of where we see and where we're investing. I don't know if, Dave, if you wanna talk more about what we see in the changes ahead there. David B. Lyle: Sure. We talked about in the last call that we would be investing in 2026 both in R&D on a whole bunch of different fronts as well as sales and marketing specifically on GTM, go-to-market. You'll see that across the year, quarter to quarter as we both hire Salesforce talent. But also enforce, and enhance some of the programs that we have out there. Mike Grondahl: I guess, like, would you say the Salesforce is expanding headcount 5%? Can you quantify it at all? David B. Lyle: Yeah. We haven't gone to that level of guidance detail, but we're not gonna see, if you're asking, are we gonna see a big spike here to start generating revenue? The answer is no. You know, Ed talked about in his prior comments and prior quarter that, you know, the unification of the Salesforce has created some real synergy and having everybody sell the entire portfolio is really helping. We're already seeing the results of that. In the numbers, and I think that will continue. So we should get some more leverage, revenue leverage out of the existing Salesforce and then putting some more talent on the team will should, be able to accelerate that. Edward H. West: And, Mike, it's an area where we'll continue to invest in making sure we're bringing in the skills, and talent and we're seeing the demand, continuing to increase. On both the direct as well as the channel side, which is why we're broadening out on both sides. But we've also been able to drive more efficiency through tighter arrangement, offsetting some of that investment. Mike Grondahl: Got it. Hey. Next, you know, with Check Fraud Defender, it sounded like you guys had maybe started a couple interesting, maybe a couple larger pilots. Any more color you can provide there? Edward H. West: Yes. We have with the pilots that are underway, as I mentioned, you know, one of the ways to look at that is the datasets that have now been accumulated from all the data coming through. We're now seeing volume and transactions literally in the billions of transactions that are going through on an annualized basis now. Those pilots continue to track. We're very pleased with the progress, pleased with the platform, the progress of the platform, the deepening engagement with our customers, the value that's being returned, and the size of the that are now continuing to seek and potentially participate overall into the consortium. That the more data that comes in and the more partners that come in, the more and more valuable that 50% kinda jumped out at me. Mike Grondahl: Maybe last year last is there an average life to a pilot? Like, are some of these getting to a point where they gotta convert or, you know, is that next quarter we'll hear that or is that something over the course at 26? Edward H. West: You know, there's not an average life. Obviously, this is a relatively new solution and continuing to bring in more partners and, you know, we'll keep you, you know, updated as progress ensues. Yeah. So it's we feel good and encouraged about the progress so far. Obviously, we'd like them all to be quicker. But and we'll continue to try to accelerate that. Mike Grondahl: Sounds good. Thank you. Edward H. West: Thank you, Mike. Operator: Alright, ladies and gentlemen, as a reminder, if you have a question, please press 1. Now it's George with Craig Hallum. Please go ahead. Logan Hennen: Hey, guys. This is Logan on for George. For taking the question, and congrats on another nice quarter here. Ed, when we think about, you know, what is obviously a very rapidly changing kind of environment out there when it comes to AI-driven fraud, synthetic fraud, things of that nature. Are you seeing that creep into sales cycles at all on the fraud and identity side where, you know, maybe FIs are pushing a bit more? There's a bit more urgency to kinda bring you guys in. Edward H. West: Yeah. Thank you, Logan. Great question. If an institution's been through an attack, yes, we do see that moving, you know, potentially, you know, more quickly on it from a sales cycle standpoint. This is, you know, a comprehensive solution bringing in a lot of different factors can take time. And frankly, what we've seen mostly is a first level of engagement and going off onto a certain part of the business. Let's just say, for example, maybe starts off at an FI in opening up digital checking accounts, then that can broaden into auto loans, broaden into mortgages and credit cards, then moving into various other countries. So that's where we see that engagement continuing to broaden out. And then also into fuller authentication from verification. And continuing to get deeper and then bringing in other signals. And, you know, if there has been an attack or something they've experienced or vulnerability, we do see those times accelerate. Logan Hennen: And I guess on a similar note, like, you seeing kinda more activity maybe some of your channel partners on that side? Just where there's more engagement from them. Edward H. West: Yes. There is. I'm bringing additional opportunities, that's where if we look at some of the channel partners who operate outside of financial services, are bringing us coming into as a partner into other verticals. For example, government, or insurance. Verticals, which has been terrific in seeing opportunities and also opportunities around authentication, like, for example, with myPass. On that front, and that's also in multiple countries. And when we talk about with our core partners in financial services, they all recognize, and you've mentioned to me, you know, the number one issue that they're hearing from their customers today is around synthetic fraud. It's one of the top topics out there, which is why, you know, we're there bringing there in full force, to help support both our partners' growth and solutions for their customers. Logan Hennen: Okay. Got it. I'll leave it there. Thanks for taking the questions. Edward H. West: Thank you, Logan. Operator: All right. There are no further questions at this time. I'll turn the call back over to Edward H. West. Edward H. West: Great. Thank you, operator. And we want to thank you for joining our quarterly progress report today. And speaking for our terrific and enthusiastic employees, we all look forward to the growing opportunity ahead for Mitek Systems, Inc. So thank you very much, and have a great day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, and welcome to the Lionsgate Third Quarter Fiscal 2026 Results Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nilay Shah, Head of Investor Relations. Please go ahead. Nilay Shah: Good afternoon. Thank you for joining us for the Lionsgate Studio Corporation's fiscal 2026 third quarter conference call. We'll begin with opening remarks from our CEO, Jon Feltheimer; followed by remarks from our CFO, Jimmy Barge. After their remarks, we'll open the call for questions. Also joining us on the call today are Vice Chairman, Michael Burns; COO, Brian Goldsmith; Chairman of the TV Group, Kevin Beggs; Chairman of the Motion Picture Group, Adam Fogelson; President of Worldwide Television Distribution, Jim Packer; and Senior Adviser to the Office of the CEO at Lionsgate and Co-CEO of 3 Arts, Brian Weinstein. The matters discussed on the call also include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors. This includes the risk factors set forth in our public filings for Lionsgate Studios Corp. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. I'll now turn the call over to Jon. Jon Feltheimer: Thank you, Nilay, and good afternoon, everyone. Thank you for joining us. Today, we're reporting a quarter that not only keeps us on track for our fiscal '26 financial targets, but positions us for significant growth in fiscal '27 and beyond as the investments we've been making into our intellectual property portfolio, translate into strong and growing momentum across our businesses. During the quarter, we launched a new franchise with the worldwide box office success of Paul Feig's thriller, The Housemaid. We expect the sequel, The Housemaid Secret to begin production later this year. Released 12 days before the end of the quarter, the majority of the Housemaid's contribution will fall in Q4 and continue into fiscal '27. Last week, we began production on John Rambo, directed by Sisu's Jalmari Helander, with rising star Noah Centineo from our Lionsgate Television series, The Recruit, and we announced plans to produce one of our most iconic properties, Dirty Dancing, shepherded by Hunger Games producers, Nina Jacobson and Brad Simpson and starring Jennifer Gray. These are part of a growing portfolio of more than 40 active franchise properties that are being extended across multiple platforms, including film, television, video games and live experiences. After teasing it on the Grammy telecast, the next day we released the full trailer of Michael to wildly enthusiastic fan response as we continue to ramp up the campaign for the film's April 24 global rollout. With 3 major tentpoles anchoring our fiscal '27 slate, we expect to continue building momentum generated by The Housemaid and other recent box office successes. Our television group has secured renewals for 12 of our 13 current scripted series. And notably, these renewals, which include the Studio, The Hunting Wives and the Rainmaker are spread across 12 different buyers. And finally, our film and television library achieved its fifth straight record quarter with trailing 12-month revenue reaching an all-time high of $1.05 billion. Turning to our individual segments. Our Motion Picture Group had a strong quarter with the success of Francis Lawrence's profitable and critically acclaimed adaptation of Stephen King's, The Long Walk. Ruben Fleischer, Now You See Me: Now You Don't, which grossed nearly $250 million at the worldwide box office and of course, The Housemaid, as we roll out a diversified slate that spans every genre and budget category. Both The Housemaid and Now You See Me achieved exceptionally strong international box office performances with particularly strong results in the markets where we self-distribute, the U.K. and Latin America, bolstering our position as the only studio licensing a steady supply of major properties to leading international theatrical distributors. As I mentioned, we continue to expand the largest and most valuable portfolio of franchises and other branded IP outside the 5 major studios, fueling our slate with upcoming tentpoles like Michael in April, the Hunger Games, Sunrise on the Reaping in November and Resurrection of the Christ Parts 1 and 2 next March and May, respectively. Behind them, The Housemaid Secret, John Rambo, Dirty Dancing, Caine, the next film from the John Wick franchise, Naruto, American Psycho and new installments of Saw and Blair Witch are all either in production, being readied for production or in fast-track development, a really powerful slate of intellectual property that matches the right creative auspices with the right content. In television, our series continue to perform well across every platform. The Studio, which just began shooting its second season for Apple TV, was one of the most critically acclaimed shows of the year. The Hunting Wives was Netflix's top non-original English language series for the second half of last year and debuted high on their global list of top 10 shows despite only airing on Netflix in the U.S. The Rainmaker was USA Network's most watched freshman series in 7 years. Robinhood has ranked #1 on MGM+ for 9 weeks in a row, and the Rookie has been resurgent in its eighth season on ABC. The Rookie: North spin-off pilot begins shooting in Vancouver later this month and Spartacus: House of Ashur is one of the best reviewed series on Starz with a 92% Rotten Tomatoes rating and performing well across its international platforms. And in a business where renewals are the name of the game, the renewal of nearly every one of our scripted shows anchors a fiscal '27 slate with double the number of scripted episode deliveries and a diversified mix of cost-plus and retained rights models, balancing profitability with long-term value creation. 33% of our record library revenue this quarter comes from our television series, more than doubling the percentage from 10 years ago. Achieving 5 record quarters in a row reflects the work we put into managing and growing that library, enhancing it with new technologies, monetizing it across new buyers and platforms, selectively buying back rights and striking the right balance between acquisitions and organic growth. As a result, we have one of the youngest major libraries of any studio, with 85% of our 20,000-plus titles produced since 2000 and nearly 2/3 of library revenue coming from titles outside the top 50. In closing, we like our place in the media ecosystem and the trajectory of our businesses. Our film and television pipelines are strong. Our library continues to grow, and we're replenishing it with valuable new franchises and brand-defining television series. We're a leading global content company at a time when content is king, critical to AI, essential to our partners and the subject of every conversation around M&A and industry consolidation. We continue to lower our costs and restructure our businesses, so we can move faster and more efficiently than ever before. We continue to align ourselves with our shareholders, adding former U.S. Treasury Secretary and major shareholder, Steven Mnuchin, to our Board, converting our dual share structure into a single class of stock and letting our shareholder rights plan lapse in May. Although there are many disruptive forces reshaping our industry, the rise of AI, the power of social platforms and the increased tempo of M&A, to name just a few. We believe that we are prepared to adapt to all of them as a dynamic, agile and entrepreneurial company positioned for sustainable growth. Now I'd like to turn things over to Jimmy. James Barge: Thanks, Jon, and good afternoon, everyone. I'll briefly discuss our fiscal third quarter 2026 studio financial results and provide an update on the balance sheet. Lionsgate Studios revenue was up 1% year-over-year to $724 million. Adjusted OIBDA was $85 million and operating income was $36 million. Reported fully diluted loss per share was $0.16 and fully diluted adjusted earnings was $0.01 a share. Net cash flow used in operating activities was $109 million, while use of adjusted free cash flow for the quarter was $58 million. Trailing 12-month library revenue continued to demonstrate strength with growth of 10% year-over-year to $1.050 billion and reached record levels for the fifth consecutive quarter. Now breaking down our performance in the quarter, I'll start with a discussion of our Studio segment profit. Studio segment profit, which reflects our Motion Picture and Television segment profits before corporate overhead expense has grown sequentially throughout the fiscal year and was $114 million in the quarter. This sequential cadence reflects the back end loaded fiscal year we previously outlined, and we expect it to continue into Q4. We reference our Studio segment profit because this metric is generally more comparable to the studio OIBDA figures reported by many of our peers as most other media companies do not include corporate overhead expenses in their reported studio results. Moving to Motion Picture. Revenue grew 35% year-over-year to $421 million, driven by the release of Now You See Me: Now You Don't, The Housemaid and Good Fortune. Segment profit expectedly declined year-over-year to $59 million, primarily on the timing of P&A spend to support 3 wide theatrical titles, including the December 19 release of The Housemaid. The quarter included approximately $100 million of P&A spend in the U.S., which is helping drive future value across our release slate and replenishing library. Looking ahead, we expect Motion Picture will end the fiscal year strong as we have significant carryover box office from The Housemaid and an increase in the number of titles entering their pay-one window in Q4. As we outlined last quarter, there will be some P&A spend in the fourth quarter tied to the April release of Michael. But we are confident this and other key tentpole theatrical releases in fiscal '27 will drive robust growth in our Motion Picture business. Moving to TV. Revenue was $303 million, and segment profit was $56 million. Revenue and segment profit were expectedly down year-over-year due to the previously mentioned timing of episodic deliveries in the quarter, partially offset by strength in television library revenue. As a reminder, the prior year third quarter included the financial contribution from the inaugural season of the Studio, creating a difficult comparison. As Jon highlighted, the television group has already secured renewals for an impressive 12 out of 13 of its current scripted series, which reinforces our confidence in achieving our previously outlined goal of doubling scripted episodic deliveries in fiscal '27. Now let's take a look at the balance sheet. We ended the quarter with $1.75 billion of net debt and leverage expectedly increased to 7.4x due to lower trailing 12-month adjusted EBITDA. The revolver had $770 million of undrawn capacity available at the end of the quarter, and we had $213 million of cash on the balance sheet. We anticipate leverage will meaningfully decline from these levels as adjusted OIBDA and free cash flow improve. Additionally, our backlog remains elevated at $1.5 billion, up 26% year-over-year. As you will recall, backlog represents off-balance sheet contractual orders not yet delivered and is indicative of the visibility we have in future revenues and cash flow. Looking forward, we anticipate exiting the fiscal year with significant momentum heading into fiscal '27 across both our Motion Picture and television businesses, with Q4 adjusted OIBDA expected to improve materially from Q3 levels on strong theatrical carryover. With continued carryover profit from our fiscal '26 film slate, a tentpole heavy fiscal '27 release schedule and increased scripted episodic deliveries, we remain on track to deliver strong adjusted OIBDA growth in fiscal '27 relative to fiscal '25. Now I'd like to turn the call over to Nilay for Q&A. Nilay Shah: Thanks, Jimmy. Operator, can we open the lines up for Q&A? Operator: [Operator Instructions] The first question comes from David Joyce with Seaport Research Partners. David Joyce: I appreciate that 2027 is shaping up very strongly with theatrical releases that we've been talking about and the doubling of episodic deliveries on the TV side. What can give us confidence in the sustainability of these volumes and the profitability of the business model given the backdrop of industry consolidation? What would you see happening in terms of the buyers or other platforms where you can monetize your content? Kevin Beggs: David, it's Kevin Beggs responding. We're seeing some really nice green shoots in the market, a number of players that we hadn't been working with before that we're doing more with. Jon pointed to The Rainmaker on USA. That's been a really great new partnership. They've been out of scripted for a while. This is moving into a second season, performed well. We have a hit in Robin Hood with MGM+. We had previously not worked there. We have more in development there. Many of the buyers that were kind of slowed down or taking it a little more carefully are opening up more commissions. We continue to find entrepreneurial ways to get shows on the air via cost-plus and/or deficit models. Our distribution team is so strong. We're getting commissions in international markets, bringing those shows back into the U.S. So -- and many of the shows referenced are long-running shows, The Rookie and Season 8. It's been a great success for us in ABC. So those are the reasons that we feel quite bullish about this cadence maintaining in place and holding, but it's not easy and requires 24/7 attention and the kind of entrepreneurial ideas that we bring to the market every day. Jim Packer: David, this is Jim Packer. One thing I would say also from a buying perspective, if you just look at our trailing 12 months and the directional number, it's obviously a new benchmark. We always have an ebb and flow with buyers. Certain buyers are slowing down because of mergers or acquisitions or various things, but others stand up and start to fill those voids. I don't have a streamer that I need to take into consideration, so we can really play the market. And I think overall, the trends are going to continue. And I also have a slate coming in from Adam of Now You See Me, Dirty Dancing, Hunger Games, another Wick and SAW. If you look at those franchises, all of those have other film and TV products associated with them, and that helps my drag along. So I feel pretty good about it. Michael Burns: Yes. And I would say from a macro, David, both the potential existing bidders are talking about more movies bolstering their streaming platforms on a global basis. And at the end of the day, a stronger scaled streamers are going to be better for us in terms of original content, going to be better for us, as Jim was saying, in terms of selling library. So I don't think -- I think sort of the thesis that this consolidation is going to be a negative. I kind of see it the other way. I think it's going to be a positive. They both want to do movies. I think they're both committed. David just did in the U.K. in his speech to really a big slate of movies. And so -- and we want more movies in the marketplace. We think that's bringing the audience already back to the theater. So we think we're heading towards a nice macro environment. Operator: The next question comes from Thomas Yeh with Morgan Stanley. Thomas Yeh: One more maybe on the health of the more immediate downstream window for Motion Picture. There was a big pay-one deal struck recently, obviously, and I know you have an Amazon agreement kicking in as well. When you have a success like Housemaid, how should we think about the carryover benefits, particularly just in the context of the pay-one monetization of that, and whether you see maybe home video rental market as something that could be strong as well? Or does that get squeezed by pay-one becoming more prominent? And then on the AI front, I saw the appointment of a Chief AI Officer. Maybe give us an update on the Runway partnership and what other avenues you're maybe looking to unlock here with that position, that would be very helpful. James Barge: Yes. On Housemaid, great carryover. Thanks. It's fantastic. And pay-one will be rolling over. We're very excited about that as part of the carryover into Q4, and then obviously, major carryover into '27 on Housemaid's and quite frankly, the entire fiscal '26 film slate. So we're really excited about that. Jim Packer: Yes. Thomas, I would say also on the pay-one environment in general, I think the Sony Netflix deal solidified the fact that pay movies are some of the most valuable content out there. We saw it, we have a great pay-one deal with Starz. We have Amazon after Starz. Housemaid, as you mentioned, is actually going to be Starz and HBO. But really, the key for us is that right after these pay-one windows are over, you have multiple years that you can go into the open market and people can really bid on these titles. So the beauty of having a Housemaid is we haven't had one of kind of this level in a while. So that's going to really, I think, help the entire team and we go out to an ecosystem that can have a shot at something that's going to be a great, I think, a great bidding situation for us. Michael Burns: And I'll answer your question on AI. Look, we have the opportunity to bring in somebody, Kathleen Grace. You read about her. Somebody who obviously has a very strong grasp of AI, of the AI ecosystem. She's going to report directly to me that shows how important this is as we integrate it into every facet of our business. I should point out, she comes from both a creative background as well as from a company, [ Vermilion ] that really their whole mandate is the protection of creators and talent in respect to AI adoption. So that's a real priority for us. In terms of Runway, look, we have a really strong relationship with Cristobal and all of his people and are experimenting in a lot of ways. And I would say Kathleen will be the point person for us, the point of the spear in terms of any conversation we have, and I expect to have some pretty interesting ones with all of the major AI companies in terms of potential future partnerships. Operator: The next question comes from Omar Mejias with Wells Fargo. Unknown Analyst: It's [ DK Hall ] on for Omar. Since I'm on the call tonight, I might squeeze a few in, if that's okay. First, Jon, I was just hoping to follow up on your comments on AI. If you could just talk a little more about some of the broad initiatives for the company. I know I think Jim Packer has some benefits in his business in programming fast channels. We've heard there's things like reshoots and visual effects that can benefit as well. So in addition to the partnerships, I'd love to just know how you're thinking about kind of infusing it into the business day-to-day. Michael, I saw you on CNBC in December, you talked about the success of The Housemaid and another face-based film that maybe was at Lionsgate. But I'm just wondering, as you look at kind of the middle budget targeted area, what you're most excited about for the slate beyond Michael in fiscal '27? And then finally, Jimmy, just you talked a lot about the EBITDA growth coming ahead. Do you see any pathways to inorganic deleveraging as well as organic deleveraging as you look ahead? Michael Burns: Let's start with Adam. Adam Fogelson: Yes. So as it relates to the opportunities in the mid-budget space, we're excited to be working off of the success that we've had recently. Obviously, The Housemaid was an incredibly well-priced film that's generated massive returns. Similarly, The Long Walk was loved by critic, loved by audiences, and we work with Francis Lawrence and our talent partners to make sure we made it for a price where it could deliver a spectacular return on investment. We've got a couple more coming in the very near future. Strangers is the third chapter of a Trilogy made for such an incredibly smart and responsible price that we're looking at fantastic results, and I can only imagine follows right on its heels. Sequel to the highest grossing faith movie that the studio has had. And we've got a bunch of other films coming that fit into that category. So alongside -- the tentpoles, alongside the Michael's and the Hunger Games and the Resurrections, we've got a bunch of films in the low and mid-budget category that we feel really good are made with the right creative partners, made for the right price, have a marketing hook embedded in the idea that we can work off of. And when we look at the slate in total, we think we're going to turn out some really good returns. Michael Burns: Yes. I'll take -- I'll drill down more with you on AI DK, but you covered a lot of ground, frankly. You talked about scheduling FAST channel. Yes, we're doing that postproduction, enhancing some of the effects, something I think I may have mentioned before, we certainly used it on Spartacus very effectively to open it up, expect to use it even more, plan for it a little bit more this year. We use it for [ previss ] in the Motion Picture business. We're looking at it in enhancing in some ways, some script revisions, things like that, obviously, working with the writers. If we are -- we certainly, have it integrated into all of our technical operations, obviously, that's a reasonably easy one. And if we're playing with it in any original creation ways, maybe we are, but I'm not going to talk about it. James Barge: Yes. And Omar, your question about inorganic delevering, if you will. Certainly, 3 Arts would be an opportunity to delever. But we're in a position of strength there. That's not the primary objective. I would really go more to give you comfort on the organic delevering that will naturally occur. You see the pipeline; you see the backlog of $1.5 billion. 80% of that is future revenue and cash flows that come in, in the next 15 months, okay? So we are going to naturally -- we said this was the peak leverage. We're naturally with trailing 12 months and free cash flow, not only back-end loaded this year, but the carryovers into '27 and the significant growth into '27, feel really good about that delevering. I will tell you; we're going to be -- I would expect to be in kind of the mid-4s by the middle of fiscal '27 and that 3 to 3.5 range where we would more likely be in fiscal '28. So that's just happening naturally. Operator: The next question comes from Brent Penter with Raymond James. Brent Penter: First one on the M&A topic you brought up. Warner Bros. obviously commanding a very high valuation and has had 3 large, sophisticated bidders. The question is, why now? Why do you think there's so much interest in this kind of studio asset now in particular? And for Lionsgate, it seems like you all have more openly talked about M&A recently and you're letting the poison pill expire. So the same question to you all in terms of why would now make sense for you to participate in M&A versus sometime in the past? Jon Feltheimer: Do you want me to answer. Michael Burns: We think that -- it's Michael. We think that recognizable world-class IP has never been more valuable, and you're certainly seeing a validation of premium content when you have those well-heeled players pursuing Warner Bros. We don't know who's going to end up with that, but we do believe that, that is the first domino to fall. Brent Penter: Okay. Okay. And then a financial question. So on OIBDA, my understanding has always been OIBDA gets hit for the financing cost of production loans on films, which is why we don't include those in net debt or EV valuation multiples. Can you just update us on how much film financing cost there is above the line that hits OIBDA? James Barge: Yes. I mean, naturally, whether you're using production loans or not for working capital or to bridge and true up cash flows between cash out and cash in and better align, you capitalize industry, you capitalize interest above the line, and that becomes part of your production cost that amortizes through. So that's just fairly natural. For us, it's really more about managing our working capital, right? It's a great source, if you will, of film obligation that matches up cash outflows, which naturally occur 12 to 18 months ahead of release or delivery of episodic deliveries, and it's just a nice mechanism like any other working capital on the balance sheet to match cash flows. It's just good financial discipline. Operator: The next question comes from Vikram Kesavabhotla with Baird. Vikram Kesavabhotla: My first one is on Michael. Just wondering if you could talk more about the Reception to the marketing efforts there. You released the official trailer a few days ago. How has that performed relative to your expectations? And what else are you monitoring in terms of the data points to inform the potential success of that film? And then separately, you talked about extending the value of your IP into other areas like video games and live experiences. Could you talk more about how some of those initiatives are going? And what are some of the latest examples of where those strategies have been particularly impactful? Adam Fogelson: Sure. It's Adam. Thanks for the question, Vikram. So with respect to Michael, the -- I can tell you that we've now started screening the movie pretty actively, and the response to the movie itself has been extraordinarily positive. So we love the film that's been made, and that's a great thing to have in our pocket, and we're excited for everyone to get to see it. In terms of the release of this latest trailer, it once again has broken records for us. It is by far the highest viewed music biopick trailer you can find, and it sits at the top end of views alongside some of the biggest movies that have happened over the course of the last decade. Obviously, in addition to views, we're monitoring sentiment. We're monitoring engagement. We have very sophisticated tools that are available to everybody, but we have very sophisticated tools to be able to identify how people are responding to the content, to what extent they're passing that content along and talking about it with other people. And every single metric is in a very strong place. When you add that to the commitment that the IMAX and large formats have made to wanting to make sure that we've got an incredible footprint there and the enthusiasm we're seeing from every territory around the world, it's very, very encouraging. And you never want to count your chickens before they're hatched, but this feels like it has lined up in an extraordinarily strong way. With respect to your second question, look, the financial benefits of our non-theatrical opportunities will take a couple of years to fully materialize, but we have made significant progress on every platform. We opened the Hunger Games Live in London to terrific reviews and incredible attendance. We opened the Now You See Live event in Australia, again, great reviews and spectacular attendance. Our Wonder State Show has gotten incredible reviews in Boston, and we're excited to talk about what the next opportunities are there. Dirty Dancing and La La Land both have great plans that are coming together for their live stage. And on the games front, we'll have a lot more to say about John Wick, which we've been talking about for a while, but I think there's going to be some really exciting stuff to talk about in the near future, not only on that, but a couple of the other projects as well. So there has been real and significant progress over the last 18 months, and we think that there'll be a lot of good stuff not only to talk about in terms of response, but to talk about in terms of revenue contribution. Operator: The next question comes from Peter Supino with Wolfe Research. Unknown Analyst: Jack [ DiD ] on for Peter. I was hoping if you could unpack the sources of growth for your library revenues and the contribution from FAST services. Jim Packer: Jack, it's Jim Packer. Well, first of all, again, as I said earlier, the trajectory of it has been strong. It's really driven by our core of film and TV. This particular quarter, we had a lot of Hunger Games revenue flowing through with some pay windows, delivering a new season of Ghost to Paramount+. And then obviously, I'm sure everybody has known and read about Mad Men going to HBO Max. And that was another thing that happened this quarter that was very, very helpful. And really, if you look at the new platforms and you look at what we're doing with self-directed licensing, it's FAST, it's AVOD rev share, Amazon add-on channels. That's a very consistent piece of revenue for us. It's around 6% of this number growing next year, hopefully to between 10% and 15% of our trailing 12. And then lastly, you just look at it at our EST and VOD, which is the rental and the buying of movies and TV shows globally, that transactional piece is about 10%, and it's very consistent, very strong. And as new movies come through, as I mentioned earlier, with all of these franchises that Adam's team is revitalizing, all of that content gets benefited. So it ultimately helps it. So I feel pretty good about it, and all of its coming together to keep the numbers high. Operator: The next question comes from Matthew Harrington -- excuse me, Harrigan with Benchmark. Matthew Harrigan: The other interesting implication on the TV scripted doubling apart from the effect on the LTV, if you manage to sustain that is how you're able to scale that. Certainly, AI helps and people believe in the long run, you can see the software stock sell off and the transformational effects expected there. But certainly, in the near term, you could argue that the benefits are over hiked as early isn't showing in a lot of macro numbers. But how -- it seems counterintuitive that you can -- I mean, you're not making widgets and even doubling the amount of widgets in a given year is pretty high hurdle. But -- and you've been really keeping a tight cap on costs. So how are you managing to accomplish that? That seems like a pretty herculean feat just in terms of getting it done. Kevin Beggs: Matthew, it's Kevin again. Well, I think a lot of -- look, we're coming out from under the overhang of the strike. It always takes a lot longer. COVID was still impacting things long after it ended, if you will, for day-to-day living. And 2 -- one big piece of the chest puzzle came into focus with Skydance completing the acquisition of Paramount and Paramount+ expanding its business to more third parties, and I think they're going to do more as they've talked about and discussed. And in general, the kind of chill that can prevent buyers from taking a few more risks or getting a few more budgets approved for series is thawing a little bit. And we -- because we can produce quite effectively economically, both the highest premium kinds of shows like something like the studio, which is a Critical Darling, but also just a terrific hit for Apple, but also find a way to work economically with some other platforms that don't have the kind of budget capacity of Apple and find ways to make that work. It makes us an attractive partner. And Jim and Agapy's team really chasing down international numbers that make these formulas work is critical. As a studio that deficit finances when we need to, that distributes all over the world. There are only a handful of companies that do that, that are independent, only 1 or 2 that aren't beholding to their internal streamers, which is what Jim alluded to. So we just become a really good dance partner. And right now, the cadence of the dance is moving up a little more quickly than it was a year ago. Matthew Harrigan: And clearly, you have the people to do that in place. Kevin Beggs: We have an amazing team. We have got an incredible group that I'm honored and humbled to work with across our scripted and unscripted groups. And obviously, the partnership with 3 Arts continues to provide great dividends. Hunting Wives is an amazing success story for our 2 units and one for Netflix and our international partners around the world. We look for those opportunities and really convert on them when we find them. Part of it is being nimble and quick, quick decision-making that comes from the top down from Jon to myself and Sandra and our group and really just top creative people in Scott and Jocelyn and me and my group. And that's the secret sauce. Part of it is being nimble enough to move on these opportunities quickly. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Nilay Shah for any closing remarks. Nilay Shah: Please refer to the Press Releases and Events tab under the Investor Relations section of our website for a discussion of certain non-GAAP forward-looking measures discussed on this call. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM Full Year 2025 Group Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Arne Riscassi, IR Manager of Banco BPM. Please go ahead, sir. Arne Riscassi: Good afternoon, and welcome to Banco BPM Full Year Results Conference Call. Our CEO, Giuseppe Castagna; and our Joint General Manager, Edoardo Ginevra, will take through the presentation. And let me remind you, please to limit yourself to 2 questions. And now I hand over the -- to Mr. Castagna. Thank you. Giuseppe Castagna: Thank you, Arne. Good evening to everybody for ones we are the only one in the evening. So we'll take our time, but I will try to be as quick as possible in order to give you the possibility to make an interesting Q&A session. So first slide, on Page 6, I will start is just a recap of the completion, we are more and more having on our new business model, which, as you know, started a couple of years ago with the intention to build a business model driven by the product factory and able to hedge the contribution of commission and fees vis-a-vis NII revenues. I would say that this model is becoming more and more attractive. We are completing basically the different product factoring steps. We will go through the each one later on. But let me say that with this business model, we were able to support a very strong profitability, which with this split 50-50 income -- interest income and commission is, of course, more sustainable for the next quarter and the years. The results of 2025 was EUR 2.8 billion, EUR 130 million higher than the guidance I gave you in the last quarter. Also with the strong increase in terms of common equity Tier 1 pro forma, 13.76% versus, as you may remember, a planned minimum threshold of 13%. These results allow us to match the dividend per share of EUR 1, which we gave last year so the balance dividend would be EUR 0.54, 17% higher than the first interim dividend, EUR 0.46. The payout ratio is still 80% considering for this year that net income, excluding the valuation of preexisting Anima stake of EUR 200 million. Let me remember that last year, we accounted for the 80% payout ratio, also the extraordinary contribution coming from the Numia transaction. Shareholder remuneration, '24-'25 reached EUR 3 billion, which is exactly of the strategic plan cumulative target, which is already achieved after a couple of years. Some further number, which give you the sense of where we stand in terms of where we wanted to reach with our presentation of business plan in February last year. As I mentioned before, we are already a non-NII revenues on total revenues 51%, cost-income ratio of 46%, gross NP ratio 2.2% and cost of risk 40 basis points. On Page 7, the pro forma net profit is higher because, of course, we are not considering in the stated accounting, the first quarter in which we did not consolidate Anima. So if we have a pro forma with consolidation of Anima, the net profit -- the net profit would have been EUR 2.120 million. If we compare, as I mentioned before, the '24 to '25 net profit, we have an increase of 20% excluding in '24 Numia transaction and solidarity one-off -- solidarity funds one-off and the EUR 1.880 billion, which we reached this year, excluding Anima one-off is a 20% increase in net income, which, of course, accounts for almost 20.5% of ROTE and 15.5% of ROE. The organic improvement was so high to offset completely in the Euribor reduction of this year. We started from a profit from continuing operations, pretax of EUR 2.5 billion in '24. We have a total reduction NII at full funding cost of EUR 200 million, a further reduction in NFR of EUR 56 million, which were completely compensated by organic improvement coming from non-NII core specifically commission and insurance and a reduction of operating costs and provision like-for-like. So we have a plus EUR 2.550 billion to which we add EUR 263 million related to the integration of Anima starting from Q2. If we include also the first quarter of Anima, our profit from continuing operation would stand at EUR 2.9 billion. So let's have a look to the composition of the profit and loss. We have growing revenues in terms of total revenues from EUR 5.7 billion to almost EUR 6 billion. As I mentioned before, non-NII revenues on total revenues is 49% for pro forma, but 51% considering NII at full funding cost. Net fees and commission raised 21% to EUR 2.5 billion, starting from EUR 2.055 million of last year. And the same strong increase of almost 60% comes from income from associates would grow from EUR 200 million to EUR 330 million. The Q4 was the first positive quarter of the last year in terms of core revenues, which grew almost 5% thanks, of course, mainly to fees, but also to a fair contribution Q4 and Q3 of NII. The same favorable trend we are experiencing cost control. Like-for-like, we have a reduction in cost of 1.7%, which, of course, pro forma takes in account also the impact of Anima. Significant decline also in provision, where we reduced the total provision 26% with LLPs going down from 46 basis points to cost of risk to 40 basis points. Just a quick deep dive on risk profile. As you may remember, this was the main difference that we had when we started the merger. We had an NPE ratio of 22.5% vis-a-vis an average of the Italian bank at 15% and average of EU bank at 5%. As you can see in the last 3 years, we have reduced massively this amount and now we are at 2.2%, which is exactly in line with Italian banks and slightly above the 1.8% of the European average. Let me also remember that we were basically one of the few banks who didn't make recourse to the market to offset the NPE. In the same period -- in the same 9-year period, we assume that there were at least more than EUR 25 billion of share issue in order to offset the NPE from other banks. Also, the stock has a low record. We have now a EUR 2.250 billion of GBV, decreased by EUR 600 million now, which is a 21% reduction and net NPE went down 0.37 points to 1.2%. And basically, we have a 0 bad loan if you exclude bad loans covered with the state guarantees. We, at the same time, have also the higher NPE coverage because we're increasing for 52.5% to almost 56% of the total coverage excluding, again, state guarantee and also the vintage of our NPE portfolio has been reduced to less than 2 years. The default rate was 0.84%, and we have managed also to reduce EUR 1.1 billion Stage 2 loans, which now stands at 8% of total performing loans. Capital generation, we were able to generate 194 basis points after absorbing more than 260 basis points related to EUR 1.5 billion of dividend distributed. We have a sort of road of the common equity Tier 1 during '25, which you may remember, has been a massively eaten by the Anima acquisition, not getting Danish compromise. This accounted for 240 basis points on our capital to which we had 60 basis points of regular headwinds totaling 300 -- more than 300 basis points. So with the starting point rebased in 2024 at 12%. To this, we had the capability to generate 176 basis points which brought the total to 13.76% to which we had to deduct the one-off levy on extra profit reserve, which accounted for 18 basis point, bringing the stated common equity Tier 1 to 13.58%. We managed in January to have some hedging on some minority stake holdings, which gave us 18 basis points of contribution to common equity. So we can say that nowadays, we have 13.76% of common equity Tier 1. After again, absorbing Anima acquisition, regular headwinds, the dividend payout and the levy on extra profit reserve. This is very important in our opinion because if in such a year, we were able to offset all these headwinds and generate such a consistent amount of capital as we did basically from 9 years, every year offsetting the losses that we had in reduction of NPE, you can understand that the capital generation for the future will not be a problem. We are very confident to return very soon at a 14% level. Let's go into some detailed figure on Page 12. We have the spreadsheet of Q4 and Q3 and full year '25 and full year '24. As I mentioned before, Q-on-Q, we have the first time of positive results of net interest income 1.3% higher than Q3, net fees and commissions 7.5% higher than Q3. Of course, it's a bit more difficult to make a comparison year-on-year because we have the contribution of Anima, 9 months this year. But anyway, we have 21% of net fees -- higher net fees and commission to EUR 2.5 billion. Another quite remarkable contribution is coming from income from insurance, where year-on-year, we passed from EUR 116 million to EUR 163 million. Core revenues went up 5% Q-on-Q and 2.5% to year-on-year considering more than EUR 300 million reduction in NII year-on-year. Net financial result was EUR 48 million positive due -- specifically, thanks to the cost of certificates, which went down to EUR 167 million compared with EUR 284 million last year. Total revenues went up to almost EUR 6 billion compared to EUR 5.7 billion last year and Q-on-Q went up 1.1%. As I mentioned before, we have a slightly increase in operating costs, but this is driven by the Anima impact, which was not present in '24. If we compare like-for-like, we have down in cost, 1.7%. Total provision down from EUR 547 million to EUR 403 million quarter-on-quarter, we have instead an increase, which is a seasonal increase of total provision to EUR 160 million from EUR 81 million. Profit from continuing operation. Pretax profit were EUR 2.8 billion year on '25 compared to EUR 2.5 billion, '24, so a 12.5% growth. Net profit from continuing operations is 17.4% growth with again a considerable growth. Also net income more than the figure that is shown on the Page 12 of EUR 2.8 billion compared to EUR 1.9 billion, maybe is more affected to compare the 2 years without the one-off I mentioned before, again, is EUR 1.880 million against EUR 1.570 million, a growth of 20% year-on-year. On the right side of this slide, you can see how we managed -- we were able to manage and we will go through afterwards the NII, of course, there was a massive reduction in NII. But if we consider the NII at full funding costs, so the contribution of the lower cost of certificates we managed to keep the reduction '25 on '23 at only 2.2% with EUR 200 million reduction from '24 to '25. And you can see how the impact of commission basically is now higher than the impact on NII in '25, growing to almost EUR 3 billion from EUR 2.3 billion of '23. So you can see the non-NII revenues growing from 43% to more than 50%. Cost/income down to 46% from 48%. Again, I mentioned already both the LLPs and net profit from continuing operation, which grew 38% which is quite massive, if you consider the reduction of NII. Again, net interest income, specifically a reduction of 9% year-on-year, which is 1.3% positive on quarter. At full funding cost, the reduction was only 6.2%. And the results of the last quarter was justified by the increase of 3 basis points in Euribor, which we were able to take in our commercial spread up to 2 basis points, so almost all the entire Euribor increase. Specifically, we grew 2 basis points in the liability spread, maintaining at [ 1.47% ], the asset spread. The managerial action sensitivity basically reached the top as it was already in Q3, we are not hedging anymore both in terms of replicating portfolio due to the consistency of Euribor during the last months as well as also the index current accounts were stable at 37% vis-a-vis 34% over last year. Also sensitivity was -- there was a reduction on sensitivity rate at EUR 150 million. Finally, on the last bottom right part of the slide, you can see how a strong help in NII came also from the reduction of the wholesale issue in last year. Basically, we reduced from the beginning of '24 to the last emission, we were able to reduce the average of the wholesale bonds spreads of 60 basis points which accounts for almost EUR 35 million per year. So that means that we have a lower cost of risk for our -- lower cost for our issuing going on towards the end of the plan. You can see how for each kind of issue, there was a reduction based from the last issuance from -- related to the previous one. A good signal finally in Q4 also from loan volumes Of course, there was all the year strong generation of new lending up to EUR 28 billion, EUR 7 million higher than last year, showing our constant presence close to the client make us take advantage also from -- also in a period in which there is not loan growth. We were able, of course, to foster a lot of new loans taking an important share of commission coming from new lending. Specifically, new lending to household grew 40% year-on-year to non-financial corporates grew 30% year-on-year. Also in terms of low-carbon new money long-term financing, we were up to EUR 7.6 billion compared to EUR 5.7 billion of last year. As well -- as far as the stock is related, the Q4 was EUR 1.2 billion up in Q3, growing basically in all the different asset class, non-financial corporates, household and financial. Meanwhile, when you compare with December '24, we were able to have a positive increase, both in household and non-financial corporates. Meanwhile, as you may remember, we have only 1 institutional big ticket transaction amounting from EUR 1.5 billion which impacted the reduction of EUR 1.3 billion related to the institutional lending. On the right side, some quality discretion 73% of our core customer loans are located in North of Italy. We still continue to take a lot of advantage from the collateral of our loans, 52% have secured, 27% with state guarantee. And if you go to SMEs, 63% are with collateral and more than 90% of the risk are concentrating in the best plus from mid- to low-risk. Net fees and commission is the game changer of this year, thanks not only to the Anima contribution but also to grow 5% and normalized for the Ecobonus reduction commission '25 or '24. As you can see, we have -- we passed from EUR 2.055 million of '24 to EUR 2.5 billion of '25. And this, again, make clear the share of investment product fees passing from 56% to 49% of the total commission. You can have some detail on the right side of the slide. In the upper part, there is the investment product fee growth to 11% year-on-year like-for-like. So without Anima contribution, which, of course, became EUR 1.2 billion, if you consider also the contribution of Anima, which brings to more than 50% of the contribution of the asset manager -- wealth management fees. Also in terms of loan of investment product placement, we grew 12%, in line with the growth of the commission. On the other commission, we were able to contain the reduction at 1.9% which if we exclude the deck of bonus impact on '24 became a growth of 1.2%, specifically from having good results and increasing results, especially from P&C insurance, consumer credit, corporate investment banking commission, structured finance commission. Meanwhile, some reduction in -- as I mentioned before, in ecobonus and instant payments and in the payment system and activity. Let's make a quick focus on the insurance business, as you know, has been one of the core field of our strategic plan. In the last 2 years, we have done a lot of work integrating 100% the Life business and creating the new joint venture with Agricole and P&C. This year, we had bought the IT migration of Life and Non-Life. One run directly by us and the other one run by our partner of Agricole. So, of course, as always, in this case, you always experience some reduction in sales. Basically, it was not so much the case because if you see the contribution of the insurance business, this grew year-on-year, 26% from EUR 255 million to EUR 320 million with a pace which is much quicker than the pace that we need to reach the target in '27. Basically, in the last year, we had the same increase that we expect for the next 2 years. If we go through the different kind of insurance, Life Insurance grew 27%. Commission were up to EUR 70 million from EUR 67 million, but what was really affecting these results was the income from the insurance business, keeping, of course, now all the income coming from this kind of business, which grew from EUR 160 million over last year to EUR 163 million of '25, which is almost in line with EUR 175 million, which we have as a target in 2027. Let me remember that in '23, this business contributed only for EUR 46 million to our profit and loss -- as well -- as far as P&C is related, we have the same growth up to 23% coming from EUR 71 million to EUR 88 million. And again, definitely, we are not yet at the final speed we assume we can take in '26 and '27. A quick focus also on Anima and all the total customer financial assets, which in terms of captive volumes grew more than EUR 13 billion, EUR 13.7 billion in '25 and more than EUR 25 billion in the last 2 years. So a really remarkable growth. As you can see, last year, we had a big impact also from net inflows. Asset under management grew EUR 2.3 billion, asset under custody EUR 3.5 billion and current account and deposits grew almost EUR 5 billion. We can see the same -- almost the same pace if we consider the total customer financial assets held by our group, which now amounts to almost EUR 400 billion is EUR 396 billion, starting from [ EUR 377 billion ] last year. on a pro forma basis, of course, because we did not consolidate Anima last year with a growth of almost EUR 20 billion year-on-year. A final page on Anima. Of course, the most important piece of news is that we appointed in end of January, the new CEO, Mr. Perissinotto. And of course, also the growth of Anima is quite considerable, considering also the difficulties of last year managing from one side, our acquisition, the CEO -- the former CEO leaving in the last quarter and managing the integration of the new business into the group. But Anima managed to grow 4%, EUR 8 billion year-on-year and growing 5% in terms of revenues and 16% in terms of net income. So we are very happy of the contribution Anima is doing for us. And we, of course, expect this figure bettering with the new management of the company. Let's go to the cost income, down 46%, thanks to a rigorous cost discipline that is now, I would say, quite a mark for our bank. Like-for-like, we have the reduction of 1.7% to EUR 46 million, which, of course, including Anima is higher up to EUR 2.7 billion. If we consider staff cost, we have a reduction of 1.5% like-for-like. With Anima, we have stated EUR 1.8 billion if we integrate also in the first quarter Anima, the figure would have been EUR 1.825 billion, but we assume that we are completely in target with the business plan, which may remember is EUR 1.780 billion because thanks to the retirement scheme we fostered last year, we have already generated more than 1,000 exit and another 600 will be during the last 2 years. This will be -- will generate EUR 60 million of reduction of cost of personnel only offset by EUR 20 million of increase of national contract and new hiring that we are doing. Also in other administrative expenses, we have a quite strong reduction, 4.7% in terms of [indiscernible] we just said we register a slight increase in depreciation and amortization due to the increasing amount of investment we are doing in IT and AI. Let me remember that the headcount that with Anima were pro forma more than 20,000 people being in '25, now are down to below 19,000 people. We have 18,970 people and further reduction of 300 people is forecasted by the end of the plan. We already mentioned cost of risk, very good news in all aspects total down EUR 600 million to EUR 2.250 billion, net bad loan down to 0.36%, which became 0.1%, excluding state-guaranteed loans. The cost of risk is down to 40 basis points, but this 40 basis points includes 5 basis points related to front-loading future derisking for other EUR 300 million, which we forecast to materialized during this year default rate at a low rate of 0.84%, increasing cure rate and of course, decreasing net default rate also the coverage is a record level for us without the state guarantee, we had almost 56% in NPEs and 77% of bad loans. I'll give the floor to Edoardo Ginevra for the financial and capital side. Edoardo Ginevra: Thank you very much, Giuseppe. I try to be very quick in the interest of time. Good evening, every one, of course. So in this Page 21, we see the evolution of the contribution of the financial component to our P&L and our capital reserves performed very well during the year. They had a negative contribution on a net basis above EUR 500 million now or below EUR 300 million, with a further improvement during the month of January. Bond portfolio is slightly below EUR 47 billion, decrease in the quarter was due to some maturities. But you may remember that we described the evolution of this portfolio is pre-investing during the rest of the year also for some maturities that we had in the final part of the year. Composition is similar to third quarter with 68% at amortized cost. Out of this, EUR 46.6 billion, EUR 38 billion are Govies, of which Italy accounts for 38%. Most of Italian bonds as usual, as in the previous quarters are in the area of -- in the category of amortized cost. Net financial result was negative last year for EUR 82 million, now is positive for EUR 48 million. Most important drivers of these results is -- this evolution are the reduction in cost of certificates from negative contribution to EUR 184 million to negative EUR 167 million. The other components accounted for EUR 215 million, out of which almost EUR 100 million are represented by Monte Paschi dividends, which, by the way, left us some room for prudent valuations of loans booked at fair value during Q4. '22, cash is almost at EUR 54 billion with a positive evolution on total direct funding that now is at above EUR 137 billion, thanks to EUR 5 billion almost of increase in direct funding in current accounting deposits, sorry. Indicators of liquidity and funding are on a very solid level with LCR in particular, that is at 147%, which is quite the level that on a 12-month basis, the average we have continuously registered. NSFR is constant at 126%. MREL buffer is at almost 7.7 percentage points. The evolution of our funding has been very successful as far as our access to the markets is concerned. Thanks also to positive influence of improvement in credit ratings from Fitch, from Moody's and DBRS, we have been upgraded whilst S&P during the year assigned to the bank a positive outlook. Moody's and DBRS for the first time, showed for the deposit category, also the A class of our rating. We were successful in issuing EUR 2.65 billion of wholesale bonds, of which [ EUR 175 billion ] using GS&S bond framework or EU GB fact sheet. We were the first Italian bank issuing a green bond using the EU labor for EUR 500 million during the year. Secondary market spreads that were described on an average basis in the first part of this presentation in NII slide, here are analyzed in terms of the evolution between -- or the difference between the average spread of the strategic plan, which is the blue bar and the issuance spread that for that category, we have reported -- we have achieved in '25. So for example, senior preferred, we have in the plan, 140 basis points of spread, we issued this year at 95 basis points of spread and secondary market, which may, of course, be is a different type of indicator, but it's interesting as a benchmark, as at the end of last year was at 63 basis points. Similarly, also for the other categories, you see that we are well ahead of where we expect it to be when we drafted the plan in February last year. Page on capital. Here, we focus on the evolution of this fourth quarter where we started at 13.52%. We have to book -- to account for the levy on extra profit reserves, which dragged the capital for 18 basis points. So the real rebate starting point is 13.34%. We are at a pro forma level of 13.76%. This is thanks to the contribution of our P&L, which after dividend contributes for 9 basis points, 72 minus 63 to the contribution of DTAs and fair value comprehensive income reserves. RWA operational risks is a one-off of 19 basis points due to the need to take account of Anima in our yearly -- full year P&L replacing the previous full year P&L, which was less rich in terms of revenues and final other components account for 4 bps. Organic capital creation in this quarter has been 24 basis points on a pro forma basis, taking into account the hedging transactions that we have executed in January. We are on top 18 basis points coming to the level I mentioned 13.76%. MDA buffer allows us room for additional business expansions, investment opportunities, capital deployment, which is as high as 408 basis points or on proforma basis 425. Let me remind that the minimum threshold in the plan 350. Finally, we continue to have material level of capital that will be created from additional sources on top of P&L, in particular, DTA and fair value comprehensive income reserves will contribute to capital creation during the remaining part of the plan horizon in the next 2 years for an expected level of 150 basis points of about 150 basis points. And I'll leave the floor again to Giuseppe. Giuseppe Castagna: Okay. Just for the conclusion, thank you. So Page 26, we are very satisfied and proud also of the new bank with a very strong and diversified business model we were able to build in the last years, starting from a very normal commercial bank driven by NII. Now as you can see, we are able to deliver almost 50% through commission. Meanwhile, growing also in terms of net profit. So it's just not a substitution of income and profitability, but it's a growing profitability coming from a sustainable remuneration of commission. Basically, we have the growth we experienced in the last year, which is already the double of the growth we will need to have in the next 2 years to reach the target '27, but more important, again, we are already at the 50% that we expect in terms of non-NII contribution. Let me say that 35% of our net profit comes from wealth management, asset management and protection, which was only 24% last year and below 20% in the previous year. So all these allow us to be very confident in the trajectory towards the EUR 2.150 billion of the net income target with a very consistent ROTE and ROE we almost already reached and the capability to continue to distribute a dividend of EUR 1 also this year, which, as you can see, the progression from EUR 0.23 to EUR 0.56 last 2 years ago, EUR 1 last year. But as you may remember, this EUR 1 was coming from out of EUR 400 million coming from the Numia transaction. This year, the EUR 1.5 billion comes all from a repeatable and sustainable profitability, capability to generate profitability. All in all, we have -- with this distribution, we will reach the EUR 3 billion, which is half of what we promised to the market, which is EUR 6 billion, but we are already ahead of expectation because the first 2 years were considered lower in terms of profitability vis-a-vis the next 2 years. If we consider the average price of the stock in 2025, the dividend yield is 9%. Let's have a look, recap on '25, profitability at record level with over delivery of EUR 130 million, more diversified and sustainable business model, producing 50% of non-NII revenues, record of asset quality, reduction of NPE to 1.2% and a good increase in the common equity Tier 1 ratio, notwithstanding a very difficult year in terms of headwind to just not remember that the year was, in a way, more difficult for many reasons. But notwithstanding that, we are already ahead of the figure we gave with our business plan in February vis-a-vis the target '26, both in terms of total revenues, in terms of operating cost, in terms of cost of risk. And this, of course, this allow us to say that the pretax targets are confirmed with some room for overperformance. Of course, we know that for next 2 years, there will be better next 3 years, there will be some external challenge. We have a budget law, which increased the tax rate in the plan horizon. We have also some incremental due to specific systemic charge. Notwithstanding that, we think that through managerial action, the advantage accrued in '25, the capital generation that we are able to produce, we will, in any case, be able to deliver EUR 1 dividend per share also in 2026 and doing so, remaining ahead of the EUR 6 billion target distribution that we have for 2027. This is my final page. So please, I would go for Q&A section. Operator: [Operator Instructions] First question is from Giovanni Razzoli, Deutsche Bank. Giovanni Razzoli: I have 2 questions. The first one is on the NII. We have seen an acceleration of the household segment in terms of loan growth in the Q4, but most of the growth was driven quarter-on-quarter by the financial institutions. So I expect that the trend of the NII in the coming quarters could be supported more by the household -- the growth in the household volumes going forward, whether this -- so I was wondering whether this -- my understanding is correct. Because on the other side, I've seen that you have reduced by around EUR 2 billion your replicating portfolio in the Q4 when compared with the Q3. And if I remember it correctly, you tend to replicate much less than the other peers. So I was wondering what shall we expect going forward in terms of NII when compared with the Q4? And the second question related to the governance and specifically to the evolution of the governance and legal framework in the coming weeks. We've seen some coverage on the press. You are planning to introduce the changes in the Articles of Association. So what are the steps that we shall expect from here in terms of governance, legal framework? So if you have the opportunity to clarify this to us. Giuseppe Castagna: Okay. Thank you. Let's start from NII. We think that the pace of new loans we were able to produce last year is -- and also the increase in Q-on-Q is a good signal for forecasting a slow increase also in terms of portfolio of stock of loans. Beginning of the year is not that bad. Of course, every year, you have to stand and replace what is expiring end of the year, but we are already at a quite good pace. We are confident that this year could be the first year of recovery also in terms of loans. But don't forget that last year, we grew EUR 5 billion in terms of deposit. This, I think, a very strong assumption. I don't know if we can repeat the same pace. But in any case, the margin coming from deposit is exactly the same, the margin coming from loans. So this is another very good way to increase NII without taking further risks. Of course, we will stand close to our clients, taking all the advantage also for increasing loans, but it's not the only way to better NII. I leave to Edoardo the replicating portfolio, but maybe I can go through your question about governance. As you have seen from the published documents, we plan to amend our bylaws to comply with Legge Capitali and provide for an increased minority representation to our shareholders in line with the spirit of the law. As you know, we have a new EGM on February 23, which will be followed by the submission of slates for the renewal of the Board. If we will go for the list of the Board, we have to submit 40 days before the Ordinary Shareholders' Meeting of 16 April. So this will be within 7 of March. And if the list will be presented by the shareholders, the presentation will be allowed up to 25 days before such extraordinary meeting, so within 22 of March. In terms, of course, of requirement, I think that there are the usual requirement, which are requested by ECB. So of course, fit and proper requirements, independence requirements, rules, equilibrium on gender. And specifically, of course, we have some bylaws, which imply that, of course, in terms of competitors, we cannot have in our Board members of competitors. Giovanni Razzoli: Thank you. On the replicating portfolio, you are right. We have reduced the level versus what we had in September. But this was, I think, completely planned in September, we basically entered into new transactions to anticipate of some swaps that was due to happen by end of the year. So we came back to the level that we plan to have in our strategic plan, which is exactly EUR 25 billion. Next year, we will start the year with this EUR 25 billion and the contribution to NII of the replicating portfolio is expected to be supportive to represent a tailwind for the overall NII given the evolution of especially the floating rate, the lag that is paying for us. So also the replicating portfolio on top of the commercial evolution of the commercial part will allow us to reap some benefits. Another point worth mentioning is that despite the observation you made on replicating portfolio, still our sensitivity, overall NII sensitivity is reduced especially compared to June, given that on the period, it was EUR 50 million higher like-for-like, of course, so considering the contribution to NII or the contribution including certificates. Operator: Next question is coming from Sofie Caroline Peterzens, Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. So my first question would be on the investment products on Slide 15. We can see that the upfront fees were very strong at EUR 343 million. Should we expect this to remain the run rate going forward? Or do you see kind of scope for increasing both upfront fees and also the running fees on the investment products? And then my second question is on the systemic charges that you mentioned on Slide 26 -- sorry, 27 that you expect kind of incremental systemic charges. Can you just walk us through what these charges are and how we should think about these new challenges? Giuseppe Castagna: Thank you, Sofie. On investment products, yes, it's been a very strong pace, but we come from years of increasing this kind of product. And of course, having now Anima into our group, it will be even easy to have the opportunity to give -- to offer our clients the best product having the possibility to offer without any advantage for us, but only in the interest of the client, both insurance product, asset under management, funds, certificates and whatever. So we think this is something that we can continue. Asset under management, notwithstanding the growth of the last years, we are still with a share which is a bit below the average of our competitors. So we feel that we can have the opportunity to have a common policy together with Anima and grow in this respect. I have to add that next year, we will be -- this year, of course, '26 will be more attentive to the product, which will generate a run rate rather than upfront. This year, we were a bit in the middle of our bancassurance business proposition. And we had also the need to serve our clients with product which we were not -- we were more in the interest of our clients in terms of yield, reducing our commission in the run rate. Starting from this year, we are not anymore in this situation. We will have only one company, which will do together with Anima, the new product, and this will make much easier to have product, which will have more run rate embedded. I leave Edoardo for the systemic charge. Edoardo Ginevra: So on systemic charge, of course, there is this specific case, which is very well known in the Italian market of Banca Progetto, which will require Italian banks to contribute through the interbank fund. Our share is around EUR 20 million per year in the next 5 years. On top, there is a small amount that will contribute to the insurance fund, which is additional EUR 5 million, EUR 6 million. I'm talking about gross before tax. Operator: Next question is from Antonio Reale, Bank of America. Antonio Reale: It's Antonio from Bank of America. Two questions from me, please. The first one is on your outlook for revenues in 2026. Your Slide 27 shows your business plan target, which, I mean, increasingly look very conservative now in the context of the strong numbers you've managed to deliver in 2025 and also in the context of your remarks in the presentation. So as things stand, your 2026 revenue number, it basically imply no growth year-on-year. And I'd like to understand or get a more up-to-date target on what you think this number could look like and possibly understand the moving parts on the sort of key revenue line items. The second question is really a follow-up on the previous question on governance because I'm trying to square up. I think yesterday, Crédit Agricole said that they would like to have a fair representation on the Board. And I mean, it's no surprise given the shareholder register. Based on what you said earlier though, of not having members of a competitor on the Board, do you think this is going to require an additional approval from ECB or other authorities in Italy? I'm just trying to understand how this comment squares up, if I understand correctly. Giuseppe Castagna: Okay. Yes, every time we announce some plan, it looks like not to be conservative, then when we reach, of course, the final step looks conservative. Let's say that we are very happy where we stand right now. Of course, you know which were the figure for 2026. On top of that, we have some headwinds that I mentioned before. We are committed to make good results also for '26, trying to offset this EUR 100 million of lower net profit coming from the new taxation and the contribution that Edoardo was specifying. So I don't think it's something -- if you start from EUR 1.880 billion, which is the net profit of this year, not considering the contribution of Anima, I think is a quite impressive increase towards, of course, the final target, which is more related to '27. And again, we are also committing in paying the same amount of dividend for this year. In terms of governance, no, we do not need any approval is Crédit Agricole. I think that need approval from ECB. We just have -- as I mentioned before, we have done a new -- some change in our bylaws in order to accommodate not only for Crédit Agricole, but for the minorities, all the minorities, a more consistent pace, also considering the level of shareholding held by Crédit Agricole. So we are going ahead. Of course, in order to change the bylaw, we need an approval from ECB, but it's not related to the Crédit Agricole possible Board member. Operator: Next question is from Manuela Meroni, Intesa Sanpaolo. Manuela Meroni: The first one on the capital base. I'm wondering if you expected to make some optimization actions of your risk-weighted assets right now in 2026. I'm referring to potential SRT or maybe some action in order to reduce the capital impact of Anima. The second question is a follow-up on the question that you just answered. I would like to understand what should happen in order to allow you to revise upward revise your targets for 2026, '27. is this something that at some stage in 2026, we may expect? And the third question is on the hedging transaction that you executed in January. I'm wondering if you can elaborate a little bit more, providing some, let's say, indication also if there is any impact on the P&L. Edoardo Ginevra: Thank you, Manuela. Edoardo here, Ginevra. In 2026, the indication that we gave of 14% is based on, I would say, more of the same of what we have done during this year. So strong attention to capital absorption in origination, management actions to reoptimize RWA, including, as you mentioned, correctly, synthetic securitizations and capital production through [indiscernible] 20% retained earnings and DTAs and put to par of fair value comprehensive income. We have on top kind of confidence that at least with this market scenario, we may be even more effective, for example, in managing the bond portfolio and creating additional capital out of that if needed. We don't have extraordinary transactions expected in this evolution to contribute to this evolution. In this fashion, what we have done in the hedging transaction is a simple capital hedging structure that we have to avoid to deduct from capital participations that would have been -- that have exceeded the threshold of 10% for the total participations below 10% -- so it's a transaction that creates a synthetic short position, counterbalancing the long positions and net-net generating capital efficiency via avoiding the deduction. Giuseppe Castagna: As far as your second question, let me remember, Manuela, that we gave this number only in February this year were numbers that we gave under an OPS. So I think you can understand that we were not shy where we gave this number to the market. We are very happy that in the first year, we are above we are as well confident that we will be good in '26 and '27. But for '26, let at least go through the 1 or 2 quarters in order to understand better the situation for '27, just some figure. We have a target of EUR 2.15 billion. Without Anima, we are at EUR 1.880 billion is EUR 270 million. Let me say that we can add another EUR 100 million of tax that we didn't expect is EUR 370 million is 20% more than the net profit this year. So let me wait a bit in order to increase the 20% increase on net profit to which we are still very much committed, but it's difficult to say that we can right now, 2 years in advance, raise this target. Operator: Next question is from Delphine Lee, JPMorgan. Delphine Lee: Just first of all, just wanted to come back on the governance. Just trying to think about like if you could give us some color about what you think once Crédit Agricole will have some representation in the Board, like what implication that would have long term strategically? My second question is just like a very quick one on guidance on sort of net financial results, if you don't mind, given it can be sometimes a bit volatile. I mean, if you don't mind giving us a little bit of sort of a reminder of what you said in your business plan -- and then also maybe for this year, what do you expect including or excluding the dividend of Monte Paschi? Giuseppe Castagna: Okay. Delphine for the first question, frankly speaking, I think that there will be an important shareholders, which will be represented in the Board doesn't change that the bank remains a public company with a very important shareholder. I think we have been able to run the bank quite independently up to now. All the move we have done in insurance asset management are completely showing the independence of mind of our management. So I don't expect any implication in this regard. Of course, we will strengthen all the rules related to the conflict of interest. This is something that also ECB will require for anybody being in our Board it running a business, which is in some way in competition with us. But for the rest, I think also Crédit Agricole is very happy. They have invested very recently in our bank. They are getting some good reward from the investment. We have 2 joint ventures in common. So I don't expect anything different from what we do right now. Edoardo Ginevra: Okay. On net financial result, I think that it is not surprise that this is an item that shows some volatility. We gave -- we insert in our strategic plan a conservative outlook for this item on the P&L, which after some reclassifications that we have done and we explained to the analyst community in June or in the second quarter of this year can be quantified in slightly below EUR 50 million. This is the indication for 2027. Current expectation is to be able -- to be confident to do better than that. leveraging on both the reduction in cost of certificates and on the ability to produce revenues from our structuring activity that is included within the certificates and so on and so forth, which is included within trading. Last but not least, of course, this component this item will include dividends from MPS, which is factored into our plan for an amount consistent with the dividend payout, which was announced 1 year ago by the bank. Operator: Next question is from Luis Pratas, Autonomous Research. Luis Pratas: The first one is on the cost of risk guidance. So essentially, you printed 40 basis points this year. You also reduced the NPE ratio significantly. I was just wondering why do you reiterate your 43 basis points 2026 target? Are you seeing like any signs of deterioration picking up? And then my second question is on the tax rate. Can you provide the guidance for the tax rate in 2026? I think you had 29% in 2025. So not sure if there were like any one-offs here? Or can we just assume maybe like 2 percentage points higher, so 31%. Giuseppe Castagna: No, you're right. Of course, cost of risk, if we have -- now our cost of risk is basically driven by default rate. As you were mentioning, we have a very low stock, very well provisioned. So we don't have any possible increase of cost of risk coming from managing the stock. Of course, inflow, default rate, it is always a question mark. We have had a very good '25 as well as good '24. With this, assuming there will be -- could be another year at that level, of course, we will have some better in terms of cost of risk. But if you -- of course, it's very difficult, especially if we forecast a potential increase in the demand, which we don't see yet so strong, but could become strong, it's difficult to not consider at least 1% of default rate. If the default rate will be lower, considering that we don't have any stock to manage increasing provision, of course, the run rate related only to the cost -- to the default will be lower than our guidance, and we will update it during the year. Edoardo Ginevra: Tax rate, we are in the area -- in our outlook in the area of 33%, including, of course, the increase in taxes coming from the recent budget law. This year, correct, your observation has been lower. It's a technical out of the same budget originating one-off effects on DTAs that were readjusted to the new tax rates introduced by the budget law. So we basically have increased the current fair value of DTAs and this generated a one-off benefit on taxes. Operator: Next question is from Lorenzo Giacometti, Intermonte. Lorenzo Giacometti: I have actually 2. So the first one is whether there is any chance that you will be able to obtain a review on the ECBs decision on the Danish Compromise? And then the second one also on Anima is what are, in your opinion, like the most reasonable options you have in the medium term for the stake you hold in Anima, I mean, keep it listed, delisted or doing in industrial partners. Edoardo Ginevra: No. On the Danish Compromise, I think that the recent publication by EBA seems to close the various doors. So we are not taking in our plans, we're not assuming to have benefits from reviews. Also bearing in mind this recent position from EBA. On Anima, 10%. Giuseppe Castagna: On Anima, as I mentioned also before other presentation, we are really happy to be free to decide what to do with the remaining 10%. As you know, we have the possibility to take on board other partner, commercial -- new commercial partner, old commercial partner, all the definition of the banking system in Italy is ongoing. So let us wait at the right moment to decide what to do. Of course, having the Anima listed, I think, is much more flexible to operate in this respect. Also considering that basically for 1 year, we had to offer to retire the 10% stake, the same price of the OPA we did. And basically right during these hours, the price of Animas is coming back towards EUR 7. So of course, it's something that we will decide, but we are not pressed. We have many projects and many potential opportunities that we want to exploit. Operator: Next question is from Noemi Peruch, Morgan Stanley. Noemi Peruch: So I would like to ask which P&L line you see -- in which P&L line you see room for overperformance in 2026? And which actions are you planning to implement to reach targets? You mentioned wholesale spread, but if you could elaborate more, it would be very useful. And then on the capital and 18 bps common equity impact from the hedging transaction. Am I understanding correctly that you hedged the stake in Monte? And if so, what's the net stake at the minute? Giuseppe Castagna: Again, we gave on page -- I think the last page of my presentation was very clear in saying that we are above the plan, both in total revenues and operating costs and cost of risk. And for sure, this will be the aspect that are more encouraging. Specifically, I would say, commission, thanks to the consolidation of Anima for the full year, of course, the insurance that we made the focus in order to make you understand the pace of growth we are experiencing. Some -- all the commission, I think we will grow and will be better than this year. Of course, NII -- depends from the interest rate where they will stand, of course, [indiscernible], which is like the current one, and we consider it to be stable. Of course, we think that we will be in line with the 2026 forecast, but lower than this year. Cost of risk, as I mentioned before to your colleague for Q&A, we think that depends on default rate. We are assuming the 1% default rate. We think that with a better default rate, we can do better. Edoardo Ginevra: On the hedging transaction, I prefer to repeat what I said, we had inefficiencies due to the fact that in total, our participations below 10%, exceeded the 10% of own funds threshold, and we implemented the transaction allowing us to come back within that maximum level, avoiding these deductions. Operator: Next question is from Hugo Cruz, KBW. Hugo Moniz Marques Da Cruz: Yes, just one more question. So you talked about a lot of the revenue lines. I don't think you've given an indication for trading, which has been very difficult to forecast. And also related to trading, should we expect any material impact from this hedging transaction in January? So if you could just give a bit of an indication what could be the trading income in 2026? Edoardo Ginevra: Well, it's always, I mean, difficult to commit with indications on single lines of the P&L. Trading, of course, is the most difficult. So again, allow me to say that in the current market scenario, we believe we'll be able to do better than to improve the final level of contribution of trading, both in '26 and in '27, allowing us some room of maneuver in general to exploit tailwinds on the revenue side. Operator: Next question is from Adele Palama, UBS. Adele Palama: Sorry to repeat the question, but I have a question on the NII evolution. So in the target for 2026, so the quarterly run rate basically implied a little bit of decrease versus this quarter print. So now I understand that the guidance has like a degree of conservativeness. But I want you to understand like in terms of lending growth, are you still expecting -- I think the plan had a 1.7% growth assumption. And then how is the lending growth expected also for 2027? I mean is there any change or potential upside on that loan growth? And then which are the possible headwinds that might bring the quarterly run rate for 2026 NII down versus the fourth quarter? And then the second question is actually on the capital. I just want to double check the DTA recovery that you had in 2025, the impact on the capital, the total one. And then the DTA recovery that you expect for 2026 and 2027. I have like an amount of around 80 basis points between '26 and '27. I just want to check if that amount is correct. Giuseppe Castagna: Okay. I'll try to answer to your first question related to NII, I think it's very consistent with the Euribor forecast that all the banks are doing, basically flat on 2%. We are still linked to our forecast of growth in terms of loans. But as I mentioned before, we -- for instance, this year, we were very much better in terms of deposit growth. So we depend also on that. Having said that, we are reducing in our forecast, the reduction vis-a-vis '25, if you consider the new Euribor average for '26. And we feel that it's not conservative. It's quite consistent with the current situation. Maybe Edoardo, do you want to say on the DTA? Edoardo Ginevra: Yes, we gave indication that we expect from DTA in February comprehensive income in total, 150 basis points of capital creation between '26 and '27. Most of this capital creation will definitely come from DTAs. Adele Palama: Okay. Sorry, if I can make a follow-up on the NII. I mean, so is the lending growth for 1.7% has an upside risk? -- in your estimates? Giuseppe Castagna: What do you mean, sorry, an upside risk... Adele Palama: Definitely you can do better. Giuseppe Castagna: Okay. Of course, normally, if there is a growth, our bank historically due to the geographic footprint and strength in structured finance, SMEs, corporates, normally, we grow more than the banking system. But we don't see yet such a strong growth in order to say that we can change the forecast of 1.5%, 1.6% growth. Operator: Ladies and gentlemen, there are no more questions registered at this time. Sorry, we have one more question from Giuseppe Grimaldi, BNP Paribas. Giuseppe Grimaldi: I have a brief one related to the replicating, just a clarification. You said before that you expect some tailwind from the replicating this year. Can you help us in understanding the magnitude of that? Edoardo Ginevra: I mean 25 billion of average volumes magnitude may help if you compare a scenario of past year, 2.17% -- 2.2%, let's say, average Euribor. This year expected level of 2% and some delay in the translation of Euribor into cost of the swap. So the order of magnitude is slightly less than the 20 basis points multiplied by the EUR 25 billion. Also will depend, sorry, on renewal of existing swaps with new ones. So there are risks in that because we have part of this replicating that is maturing during the year, some EUR 6 billion -- and over time, we will need to see what will be the market rates from the swap curve. Giuseppe Grimaldi: And maybe just a quick follow-up. If you can -- if we can expect some growth in NII considering you have given a pretty solid outlook in terms of volume and replicating as well could be -- is expected to be a tailwind. So what kind of NII growth we can expect for '26? Edoardo Ginevra: We stick to the guidance that we gave in the plan, conservatively stay slightly above EUR 3 billion. Operator: Gentlemen, we have no more questions registered at this time. Giuseppe Castagna: Thank you very much to everybody. I expect to see you in person in the next few days, and thanks for your attendances. Bye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone.
Operator: Good afternoon, and welcome to Gold.com's Conference Call for the Fiscal Second Quarter ended December 31, 2025. My name is Paul, and I will be your operator this afternoon. Before this call, Gold.com issued its results for the fiscal second quarter 2026 in a press release, which is available in the Investor Relations section of the company's website at www.gold.com. You can find the link to the Investor Relations section at the top of the homepage. Joining us for today's call are Gold.com's CEO, Greg Roberts; President, Thor Gjerdrum; and CFO, Cary Dickson. Following their remarks, we will open the call for your questions. Then before we conclude the call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Gold.com's website. Now I would like to turn the call over to Gold.com's CEO, Mr. Greg Roberts. Sir, please proceed. Gregory Roberts: Thank you, Paul, and good afternoon to everyone. Thank you again for joining us today for our first earnings call as Gold.com. This is a truly historic moment for our company and I'm excited to officially address you under our new corporate identity following the successful completion of our rebrand to Gold.com as well as the New York Stock Exchange relisting in December. This transition represents far more than a name change. It encapsulates our corporate identity as the most trusted and globally-recognized precious metals platform and our commitment to delivering value for our customers, partners and, of course, our shareholders. It also represents our evolution as a category leader with a diversified portfolio spending -- spanning precious metals, numismatics, wine and other high-value collectibles as well as alternative assets, and this is all supported by a vertically integrated operating model and a growing global footprint. I'm excited to share that we have entered into an agreement with an affiliate of Tether Investments, whereby Tether will be purchasing approximately $125 million of Gold.com's common shares at an issue price of $44.50. And they have agreed to purchase approximately $25 million more of our shares at the same price following regulatory clearance. We and Tether are extremely excited to enter into certain other mutually-beneficial commercial commitments. I'll touch on the details of the transactions before turning to the quarter. Tether is one of the largest owners of gold globally and sponsors the largest dollar-backed stablecoin, USDT, and the largest gold-backed stable coin, XAUT, in the world. As part of the transaction, Tether is entitled to nominate a member to the Board of Directors of Gold.com. It is expected that Tether will provide Gold.com with a gold leasing facility of no less than $100 million. The companies are also expected to enter into agreements for Gold.com to provide storage and utilize logistics and for Gold.com to offer Tether stablecoins through its DTC channels. Gold.com has agreed to invest $20 million of the proceeds raised from this investment in Tether's XAUT stablecoin. Tether's minority investment in Gold.com validates our strategy to be the vertically integrated leader in physical bullion and to offer the industry's most comprehensive precious metals platform. This investment builds upon our 60-plus year legacy and expands our reach beyond traditional bullion into cryptocurrency. The proceeds from this transaction will provide us with increased funding and flexibility to strengthen our balance sheet by further developing our portfolio of category-leading brands. We look forward to Tether's continued support and partnering with their team to potentially develop additional innovative, mutually-beneficial commercial opportunities. Now turning to the quarter. Our second quarter results demonstrate our ability to successfully navigate rapidly evolving market conditions. During the quarter, we experienced an increase in consumer demand across our platforms. Premium spreads remained tight through the end of 2025 and backwardation in the silver market contributed to trading losses and higher interest expense due to increases in product financing and precious metals lease rates. Despite these headwinds, we delivered $11.6 million in net income and earnings of $0.46 per diluted share, demonstrating the resilience of our business model and our disciplined approach to managing market volatility. As announced last week, we also closed the acquisition of Monex Deposit Company. Monex's large and loyal customer base, along with its well-established storage and services platforms, strengthens our offerings and expands our ability to serve customers across the full precious metals value chain. We are making meaningful progress in optimizing our expense structure as well as unlocking synergies from all of our recent acquisitions. Integration efforts continue to advance with our AMGL facility in Las Vegas, operating at increased capacity and delivering the operational leverage we anticipated. Internationally, we are seeing encouraging signs of growth and remain committed to expanding our international presence. At the end of the second quarter, we increased our equity interest in U.K.-based Atkinsons Bullion & Coins with an additional 24.5% investment, bringing our total ownership to 49.5%. Since our initial investment in 2023, we have been very impressed by the Atkinsons team and the business' sustained success across Europe. Moving on, performance at LPM in Hong Kong and our new location in Singapore also remains incredibly strong with both retail showroom activity and wholesale trading volumes showing positive momentum. Asia continues to represent an attractive long-term growth opportunity for Gold.com, and we remain focused on expanding our footprint across that region. Looking ahead to fiscal third quarter, consumer demand remains elevated, and we have experienced an expansion of premium spreads. The problem with backwardation in Q2 has eased, and we're starting to see the markets move back towards contango, which is a positive for our trading business. We continue to benefit from our strong balance sheet and the ability to adjust weekly production levels across our minting operations to manage our inventory levels and to keep up with demand. I will now turn the call over to our CFO, Cary Dickson, who will provide an overview of our financial performance. Then our President, Thor Gjerdrum, will discuss key operating metrics. I will then provide further insights into the business and growth strategies followed by taking your questions. Cary, jump in. Cary Dickson: Thank you, Greg, and I hope everyone is having a great afternoon. Our revenues for fiscal Q2 '26 increased 136% to $6.5 billion from $2.7 billion in Q2 of last year. Excluding an increase of $2.5 billion of forward sales, our revenues increased $1.2 billion or 69% which was due to higher average selling prices of gold and silver as well as an increase in gold ounces sold, partially offset by a decrease in silver ounces sold. For the 6-month period, our revenues increased 86% to $10.1 billion from $5.4 billion in the same year-ago period. Excluding an increase of $3 billion of forward sales our revenues increased $1.6 billion or 50.3%, which is due to higher average selling prices of gold and silver as well as increase in gold ounces sold, partially offset by a decrease in silver ounces sold. Revenues also increased in both the 3-month and the 6-month periods due to acquisitions of SGI, Pinehurst and AMS in the last 2 quarters of fiscal '25. Gross profit for fiscal Q2 '26 increased 109% to $93 million or 1.44% of revenue from $44.8 million or 1.63% of revenue in Q2 of last year. The increase was due to an increase in gross profit driven by both the Wholesale Sales & Ancillary segment and the Direct-to-Consumer segment, including the acquisitions of SGI, Pinehurst and AMS, which were not included in the same year-ago period, partially offset by lower trading profits. For the 6-month period, gross profit increased 88% to $166.3 million or 1.64% of revenue from $88.2 million or 1.62% of revenue in the same year-ago period. The increase was due to an increase in gross profit earned by both the Wholesale Sales & Ancillary segment and the Direct-to-Consumer segment, including the acquisitions of SGI, Pinehurst and AMS, which were not included in the same year-ago period, partially offset by lower trading profits. SG&A expenses for fiscal Q2 '26 increased 132% to $59.8 million from $25.8 million in Q2 of last year. The change is primarily due to an increase in compensation expense, including performance-based accruals of $21 million, higher advertising costs of $5 million, an increase in consulting and professional fees of $2.7 million, an increase in facility expense of $1.3 million. SG&A expenses for the 3 months ended December 31, '25 included $30 million worth of expenses that were incurred related to SGI, Pinehurst and AMS. So they accounted for the bulk of the increase, which were not included in the same year-ago period as they were not consolidated subsidiaries. For the 6-month period, SG&A expenses increased 128% to $120 million from $52.4 million in the same year-ago period. The change was primarily due to an increase in compensation expense, including performance-based accruals of $41 million, higher advertising cost of $10 million, an increase in consulting and professional fees of $6.7 million and an increase in facilities expense of $2.6 million. SG&A expenses for the 6 months ended December 31, '25 included $60 million of expenses incurred by SGI, Pinehurst and AMS, which were not included in the same year-ago period. Depreciation and amortization expense for fiscal Q2 '26 increased by 65% to $7.6 million from $4.6 million in the same year-ago quarter. The change is primarily due to a $3.2 million increase in amortization expense related to intangible assets acquired through our acquisitions of SGI, Pinehurst and AMS and $1.6 million increase in depreciation expense, partially offset by a $1.8 million decrease in intangible asset amortization from JMB and Silver Gold Bull. For the 6-month period, depreciation and amortization expense increased 63% to $15.2 million from $9.4 million in the same year-ago period. The change is primarily due to a $6.4 million increase in amortization expense related to intangible assets acquired through our acquisitions of SGI, Pinehurst and AMS. And a $3.1 million increase in depreciation expense, partially offset by a $3.7 million decrease in intangible asset amortization from JMB and SGB. Interest income for fiscal Q2 '26 decreased by 15% to $5.8 million from $6.8 million in the same year-ago period. The decrease was due to a decrease in other finance product income of $1.1 million, partially offset by an increase in interest income earned by our Secured Lending segment of $0.1 million. For the 6-month period, interest income decreased 18% to $11.4 million from $13.9 million in the same year-ago period. The decrease was due to a decrease in other financing product income of $2.2 million and a decrease in interest income earned by our Secured Lending segment of $0.3 million. Interest expense for fiscal Q2 '26 increased 57% to $16.3 million from $10.4 million in Q2 of last year. The increase is primarily due to an increase of $3.7 million related to product financing arrangements, an increase of $1.9 million related to precious metal leases, an increase of $0.1 million associated with our trading credit facility. For the 6-month period, the interest expense increased 42% to $28.9 million from $20.4 million in the same year-ago period. The increase is primarily due to an increase of $4.2 million related to product financing arrangements, an increase of $3.2 million related to precious metal leases, an increase of $0.7 million associated with our trading credit facility. Earnings from equity method investments in Q2 '26 increased 142% to earnings of $1.0 million from a loss of $2.4 million in the same year-ago period. For the 6-month period, earnings from equity method investments increased 106% to earnings of $0.1 million from a loss of $1.8 million in the same year ago period. The increase in both periods were due to increased earnings of our equity method investees. Net income attributable to the company for the second quarter of fiscal '26 totaled $11.6 million or $0.46 per diluted share compared to net income of $6.6 million or 27% diluted share (sic) [ $0.27 per diluted share ] in the same year-ago quarter. For the 6-month period, the net income attributable to the company totaled $10.7 million or $0.42 per diluted share compared to net income of $15.5 million or 65% (sic) [ $0.65 ] per diluted share in the same year-ago period. Adjusted net income before provision for income taxes, a non-GAAP financial measure, which excludes depreciation, amortization, acquisition costs and contingent consideration fair value adjustments for Q2 totaled $23.2 million, an increase of $9.9 million or 74% compared to $13.4 million in the same year-ago quarter. Adjusted net income before provision for income taxes for the 6-month period totaled $28.1 million, which is consistent with the same year-ago period. EBITDA, a non-GAAP liquidity measure, for Q2 fiscal '26 totaled $33.9 million, an increase of $17.7 million or 109% compared to the $16.2 million in the same year-ago quarter. EBITDA for the 6-month period totaled $48.2 million, an increase of $14.2 million or 42% compared to the $34 million in the same year-ago period. Turning to our balance sheet. At quarter end, we had $152 million worth of cash compared to $78 million at the end of fiscal '25. Our nonrestricted inventories totaled over $1 billion, $1.031 billion as of December 31, '25, compared to $795 million as of the end of fiscal '25. Gold.com's Board of Directors has declared a quarterly cash dividend of $0.20 per share, maintaining the company's current dividend program. The dividend is payable on March 4, 2026, to stockholders of records as of February 20, 2026. That completes my financial summary. Now I will turn the call over to Thor, who will provide an update on our key operating metrics. Thor? Thor Gjerdrum: Thank you, Cary. Looking at our key operating metrics for the second quarter of fiscal 2026. We sold 545,000 ounces of gold in Q2 fiscal '26, which was up 17% from Q2 of last year and up 24% from the prior quarter. For the 6-month period, we sold 984,000 ounces of gold, which was up 14% from the same year-ago period. We sold 18.6 million ounces of silver in Q2 fiscal 2026, which was down 15% from Q2 of last year and up 79% from last quarter. For the 6-month period, we sold 29 million ounces of silver, which was down 31% from the same year-ago period. The number of new customers in the DTC segment, which is defined as the number of customers that have registered or set up a new account or made a purchase for the first time during the period, was 96,100 in Q2 fiscal 2026, which is up 47% from Q2 of last year and increased 38% from last quarter. For the 6-month period, the number of new customers in the DTC segment was up 165,500, which increased 37% from 120,700 new customers in the same year-ago period. The number of total customers in the DTC segment at the end of the second quarter was approximately 4.4 million, which was a 37% increase from the prior year. These changes in customer base metrics were primarily due to the acquisitions of SGI, Pinehurst and AMS, which were not included in the same year-ago period as well as organic growth from our JMB customer base. Finally, the number of secured loans at the end of December totaled 355, a decrease of 31% from December 31, 2024, and a decrease of 16% from the end of September. The dollar value of our loan portfolio as of December 31, 2025, totaled $120.4 million, an increase of 22% from December 31, 2024, and an increase of 16% from September 30, 2025. That concludes my prepared remarks. I'll now turn it back over to Greg for closing remarks. Greg? Gregory Roberts: Thanks, Thor and Cary. With Tether's strategic investment in Gold.com and our expanded portfolio of category-leading brands, we believe Gold.com is well positioned to capture growth across multiple channels and to deliver long-term value for our shareholders. Our strategic focus remains on integrating and realizing cost savings and the synergies from our recent acquisitions, expanding both our domestic and geographic reach as well as further diversifying our customer base. We are pleased with our recent accomplishments and remain committed to exploring additional opportunities to deliver value to our shareholders over the long term. This concludes my remarks. Operator, we can now open the line for questions. Operator: [Operator Instructions] And the first question today is coming from Thomas Forte from Maxim Group. Thomas Forte: Great. First off, Greg, congratulations, especially on the announcement of Tether. I'm going to ask both my questions at the same time. So the big difference between this quarter and quarter-to-date, in recent quarters, is that silver is starting to run. So I was hoping that you could compare and contrast the performance of gold and silver in the December quarter? And then the second question I had was, you invested in expanding your facility in Las Vegas. And then you also have the Dallas facility, which I think you got with the JMB acquisition, with the Tether investment, how should we think about your capacity and if you need to further expand your fulfillment center and logistics efforts? Gregory Roberts: Yes. So we have expanded in Vegas, and I'm happy to say that we really tested the ceiling on Vegas in January. We were excited and over 120,000 packages in January alone and a similar number, not quite that high, in December. So the facility is operating and it's built to do more, but it was great to test the limits over the last couple of months. I think that we're ready to do more. One of the challenges right now is this uptick and this swing up in volume really happened very quickly. November was a very slow month for us for whatever reason and then things started to pick up in December. But really, it was craziness through the last 3 weeks of December and then into January, and we did need at that point to hire some more actual humans. Even though we have been using and testing our automation, we did need more actual employees. So the fact that we were able to scale up and get the packages we did out in January is a real testament to everything Thor and Brian have been doing there and to see it all work was very exciting for us. As it relates to Tether and what we're going to do for them, I mean, it's no surprise that they are the -- what I believe to be the largest holder of gold in the world outside of central banks, and they need to store that metal. And the conversations we've had and within our press release, storage is a big component for us to assist with, and time will tell if we need to build another facility or expand the facilities we have. But these guys have a lot of gold and that gold takes up a lot of space. So we're hoping to be able to help them with storage solutions. Thomas Forte: And then the gold versus silver performance in the December quarter? Gregory Roberts: Yes. I mean, I think we talked a little bit about it in Q1 and probably a little bit in last fiscal year. We had seen -- throughout the slower times that we were dealing with earlier in 2025, we saw a much higher gold ratio to silver at the DTC brands. What we've seen in the last, let's call it, 8 weeks, is a shift back to silver. And I would say silver could be either side of 50% right now as it relates to total volume. And as we expect and what we have seen in the past is when you get that increased demand, you're going to see premiums go up. And anybody that's on the call, and I know there's many of you that track the premiums at JM Bullion, the premiums are significantly higher for 1 ounce silver products than they were 3 months ago. So the demand has -- the demand in silver is, as we've always talked about, silver is good to us, and volatility is good, and we've seen a lot of that. So silver is our friend. Operator: Mike Baker from D.A. Davidson. Michael Baker: Great. So yes, everyone has seen the craziness -- and I guess, your words, craziness in silver pricing and gold pricing and volatility the last couple of months or so, you seem to indicate that -- well, you said that premiums are wider now in the current quarter than they were for at least the beginning of last quarter. Remind us how that impacts profitability? I know you don't give any kind of guidance or anything along those lines. But how should we think about the impact of profitability from widening spreads in the March quarter versus December quarter? Gregory Roberts: You should probably think about that we're going to have a really good quarter this quarter. Michael Baker: Fair enough. Okay. A couple more questions since that was such a quick answer. In the past, and you even alluded to it, I think, in the press release, at times when pricing was really high, there's been a situation where you've been more of a buyer than a seller as people sort of proverbially empty out their closet and sell you back, the gold or silver that they might have in store and that hurts you guys in -- or your profitability. It seems like -- is that what you're referring to in terms of the trading losses in the December quarter? And how does that play out in the March quarter? Gregory Roberts: No, I think they're two separate issues. I think that when we're talking about trading headwinds, we're talking about backwardation specifically. And as we've talked about before, this -- Gold.com has historically enjoyed a short position in silver and gold that hedges our position. And with that trade comes contango income and it gets carried in our interest income. And when you have backwardation, that turns into an expense -- an interest expense. So we -- with everything that's been going on, particularly in silver and the tightness of the market at an institutional level and our being net short in backwardation, it created a significant expense in Q2 versus Q2 of 2024. So I think that answers that question. As it relates to the buybacks, buybacks are great when your demand is increasing. And you have a significant increase in demand, which is what we're seeing here in December and what we're seeing in this quarter, and at that point, when product actually starts to become scarce on the silver side, and we have seen a tightening of supply across the silver market, having those buybacks is actually helping us. And the majority of the buybacks coming in today are going to our own DTC platform. So they're being sold off as opposed to maybe last quarter, a lot of the buybacks were going out into the wholesale market. So when we actually need them and premiums are up and we can resell 100% of what we're buying back at a retail level, it's going to improve our performance. Michael Baker: Yes. That makes perfect sense. If I could ask one more, just help with, where and how does the Tether acquisition -- where does that show up in the P&L going forward, or the Tether investment, I should say, in terms of storage, how does that impact your profitability? Remind us how big that business is for you guys in terms of profits and what that deal could do for that line item? Gregory Roberts: Well, I think if you look at the fact that we're bringing in $150 million of fresh money as well as a gold lease, which will provide more liquidity for us, my anticipation is that you're going to see a significant drop in our interest expense and our dollar borrowings. If you look at our dollar borrowings, we're paying 6% to 7% for our dollar lines. The less we can be reliant right now on those dollar lines and the more we can utilize gold leases for liquidity, which are at a much lower rate, we're going to see an immediate impact. So it's a very good thing. If you just throw everything else out, and you just take the interest expense benefits we're going to see from this transaction, it's a significant amount of money. Operator: The next question will be from Craig Irwin from ROTH Capital. Craig Irwin: So Greg, over the last number of weeks, a few of your smaller private competitors have talked publicly about challenges, keeping some of their most popular SKUs in inventory. And I know you deal with more than 12,000 SKUs, but can you maybe comment on your ability to keep products and inventory as we're seeing this surge in demand? And if you do touch on the captive mint capacity, can you maybe talk a little bit about your combined monthly production capacity in ounces? Gregory Roberts: Yes. I mean I don't have the exact numbers in front of me, but I can tell you that having our balance sheet and having two mints available to us is going to allow us to sell more products than our competitors and there's nobody really even close. Probably mid-summer last year, we had production at the Silver Towne Mint in the 200,000 ounces a week rate for silver, small silver products. We anticipate we're going to sell -- we're going to manufacture over 800,000 ounces this week. So demand creates supply and we have an option on supply. So having these mints is very important. Now that doesn't mean we're not going to run out of Silver Eagles at our platforms because Silver Eagles are on allocation, and there's only so many being minted right now. But when Silver Eagles do go on allocation and become scarce, customers tend to buy our other private mint products. So there's a direct correlation, and I believe that although we're not trying to maintain 12,000 SKUs right now, we're trying to maintain a core group of SKUs that everybody wants that we can deliver. We have still faced some of the challenges that our competitors have in a small scale, just on delayed delivery. So we do have a little bit higher percentage right now of what we call preorders that are customers committing and paying for product, knowing that -- we disclosed to them, there will be a slight delay in delivery. So we're balancing through that. But I do believe we're taking market share right now. And I do believe -- I've always believed we're better than everybody else. Craig Irwin: Excellent. Excellent. So then I wanted to ask about the throughput capacity at AMGL. So yesterday, I visited the facility with Steve Reiner. And the last time I had visited that facility, you had actually just hit about 100,000 packages in 1 month, which is just a mind-blowing number. And now the level of automation in that facility is something that is kind of like night and day as far as how well organized and how precise everything Brian has the whole facility running. With the roughly 25% to 30% capacity increases as far as throughput, you still have a number of initiatives that you're in the process of implementing there that will improve efficiency further. Can you maybe talk about what your goal is as far as monthly throughput or what your aspirations are? And then what would it take you -- what would it take for you to put a similar logistics facility in Europe or in Asia to capture on the local production, local shipment synergies that come from what you've developed in Las Vegas? Gregory Roberts: Yes. Like I said earlier on this call, we were in excess of 120,000 packages in December. I would anticipate that we'll be in the 275,000 range for December and January. And I think that those are going to be likely our two busiest months. We still have automation that is coming online. We're still improving software and APIs and the ability for customers to direct shipments more efficiently. And I think there's room to grow in that facility. I would think that within a few months or 6 months when everything is -- that we have planned for is online, we should be easily able to ship 150,000 packages a month, which would be a phenomenal number and would be a very impressive accomplishment. As it relates to other facilities, as you can probably imagine walking through this place, it's a very large capital commitment which we made and we committed to, and we continue to expand even when things were slow. So we're hoping we're going to benefit from that gamble and benefit from the rewards of being committed to that facility. But to stand up another facility like it in Europe or somewhere else, pretty big capital commitment and a pretty big -- it's a pretty big project. And at the moment, I just don't see outside of the U.S., a real need for small package delivery at these quantities. It is somewhat -- although we do ship from Vegas to all parts of the world, I don't know that at the moment, we would need to tie up inventory and tie up capital in a facility this size outside of the U.S. Craig Irwin: Understood. That makes a lot of sense. And then if I could just slip in another question. So sometimes GAAP EPS and the onetime items in GAAP EPS ends up being important. And I think that might be the case this quarter. Your noncontrolling items in the second quarter of negative $1.892 million, it's a deviation from what's generally been a positive contribution over the last several quarters. Was there anything specific at one of your equity investments that you can possibly call out for us so that we can understand this impact on GAAP earnings and whether or not this is transitory or something that can repeat? Gregory Roberts: Well, probably the key issue that we dealt with in this quarter was Sunshine Mint, which we do have a minority interest in. They shut down their facility in Idaho and consolidated everything in Las Vegas. And the timing of that may not have been perfect because they consciously did it when they were slowing down and then things picked up. So there's been a little bit of a whipsaw there for them. But I think that, that's probably the area that I would expect where these numbers are coming from. I consider it an anomaly. I think Sunshine is having a very good start to this quarter. A lot of it also has to do with demand at the U.S. Mint. And because Sunshine makes blanks for the U.S. Mint, and that is one of their key businesses, and they're geared for that and relying on that customer. When the U.S. Mint slows down, they're going to have some negative results. But I do believe that we've got a little -- we've got most of that behind us and they're looking better this quarter. Craig Irwin: Congratulations on this nice big investment. Operator: [Operator Instructions] The next question is coming from Sy Jacobs from Jacobs Asset Management. Seymour Jacobs: So I appreciate the rare and really bullish forward-looking statement in response to the first questioner about the swing [ up ] in margins. So my question would be really easy because I'm asking for a historical number, which was about -- when you talk about how the sort of prolonged and protracted and atypical backwardation in the silver market caused hedge losses but that has now moved back at least to a slight contango, can you quantify in dollars either for the -- either the second quarter or the past year or whatever time period you want to be just to give us a sense for how much the backwardation actually cost? And once it goes back to contango, does that swing from a negative number to a positive number? Gregory Roberts: Yes. I mean I think it's a little -- it's a great question. And the numbers are a little bit masked because they get blended with other interest expense or interest income and they're spread out a little bit. But I think a fair comparison, if you were going to compare October, November, December, in calendar 2024 versus the quarter we're talking about right now, I think we probably swung -- just roughly, I bet we swung from about a $6 million gain from contango in December of '24 to a $5 million or $6 million loss in Q2 of calendar '25. So it's about a -- year-over-year, same quarter, it was a $10 -- probably a $10 million to $12 million swing. So obviously, that's pretty material and it's extremely material when we're slow. And to have that swing back to -- I mean, it's not back to where the contango was in '24 but at this point, we were just happy to see it's swinging back towards a positive. So we're hoping that, that continues. But when you have this kind of volatility in silver, and we've had two kind of black swan events in the last 1.5 weeks where silver was down $20 in one session and then it was up $10 and it was back down $10 in the last 24 hours. The silver market is very volatile right now. And the lending of silver, which is critical to us, which is silver leasing at these higher numbers, it can be a big deal. And to be quite honest, silver at $100 and gold at $5,000, as we've talked about before, it causes us a significant increase in the amount of dollars we need to manage those positions. To this point, we have been successful and we've been able to move capital around and we've been able to manage through these numbers, but it is a bit of a stress when the numbers are this big, which, to be quite honest, this relationship with Tether and what we're going to benefit with them from the investment and the gold lease, it's going to really give us a lot more liquidity and be prepared in the event gold goes to $7,000 or silver goes to $150. I'm not saying that's going to happen. But in my world, you really have to be prepared for anything because every morning, you wake up, not knowing which direction it's going right now. So I think the strategic investment from Tether was important in this area also. Seymour Jacobs: And then one follow-up question. You've talked about the Tether agreement helping in one area in that they're going to be -- become a storage customer; in another area, the $150 million of equity capital and $100 million of lines, which will replace other expensive lines. Are there any -- what are some of the other commercial opportunities here? It strikes me that they're a buyer and inevitably seller, at times, of gold to back their stablecoin. Is Gold.com in a position to be their agents, broker, dealer in any way that's going to help your volumes? Gregory Roberts: I see a lot of opportunity in areas that you can imagine we can help them with or they can help us with. I think that the beauty of this relationship is from every discussion I've had with them, it's been a real two-way street. I think there's things they can help us with. I think there's things we can help them with. They're a huge, huge company, as everybody knows, this business and the size of the gold, the size of the treasuries and just the performance of Tether that's been published out there, I'm very excited about this relationship. And I do think there's a number of opportunities that have been discussed, but not yet formalized that I think will be very beneficial for Gold.com as well as for Tether. Operator: The next question is coming from Greg Gibas from Northland Securities. Gregory Gibas: Congrats on the Tether announcement. And I wanted to kind of follow up on that strategic investment by Tether. Wondering where you see that relationship going forward? Do you see it expanding further by chance? Gregory Roberts: Yes. I mean, I think we put out in the press release that we believe the gold leasing, storage and utilizing the Tether stablecoins as a currency on our retail platforms is a great opportunity. We've previously announced a Gold.com credit card that we're developing. I think there may be some opportunity there with Tether. And I think that we have been trading gold for 40 years. And I think that Tether will be looking for opportunities where they can expand their business and they can grow what they're doing. And I think they identified Gold.com -- when they approached us, I think they identified us as a great partner that there's plenty of opportunity, and I agree with that. Gregory Gibas: Got it. That's helpful. And wondering if you could kind of speak to or elaborate on your mint production volume, all the investments there and the ability to ramp that up. How kind of that's positioned to meet demand and what we're seeing in terms of the increase in demand for silver? Gregory Roberts: Yes. I mean, it's a feast or famine business, the silver minting business. We intentionally, and we had -- it was necessary for us back in July and August and September that we had to really pull back. We had to cut some costs. We had to unfortunately let some people go. And we got down to really barely utilizing 1 shift a day. In the past, we've been 3 shifts a day at Silver Towne 24/7. You can imagine in today's labor market, it just is a little bit tougher to snap on and off talent that you need that has any experience in minting 1 ounce silver around. So I think we -- Jamie Meadows, who runs Silver Towne Mint, has done a fantastic job. He's ramped up very quickly. I think our liquidity and our ability to provide feedstock to the Silver Towne Mint has been exceptional, and I think we're getting him enough silver to make. But there are a lot of factors in what that top line number comes out to. I think it depends a bit on whether or not this demand we're seeing right now continues. Again, I said it. We're going to -- we should be having a very good quarter this quarter, but we're only 35 days into it. And we've seen before where these bull markets or these hot markets can turn very quickly. So I think we're careful and we're being very cautious as we ramp back up at Silver Towne and Sunshine but I think there was a week a year, 1.5 years ago where they turned out 1.3 million ounces in a week, and I think that was kind of the peak. So we're not there yet, and we're trying to get back to 900,000. But as you can imagine, it's going from 200,000 or 250,000 a week to even just 900,000, there's a lot of juggling. Operator: And we have a follow-up coming from Thomas Forte from Maxim Group. Thomas Forte: Sure. So Greg, I'm going to control myself and limit myself to one statement and one follow-on question. So having had more time to think about this as the call has progressed, I think the strategic partnership with Tether is the most significant announcement in the history of the company. And then my question is, does working with Tether change your strategic M&A efforts, including your ability to engage in larger transactions? Gregory Roberts: It doesn't change a thing, and I think it gives us the opportunity to grow the company with bigger transactions, yes. And I think that from my conversations with Tether, they're very supportive of carefully and cautiously and continuing to grow Gold.com in the physical gold markets. And I think they're going to be great partners for that. But you can just look at our top line numbers for Q2 and the amount of metal and the amount of top line volume that we're moving through. I mean this is -- these are big numbers. And I think having somebody that is the size of Tether and some of the great ideas that Tether has, what they're going to be doing with their business going forward and the -- their very, very large customer base, and I think it's going to back up and we will continue with the plan that we've had since the day I met you. Operator: At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Roberts for his closing remarks. Gregory Roberts: Thanks, everybody. As Tom Forte just said, we view this as a really big day in our evolution and where we started and where we're going with Gold.com. Continued as every quarter, I thank you for the loyalty for our shareholders for being with us and letting us invest your money and put it to good use. Thank you for joining the call today. Continuing, as always, to thank many of -- all of our employees and the many contributions they make to getting us to where we are right now and the commitment to our success. And we see exciting times moving forward, and we look forward to updating you on our progress. So thank you very much. Operator: Thank you. Before we conclude today's call, I would like to provide Gold.com's safe harbor statement that includes important cautions regarding forward-looking statements made during this call. During today's call, there are forward-looking statements made regarding future events. Statements that relate to Gold.com's future plans, objectives, expectations, performance, events and the like are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. These include statements regarding expectations with respect to future profitability and growth, international expansion, operational enhancements and the amount of timing of any future dividends. Future events, risks and uncertainties, individually or in the aggregate, could cause actual results to differ materially from those expressed or implied in these statements. These include the following: with respect to the proposed transactions with Spectrum Group International, the failure of the parties to agree on definitive transaction documents, the failure of the parties to complete the contemplated transactions within the current expected time line or at all, the failure to obtain necessary third-party consents or approvals and greater-than-anticipated costs incurred to consummate the transactions. Other factors that could cause actual results to differ include the failure to execute the company's growth strategy, including the inability to identify suitable or available acquisition or investment opportunities; greater-than-anticipated costs incurred to execute the strategy; government regulations that might impede growth, particularly in Asia; the inability to successfully integrate recently acquired businesses; changes in the current international political climate, which historically has favorably contributed to demand and volatility in the precious metals market, but also has posed certain risks and uncertainties for the company, particularly in recent periods; potential adverse effects of the current problems in the national and global supply chains; increased competition for the company's higher-margin services, which could depress pricing; the failure of the company's business model -- business model to respond to changes in the market environment as anticipated; changes in consumer demand and preferences for precious metals products generally; potential negative effects that inflationary pressure may have on our business; the inability of the company to expand capacity at Silver Towne Mint; the failure of our investee companies to maintain or address the preferences of their customer bases; general risks of doing business in the commodity markets and the strategic business, economic, financial, political and governmental risks and other risk factors described in the company's public filings with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or revise any forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements. Finally, I would like to remind everyone that a recording of today's call will be available for replay via a link in the Investors section of the company's website. Thank you for joining us today for Gold.com's earnings call. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the EastGroup Properties' fourth quarter 2025 earnings conference call and webcast. [Operator Instructions]. This call is being recorded on Thursday, February 5, 2026. I would now like to turn the conference over to Marshall Loeb, CEO. Please go ahead. Marshall Loeb: Good morning, and thanks for calling in for our fourth quarter 2025 conference call. As always, we appreciate your interest. I'm happy to say that joining me on this morning's call are Reid Dunbar, our President; Staci Tyler, our CFO; and Brent Wood, our COO. Since we'll make forward-looking statements, we ask you listen to the following disclaimer. Casey Edgecombe: Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and our earnings press release, both available on the Investor page of our website into our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and in the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views of the company's plans, intentions, expectations, strategies and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Please see our SEC filings, including our most recent annual report on Form 10-K for more detail about these risks. Marshall Loeb: Thanks, Casey. Good morning. I'll start by thanking our team. They worked hard through a volatile environment last year, and I'm proud of the results achieved. Our fourth quarter and annual results demonstrate our portfolio quality and resiliency within the industrial market. Some of the stats produced include funds from operations were $2.34 a share, up 8.8% over quarter. And for the year, FFO per share growth was 7.7%. For over a decade now, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year, truly a long-term trend. Quarter end leasing was 97% with occupancy at 96.5%. Average quarterly occupancy was 96.2%, which was up 40 basis points from fourth quarter 2024 and reverses a downward trend we've experienced for the last several quarters. Also notable with same-store occupancy at 97.4%. This strength shows the trend we've discussed where the portfolio is well leased while development leasing has been taking long. Quarterly re-leasing spreads were 35% GAAP and 19% cash for leases signed during the quarter. Annual results were higher at 40% and 25% GAAP and cash, respectively and cash same-store NOI rose 8.4% for the quarter and 6.7% for the year. Finally, we have the most diversified rent roll in our sector with our top 10 tenants falling to 6.8% of rents, down 40 basis points from last year. We target geographic and tenant diversity as strategic paths to stabilize earnings regardless of the economic environment. In summary, we're pleased with our results and excited about the quantity of development leasing signed during the quarter, along with our current prospect activity. Reid will now walk you through more of our fourth quarter details. R. Dunbar: In terms of leasing, fourth quarter improved materially from slower second and third quarter results, especially in development leasing. Our fourth quarter development leasing accounted for 52% of our annual total square footage, which makes it our best quarter of overall leasing in over 3 years. We're excited to see this pickup in momentum with the key being sustainability. The headline volatility impacted long-term decision-making last year. We believe businesses are more accustomed to outside noise and simply can only delay expansion decisions so long. We continue seeing a flight to quality which has contributed to EastGroup's portfolio occupancy outperforming the broader markets. As Class A shallow bay continues to be absorbed and new supply lagging, we anticipate increased decision-making and deal velocity. On the other hand, our development pipeline is leasing and maintaining projected yields but at a slower pace. This, in turn, lowered development start projections from earlier in the year. On our development starts, as we stated before, are pulled by market demand within our parks. Based on current demand levels, we are forecasting 2026 starts to $250 million. Longer term, the continued decline in the supply pipeline is promising. Starts remain historically low again this quarter. Couple this with the increasing difficulty we're experiencing with attaining zoning and permitting as demand increases, supply will be more challenged than historically to catch up. This limited availability in new modern facilities will place upward pressure on rents as demand stabilizes. And as demand improves, our goal is to capitalize earlier than our peers on development opportunities based on the combination of our team's experience, our balance sheet strength, existing tenant expansion needs and the land and permits we have in hand. From an investment perspective, we're excited to continuing to be growing our Las Vegas footprint. We are also -- where we also added new land development sites in San Antonio, and in the fast-growing supply-constrained Northeast Dallas submarket. Finally, as an important part of our long-term strategy, we continue modernizing our portfolio with our upcoming Fresno market exit. Staci will now speak to several topics, including our assumptions within our 2026 guidance. Staci Tyler: Thanks, Reid, and good morning. We are pleased to report strong results for the fourth quarter and year 2025. These results were achieved by our team through variable market conditions that improved during the last few months of the year. Our FFO results for both the quarter and year met the upper end of our guidance range at $2.34 per share for the fourth quarter and $8.98 per share for the year 2025, which represents 7.7% growth over prior year FFO per share, excluding gains on the voluntary conversion. The outperformance in fourth quarter was primarily driven by property net operating income and continued strong performance by our 62 million square foot operating portfolio, which ended the year 97% leased and 96.5% occupied. We also achieved net interest expense savings that resulted from lower bank credit facility balances and a lower interest rate than originally projected on our new $250 million unsecured term loan that closed in November at 4.13%. We ended the year with $19 million drawn on our unsecured bank credit facility, leaving available capacity of over $650 million as of the end of the year. Our debt to total market capitalization was 14.7% at year-end. Our fourth quarter annualized debt-to-EBITDA ratio was 3x, and our interest and fixed charge coverage was over 15x. Our strong and flexible balance sheet positions us well to pursue growth opportunities that align with our time-tested strategy. Looking forward to 2026, FFO is estimated to be in the range of $2.25 to $2.33 per share for the first quarter and $9.40 and $9.60 per share for the year. Those midpoints represent increases of 8% and 6.1% compared to the prior year periods, excluding gains on the voluntary conversions that result from insurance claims. We are projecting strong cash same-property net operating income results for 2026 with a midpoint of 6.1%, driven by rental rate increases on in-place and budgeted leases and expected same-property occupancy of 96.3%. The midpoint of our 2026 guidance assumes $250 million in new development starts and $160 million in operating property acquisitions, which includes an acquisition in Jacksonville that is currently under contract with money at risk. Our rent collections currently remain healthy and in line with historical averages. So our projections for 2026 uncollectible accounts include a typical run rate in the range of 30 to 35 basis points of revenue. Please note that projected G&A expenses for 2026 are $27 million, which includes an estimated $4 million or $0.07 per share in costs related to the executive team transitions that were announced in December. Also, as a reminder, approximately 32% of the annual G&A expenses are expected to be recognized in first quarter, primarily due to accelerated expense for employees who are retirement eligible under our equity incentive plans. We have $140 million in unsecured debt maturing during fourth quarter 2026. We plan to fund those debt repayments and new investments throughout the year with our bank credit facilities and new debt issuance of $300 million. While our guidance assumes debt issuance, we will remain flexible and monitor the equity markets and may utilize both debt and equity as sources of capital. We're pleased with our strong performance in 2025. And as we look ahead through the year 2026, we are confident in our high-quality portfolio of well-located, multi-tenant assets and in our team's ability to execute in this steadily improving environment. Now Marshall will make some final comments. Marshall Loeb: Thanks, Staci. In closing, we're pleased with our execution for the quarter and year. Market demand is picking up momentum, and we're hopeful it's sustainable. Regardless of the environment, our goals are to drive FFO per share growth and raise portfolio quality. If we can do those, we'll continue creating NAV growth for our shareholders. Our executive team restructuring as a reflection of the growth we've achieved and even more so the opportunities we see within our markets. Stepping back from the near term, I like our positioning as our portfolio is benefiting from several long-term positive secular trends such as population migration, near-shoring and onshoring trends, evolving logistic chains and historically lower shallow bay market vacancies. We also have a proven management team with a long-term public track record, our portfolio quality in terms of buildings and markets improves each quarter, our balance sheet is stronger than ever, and we're upgrading our diversity both in our tenant base as well as our geography. We now would like to open up the call for any questions. Operator: [Operator Instructions]. The first question comes from Craig Mailman at Citi. Craig Mailman: Congrats to Reid, Staci and Brent. I see Brent is already enjoying his promotion by not talking on the call. Brent Wood: Craig, give me a break. I'm here. Craig Mailman: I wanted to just dive in a little bit more on the development leasing because that was a big uptick. And I know, Marshall, you had foreshadowed that last quarter's call on the NAREIT. Just can you just walk through kind of what the -- a little bit more into what the prospect activity looks like? And any trends you're pulling away from either sectors that are more active than others? And also just give us a little bit of a sense of are these all organic growth to the portfolio? Or are some of these existing tenants that could leave some holes in the existing portfolio as they move into new space? Marshall Loeb: Good question. It was mostly -- it was, I guess, interesting in the great adjective, but we had activity at all during the year. And then in fourth quarter, maybe it was long enough beyond tariff day that people started finally making a decision in getting leasing -- development leases signed. There weren't expansion. A couple were existing tenant relationships where, hey, we have you in Orlando and you need space in Tampa. And that was kind of a full building lease the team was able to get signed there. So in terms of kind of trends, what I would say is it felt like you finally break through the ice a little bit, and we got in more than half of our development leasing signed for last year happened to be in fourth quarter. The tricky part is I sure hope that's sustainable. We have good prospects activity. The other thing a little bit that helped us last quarter with such a high square footage is -- and I think it's with the construction pipeline being so low, we have probably 6 to 8 conversations in varying stages, and they won't all happen but where prospects could take a majority of all of the building, a couple of buildings pre-leased kind of build-to-suit opportunities. So that gave us a little bit of that confidence to raise development guidance this year, we think, as some of those happen. And it's a mix of expansions, relocation from California is one of the prospects. It's kind of a mixed bag and simply new to the portfolio, things like that. So I'm glad that it's pretty broad-based. And when I was looking at just the markets where we could have these pre-leases, it is probably about 6 different states. So it's pretty spread out. It's not any one market, things like that. So I'm cautiously optimistic as we turn the page. I'm really proud of the team, a good fourth quarter. We kind of finally got through and got things signed and we have good activity to date. It's just that conversion rate that will be key. R. Dunbar: And I would add to Marshall's comments on some of the specific development leasing in the year. Our average lease size in the quarter actually jumps to a little over 60,000 square feet, which was a nice uptick from previous quarters, which obviously helps move the needle. And then geographically, it was very dispersed. We saw great activity really from Florida all the way to California. So all of our development markets, we were fortunate to land some new deals in the quarter. Operator: Next question comes from Samir Khanal from Bank of America. Samir Khanal: Marshall, I guess your comments are very encouraging to hear, especially from even listening the last question on development leasing. I guess how is that translating into pricing or market rent growth? I guess where do you see market rent growth going this year at the national level? And maybe talk about markets which are outperforming or even lagging at this point? Marshall Loeb: Sure. Samir, it feels like it's hard to speak for us maybe a little bit nationally. We're so focused on more of the Smile States. But I would say rent growth and we're pleased demand has picked up, you're right. I have not really seen that translate into rent growth just yet. I'm optimistic because construction pipeline is a 7-, 8-year low and that it's going to take a while to catch up that there will be rent growth, but we're not seeing it just yet. We're still in all of our markets, maybe absent California, probably inflation plus a little bit. So rents have hung in their. Construction pricing has come down. So we've been able to maintain our yields a little north of 7% on the developments and things like that. Look, there could be an inflection point. I keep calling for it, and eventually, I'll be right on when rents pick up again because I think there's just not much supply out there and as demand does stabilize, it won't take a lot of kind of positive and just stable demand for people to start pushing rents, but we're not -- unfortunately not seeing it quite just yet, but at least we're trending in the right way as we ended the year. Operator: The next question comes from Blaine Heck from Wells Fargo. Blaine Heck: Just taking Samir's question a step further. I know you guys are typically hesitant to forecast rent spreads. But just looking at your expirations this year, the average rent is a bit lower than your forward year expirations at this time last year. I guess does that give you any confidence that you can hold spreads somewhat steady year-over-year? Is that lower expiring rent more of a function of the mix of markets and just lower rent markets rolling over this year? Marshall Loeb: Blaine, it's Marshall. I feel you're right. I felt better, probably right, looking at what has expired, but it is more market by market and even submarket by submarket in some of our markets as to where. But look, it's definitely trending down, but still -- look, I'm happy we ended the year at 40%, although we were lower at the end of the year, net effective than when we started the year. I think it will keep drifting down. Hopefully, we'll hang on to it. We're several years away from having negative rent growth. And I remind myself, look, we're in a cyclical business. It's always underbuilt and then overbuilt and we're underbuilt. And it's -- as the market shifts, as we were taking the last question, I think you'll have that rent inflection and we'll re-lift our mark-to-market within our portfolio. So we should have good positive re-leasing spreads this year. I think there'll be probably more like the back half of the year than the first half of last year. And then it's just when does that market turn because there's not much vacancy. And even in the shallow bay because we have the older buildings, there's more functional obsolescence in shallow bay than there is big box because no one was building big box buildings 20 years ago. R. Dunbar: Yes. And Blaine, I would add speaking specific to some of the markets, I like our diversity. So as California has maybe slowed some, other markets like Houston, which is one of our larger markets, has actually picked up some of that steam. So our diversity definitely helps as we go into the future quarters. Operator: The next question comes from Alexander Goldfarb from Piper Sandler. Alexander Goldfarb: Congrats all around, and Reid, I'm assuming they told you all about the joys of endless NAREIT. So welcome to [ REIT land ]. Question for you guys on competitive supply. Industrials are always a big institutional demand area and hard to believe that if things are good to getting better, that competitive supply is going to remain at a diminished level. So what are you seeing for the appetite from lenders, whether it's banks or private credit for development and from the institutional equity side, what do you see as their appetite for existing versus getting back into development? Brent Wood: Yes. Alex, this is Brent. Good to chat with you. Yes, competitive supply, as Marshall alluded to, we feel good about where that is. We spend a lot more time as a team talking about demand relative to supply. It's still tight. When you look at multi-tenant, that vacancy rate is about half of the overall or half of the bigger box space at about 4.5% on a national level. But the one analogy we've been kind of giving if we could just have a little better uptick in signing and momentum, we have a land bank and land inventory. We have literally plans with permits ready to go. We're obviously still actively developing, but we desire to do more and we're poised to move very quickly, and you see we guided to a little bit of a higher number this year, but we could accelerate from that, and we're poised to do it. Our competitive set tends to be good regional developers and there are equity guys, partners out there. There's been risk off. I think that will begin to unthaw if the market turns some, you'll certainly see that come back around. But there's going to be a lag time there for them to -- typically, those type groups don't carry land inventory, so they may have to secure a site, which can be very time-consuming, get their equity partner together and get some of those ingredients together. So much like we did coming out of the great financial crisis, we were sort of first to market, so to speak, and really ramped up and got more of our proportion of the activity. And we kind of can't see that happening again. If we could have a nice uptick, we could lean into it faster and ahead of the competition, maybe play a few innings of the game before the other team gets ready to play. And so we -- to be fair, we've been saying that for about 24 months running now. But the ingredients are there for that to happen. I'm confident it's going to happen. It's a matter of when. Could this be the year? We hope so. We're poised if it is, we'll lean into it. And if it's kind of like it's been in the last couple of years, we'll paddle with it sideways, if that's what it gives us. But we feel good about where the competitive set is and our ability to lean into it if we're given that opportunity. Operator: The next question comes from Nick Thillman at Baird. Nicholas Thillman: Maybe a question for the COO or President here. I'm continuing on the land bank here. The overall basis here is around $32 a buildable foot. I'm sure there's a little bit more permitting and costs that have to go into that number. But as you just look at these new starts and potential yields assuming relatively flat just rent growth here, like what type of yields are we talking about on additional starts from here? R. Dunbar: Yes. Nick, it's Reid Dunbar. I would say, going forward into 2026, we would anticipate similar yields of what we've achieved in '25. And thanks for pointing out the land bank, a little over 1,000 acres is something that we are bullish on. And as Brent mentioned, that's not easy to come by. The permitting and entitlement periods now take longer and longer and more and more challenging. So the fact that we have the land that we do, the portfolio and the relationships that we have, we feel like we will be able to take advantage when that demand starts to pick up with the team in place. And majority of our or land, especially for second phase developments have permit in hand. So the team is geared up and ready to go, assuming the leasing continues to occur. Operator: The next question comes from Brendan Lynch at Barclays. Brendan Lynch: Maybe one for Staci, and congrats again on your new position as CFO. You suggested that guidance assumes additional debt issuances, but maybe you would consider issuing equity. Could you talk about the -- what would make you toggle between the two in terms of capital allocation when looking at the development pipeline and perhaps scaling that beyond what you've guided to and potentially additional acquisitions throughout the year? Staci Tyler: Sure. First of all, thanks, Brendan. I appreciate that. Excited for the team. And yes, as we enter the year, our guidance does assume $300 million in debt issuance and we really are constantly monitoring the debt and equity markets remaining flexible. And while we assume debt issuance, we're monitoring the cost of that debt versus cost of equity. Ideally, we're in a situation where we can toggle back and forth and have a balanced approach. But in guidance, we contemplate debt. We have plenty of room on the balance sheet to fund the opportunities that come our way this year between development starts and acquisitions. So we could certainly issue debt or debt and equity beyond the $300 million. And we also have plenty of capacity on our bank credit facilities. At year-end, we had less than $20 million drawn. So over $650 million available. So we can immediately fund those opportunities that we think make strategic sense for the company, and then we can either issue debt or equity beyond that. Right now, we're around a 3x debt-to-EBITDA so when we think about the strength of our balance sheet, we have a lot of dry powder, sub-5 debt-to-EBITDA would be a long-term range that we would want to stay in. But even with the debt that we have contemplated, we're still in the low 3s as we think through the end of the year. So plenty of capacity if we were to find additional opportunities. So it's really not that we have capital constraints, it's more of the opportunities that we find and that's what the teams are working hard to find those opportunities that make sense. And with accretive acquisitions on day 1, we can certainly enjoy using that dry powder to continue to grow earnings. Operator: The next question comes from Todd Thomas from KeyBanc Capital Markets. Todd Thomas: I appreciate all the commentary around development leasing in the quarter and the prospect pipeline sounds encouraging. What's assumed in guidance in terms of development lease-up both on assets already converted, including Horizon West perhaps? And then what about the 1Q and 2Q scheduled conversions? How are you thinking about the lease-up and sort of what's included in the guidance? Marshall Loeb: Todd, it's Marshall. For the year, we have around $0.07 of spec development leasing kind of assumed in our budget. And that kind of mirrors our starts this year as well. I mean it's pretty back-end weighted. So we're low the first 2 quarters of the year, and then it picks up in third and fourth quarter. And yes, and so there's -- we've got some time to identify. We've got some leases signed, obviously, in fourth quarter that we're getting those tenants in and the build-out finished and things like that. But at least those are signed and it's more construction. But in terms of landing new tenants, getting them in, really the impact will be in third and fourth quarter, and that's -- if I'm an optimist, that also gives us a chance where we could get ahead of this year's budget. Todd Thomas: Okay. The $0.07 is all new incremental leasing or related to new incremental leasing? Or is some of that from the fourth quarter leasing that will come online late in the year? Marshall Loeb: It would be new spec. If you said how much speculative leasing do you have in this year's budget, it's $0.07 of the $9.50 and that's back half of the year. Does that make sense? Todd Thomas: Yes, got it. That's helpful. Operator: The next question comes from Rich Anderson from Cantor Fitzgerald. Richard Anderson: Congrats, everybody. So Marshall, every brain has 4 lobes, so I want to get to 1 or 2 of Marshall lobes. And when you're thinking about guidance going forward, last year at this time, it was $8.80 to $8.90. You did $8.95, so you beat that by $0.10. You did -- you beat same-store NOI by 100 basis points, ultimately versus the initial guidance. So when you're -- and that year last year required hopscotching, hopscotch -- yes, hopscotching through Liberation Day, new politics and so on. So when you think about the forward view today, I imagine you feel more confident than you did a year ago today. And what's the reality about setting guidance in your mind with perhaps a cleaner sort of runway? Is there an element of conservatism? Do you kind of put yourself in a position to hopefully have a beat and raise type of year? Like how does -- what's the reality factor around setting guidance today with hoping to expand upon it as the year progresses? Marshall Loeb: Rich, it's Marshall. I don't know that I have frontal or a rear lobe actually [indiscernible] but I appreciate the creativity. On our budgets, we'll -- they bubble up kind of suite by suite from the field. So we'll look rather than corporate budgeting, and saying, hey, hear's what you need to do that may or may not be realistic. So that's kind of always been our approach. They know what they can do. And then the regionals will challenge them on the budget to try to make sure it's not either. And then you kind of get to know personalities. I can -- one day, over a beer, I can tell you who's conservative, who's aggressive and who's usually spot on, on their budget and things like that. So I think what I'll complement the team, we'll scrub the budget and usually push, and it ends up a little higher than what bubbles up from the field, but they do a great job of finding ways to beat it. Once we said it, we do talk about what's our budget versus what's our goal, and we'll find ways to beat it. In terms of a year ago, we felt -- here's why I guess one of the cautionary tale is we felt good. Last year, fourth quarter was our best -- one of our best quarters for leasing. First quarter was really good. It was really a Liberation Day that was kind of starting April where it felt like, I remember that first quarter call where people think, have you stress tested the lower end of your guidance and things like that. So for what it's worth, if we guess this year, I would say I think people are maybe a little more numb to headlines, but I'm expecting a year where we'll have some tumultuous headlines. And I just hope that doesn't throw long-term capital allocation decisions, meaning development leasing. But I'm expecting it to be, like last year, it was a good year, but it was choppy water for a lot of the time. And I would guess this year until we get closer to midterms or whatever. But look, at the end of the day, regardless, we got to go lease this space in this building. So it's like simple and straightforward. We know what our task is to go get the vacancies, and especially within our development leasing done, and that will pull the ticket for the next building as well. So I hope we're being conservative and I'll let you be the first one to remind me that we were conservative then, if you're right. Richard Anderson: Is guidance versus goal? Like what's the typical spread there? This is not a second question, by the way, but... Marshall Loeb: Yes. No, there's no increment. They just -- look, our comp in the field is that if you can beat your goals, you know there's a little more incentive. And that's where -- but there's no $0.06, $0.05 anything. It's just, hey, this is what we've all signed on to, and so it's your job, one, to deliver it and then, two, if we can help you or find ways to get a little ahead of it, that's what benefits our shareholders. So how do we find that window really pending what the market gives. Sometimes it's leaning into development. Sometimes it's leaning into acquisitions or buying value-add or being creative and figuring out how to make a lease work that looks like it's about debt or something like that. Brent Wood: Yes. I would just add to that, Rich, having been in the field, it gets I think our midpoint of guidance, just a slight bit lower for '26 than '25. But if you ask us, do we think occupancy would be lower, not necessarily, but when you get in that 96%, 97% range and you're rolling budgets up, it becomes challenging to say I'm going to be 100% leased this year and everything is going to go. And it could. But then as you roll that up organically being 20 bps down in that sort of range is really just a deal going here or there one way or the other. So I hope, as you said, our trends have been to be a bit ahead of where we are, and we feel like we could do that again. But you've got to have a starting point somewhere. And obviously, this is the jump out of the gate and the field is trying to be reasonable with what they're seeing and then we certainly hope to better it as we go through the year. Operator: The next question comes from Michael Griffin from Evercore ISI. Michael Griffin: I wanted to circle back on supply and maybe dig a little deeper. Obviously, it feels like maybe there are going to be some puts and takes of '26, but the outlook feels better, I guess, relative to 2025. But Marshall, if we do see this inflection point, is there a worry that supply could then follow precipitously pick back up and then we're just kind of in the same state we've been in over the past couple of years of overbuilding? Or are there maybe more onerous, whether it's regulations, cost constraints, kind of governors that would put a meter on that, I guess, forward future shadow supply? Marshall Loeb: Michael, I think -- and I don't mean to be, but a little bit yes and no. And that I think the no part of my answer, you're right that getting permits and things, and we -- I've usually attribute it to Amazon. Everybody wants the good service or package delivered quickly, but no one wants the distribution building in your neighborhood. So we've seen zoning get materially harder and more time-consuming when we go through. And so that's what we'll -- and as Brent mentioned earlier, the private developers typically aren't structured balance sheet-wise to carry land, carry a construction team, have a permit in hand. So long term, yes, we're a cyclical business. It will attract capital where people are making money. Other people imitate and jump in and everyone became an industrial developer last cycle and we overbuilt. So long term, you're right, but I think it's going to be -- I'd say longer term, it's going to be measured in a few years before people can kind of gear back up, get the land, get through permitting. And I know how much we struggle finding good land sites. It will take a while for people to find the site and get through the process. And thankfully, we're -- it's something we purposely have but we have the team, the land, the balance sheet and the permits in hand and that will give us several quarters, if not a couple of years head start before the local guys start getting land and they get it permitted and then flip the land and all the things. So it will get overheated. That's just what we do, but that we'll have a pretty long runway before we get to that. And along that way, that's when our mark-to-market should pick up. And when you'll see our development starts go from $180 million last year, which we scaled back to hopefully that wherever the market takes us $400 million in starts or more. Operator: The next question comes from Mike Mueller of JPMorgan. Michael Mueller: With the expanded management structure, what aspects of your operations do you think you're going to be better at than before you added the extra depth? Marshall Loeb: All the things I delegated, I guess, with my answer one. Look, I'm excited -- a good question. I'm excited for the team and maybe a little bit -- I'll go to the -- if you're in a car, I'll go to the rearview mirror and then the windshield. We had not changed our structure, and it's worked, been a little over 20 years, and we were 19 million square feet. And just as the world evolved and has gotten more complicated with corporate responsibility, the company has grown. We picked square footage and property-wise, a lot more analysts and things. And so our team was just -- we've got a really strong team. I'll tie that into why we've usually found ways to beat our budget. So I'm excited for all 3 of them. I was probably, I'll put it on myself, part-time COO for the last few years and Brent's got a great background and just the more I got tied into Zoom calls, non-deal road shows, conferences, it's harder to just go sit in a suburban with the brokers and stared a piece of land in Austin, Texas and all the fun things that we do. So I'm excited about that end, excited for Staci, who's been with us for as young as she is an awful long time and taking on more and more. And then Reid, we've done so well in the central region. We said, okay, let's get Reid involved with. As you've seen us kind of work through our markets where I'm excited with -- talking with one of your peers yesterday where we exited Santa Barbara, we're maybe a few weeks away from exiting Fresno. We've sold 4 of our 5 buildings in Jackson and Reid took us into Nashville. And John Coleman and team into Raleigh of -- we spend a lot of time talking about where do we want our capital allocation and research and where are those markets we can create a lot of value with development. But then the other way we can create value for our shareholders is where do those rents go over time and where is population moving and land constraints and things like that. So just as we grow -- it's gotten -- which is -- comes with growth, more complicated. And we said, okay, let's divide this up. And it's just time to do it every 20 years, we'll rethink our structure a little bit. So we'll get a lot more operating efficiencies there. Brent Wood: Yes. I would just jump in and add to that. like Marshall said, as we've grown as a company, everything we've done kind of -- which is fun. We're very horizontal. It happens organically and the addition of myself and Reid kind of expanding role. I view it more as just trying to help not change of strategy or anything, but help support our team in the field and be a little more communicative from corporate to the team in the field. And look, when you're on the ground in development leasing and all the things you're doing and our team does a great job of that, [indiscernible] also trying to help think strategically, think long term, think runway where do we have more opportunity, communicate capital access or limitations from corporate to the field. So just better with that, more efficiencies, more perhaps analytical review within our portfolio and looking at trends and those things. So just sort of an exciting time to take the next step and put ourselves in a better position to keep doing what we do, but do it maybe a little better, more efficiently and lean into it just as well as we can. Marshall Loeb: And I apologize. I agree with Brent totally. I should have -- I talked about the rearview there. The other reason that led us to this was that, look, we talk about this inflection point. And I think if pick whatever -- so if we were in a classroom, you can see it coming. You can see the low supply. You can see demand. You can see the delay in supply coming. One of the goals, as we talked about is we -- while we have the land we do and [ every ] the balance sheet, we really want to step in and make, hey, while the sun shines when you're in a cyclical business, we're going to stay disciplined with our new investments, but we really wanted to have the right team in place and the right structure in place. We've grown a lot and growth just for growth's sake is never a goal of ours, but we really think we're going to have a really good opportunity as the market stabilizes to really take advantage of our competition lagging behind us with our skill set, and we needed to restructure our team a little bit so that we can move more quickly on those opportunities. Operator: Next question comes from Vikram Malhotra at Mizuho. Vikram Malhotra: I just wanted to clarify sort of two things and maybe you can expand. I guess, one, you've started new developments. You've talked about like an improving cycle and trying to take advantage of when things turn further. I'm hoping you can give maybe more granular anecdotes either by tenants or from your folks in the field on like what's actually turning kind of this new up cycle? And then related to that, just where your thoughts are on absolute rent in the Sunbelt. You've had this fantastic run and from an occupancy cost standpoint. I'm wondering, is there a chance there's a sticker shock just from the absolute rent levels we've seen? Marshall Loeb: Maybe a couple of thoughts I'll try. Vikram, that's what makes me more excited and again, what I would say on the development side, it's one, the quantity of development leasing we got -- I mentioned over half of our annual total was in fourth quarter. The sizes of those leases were larger, as Reid mentioned, then -- so we're seeing tenants under 50,000 feet, but now we actually got some larger tenants and people being more comfortable with their capital allocation and kind of layering in on top of that, it's abnormal for us or it's atypical for us to have as many large tenants. 92% of our rents come from tenants under 200,000 square feet. For us to have 6 to 8 to 9 conversations going on with, we'll take a couple of your buildings or can you build me a building and things like that. And they're not all over 200,000 feet, but they're all certainly north of 100,000. And we won't get all of those and some will be put on hold in every other reason, but just the quantity of those decisions and really the diverse tenant base and diverse geography. If it was all happening in Florida, it might be one thing, but it's really across all 3 of our regions in multiple markets and you kind of go, okay, it feels like the ice is thawing a little bit. If we got this many finished and we've got this much more dialogue going from the field where they're -- when we talk to them, we say, hey, I got a call and someone wants 150,000 foot pre-lease, there's a lot to work through. So that makes us feel a little better. And then we do look each quarter while we lose tenants kind of going on the absolute rent, where we still have that embedded growth, if there's sticker shock, all of our tenants, even renewals have a tenant rep broker. So that's usually where they'll get the sticker shock if it does come before they talk to us, and we don't lose tenants over rent. It's usually a consolidation or leaving the market or every once in a while, a bankruptcy or something like that. We can only charge market rents for maybe a little above market rents if we're doing a good job managing the park and things like that. But thankfully, the [indiscernible] rents in the market and look, we're a really cheap alternative as people move to faster and faster service. I think if you don't have that last mile distribution hub, you may can cut costs, but you're going to cut your service so badly. If you're train air conditioning or home depot or one of those, you can have a low-cost structure, but your revenue is going to be falling even faster. Brent Wood: Yes. And I would just add to that, Vikram, as far as absolute rents and certainly rents have had significant increase, say, even post COVID, but really supply and demand, right? So I mean, demand -- the options are limited. So if you need the space, you've got to pay to get it. I think one important thing to note about this cycle of sorts is that the vacancy is much tighter than we've seen in some of the other cycles. If you go back to great financial crisis, you started seeing vacancies get into the 12%, 14%, like I think our operating portfolio maybe got down to 88% or something. And certainly, we've not seen anything near that level. But the point being is even when you look right now, I mentioned earlier in multi-tenant vacancy being 4%, 4.5%, if you say things have been "slow" over the last few years, and you're still running at a 4.5% vacancy, there's not -- again, we're talking about not a huge pivot or tsunami that we need to kind of turn and get things to where you could push even push on rents because we don't have that wall of vacancy that got dumped into the market and mainly because capital got pulled back and so supply began to come down even when leasing was still strong. So we don't have that wall of vacancy to work your way through to get back to a good stable market. Thankfully, we've kind of maintained a sideways good stable market. If we uptick, I think there's even room to push rents versus relative to sticker shock of where they are today. So time will tell, but as Marshall said, much more time spent in our shop talking about demand relative to rents. Vikram Malhotra: Makes sense. And congrats everyone on the new roles, Reid, Brent, Staci. Look forward to working with all of you in your new roles. Staci Tyler: Thank you. Operator: The next question comes from Eric Borden from BMO Capital Markets. Eric Borden: Congrats. I just wanted to circle back to the occupancy. I appreciate your comments on the decline related to a couple of leases in '26. But just curious, how much of the expected decline in the first quarter is related to move-outs versus development projects being added to the operating portfolio? Staci Tyler: Really, in first quarter, there's not much of an impact from development transfers. We are seeing that more as we look throughout the second, third and fourth quarters. And I think some of that, as Marshall alluded to earlier, is opportunity for us. We have some work to do, but that's where we could hopefully see an increase in our occupancy -- actual occupancy compared to projections as the year goes on. First quarter is pretty flat really from fourth to first quarter. So we start projecting that for later in the year. And again, that's the budget and not the goal, just with the uncertainty in the environment, it's hard to know exactly the timing of when we'll see occupancy there. But that's definitely, as we look at occupancy for the year '26 where we do see a decline in projections from '25 to '26, it really is due to those development transfers. The core portfolio that's in place is not declining. It's the drag. We would be flat, if not for those development transfers. R. Dunbar: Eric, I would add, with the increasing development projections, to some extent, that comes at the decline of same-store sales. So a lot of our leasing comes from our existing tenant base, which typically is consolidation or expansion. So as our development business grows, our same-store sales may decline. So we're taking at times half a step back to take a full step forward. But net-net, FFO, we anticipate to increase and we see that as a winning strategy. Operator: The next question comes from Omotayo Okusanya from Deutsche Bank. Omotayo Okusanya: Just a follow-up question around tariffs. Just kind of curious your thoughts at this point on the Supreme Court and how things may kind of turn out from that end. And even if the Supreme Court does kind of say, current tariff policy is not constitutional or legal, kind of what happens next? And how do you kind of think your tenant base kind of deals with all that in terms of either kind of pulling back on a wait-and-see basis or they just kind of keep taking up space because they need to. Just curious how you're thinking about all like that whole iteration around tariff policy? Marshall Loeb: Good question. And I think, thankfully, I guess, as we think of the tariffs, one, certainly, it's that noise level or headline impact, tweet impact on our tenants that you'd love to minimize that so that their decision-making goes smoothly. So I hope there's not shocks to the system like that. The only other comment is tariffs hit us last year and we really rippled through. It did impact somehow, say, our Dominguez building a little bit where prospects. It's near the ports of L.A. and Long Beach in that South Bay Area, Carson, California. But by and large, it also reminds us over the years where we've said markets like Houston and Jacksonville, where we've been in since the 90s where we like metro area distribution. We want to be that last mile and a fast-growing higher-income area because that customer base is a lot stickier. And if you're buying a good or service, I'll go with a good, you don't care if it came from China or Mexico, you just are buying the item online and you want to deliver to your home or business really quickly. So that noise is a good reminder for us why ports are so volatile, and we're not trying to guess which port is going to gain -- we're not -- I'm not smart enough to guess which port is going to gain and lose market share that we're just pretty confident that Orlando and Atlanta and Dallas and Phoenix are going to have more people over the next 5 to 10 years, and we want to be in the middle of all that with the best, most convenient locations. So we try to -- again, I think we try to take as many ways as we can as a company to minimize or eliminate risk, whether it's how we develop in phases in a park or being near consumers or our balance sheet or all the things we can do, but we also say as we're reducing that risk, we don't want to reduce the return at all. So that's just kind of one more way we go about it. And we can't eliminate the headline risk and how people make decisions, but we're working on it. We'd sure like to. Operator: The next question comes from Jessica Zheng at Green Street. Jessica Zheng: Just noting on that previous question. Just curious if you're seeing a pickup of onshoring or nearshoring related leases in any of your markets recently? R. Dunbar: Yes, this is Reid, Jessica. Activity for nearshoring has definitely at least from what we're hearing from the brokerage community and some of the prospects has definitely picked up. Markets like Houston and Dallas are actually seeing an uptick in advanced manufacturing and users that need higher power requirements. So I would say that is a driver and will be a tailwind for us going into the future. A lot of our markets that we're in don't specifically cater to those larger users, but a lot of the ancillary uses we may make benefit from going forward. Operator: The next question comes from Ronald Kamdem from Morgan Stanley. Ronald Kamdem: Just, I guess, a quick 2-parter. So first, obviously, the development leasing was encouraging. The guide sort of assumes, I think, starts are picking up, got some acquisitions. Just can you remind us what the spread is looking like today between sort of cap rates and IRRs on acquisitions versus development that you're starting? Just curious what that spread is. And then the quick follow-up is just the exit of Fresno, any other sort of markets where you're paring back to capital recycle? Marshall Loeb: It's Marshall. I'll go reverse order. Yes. The markets we're exiting, as we mentioned, this is -- it goes back a few years. Santa Barbara, excited about Fresno. It's a project Brent and I bought in the '90s. And so just modernizing and updating our portfolio. And we'll -- hopefully, we'll have that closed in a couple of weeks or so. Jackson is another market where we had 5 buildings. We're down to 1 building. We'll continue to -- it's leased, but work on an exit there. And then the other one we've said is -- and you've seen us go into Raleigh and Nashville. We've talked about Salt Lake potentially. Again, [ Capital City ] has technology university presence, and we may never get to Salt Lake, but I'd rather not surprise anyone. But New Orleans being on another market where we could scale back a little bit there. And so that's kind of how we're thinking on our markets. And then going back to the first part of your question was on development leasing and kind of how we're seeing it. But yes, we're encouraged where we're headed with it. I think it's going in our direction and, look, I think on the development, I guess I remember, we've been developing to call it a low 7%, 7.1% to 7.3% is probably our average on a ground-up development. And really, the acquisitions we've made have been more strategic than opportunistic, we've said. It's been the building around the corner and something in our submarket. They're still in the low to mid-5s. So there's still a lot of demand for quality industrial shallow bay buildings. Cap rates have been pretty sticky. And kind of given that we're probably on the high end, maybe 180 basis points better return closer to 200 on a development today than a straight-out acquisition. And that's why we really haven't bought a portfolio or anything. It's usually been one-off buildings here and there and the bigger the portfolio, the lower the cap rate. It attracts more capital and it gets priced like that, but it can certainly drift into the 4s in some of our better markets as well. Brent Wood: Yes. I would just add to that, Ron, the development leasing as Marshall said, but what we'd ideally like to see is just some consistency. First quarter last year was good. Second and third was challenging. Fourth ended well, but trying to just stack good quarters behind good quarters would be nice. And so hopefully, we can get a little more quieter macro environment, rates continue to down, the economy slightly uptick better, again, just kind of get that confidence in executing and moving a little faster would all work in our favor. And so excited about the fourth quarter. We need to stack a couple of those together. And again, we back-end weighted our start, so we're hoping for that, but we'll see, but we're in a good position if that happens. Operator: We have no further questions. I will turn the call back over to Marshall Loeb for closing comments. Marshall Loeb: Thanks, everyone, for your time and interest in EastGroup. If we didn't get to your question or if you have anything to follow up, certainly feel free to reach out to us, and we look forward to seeing you probably here in a few weeks, most of you. Thank you. Brent Wood: Thank you. R. Dunbar: Thank you. Staci Tyler: Bye-bye. Operator: Ladies and gentlemen, this concludes your conference call today. We thank you for your participation and we ask that you may now disconnect.
Jostein Lovas: Good morning, and welcome to DNO's Full Year 2025 Interim Results Earnings Call. My name is Jostein Lovas, and I am the Communication Manager here at DNO. As you may understand from the color photo, we've had a landmark year with lots of celebration. Recently, our Board of Directors and senior management were in Kurdistan, marking that 500 million barrels of oil have been produced from our operated Tawke license. This photo shows our 2 chefs, Executive Chairman, Bijan Mossavar-Rahmani, cutting the cake together with the chef at the Tawke field. Now back to Oslo and the results. Present with me here today are Managing Director, Chris Spencer; and CFO, Birgitte Wendelbo Johansen. And the Chairman is joining us online from New York, and we will kick off the presentation. Please, Bijan, go ahead. Bijan Mossavar-Rahmani: Jostein, thank you, and good morning to everyone attending this call. We will, of course, be discussing the interim results for the fourth quarter of 2025 and for the full year, but also taking a peak look at the direction of the company in 2026, our goals, our targets, our plans and programs. As Jostein mentioned, 2025 has been a very transformative year for DNO with milestones and records. He mentioned the great milestone of 500 million barrels produced from the Tawke license that includes the Tawke field itself and the Peshkabir field. 500 million barrels produced is a lot of barrels. And this field has outperformed the expectations of many not necessarily ours. We've always known this is a very important license. And we produced 500 million barrels and many hundreds of millions of barrels still left to be produced from these 2 fields. So this has been a terrific asset for DNO. And I think we've managed it responsibly and safely and well over the more than 20 years that the DNO has been producing from this license. Going beyond that important celebration and visit that the Board and I and senior management paid to Kurdistan in January. I'll say a few words about other records reached by DNO in 2025. Our net production increased significantly by about 43% year-on-year to 110,700 barrels of oil equivalent per day. That is the highest level reached in the company's 54-year history, boosted in important respects in the second half of 2025, of course, by the transformative acquisition of Small Energy Group in Norway. Of that total, 110,000, 111,000 barrels a day equivalent, 54,300 barrels of oil equivalent per day was in the North Sea and an almost equivalent amount of 52,600,000 barrels of oil per day equivalent in Kurdistan. So the company is now about evenly balanced between the North Sea, most importantly, of course, Norway and also Kurdistan. So our 2 legs are now about equal size and both very strong and robust. We have a smaller leg in West Africa, where we produced last year 3,300 barrels of oil equivalent per day. Most of that is gas in the Ivory and in the Ivory Coast. The figures picked up in the fourth quarter of the year with net production of as much as 88,300 barrels of oil equivalent per day in the North Sea and 58,000 barrels of oil equivalent per day in Kurdistan. Our revenues in 2025 more than doubled year-on-year to close to $1.5 billion. That's a very significant figure, of course, for us, with cash from operations also nearly more than doubling to $929 million last year. Our operating profit was strong, increasing to $513 million, while net profit stood at a negative $25 million, that reflects importantly, the income tax in Norway and net financial expenses. And our CFO, Birgitte will go into some detail on those numbers. And Chris will -- in this coming presentation, go over our operational issues and then talk about both in more detail the figures that I just presented and our plans for 2026, which are very exciting as well. We now have a very strong platform coming out of 2025 to go into '26 and into the ensuing years. One final point for me. The Board of Directors yesterday approved another quarterly dividend of NOK 0.375 per share to be paid to our shareholders later this month. Last year, our total dividends paid to shareholders was $130 million, again, in 2025. And I should also note that we have been paying quarterly dividends consistently since August of 2022. And we're pleased to have that also as part of our ongoing targets is to prioritize our shareholders and pay quarterly dividends on the back of our performance. So with that introduction, I now pass this on to our Managing Director, Chris Spencer, to cover the operational issues, and I will stay, of course, in the meeting and happy to respond to questions together with my colleagues during the Q&A at the end of the presentation. So thank you. And Chris, if you would please resume the presentation. Christopher Spencer: Thank you very much, Bijan, and good morning from me from cold Oslo. So as Bijan mentioned, I'll take you through the operational aspects of our quarterly report. And as the title of the slide -- I'm starting in Kurdistan, obviously, and as the title of the slide indicates, we are putting our foot back on the accelerator in Kurdistan. As the previous slide mentioned, 2025, however, was characterized by tremendous resilience of our business in that region. And that's really the first couple of bullet points that we have on the slide are alluding to that. So notwithstanding the production deferment resulting from the drone strikes back in July, our team did a fantastic job recovering from that, and we managed to average 70,000 -- just over 70,000 barrels of oil equivalent per day throughout the year. And you can see that from the numbers how the recovery panned out because by fourth quarter, we were back at 77,000 barrels a day roughly. And that looking back, it's -- we highlighted it in several of the quarterly presentations last year, but it's a real credit to both the team and the quality of the assets that we have in the region [Audio Gap] and compares very favorably with the 2024 average production rate of about 79,000, so despite not drilling for 2 years, the team has kept pretty much a flat production apart from when we've been hit by drones. So as Bijan mentioned, we've been celebrating 500 million barrels, but I think that, that performance in the last couple of years has illustrated for us that there's plenty of potential left in the Tawke and Peshkabir fields. And that is one of the reasons why we've decided after a [ 3-month ] hiatus to get back to drilling. That has started already. We have -- in December, we kicked off our 2-rig 8-well program. So it's a little bit in '25, but mainly 2026. And that's the company-owned Sindy rig and one contracted rig from our long-term partner, DQE. Second contracted rig and third rig in total is now being signed up, another DQE rig. And so we -- by April or so, we should have 2 bigger rigs and Sindy all working in the Tawke license. That makes us by far the most active international operator in the region once again. Of course, that means increased CapEx this year. But that's good news, good money spent. It's going to have very short return on investment times. And of course, as a reminder to everyone, the cost that we -- all cost that goes into the company license is recovered as we spend it under the cost recovery mechanism in the PSC. But of course, that requires one to be paid, which I'll come back to. On the back of that resilience that we've seen from the assets and our ability to maintain production at around the 80,000 mark combined with the drilling program that we're now putting in place, we have our target to hit 100,000 barrels a day of gross operated production from the license which, of course, DNO share would represent 75,000 working interest. And as you will -- if you've read the press release, you will see we are guiding an average of 65,000 share from the Tawke license this year. As I touched on, the cost recovery, of course, requires one to be paid. And this is a key driver, as we discussed before, for the choice we made to continue to sell our oil to a local buyer where payment, we call it -- we call or use the shorthand cash and carry, but it's actually a bank transfer, international bank transfer, and we make sure the money hits our account before we hand over any oil. So we are -- we have that payment certainty in an uncertain region. We're not content with that. However, we're very pleased that [indiscernible] and other producers agreed to get back to using the export pipeline last year. I think that's very positive for the country. And the buyer of our oil puts it into the export pipeline as well. So with that reopening, we hope there are and aim to find a way to get back into export markets or export pricing for our own oil during 2026, and that's a key aim for us this year. Moving on to North Sea and a couple of general themes here. First of all, the slides talk to the business model of the North Sea, where we have -- we're turning exploration -- we're doing exploration and identifying upsides in existing assets, maturing those into resources, reserves, production and therefore, dollars. And as you know, DNO is pushing hard to fast track that process wherever we go, trying to shorten the cycle time from an actual investment to return on that investment. And that is one of the themes that runs through the slides we have for you. The other, of course, is the impact of the Sval acquisition on that business model for us and the operational financial synergies that we are realizing from that transaction. So we maintain our active but focused exploration portfolio. We're making discoveries and then we are impatient to get those on stream. We've guided 82,000 of net production for this year from the portfolio, which gives us that financial and tax efficiency for the fast track development model that we're pursuing. We just gave for your reference here the pro forma figures as if we had owned Sval throughout last year, just to give you a sense of where the assets stand. Of course, for DNO shareholders, this is the first year where we have the full effect of Sval production. So the increase in production that Bijan mentioned is the real number for DNO shareholders to consider, but the 81,000 just gives you a sense of where the assets have been performing and that we're tweaking those up this year as well. Many, many fields that we're involved in now as the slide says, the recent highlights of the start-up of [indiscernible] and Verdande. But as we show in the slides, this is part of conveyor belt of opportunities that we're working on ongoing developments that have been sanctioned and are in halfway through the projects with start-ups in the next few years. And that's seeing -- that means that we need to ramp up the CapEx a little bit. Again, in Kurdistan, we have the cost recovered in Norway, as most of you know, these are tax deductible when you have a portfolio such as we have now with 82,000 barrels a day of production. We are also realizing cost synergies from the Sval acquisition. I would -- and we've just been through the painful process of downsizing and streamlining the team. That does realize cost synergies, but I think from my perspective, that's much more about getting the right team, streamlined efficient team in place to go after the business model we're pursuing. And I would say that we have a fantastic team. We've actually had to let some good people go in order to get the rightsized team because we believe that an efficient team is the way to run the business. And then back to the conveyor belt of exploration through to production and dollars. Right at the front end of that is, of course, the APA licensing rounds that we are very active in Norway. And again, we had a very successful round. I think we were ranked third in terms of the number of licenses received from the ministry. We move on to the next slide. This one, we think, speaks for itself. And I'm really pleased to show the progress that we've made since we announced the acquisition, which was the yellow dotted line here. So back in March, when we came to the market and then started raising money on the back of the acquisition, this is what we expected to achieve from the combined portfolios. And as you see, we've been, I was going to say pleasantly surprised, but we've also been working very hard to make this happen. So the projection now looks better. And of course, this is our daily work that we are seeking to improve this further. And again, you see from the different colors, this life cycle I'm talking about of working through from exploration and upsides are shown here through the 2C category into 2P and then out the back in production and dollars, which is what then comes back for capital allocation to dividends and reinvestment in the business. So I think that one speaks for itself as a very strong development for the outlook for our business. Subset of that is, of course, the 4 discoveries that I touched on earlier. The interesting thing here is that those are in a prime core area for us. This is one of the core areas that we highlighted for operational synergies, again, on the back of the acquisition, and you see that coming through. So we have very strong production from the Nova field, which is not actually labeled here, but is just to the southwest of the hub. And that is what also the Suttaka development is to be tied back to Nova and into. So great example of the operational synergies that we were hoping to achieve. And Suttaka is also the best example of fast tracking that we are looking for, where together with Aker BP, we are going to have that in production 3 years after discovery and that we are trying to replicate across the portfolio. Also, the -- as you see from the statistics on the slide, the fast track is not done at the -- by sacrificing sort of breakeven price for these developments. $40 to $45 per barrel seems to be very much part of the course on the NCS when I look around the industry. And as I've touched on a few times, we have many other discoveries in our portfolio where we're trying to unlock time lines and get fast track developments moving. And if I take the next slide, please. And then we go back to the ones that we're trying to add to our hopper. And so we're back very active exploration appraisal program again, $200 million spend, again, tax deductible. I have to be careful how I use that phrase because I don't want to give the impression that we don't care about costs. We are very cost focused, but investors should be aware that those hard spent dollars are still tax deductible in Norway. So very exciting wells coming up this year. I'm not sure what to touch on. But of course, there's 2 appraisals there of very significant discoveries that we've made, [indiscernible] and Norma. So I'm excited by the outcomes there and numerous exploration wells. [indiscernible] is worth just mentioning because that's a higher risk than many -- all of the others, but we have a carry arrangement there. So for us, financially, it's not such a high risk on the chance of success since we have the carry. We've added a column to this slide as well to talk to -- we try to express what we're working on, which is that one thing is whether you find something or not, which is the traditional geological chance of success on the left. The other is how quickly and efficiently you can bring that into production. And so we're trying to give you a sense of that on the chance of commerciality column. As you would expect from what we've been saying before, if we have discoveries, then we see the chance of commerciality for all of them is medium to high. And the second bullet point on the slide explains that a little bit more where there's 3 examples there where exploration prospects are going into licenses where you've already got discoveries that are heading towards development that they should be able to piggyback very quickly on the back of that. Another example is Carmen where the adjacent Atlantis discovery is being matured by Equinor to tieback to [indiscernible] , where we have a 19% interest. And so if the resources there are firmed up, that also should be able to hop on the back of Atlantis and be developed rapidly. In the interest of time, sorry, I could go on all day on these topics. Let's move on. And I think I'm now handing over to the CFO, Birgitte to take you through the numbers. Birgitte Johansen: Thank you very much, Chris, and good morning, everyone. Yes, let's dig into the financial results. We start with presenting the preliminary income statement for the full year of 2025. Our revenue was $1.474 billion, up 120% compared to 2024. The growth is strongly influenced by the acquisition of Sval Energi last year, which was consolidated into our accounts as of June. 86% of the group's revenue stems from the North Sea business in '25 compared to 65% in 2024. Operating expenses have increased also following the inclusion of Sval and operating profit ended at $513 million, also a substantial increase from 2024 and also previous years, as you can see. 2025 pro forma operational spend was $1.55 billion, which we expect to see climb to $1.65 billion in '26, as you've also read probably in the press release this morning. Net profit in '25 was negative $25 million, roughly at the same level as $27 million we had in 2024. And the large difference between the operating profit and net income is due to higher financing costs as well as tax rate above 100%, and I will explain the latter as a part of the quarterly results on the next slide, please. So we have an extra table here to give you some more details on the fourth quarter isolated. Our revenue in the fourth quarter was $481.6 million compared to $546 million in 2025. And the main drivers for the reduced -- the revenue decrease is reduced sales volumes and realized prices in the North Sea, partly offset by higher sales volumes in Kurdistan. And for the North Sea, it's worth mentioning, reminding you that we had a strong production growth in the quarter, 14% higher than the previous quarter. But as you know, revenue is recorded based on sold volumes, and we had a large underlift in the quarter -- in the fourth quarter of '25. Our operating profit was $177.1 million in the fourth quarter, down from $221.8 million in Q3. The main drivers are reduced revenue and increased exploration costs expensed in the North Sea, partly offset by the impairment reversal and gain on license transactions. And as you can see, we have a net impairment reversal of $56.8 million. And I've seen this morning that this has caused a little bit of a confusion amongst the analysts. I'll give you some more details on that. If you look at Note 7 in the report, we have the full description there with all details. And there, we see that the net impairment reversal contains a reversal relating to Bestla in the Brage area, and this reversal is subject to a 78% tax charge. Then we make some impairments related to other assets, but these are goodwill impairments. So there is no corresponding tax shield related to this. So with the combination of tax charge on the reversals and no tax shield on the impairments, we end up with a net impairment contributing positively to the pretax profit, as you can see, but negatively to the net profit. Move over to the cash flow, please. Thank you. Here's an overview of the full year main cash movements. And as you can see, they are quite substantial. Net cash moved from NOK 899 million at the end of '24 to NOK 454 million at the end of '25. Quite substantial movements also in between, as you can see on the waterfall on the slide. Our operational cash flow is strongly supported by the inclusion of the Sval numbers and totaled NOK 929 million in 2025 compared to NOK 433 million in '24. Sval is also the main change when we report our tax payments, which totaled NOK 264 million in '25 compared to only NOK 1 million the year before. Look at our investment activities, NOK 814 million out of the NOK 831 million you see on the bar there represents investments in organic and inorganic assets, including the Sval acquisition. And the rest is decommissioning with NOK 33 million and net cash from equity accounted assets in West Africa. For financing activities, it has been a very active year, as those of you following us would know. We've had a lot of moving parts in form of establishing new financing facilities as well as the redemption of the DNO04 bond and as Sval DNO RBLs. These activities have been covered in previous presentations as they mostly relate to quarters 1 to 3, so I'll not dig into the details there. But on the back of these numbers, we're also very pleased to announce that the Board has decided a dividend distribution for the 15th consecutive year in a row. So that's very good news for our shareholders. Balance slide, please. Thank you. You see the same effect here on the balance sheet. It's been a year of significant changes with much more assets, as you can see in the blue bar, balance sheet with a net debt position and a book equity supported by the hybrid bond. We still have a very solid and healthy balance sheet, well in compliance with all our bond covenants in addition to being a very strong basis for new potential M&A activities also with the financial toolbox we now have in place. So all in all, we have had a very strong quarter from DNO, -- no specific surprises or special items to take note of and not least a year with high activity, both operationally and on the business development side. So we're growing production in all 3 regions, and we are ready for an exciting year in 2026. So by that, I hand the word back to Jostein for the Q&A. Jostein Lovas: And I believe I should give some instructions while people are lining first up. [Operator Instructions]. So -- but first up is Teodor Sveen-Nilsen. Teodor Nilsen: Congrats on a transformative 2025. A few questions for me. First, on the export in Kurdistan. You said that you expect exports during 2026. I just wonder how does it work? Are you able to join the current export deal? Or what do you need to see to put you in a place to join that export agreement? So that's the first question. Second question, that is on Tawke production. You mentioned 100,000 barrels per day. Could you share some more thoughts around the time line on that, when you will reach that or if it's already there? And final question, that is on 2026. Dividends, you talked about the 2025 dividends, but could you share some thoughts around 2026 dividends levels or whether that will be a percentage of cash flow or earnings or some other numbers? What we could expect for 2026 dividend would be useful. Bijan Mossavar-Rahmani: Let me tackle the first and third questions, and I'll ask Chris to tackle the second one. On the first one, yes, of course, we can join the tripartite agreement any time we wish to do so. In a sense, we're partially doing that by the fact that, as Chris mentioned, that while we sell our oil on a cash and carry or deposit and bank account and carry basis, our oil does go into the pipeline. But we're not part of the agreement in the sense that we're not part of the review of the contracts by WoodMac as the other companies are and our payments again are made by our buyer and they're made in advance. So we have that certainty of payments, and we've been paid since the beginning of the opening of the pipeline, while the other participants had to wait some time to get paid, and they have a different arrangement. But we can join that agreement at any time we want. And I think the other participants, both the companies, certainly [ Somo ] would like that to take place. We still don't know how the tripartite agreement is going to work. We don't know the time line of the WoodMac study. We don't know what the WoodMac study is studying and what it will say and how that will be processed by the [ Baghdad ] and when that is still going through a time taking process of government formation, how the new government in place will view the agreement and its terms, we don't know. And when that will take place, we don't know. So our position is to wait and see what, in fact, that's going to look like and how that compares to the arrangement that we already have in place. That will take us probably until midyear, maybe it will drag on later depending on government formation. And by midyear, the existing pipeline agreement between Turkey and Iraq will expire, as you know. What will replace it? We don't know. And so that is another trigger for a decision by us as to what to do next. And of course, the tripartite agreement itself is constantly renewed. So there's uncertainty. And because we're making substantial investments in Kurdistan drilling and we're the only company doing it, we want to reduce that uncertainty as much as possible to be able to sustain our investments. Other companies are not investing because they're not quite sure what comes next. They're getting some payments now as we understand it. But the fact that they're not investing suggests that there's uncertainty in their minds. We don't have that uncertainty under our arrangements, and we're investing. And when the -- some of the cloud over this disappears, we will have more wells, more production, more reserves under production, and we will gain the benefit of that at that time later this year. But I expect that because of the changes that might come into play on the pipeline, the Iraq, Turkey pipeline, there may be other, again, ways that exports and export pricing will take place or because of a decision on our part once the uncertainty is removed to join or not join the tripartite agreement or have our own separate agreement with [ SOMO ]. That's a possibility as well that there will be the tripartite plus 1, much like OPEC+ 2 or 3, whatever OPEC+ is now. So that's another option, too. That's why we believe that in 2026, we will be either part of the export -- the current export arrangements or we will find another mechanism to be exposed to export pricing. I think we're pretty certain that's our aim anyway to either export or have our pricing approach export and global prices. So that's the answer to the first question. On the issue of dividends, again, we've been paying dividends since August of 2022, regular dividends and rising dividends. and we're pleased to do that. Birgitte, you might say some words as to what cumulatively we've done in terms of return to shareholders. But before I turn to her to do that, I will also say that the matter of dividends distributions is one for the shareholders. And each year in June, we come back to the shareholders, and we make a proposal for dividend policy and dividend payments and the shareholders will make the determination as to what level and or what discretion to give the Board to make decisions about shareholders moving forward. So we will make those recommendations for the next 12 months after our AGM. We'll make a recommendation to the shareholders. And ultimately, they will make the decision but we've established this record of shareholder returns and shareholders always vote in favor of dividends. So it's a question of what is a prudent level that allows us to continue this policy. And we've already signaled a number of times in the past several years that we've made this -- we've made prioritizing shareholder dividends an important part of the company. And of course, we've always prioritized our bondholders and have this incredible track record of over 2 decades of solid bond raises and solid bond returns. So this is not at the exclusion of bondholders, they are as much a stakeholder of DNO and have been for a long time as are our shareholders on the equity side. Birgitte Johansen: Yes. My calculations are correct that we have paid $455 million in dividend and $60 million in share buyback after COVID. So that should total $515 million in distribution to our shareholders. So that's quite substantial. Bijan Mossavar-Rahmani: And Chris, on 100,000 barrels a day in Kurdistan? Christopher Spencer: Thank you, Bijan. Yes, I just think it is a presentation of 500. So we're not just celebrating 500 million barrels but $500 million in shareholder distributions. Bijan Mossavar-Rahmani: Excellent. Christopher Spencer: Thank you, Bijan. On the 100,000 target, great question. Just start by reminding everyone, as I did in my presentation of the incredible performance that we've achieved on the 2 fields in the [indiscernible] license in the last 2 years without drilling. We used to get questions pretty much every quarter about the decline rates of Tawke and Peshkabir when we were drilling, what was the underlying decline rate? We were asked time and time again. Well, it's quite amazing, isn't it? -- because we've had 2 years without drilling and we haven't had any decline. Now I thank our team. They've done a brilliant job, but that obviously reflects on the quality of the assets underlying also. And that's what's given us the confidence to set ourselves this target of 100,000. And a key component of achieving that as we also wrote on the slide is that some of the wells we're going to drill are aiming to add reserves to what we already have booked on those fields. So that would be converting what's currently either in the contingent resource category or within the so-called 3P possible reserves into probable reserves and quickly into production. So the time of that depends on the success of the drilling program, and we haven't guided on when -- we haven't -- we're not guiding the market on when we'll hit 100. What we are guiding on is the average this year for DNO share production of 65,000, which you can simply do the math and figure out that, that is 86,000 to 87,000 barrels a day gross on average this year. So you can do the simple math to see that the trajectory is upwards from this quarter. And we are working to hit 100 as soon as we possibly can. But what we're guiding the market is that figure. Jostein Lovas: Okay. With that, I believe [indiscernible] questions were answered. And we'll move on to another analyst, Tom Erik Kristiansen. Tom Kristiansen: Congrats on last year. The performance in Norway particularly looks better than expected. Can you say anything more about how the portfolio has developed compared to your expectations in general and where is the upside being realized? And secondly, on the developments in Norway, you have focused of course, moving this forward at a higher pace than usual in this contract. What are the key drivers to achieve that? And is there also some corporate M&A aligning interests along with different blocks or discoveries would help in that regard? Bijan Mossavar-Rahmani: Chris, do you want to put back on again, our expectations last year versus what it looks like today? Christopher Spencer: Do you have the slide there. Jostein Lovas: Yes, sorry. Christopher Spencer: Yes. Thank you for the question. So as -- and the slide I hope will be coming up shortly, but as our production projection slide shows, Tom, it was -- we've been very pleased. So we are upgrading our outlook for North Sea production just, what, 10 months after the announcement. Now as we said in the -- I also mentioned in the slides, we have some 30 fields that we're now in. So it gets very long-winded if you go through all of the ups and downs. But clearly, the overall effect has been positive. I think on the production side, then the examples are [indiscernible] Brage, but they're all contributors. I don't want to spend too much time on that. I think really, when we're looking forward, what you see is this combination of the fast-tracking developments. I mean Kjottkake discovered in the Q1 last year and coming on production in 2028. That is a fantastic driver not only of the production, but also value. And that's underpinning the mid-life of this particular chart. And then as we said in -- when we announced the deal as well, you have the big assets getting bigger effect as well. So we're in the Martin Linge, the [indiscernible] rigs and Brage evening as well, where -- which is a huge field, and we keep finding a bit more -- as we're hoping to do in [indiscernible] and Peshkabir, we keep finding a little bit on the edge of the field that's adding up to making quite a big difference. So it's probably better to focus on those themes of turning the 2C into the -- turning the discoveries into 2C into 2P and the 2C that are in these big fields into 2P, and we're seeing positive developments on both of those fronts, and we're still working to achieve more. I'm glad you asked about the M&A because we announced -- we -- that's an important part of the -- not just the corporate strategy in terms of looking for more substantial M&A. But it's going to be a big part of the toolbox we have in the North Sea as well is optimization M&A. And that's what you saw us announce a couple of deals on in Q4, and we are working on more of those. So we're trying to adjust our growth profile on the back of M&A as well and high grade the portfolio to get out more cash spinning off the asset base that we have. Bijan Mossavar-Rahmani: Also on that point, I'll add that as we wrote in our press release today, 2026 could be a year of opportunity for us. The market is going to be nervous. We've already seen that because of geopolitical issues and trade issues and so on and the price of oil has been uncertain and it could go up, it could slide back down again depending on events outside of our control, but it is going to be a nervous year for oil markets and could be a difficult year for some companies, especially prices come back down again into the low 60s for Brent, perhaps even lower. So there could be opportunities for us to move quickly to pick up assets. And we've said that this will be a 2026 is a nervous year because of uncertainty and maybe pressure on some companies because of oil prices, but that it will also be a risky year. There will be an opportunity and the DNO is a risky company. We can move quickly as we've demonstrated. Decision-making is rapid at DNO, and we're opportunistic. And we have a line of -- effectively a line of credit with the arrangements we have in place with ENGIE on our gas and also ExxonMobil and Shell on our oil. And we can tap into sale of those funds and other resources to move quickly to make acquisitions, and we're poised for that as well. So we will be on the lookout and able to move quickly because of the way we're organized and because we have perhaps we're better positioned in terms of our balance sheet and our access to credit than other companies of our size or smaller or maybe even somewhat larger to move quickly to acquire opportunities if they fit and look attractive to us, primarily in the North Sea, but not limited to the North Sea. Jostein Lovas: Okay. Are you happy, Tom? It seems Teodor has a follow-up question. Tom Kristiansen: Very happy. Just a short follow-up for me as well. Is it correct to assume that with those facilities you mentioned the cash on balance sheet and also, of course, some leverage capacity on assets you buy, especially if they are producing in the North Sea that you could do a deal of $2 billion, $3 billion without issuing any equity, if it's producing assets in the North Sea. Do you think that's kind of a range of what you can take on right now without any equity issues? Or could you make some adjustments to that? Bijan Mossavar-Rahmani: I don't want to comment on that because we don't know what those opportunities are. When I said that we can move fast on -- to acquire assets that are a bit more distressed, I had a smaller size assets in mind because of smaller companies. But there could be larger companies that may have want to divest from Norway or reduce their assets, and we'll be on the lookout for those. And I think we will be positioned and we'll have market support and to do acquisitions. We're not fearful of those acquisitions of that size. That's the small acquisition that we made was in that category, and we were able to execute and quickly. And with that now under our belt, we are able to go even larger. So we are -- there are some assets we have -- we've been on our radar. But whether or not they become available opportunistically, I don't know. But my point was this will be a year, I think, of nervous market reactions to price movements, especially on the downside, and that could happen. But it could happen that prices will jump for some geological -- geopolitical reasons. But we're on the lookout, and we are open to doing those and certainly have the appetite and the wherewithal and the mindset, the mood and the emotional sort of riskiness. We want to do deals, we want to get bigger. So... Tom Kristiansen: Sounds very good. Jostein Lovas: With that, I think Teodor Sveen will get the last question as there are no other people on the list now. So please, Teodor. Teodor Nilsen: Actually, 2 new questions and follow-ups. You talked about exploration and definitely a [indiscernible] exploration prospects. I just wonder whether you can discuss the most promising ones or maybe pick up a couple of favorite wells. So that's the first question. The second one is on just the technicality on the Bestla reversal of impairment. I assume that forward curves on oil price is slightly down past year, but still you reversal of impairment. Could you just explain us the drivers behind that reversal? Christopher Spencer: Can maybe put up the exploration slide again. Thank you for the question. I hate to pick favorites as you know, because the implication for the other wells is what people take away. But I would just say that as -- Bijan has spoken about in previous quarters, as we have grown as a company, our ambition is actually to have a higher working interest in these opportunities. And because those are the ones that will really move the dot on -- for DNO. And so when I look at that right-hand column, then you can see that if I were using that criteria as a favorite, then you would be looking at the ones where we are 30% or 20% rather than 10%, having said that, all of these investment decisions have come across my desk, and I wouldn't have been positive to them if I didn't think that they were going to add value to the shareholders. And of course, exploration is a funny game. Sometimes the one you're not expecting to come in comes in and the one you're banking on doesn't. And we've all seen that many times over our career. So it's tough to figure out. I'm personally, I guess I'm very interested to see the appraisal results on Carmen and Norma. Those are 2 of the most exciting discoveries we made over the last few years and have substantial potential even [indiscernible] as well as being close to infrastructure. And when we talked about exploration strategy in the past, we've said, yes, we are close to infrastructure, ensuring we have rapid routes for commerciality. But we've also been looking for new play types in this new infrastructure area. [indiscernible] is an example of that to mention that one again. But Carmen and Norma also are in that category. And so they have a greater potential volume-wise than some of the others. But I don't just look at last year, when you were in Brage and you hit 10 million barrels, I mean, the value of that is tremendous because you can produce it next year. So yes, lots and lots of factors. I'm excited by the program is the way I'll finish that. The other question an impairment question, Birgitte. Birgitte Johansen: Yes. Christopher Spencer: All I know as an engineer is that we have moved closer to the startup of ore production, so the NPV has gone up. Is that part of it? Birgitte Johansen: Yes, that's part of it. The significant development work has been completed, including drilling of production wells. So we have a new assessment that led to a $30 million impairment reversal that is post tax. You asked about the input we use or the commodity prices we use. It's worth mentioning that there were some movements on commodity prices since we delivered our annual report or quarterly report for fourth quarter of '24 until we announced the acquisition of Sval. So the input in our impairment assessments will be different from '24 to when we did the Sval PPA, which was, I guess, in March, was before my time, but that's also worth mentioning. So we haven't reduced our expectation when it comes to the input we use on the commodity prices since we -- since March, quite stable. And we follow our peers and the forward curve, as you mentioned also, Teodor. There's also a lot of details in the notes. We have at least one page, even more, I think, on Note 7 in the report. So there's also quite a lot of information. There you also find a table with a lot of details on each adjustment we have done in Q4 '25. Teodor Nilsen: Okay. Have you increased any reserves or resources in the latest assessment? Birgitte Johansen: Not reserves, I think, no. Christopher Spencer: That's no material change in the reserves. The wells have confirmed what we were expecting. Bijan Mossavar-Rahmani: Jostein, would you put that exploration slide you just had on back on the screen, please? -- comments. And I'd point to 2 columns, both of which Chris has talked about. One is the DNO interest, which here we have this 10%, 15% interest and then the 30% interest. That shows the evolution of DNO as a North Sea player. When we returned to Norway several years now about 4, 5 years ago, we came in and started up as a pure exploration company. We took small interest or were awarded small interest in blocks and the target was to make discoveries. As we've matured, -- we've now -- we're now taking a larger interest and being awarded larger interest in assets. And this is significant because as a larger company, then discoveries will be more meaningful for us. Plus with larger interest, we have the ability to farm down. And for example, then reduce our exposure in terms of CapEx. We don't want to do that, but at least with larger interest, we have the ability to sell down if that makes sense for whatever reason or combination reasons. So that's been a change. And you'll see, again, that moving forward, our interests are going to be 30%, 40% in that range larger than was the case when we were a small exploration-only company with more limited resources and less of a track record. We've also added importantly this chance of commerciality. The point isn't just to make discoveries, it's to make discoveries of commercial molecules, both oil and gas. And that's now a consideration as we decide which wells to drill. It's first, what is the geological chance of success. And the second is having made the discovery, how quickly can we bring it to market. And that better be under 5 years. It hopefully will become 2 to 3 years, and that's what we're targeting. And that means we have to have discoveries made near infrastructure which we've been doing now for a number of years, but also that it's not just near infrastructure, but it's near accessible infrastructure that we are able to get into that infrastructure and to do all of this in very rapid time in terms of the time between discovery and production. So our business model has changed in that sense as we've matured. And you see that here, and you'll see it in successive quarters when we show these slides again that you'll see more wells that have high or medium to high chance of commerciality and where the DNO interest is larger, and that's -- that shows the evolution of DNO as a small exploration-focused company to a more mature company that focuses on exploration, but with access to infrastructure already, importantly, through the small acquisition of the small assets and the fact that, again, we are -- have this fast-track mentality and developing fast-track partnerships that you'll see us continue to mature and that will make us even more successful as a North Sea player than we have been because of exploration, will make us more successful because of development and then larger production volumes. So I think you see this evolution in this slide, you'll see it further in the future quarters as well. Jostein Lovas: Well, then, ladies and gentlemen, that's a wrap. And thanks to all for participating, and see you again in a couple of months. Christopher Spencer: Thank you. Birgitte Johansen: Thank you.
Operator: Good morning, everybody, and welcome to the FirstWave shareholder update. Our presenters today will be Roger Buckeridge, Danny Maher, and Sharon Hunneybell. I'll now hand over to Roger to open the call. Roger Buckeridge: Good morning or good evening to all members of the FirstWave family. It's both staff and shareholders. This is the regular quarterly update, and I'll hand over straightaway to Danny, who is appropriately speaking from Mexico City in the geography, where more than half our sales originate. Danny? Danny Maher: Okay. Thanks, Roger. All right. I'll get straight into it. Good morning, good afternoon, wherever you are. So yes, as Roger mentioned, I'm in Mexico at the moment. So pleased to join you all, and I'll get straight into the updates. So next slide, Ruth. So Q2 is what we're recapping, but of course, looking to the future as well. And Q2 was very much focused on a restructure of the business, a capital raise, and a pivot of the company towards AI-powered compliance management. As we all know, a focal point for that is the monetization of our Open-AudIT user base, but it is not the only thing that we're doing to pivot the company towards compliance management. All of our products are involved in that. So a summary of what happened in the quarter, which would be of note was we had key renewals of key agreements with NASA, Claro Dominican Republic, Telmex, and other renewals as well. All those ones had increased revenues. As I mentioned, we have further restructuring to align our resources with what we want to do and where our revenues are. That restructuring is $1.8 million per annum in savings. So it was fairly large. And of course, there's on costs on top of that, which are further savings. We released very pleasingly the first version of Open-AudIT with AI-powered compliance management. I know you're all keen to hear how that's going, and Sharon will update you on that later. And we've been working on evolving the relationship with AWS and Ingram Micro. I know we can't get this call without commenting on the share price. So it's been an interesting quarter for the share price, which for all of us as investors and shareholders, it's painful to watch share prices go backwards. For me as an invested CEO, it's painful for me from an investment perspective, it's also strange to see a business improving with the share price declining. So we're trading now at basically 1x ARR plus our working capital, which being our receivables plus our cash, which is just extraordinary, I believe. So I just did want to let you know that, obviously, we're not in complete control of the share price, but the Board is considering actions on how we support the share price, how do we get our news out there, how do we get more eyes on the stock, that type of thing. Definitely, number one is we want some key news and sales from the business to announce, but these things can change very quickly. So I am in North America for February and March, so Mexico City, where I am at the moment and the U.S., to try and help with our sales and planning and general business as well. So looking forward to bringing some news, working with the team. Of course, the teams have been working in these geographies already. So hopefully, they can help me bring some news while I'm here. In terms of financial performance, so historically, we've provided information on our ARR revenue and GP. So we simply continue this format for Q2, and you can see the data here. The company's ARR increased 2%. Nice to see an increase. Of course, we want to see a higher increase. This came from uplift. So that's -- obviously, it's increasing above any churn. And it's mostly from uplifts from our existing customer base and a few small new customers. I do want to mention that we no longer see material churn in the cyber business, as the previously disclosed Telstra closure of the CSX2 platform has all materialized as have other changes in the Telstra contract, and we now have a new 1 plus 1-year agreement with them. So that business has now stabilized, and that's been where we've seen reductions in our ARR previously, and we've just seen the last changes come through in the first half of this year. In terms of the revenue reduction, it's simply due to a large one-off perpetual software license sale. It was $380,000 in Q1. It's the same with the gross profit. It's just because we had a one-off deal in Q1. As we can see, it's not our recurring revenues because they've increased. We can see that our gross profit margin is at 95%. So that reflects both the high margins in our NMIS and Open-AudIT businesses and the increased profitability in the CyberCision business. So a lot of the ARR that's gone away there was unprofitable business. So on the next slide, looking forward -- looking to the highlights for Q2. Q2 was a down cycle in our cash usage, but that is completely in line with our expectations, okay? It's always a down cycle. Q3 will be cash positive, okay? The company's cash is cyclical and predominantly customers renew their contracts at either calendar year-end, which is the financial year end in most countries or in Australia, our financial year. So June and December are our big months for renewal. So -- taking that into account, when you have the renewals come through in December, as we did, it brings the cash into Q3, which makes Q3 a cash positive quarter. So as at December 31, we had $2.5 million in receivables, and we expect to receive all of that in Q3. We've already received over $1 million of it. The company raised some money, $2.6 million, as you know, net of costs. And we secured a $2.5 million loan facility with partners for growth. This is a 3-year facility and the loan maturity date of 17th of December 2028. So it's a longer facility than the one we had with Formue Nord, and we used the funds primarily to repay the Formue Nord convertible note. So in summary, Q2 was a quarter of restructuring and capital raising, an exciting new product launch and enabling us to invest in the future of the business. I'll come back with a little bit of an outlook at the end. But for now, I think the thing most of us want us to hear is a bit of a product update from Sharon. So I'll hand over to Sharon. Sharon Hunneybell: Thank you, Danny, and good morning, everyone. So I thought I would start today with the CSIRO and University of Sunshine Coast collaboration because that was announced yesterday and provide a little bit more detail on how this supports the next phase of our broadest product strategy. So the regional university industry collaboration program is run by CSIRO and funded by the Queensland government. And what this project is going to do is allow us to apply machine learning to the operational data that gets generated by NMIS deployments, with a focus on delivering production-ready analytics and automation at the close of the project. So through the program, we are going to be provided with a full-time AI/ML expert, who will be working directly with our team. And we also have an access -- we also have access to a team of additional identified AI designers, developers, and advisers from within the university, who have specific expertise in the field of AI and ML in networks. We also will have access to their state-of-the-art cyber labs. So this is really exciting because this is access to talent and resources that we wouldn't normally have, and it will really allow us to accelerate our growth and sort of begin implementing our vision of what we want to do with AI and ML with those massive amounts of NMIS that we generate or our customers generate. We are recognizing this as an initial project because there's opportunities to expand this project into another term. There's also opportunities to work together with the cyber labs across our other products. But most importantly, I guess, this work forms part of the broader shift towards our AI-driven compliance and automation focus across the whole software suite. We do see Open-AudIT as an entry point to the broader suite of FirstWave products. And so as we are building up the commercial interest and usage of the Open-AudIT products, they'll be able to then extend into this real-time monitoring, predictive risk detection and proactive planning across network infrastructure. So that's a little bit about the long-term AI capability, but I will now move over and update you guys with the most relevant near-term commercial and product performance, which is the Open-AudIT 6 release. So we launched Open-AudIT 6 to early adopters in November, and we had -- we went full public launch on the website on the 1st of December. As a recap, alongside releasing that new software version, we also introduced a revised licensing model, which centered on a new free tier license, which was designed to bring users into the commercial platform while maintaining a clear pathway to professional enterprise capability. So when they are using the free license rather than open source software, we get additional usage data, and it also allows us to guide them towards the commercial products within this version. So when we launched, it was intentionally measured to protect the existing global user base and to allow us to observe adoption behavior, integration stability, and the activation patterns that were occurring with these free users moving on to trials and things like that. So we really wanted to prioritize a sustainable enterprise conversion rather than trying to get any short-term burst of activity and position ourselves to scale and to sort of visibly be able to see how we can move people through to trial activation once they've adopted the free new tier. We're really happy with the way that's going. We're seeing really good uptake of the free tier. And so now we're really focused on growth. So the next slide, I'll talk a little bit about when we launched Open-AudIT 6, we also launched a brand-new website, a commercial website that focuses on all of the commercial features within the product and also allows people to purchase licenses directly from the platform or from the AWS marketplace. So the new openaudit.com site, with that launch, grew from fewer than 200 users prior to launch to around 20,000 users, with lots and lots of engagement events across the 2 months. Across the legacy websites, activity shifted from roughly 26,000 users before launch to about 19,000 afterwards. So we're seeing this more as a reflection of migration to the new platform rather than any real structural loss of demand. So in total, we've had 39,000 active users across both platforms across the course of those 2 months, which is a 50% increase on what we were getting prior to this launch. Most importantly, engagement is with the new website is really concentrated with the U.S., Europe and ANZ, which are our sort of target markets, and it's really improving the commercial relevance of our audience as we move into this enterprise conversion. So looking beyond the engagement with the website and on to user commitment, we're seeing an improvement of conversion following the Open-AudIT 6 release. So we had 5,991 explicit downloads of Open-AudIT 6. We also did 2 minor product releases within that time to deliver some small improvements based on observations that we have with the product and some feedback. Commercial trials are currently sitting at 6% from free users. Strongest uptake again is across Europe and the U.S. We currently have 194 open leads in nurture. We are seeing the first few professional enterprise license purchases emerge alongside our normal renewal activity, which was -- so we've had 2 activations in Europe and 1 in Australia. So while we're still very early in enterprise sales cycle, the combination of improving the conversion and the initial paid uptake is fairly encouraging, and I think it's showing real indicators of future commercial growth. So in closing, our focus is now shifting to the ongoing monitoring of key metrics and ongoing execution. Commercially, we are increasing targeted marketing activity. We've enabled marketing automation to strengthen the pipeline development, license adoption, and new enterprise contracts. From a product perspective, we continue to expand our compliance capability within Open-AudIT. We're deepening that integration across the broader product platform and of course, the advanced machine learning and predictive analytics within NMIS as we'll be starting with that project, and it's all very exciting. So together, these initiatives position us to convert early engagement into sustained enterprise growth and recurring revenue. Thank you. I'll pass back to Danny. Danny Maher: Okay. Thanks. So this is just a simple slide with the outlook. And I'll say in opening that we've got a real thirst from investors and prospective investors for information, and we understand that. And that speaks to the fact that we're really changing our path for a different future. Historically, on these updates, we've given focus very much on the financials and looking backwards. So thanks, Sharon, for your update, and we're trying to get you guys a little more information about what we're doing as a business and what the future looks like. But certainly, it's about the company pursuing its path of AI-powered compliance management, right? So this is going across all our technologies. We've got a bunch -- we've got an enormous amount of intellectual property that plays into this space. And inside our products is an enormous amount of data, right? And it's the new developments in AI is what is very powerful for us because it gives us the ability to do things with that data and our customers. That data is not on the Internet. It's not in a cloud anywhere. So the only ones that can do it are us. We're the only ones with the user base. We're the only ones with the data. So we're very excited to be in this position, nervously excited. And obviously, we're pursuing this path, which will be safari, not a train journey, right, but it's an exciting safari, and it's underpinned by blue-chip customers with recurring revenues. Open-AudIT 6 release is going well, as Sharon outlined, and we continue to adapt and push the metrics. We've got sufficient funds to pursue our goals for the foreseeable future. We'll be generating cash this quarter. And the cash burn last quarter, as mentioned, is largely due to restructuring costs and because our R&D funds shift from last quarter to this quarter. And then on top of that, it's always a down quarter for us because our cash is cycled. So we're not concerned about that. We will hold an AGM to approve the share options will be issued to PFG. We've already released to the ASX what those options are under their agreement. The AGM is going to focus -- so you'll see the notice of meeting come out. The AGM will focus on the specific resolutions, okay? And the process is around getting those resolutions done. So it's encouraging -- and there won't be online voting at the AGM. So there won't be remote voting. So if you want to vote on those resolutions, then you need to vote by proxy before the meeting or attend in Sydney. But we do intend for that meeting to be very procedural. We won't be doing company updates or anything like that. We'll just be running through the resolutions. So I want to let you know about that because you see that notice of meeting in a week or two. Other than that, I'll hand over for any questions that you guys have. And we've got myself; Sharon; Roger, our Chair; and our Head of Finance, Tony De Polignol, available to answer any questions. If you have any, you can post them in the -- there's a Q&A session or you can post in the chat, and we've got a few here. Danny Maher: So we have from Justin, how is the commercial conversion of Open-AudIT compared to targets set? What is the Q3 target for conversion, i.e., ARR and customers? Very valid question. The -- so we're on target. We want to see a kind of larger customer come on board this quarter. We're not putting the revenue. We obviously have our forecast and our budgets, but we're not putting them out there because as a public company, as soon as you put them out there, it becomes a public target. And the journey is a bit of a safari, right? So we've got to watch what's happening and adjust and maximize it. We -- I could say we're slightly behind our revenue target. We wanted a few more customers in January, but we're in front of other metrics. And we are stunned at the number of leads that we have. And we -- what was the number we had there, 190 or something. And so it's an incredible number of leads. And the fact we had a huge amount of activity around this product. And for it to -- for that activity on the website to up 50% over launch was very unexpected. And so there's different metrics, many of which are ahead of target. Why we not yet produced a share price re-rating? I don't know. Roger, I don't know if you want to turn your camera on and address this one? Sharon -- can we all turn our cameras on, Sharon and Roger. The share price -- so we had -- look, it's throwing a dart at why these things happen. But I can say as some facts, there's been a few dynamics. One, we did a capital raise. Two, the -- but we're below the capital raise price. Two, Perennial Value who were a major shareholder institution, they sold their fund. So nothing to do with us. They sold their entire fund and all the stocks that we hold in it to another group called Balmoral and Balmoral exited. So that created an overhang on stock. Perennial owned about 12%, 13% of the company at the time. So it was a pretty significant overhang. And there have been a few other things like that. And so to me, the business is a lot better. Stock price is interesting. Everyone tells me to focus on the business, but of course, I care a lot about the stock price. But it's pretty painful to see the stock price at 1x ARR plus working capital. I mean to me, it's ridiculous. So go and buy some. But you probably see announcements, I've been moving my stock out of my personal into my super to crystallize tax at these low levels. So we are looking at different investor relations initiatives and things like that. But ultimately, we need to do some deals and show some results and some growth. I don't know if you got some comments on that, Roger. It's an important question. Roger Buckeridge: Yes. The reason why I'm happy that Danny is located to North America for February and March is that's where the future value of the business is being generated today in terms of sales revenues, new key clients and a focus on acquisition of new large-cap corporate clients. As well, we're very happy with the renewals that have come through. So there's plenty of support from the work that's been done in recent years. But we've got a new value proposition, which under Danny's leadership needs to be taken really through enterprise sales through dedicated business development relationships with large corporates. And most of that opportunity -- because we're a small company, most of that opportunity is in the Americas. It's not to say there isn't opportunity in Europe, and we've got an eye on that and some ideas about how we might be able to access and support more European large cap clients. So that takes a while, but we'll be able to report on progress, I think, in those endeavors at the next quarterly update, which will come after really a couple of months of very hard work and focus under Danny's leadership. So I'm confident about that progressing well. The share price is as it is. Yes, there's been a couple of overhangs, which have been dealt with, one of them being the Perennial/Balmoral thing, and that was the largest that's passed. Another small one to do with the final settlement with the former senior debt provider from Denmark, and that's being dealt with also. And so I think those things are very short term and tactical and not related at all to the progress of the business, utterly unrelated to the progress of the business. So we think we've just got to aware that for a while. And yes, this is a buy-and-hold investment as our corporate objective, and that's where the management team and a brilliant technical team, I might say, in terms of the software development with just outstanding performance. I think they're backable. So over to you, Sharon or Danny. Danny Maher: Yes, that's good. I think so we got Justin -- what steps are being made to strengthen Investor Relations and market visibility? We have a couple of proposals in front of us from different IR firms that we are considering. The biggest thing is we need to get some news out there about commercial activity. But when you're inside the company like we are, you can see the leading stuff and you know the conversations and you know you can see the deals progressing and you -- if I'm here in Mexico, I can go and talk to the customers, which we expect to be doing deals with and generating news items. So you get a bit more visibility and you can kind of feel the business going forward better than external parties. But we definitely need to do some of these deals and get the news out there. And of course, we want new eyes on the stock, and we are looking at IR. We've got Joel there as well, which kind of taps into this, will directors buy on market. We look at that as well, like when you have employee share schemes in place and things like that. And I want to be clear, we don't hand out stock to most employees who -- and if you look at previous announcements about -- most employees who have bought the stock, they salary sacrifice. We don't go around printing stock and handing it out to people. We value it very, very highly. And when those mechanisms are in place, it doesn't really make sense for employees or directors to buy on market when they can leverage these other mechanisms, which are much more tax effective. And of course, each person needs to consider their own positions as well, like I already have a lot of stock myself, for example. But we understand direct to buying on market can help support the stock, and we do discuss it. We've got the pricing model-- what is the pricing model for Open-AudIT and the strategy behind it? Is it possible to make it relatively small to accelerate a high percentage of conversion to paying customers and then ratchet up price going forward? Sharon, do you want to take that one? I can add a bit if you want, but people get sick of hearing my voice. You're on mute. Sharon Hunneybell: Yes. That's better. Okay. So Open-AudIT is -- has 2 pricing tiers, so you can buy professional and you can buy enterprise. It's charged out by a number of devices that you discover and actively audit and manage in your environment. There actually is -- it is actually quite a low price if you've only got a few devices. So for the smaller businesses, there actually is a free 100 device license. That was originally under a 1-year term, we've actually reduced that down to 3 months because we are seeing that people are activating the software and really getting it up and running pretty much within a day within -- or usually even within an hour is the average. So we've really improved the installation process. So the question about making it relatively small, the interesting thing is that the people that are looking at buying the software seem to actually be the bigger ones. So it still seems to be falling into a bit of an enterprise sales cycle, which is why we've got the 194 leads there, even though there's an ability for them to get up and running themselves and to buy the licenses online. So we are actively like monitoring the way that people are interacting with the software to try and get it will be great to get more just sales just straight off. They've activated themselves, they press the button, they buy the license. One of the licenses that sold last month was just very lightly assisted by our customer service lady in Mexico. So it's a good sign that we're sort of -- I think the pricing is right. I actually think that the pricing is right. I think we just -- I don't think reducing the price would make it any more likely that it will be bought. I think it's just a little bit of a slow buying cycle because it's really enterprise software. Yes. Danny Maher: So there's a free version, right? So you can't get lower than that. And then there's -- unless we pay them. And then there's the tiers above that. It is reasonably low cost. And remember, it's an entry point to our other products. So we want to get in there with Open-AudIT compliance, get them as commercial clients paying us, talking to us, and then we want to sell them our other products that help compliance, in particular, our configuration management products and then our other management products and then STM, Secure Traffic Manager to, handle their traffic compliance and cyber decision for e-mail and web security and compliance. So we really want to use this. Open-AudIT is a lead generation machine. It is very attractive to other -- when we get approaches from other companies that want to acquire us or invest in us, often usually, they're from the U.S. And it's commonly because of this massive user base around Open-AudIT, it is a lead generation machine, and it's highly valuable and yet we're trading at 1x ARR like that. You can put lots of different valuations around that user base. To generate that amount of activity would cost an enormous amount of money and time. Roger Buckeridge: Danny, it might be worthwhile just speaking about where we are most competitive with the NMIS product suite. I've heard you talk about the stress recently, the fact it's UNIX-based that it appears -- that is very competitive with very large enterprise customers rather than small, medium. Danny Maher: Yes, that's right. With -- and it's interesting, and Sharon made the comment, we've seem to end up in enterprise sales with Open-AudIT as well. So I think what happens with these open source products is the lower end of the market just want to use the free stuff. So we end up in enterprise sales, which does require humans and does take time. If they don't -- no one's going to swipe a credit card for an enterprise sale. So it takes time. And the AWS relationship helps because we can have our software build on an invoice on an AWS invoice. So that's good. But it's the same with NMIS. It's the upper end of the market. The more complex or the larger the IT environment, the less competitors we have. It's as simple as that. So -- that's why we have customers like Microsoft, NASA, Telmex, Services Australia. They're all pretty blue-chip high-end customers. And the lower-end ones have a lot of choices of what they can buy. There's a lot of stuff that works, not for audit actually, but for network management, they do. And -- but as you move up that chain, there's less technology that will work at that scale. All right. We're getting near wrap-up time. Has Trump America's First policy been a negative, positive, or neutral impact on the company's sales? Interesting. I would say that here in Mexico, there would be a lower likelihood of people buying from an American company. So it's great that we're Australian. And I hope there's tariffs that get put on American products coming into Mexico because that would certainly be helpful for us. Overall, it's a bit of a mixed bag for us because there are certain organizations in the U.S. that like we've got customers like John Deere, their supply chain is disrupted enormously. Customers like NASA, their whole funding was thrown up in the air and became very uncertain. So uncertainty is not great for business in general, and there's a lot of uncertainty in the U.S. A lot of that seems to have settled down from our -- we just renew -- I think no, we haven't quite renewed John Deere yet. That's coming up. But NASA, we did. But NASA wasn't even sure what budget they were going to get. So that was a bit of concern for us, but we seem to get through it. Overall, I would think neutral to positive. But it's definitely a mixed bag. You notice the impact. It's a very interesting question because you really do notice the impact. Roger Buckeridge: The other thing to say is that our products are largely priced in U.S. dollars. Obviously, we've got a cost base in AUD, but it's very, very, very competitively managed in terms of keeping a very lean organization with very seasoned developers who are very -- totally in control of the use cases and in touch with the customers. So if you think about just the currency shifts, yes, having our products priced in the U.S. dollar is probably good for us. It will cost a little more in terms of our Aussie cost base, but you've heard the story about the margins. So from that point of view, I think the currency sort of marketplace probably favors us right now. Danny Maher: Yes. Well, yes, we rarely exchange money, right? We use investment dollars to pay Australian bills, and we get investment in Aussie dollars, and we use customer revenues in U.S. dollars to pay our U.S. bills. So we've got a nice little natural hedge there, and we very rarely exchange money. So it does change our financial results, but it's on paper. It doesn't actually -- financially, we're spending in U.S. and spending in Aussie dollars, so it doesn't really do much. But it does change what the results look like on paper. Roger Buckeridge: Danny, can you just briefly talk about the recent strengthening of our U.S. business development sales team given that that's really based out of San Francisco. Danny Maher: Yes. So we bought back Craig Nelson, who was CEO of Opmantek into San Francisco. So that's only recent. But we've got a big focus on those geographies. The stats that Sharon put forward about the -- over 50% of these commercial trials and therefore, you can estimate the same in terms of the number of leads are in U.S. and Europe. Europe is quite large for us. So we have to consider about how we address that, whether it's through partners or what we do there. We're not really funded to go opening new offices and things like that at the moment, but we are getting a lot of activity there. But yes, big focus on sales right now and good to have Craig back. He's looking after all sales globally other than Latin America. We got a ton of questions here. We have to filter them. Okay. So it's about revenue growth, share price growth. We're working hard on it. I expect to see some news this quarter, okay? So the amount of news and the size, we don't -- we're not putting forecast out there because we're very much embarking on a new journey. So we can't do that. Then we've got here from Matt. Thanks, Matt. Congratulations, Dan on the launch of Open-AudIT 6. Sounds promising and exciting. Also well done on the restructure, capital raise and refinancing in Q2, which no doubt was a significant distraction and had significant cost of business. Looking forward, I hope the business now has a much clearer runway, can be laser focused on execution. Can you provide more insight into Q3 and what a conservative expected closing cash balance? Wasn't clear in the 4C, and what is the business funding requirements beyond Q3. Okay. Actually, there's a question I skipped before -- sorry, from Dean, sorry, which was -- will you be operational cash flow positive this quarter? Or is it because of government grant timing operation slowly? And Tony, I don't know if you're there, I want to chime in on this. Tony De Polignol: Yes, I'm here, I can answer that one pretty easily, I think. So as Danny said about Q2, how it's a down cycle, I suppose, in cash usage, the fact is Q3 is conversely an up cycle, right? So we do get a lot of those renewals that will come in, in Q3. So short answer is yes, it will be definitely a cash flow positive quarter even without the R&D. But in saying that, I'll also caveat with the fact that that's the period or the quarter where we do get most of the cash from our renewals. Danny Maher: Yes. So Yes, it's a strong cash quarter for us Q3 and... Tony De Polignol: It always is. Like for me, it's my favorite quarter. Danny Maher: Last quarter -- this last quarter is the white knuckle ride every year, depending on how much cash you got in the bank. So it's gone, and we now enter into a cycle of positive cash and the R&D will make it even more so. I'm not sure that Tony, we would be cash positive without the R&D though in Q3. Tony De Polignol: Yes, it's pretty good. It's going to be -- there's another question about the cash balance at the end of Q3. I won't answer that, but I'll just say it's going to be... Danny Maher: Okay. What's the strength of SCT's AI offering in the absence of the USC-CSIRO collaboration? I'll kick that off and you can add, Sharon. So our real strength is in our data, right? So when you have products that are used as much as they are, they're on-premise, not cloud. And nobody is going to -- nobody will ever put all their -- the list of all their IT assets and the configuration out in the public domain, which means they'll never be able to use AI to leverage that enormous amount of data, which is in our products. So that's our real power. Our power is that we have the data that we can apply the AI to and nobody else does. So it doesn't have to be necessarily AI, our AI. And that's what I want to make the point. So we can leverage other developments in AI into our technology and other people can't because they don't have access to our data, okay? So that's a really important thing that I wanted to say. So it's not just about what AI we develop, which we are doing, and we have AI patents. We've been doing AI before it was trendy. So we've got patents and we released our first AI 10 years ago. So and then I'll hand over to Sharon for the second part on what the USC-CSIRO collaboration adds. But that also tells you why they're collaborating with us, right? So you can tag on to that, Sharon, because of the data we have, right? So if they want to develop AI and they want to research, they don't -- they can't do it without access to our data. Sharon Hunneybell: Yes. So look, we -- as Danny said, we do already have some machine learning built into our NMIS products. We have actually got some work undergoing at the moment around dynamic thresholding and trending data. So in this quarter, we're working on bringing some of that into our opCharts modules. But what -- but what this really brings is because it's -- so because we have so much data, machine learning is -- basically relies on very complex mathematical models to be able to develop insights, but they're much more -- they're extremely accurate insights when you develop them. So the access that we get through this program are like top-tier mathematicians, AI and ML experts who've already built models. So they already have patented models in similar areas. And so I'm really excited about how we can apply some of the things that they've already built and shown to be effective, how we can adapt that to performance data, which is what we gather in NMIS. It is a really big opportunity to work with some very, very smart people who are well known in the machine learning space for networks and sort of let them with some performance data that previously they've been doing a lot more stuff with traffic data and things like that. So yes, it adds a huge amount of strength. And the people within our team as well, development team are really excited. We are a small team. And so having these external brains to sit there and problem solve on the best way to develop more like deeper levels of machine learning into our software and then just have our guys be able to implement that is also -- it's huge. They're working every day. They don't get a lot of time to step out into the think tank to dream out the best ways of doing these things. Roger Buckeridge: Sharon, would you mind just reassuring anybody who is wondering about intellectual property control? Sharon Hunneybell: Yes. Yes. So we do -- all of the intellectual property that's developed during this project is owned by us. So that's very clear in the project. So yes, it's -- this will be our IP to commercialize. Roger Buckeridge: I think it's fair to say collectively, we're all fairly experienced at dealing with universities and CSIRO in Australia in these kind of contracts. Sharon Hunneybell: Yes. Danny Maher: Okay. I think that wraps it up. Sharon Hunneybell: Ashton had his hand up for a little while as well. I don't know... Danny Maher: We can't take... We work on written question. All right. Well, I think we'll have to wrap it up. Well, thanks, everyone. Interesting times, a lot of pressure on the share price, I know, and we care about that greatly. Appreciate your support. Hopefully, some news in the next month and 2 months -- and some other things we can do can help restore the price -- share price to where the business is because the business has a lot better opportunities than it ever has. The costs are down. The cash is under control. We're entering a cash flow positive period. We've got new products out there and great new collaboration there with AI and with CSIRO and USC. So a lot of good stuff happening, and I hope it's reflected in the share price soon because I know that's what you guys care about the most. You're not in this because you care about network management, cybersecurity, and artificial intelligence. You're in it because you hope those things deliver you a return on your investment. So we're focused on that and care about a lot. So hopefully, some good news this quarter. Anything else? We'll wrap it up there. Roger Buckeridge: Thanks, everybody. Sharon Hunneybell: Thank you, everyone.
Operator: Good day, and thank you for standing by. Welcome to the REA Group Limited Half Year 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alice Bennett, Head of Investor Relations. Ma'am, please go ahead. Alice Bennett: Good morning, and welcome, everyone. My name is Alice Bennett, Head of Investor Relations, and I'd like to thank you for joining REA Group's 2026 Half Year Results Presentation. Before we commence, I'd like to acknowledge the traditional owners of country throughout Australia and recognize the continuing connection to land, waters and communities. We pay our respect to Aboriginal and Torres Strait Islander cultures and to Elders past and present. So today, you'll hear from REA's CEO, Cameron McIntyre; and Janelle Hopkins, REA's CFO. Cam will talk to our overarching financial performance and strategic highlights for the half. He will then hand over to Janelle to talk to our financial results in more depth. And then following this, we'll, of course, be happy to take your questions. With that, I will pass to Cam to get us started. Cameron McIntyre: Thank you very much, Alice, and good morning, everyone. Look, as I usually do, as I'm stepping through the slide deck, I'll just mention each slide as I get to it, just so you can keep up. So look, I mean, to begin with, REA's delivered a good first half result underpinned by double-digit residential yield growth. It was the half that saw new AI-led experiences for consumers, product enhancements for customers, record audiences and growth in our market leadership position. Overall, the Australian property market landscape remained healthy with strong demand across the country and improvements in Sydney and Melbourne listings in Q2. So let's start with Slide 4, and just looking at our financial results. So for the half, and we saw revenue up 5% on PCP to $916 million. EBITDA, excluding associates, up 6% on PCP to $569 million, and net profit after tax up 9% to $341 million. Boards also determined to pay a fully franked interim dividend of $1.24 per share, which is a 13% increase on PCP. And in addition, we've also announced today an on-market share buyback of up to $200 million, and that reflects REA's strong balance sheet, the confidence we have in our future outlook, and the balanced approach we have to capital management, enabling us to return surplus capital to shareholders while continuing to retain flexibility to invest in growth opportunities as they arise. So before I move into our operational highlights, I'd just like to touch on market conditions. So looking at Slide 6 and listing volumes in Sydney and Melbourne kept pace with very strong prior year comps, while volume in our smaller capital cities softened. Nationally, we are seeing a 2-speed market resulted in a decline in new buy listings, which were down 6% for the half. As you can see in the chart on the left-hand side, listing volumes in the December quarter strengthened against the softer comps with Melbourne and Sydney leading the charge here. And the predominantly steady interest rate environment, that helps support the buoyant levels of demand that we saw with buyer inquiries surging to 4-year highs across the nation. So let's jump into Slide 8, and looking at our numerous H1 highlights. And it was a transformative half. Our technology -- we rapidly extended our AI capability. We delivered excellent new experiences and products, which we'll talk through a little bit more as we step through the presentation. Supporting our visualization strategy, we acquired a 61% stake in Canadian-based iGUIDE in October, last year. And in India, we strategically refocused the business on Housing.com. Our personalized and immersive experiences were key to the record audience levels that we saw and deep consumer engagement with 38% year-on-year growth in seller leads for the half, and we achieved a record Pro -- Premiere+ depth penetration in residential and record Elite Plus penetration in commercial, which was fantastic. On to Slide 9 and just taking a closer look at our record audience levels and high-quality engagement. As you can see here, more people than ever visited our flagship site, realestate.com.au. Record average of 12.7 million people visited the platform each month, and we achieved a record 146.1 million average monthly visits. But look, the real value is in a very large audience that lies with our deep engagement of our consumers. And looking back over the past 2 years, our audiences continue to consistently extend each half, and more importantly, key engagement metrics have also strengthened as well. Like our active member base, the number of properties tracked by owners and sellers and buyer inquiry volumes as well. The strength of our brand, the quality of our experiences and access to unique data and content ensures Australians continually return to and spend more time on realestate.com.au than any other property site in the country. Looking at Slide 10, and I'm sure most of you have seen this 1 before, but REA's purpose is to change the way the world experiences property. And our strategy centers on engaging the largest consumer audience delivering superior value to our customers, and leveraging unique data and insights as we expand our core business and build next-generation marketplaces. Moving on to Slide 11, and you've heard us say this before as well that REA has been investing and innovating with AI for some time. It's a clear strategic focus and a significant opportunity. It's embedded in our existing strategy as an enabler, that's enhancing the execution and supporting our delivery of product. Our unparalleled audience and proprietary data provides strong foundations and unique leverage for harnessing AI as we continue to change the way people buy, sell and rent property. AI has been applied across all of our operations. We've delivered several key AI-led initiatives and partnerships in the last half, which I'll talk to you a little bit more about in a moment. So let's turn to Slide 12, and just talk a little bit about consumer experience. And during the half, after a successful 12-month trial, we've -- where we're progressively rolling out natural language search, which is now available to half our website visitors. This new way of search, it really offers consumers a choice between traditional search with filters map or natural language search. In terms of the next evolution of AI search, a conversational search trial is running on realestate.com.au. And that's now live for 10% of our web audience. And for those of you that are interested in having a look at that, you can contact Alice and she can give you some directions on how to get on to that one. But this really is an intelligent search experience that's going to encourage consumers to take action, such as saving or sharing a listing. And it also may encourage consumers to think outside their set filters. So I mean, for example, if you're looking for a property for sale in Kew, the tennis court, let's say, and there aren't any -- well, search results using this sort of search engine may result in you looking at large properties with big enough backyards to install one your own, and estimate the cost for an upgrade, for instance. So level of intent data available through conversational search will increase exponentially and this is going to be incredibly valuable to customers. In the middle of that slide there you can see supporting our visualization strategy to engage consumers in a new way. And we launched a great new video hub in November. And on the right-hand side of the slide there, you'll see we launched our new AI-led conversational assistant, which is a great tool designed to support owners to better understand their real estimate valuation. Let's also now look at Slide 13 and just talking a little bit about our customers. And we saw record Premiere+ penetration support yield growth in our core residential business. During the half, we introduced the serious buyer metric exclusive to Premiere+ listings. And this metric is powered by PropTrack. And what it does is it analyzes hundreds of behavioral signals to identify consumers showing true purchase intent and that predictive score empowers agents with data to optimize campaign strategy and enhance their vendor conversations that they have. Our audience extension offering, Audience Maximiser. I mean that was invigorated in 2025 and new features, price points and additional value helped drive record penetration in the half with that product. And on the right-hand side of the slide there, you'll see, we've added additional value to our high-performance listing solution, Luxe, which is proving to have market appeal, which is great, and we're seeing its penetration continue to build as well. On to Slide 14, and the value in our Pro subscriptions is in both enhanced brand exposure and access to exclusive products and tools that help generate new business. Agency groups have recognized the value that we have in Pro with a number of customer groups signing enterprise wide Pro agreements now. And in addition, Australia's largest agency group, Ray White was the first customer to access our new Market Intelligence data suite in December. And that offering is enabling agencies to better benchmark with insight into market share and conversation trends or conversion trends or, I should say. Underpinning value for our customers is access to Ignite, and the self-service platform we have here is designed to bring deep insights, tools and leads together into the 1 place. Monthly active Ignite use increased 14% on PCP. And in the first example of generative AI in Ignite, during the half, we introduced AI smart summary for leads. And what that does is it provides a quick seller lead insights to help customers have more informed conversations with property owners. Now on to Slide 15 and realcommercial.com.au delivered record audiences with 2.9 million Australians visiting the platform on average each month, which was up 90% on the prior year. And our top-tier product, which is Elite Plus achieved record penetration and there's been strong uptake of Elite Plus Unlimited, which offers unlimited days on site. The value in Ignite's continued -- continue to increase for commercial customers. We saw a 59% PCP growth in monthly active users. In November, we also acquired Neighbourlytics, and that offers a unique view of demographics with real-time lifestyle and mobility data. Both Neighbourlytics and Arealytics are really good opportunities for our commercial business. Turning to Slide 16, and just talking about our financial services and improved market conditions, product innovation and brand investment delivered good revenue growth. Submission volumes continue to increase and they flowed through to a pleasing increases in settlement numbers. Enhancements for finance experience supported a 26% PCP growth in realestate.com.au generated broker leads in a good demonstration of the quality of these leads. The submissions from REA leads were also up 32% on PCP. We also continue to invest in our core broking platform and in AI training and tools, and they delivered ongoing value and supported productivity improvement for our brokers. And this includes access to Google Gemini, which is supporting brokers to efficiently automate their processes. From a consumer perspective, in partnership with Athena Home Loans, Mortgage Choice launched a new bridging finance solution called Freedom Move in the half, and that solution is designed to simplify the complex and costly process of buying and selling. On to Slide 17, and look, AI is clearly embedded with an REA strategy as you're seeing through this presentation. And our team, along with our key partnerships and investments are really, really significant enablers and continue to integrate AI across the business. The business is evolving to an AI primed company or AI prime company in terms of thinking and adoption. We're focused on empowering our people with the right tools and skills to harness the technology and boost capability, productivity and drive to efficiencies are also incredibly important. And this focus is delivering really strong results. Across the business, around 90% of our Australian employees have completed foundational AI training. And 85% of our team regularly uses AI, our internal AI assistant. We're seeing very strong adoption in our global tech team as well and 90% of our global tech team are leveraging AI daily. Look at a number of recent investments providers also with deeper AI and data capability. This includes our U.K.-based AI property portal Jitty and the Canadian-based iGUIDE business that I just mentioned. We're also really pleased to be partnering with global leaders in AI and have them help power some of our new AI-led products and experiences. So looking at Slide 18, and demonstrating our accelerated innovation. This slide really highlights recently delivered AI products, experiences and tech capability along with training support and tools for our customers and brokers. AI-led search and immersive experiences on our platforms are engaging consumers in completely new ways, and these experiences not only offer property seekers more choice, flexibility and personalization. They also unlock rich consumer and market insights underpinning customer value as well. And what's to come is really exciting. AI is going to continue to evolve, and we'll be very thoughtful in how we deliver that capability over time, too. In the coming months, consumers can expect to see deeper personalization with enhancements to conversational search, and exclusive content and video. Our customers can expect to see powerful AI integration into our self-service Ignite platform. And data and technology that underpin our products and experiences will strengthen and the foundation REA has to leverage in AI. So turning to our international businesses. And as we flagged previously, Housing.com's, REA India's strategic priority and -- is now solely focused there on moving forward. Our first strategy continues to deliver positive results with Housing.com continuing to lead app downloads in India. Focused improvements on the platform. We've also placed more relevant properties in front of the right consumers, which supported a 20% year-on-year growth in leads delivered to customers in the second quarter. We've also evolved our depth model as well with the introduction of a new top tier subscription product called Ultra, which provides customers with superior listing branding. Looking at Slide 21, we announced the acquisition of our controlling stake in Canadian-based Planitar, which is the maker of iGUIDE in October. iGUIDE what that does is it use AI to identify property features and produces immersive 3D virtual tours, precise floor plans and reliable property measurement data. It's the market leader in Canada with around 25% of all listings sold in the country in 2025 featuring an iGUIDE. Canadian revenue grew 23% in half 1, with strong growth in each of its 4 key markets, which are residential, insurance, construction and commercial. And the success of the business in Canada points to the opportunity that we have here in Australia where video and interactive content will become standard in property advertising. In the Australian market, the early signs are really strong with the first sales to customers in recent weeks, and we've been receiving really great positive feedback. In the U.S., REA has a 20% stake in Move, operator of realtor.com. Realtair introduced a number of innovative products and experiences in the half, including FlyAround, which provides consumers with a new way to explore neighborhoods from above, which is very cool. REA and Move are also collaborating on AI strategy amongst other things to facilitate faster delivery and reusability of AI capability across both the Australian and United States markets. Before I hand over to Janelle, I'd just like to share a quick few comments on the market as we look ahead. And I guess, ongoing strength in employment levels and population growth, they really continue to drive strong demand nationally, and they really contributed to the health that we have in the Australian property market. And while we saw an increase in interest rates this week, the prospect of rising rates was already widely flagged, and the underlying fundamentals of the market remain very strong. Supply has improved in Melbourne and Sydney with limited stock in smaller capital cities, resulting in some vendors delaying their listings. Anecdotally, across the country, our customers are telling us that they're seeing very good numbers coming through open for inspections, which aligns with that view of a buoyant of demand that we're seeing. Into the second half, we will continue to drive innovation, and it's an exciting time with AI presenting new opportunities and our team is embracing this capability, coupled that with the ongoing health in the property market, and we're well positioned to drive further growth for the remainder of FY '26. And just before I hand over to Janelle for more detail on our results, it is her final result with the business. And I'd just like to acknowledge her service and achievements as CFO, and thank her for her outstanding contribution to REA over those years. So thank you, Janelle, and over to you. Janelle Hopkins: Thanks, Cam, and good morning, everyone. REA has delivered a good result with strong buyer yield growth in the residential business despite lower listings. From our core operations, revenue increased 5% to $916 million. Operating expenses increased 3% to $347 million. EBITDA, excluding the results from our associates was $569 million, up 6%, and the group delivered NPAT of $341 million, up 9%. Our half year result includes the consolidation of iGUIDE, the divestment of PropTiger and the exit of Housing Edge from the second quarter. Excluding those items, on a like-for-like basis, revenue and operating expenses increased 8% and NPAT increased 10%. The group results from core operations differ from reported statutory results with a number of one-off items excluded. On Slide 37, we provide a summary of the reconciliation between the core and statutory results. Turning to our Australian residential business, which has had another strong half, delivering 7% revenue growth despite lower listings. National buyer listings declined 6% in the half, improving from an 8% decline in Q1 to a 3% decline in Q2 as comps became easier. However, as Cam discussed earlier, we saw a 2-speed market during the half, with Melbourne and Sydney both flat and up year-on-year in the second quarter, while markets like Brisbane and Perth were down 12% and 20%, respectively. Buy yield was strong, up 14% for the half, driven by a 7% average Premiere+ price rise, growth in add-ons, AMAX in particular, increased subscription revenues and increased depth penetration with a 1% positive impact from geo mix. Excluding geo mix, controllable yield growth was 13%. Our rent business saw continued growth with revenue driven by high single-digit yield growth, partly offset by a 2% decline in listings. The following slide shows both the penetration and mix of paid debt listings in the residential business. And while it's still early days for Luxe, penetration doubled from FY '25 to the first half '26, and is tracking in line with our expectations. We continue to see Luxe take-up across properties of all values with nearly 2/3 of Luxe listings on properties less than $3 million. Commercial and New Homes revenue increased 10% to $121 million. Commercial revenue increased by 9%, with yield growth driven by an average 7% price rise and increased depth penetration and listings broadly flat. And New Homes revenues were up 11% on the prior year, the first time in 5 years, we've seen double-digit growth for this business. This was driven by increased project profile volumes and average yield and higher display revenues. Other revenue was up 8% to $35 million, driven by growth in media display from increased spend from our direct customers and growth for campaign agent as the business continued to grow customer numbers. Please note PropTrack data revenues, which used to sit in other and are largely generated from financial institutions have now been included in financial services to align with an internal restructure. A reconciliation is provided in the appendix on Slide 40. On to Financial Services, which had an excellent half with revenue up 11% to $58 million and EBITDA increasing 14%. We saw double-digit growth for both our Mortgage Choice business and PropTrack. Mortgage Choice revenues were up 12%, benefiting from a 14% increase in settlements and continued improvements in broker productivity, partially offset by higher broker payout rates. Pleasingly, submissions were up 24% in the first half, which suggests settlement growth should remain strong in the second half. In our PropTrack business, we grew revenue 11% through new customer data contracts. Turning to our India and North American businesses. In India, Housing.com revenues were flat at $26 million for the half or up 3% on a constant currency basis, with customer growth and improved monetization in our Tier 2 cities, offset by continued competition in pricing and packaging, which has negatively impacted Housing.com's yields. India operating costs for Housing.com increased 3% or 6% in constant currency, which reflects the growth in tech costs due to license price rises and increased data usage, partly offset by lower employee costs as the cost base was reviewed post the business simplification. Housing.com EBITDA loss was $19 million. Moving to North America. As Cam mentioned, we acquired iGUIDE, which was consolidated from October '25. It generated revenue of $6 million, with underlying like-for-like growth in half 1 of 23% and was broadly EBITDA neutral. In the U.S., Move's revenue growth has accelerated, up 10% year-on-year, driven by higher sales of its RealPRO Select premium offering and continued revenue growth in seller, new homes and rentals. And pleasingly, lead volumes turned positive, up 5% in the half and up 13% in the second quarter. Move's equity accounted contribution was a loss of $10 million, a $1 million improvement on the prior year. And for more information on Move, please refer to the NewsCorp's results release. On the next slide is our core operating jaws. In Australia, jaws were closed by 1% with revenue growth of 8% and core operating cost growth of 9%. Australia operating cost growth reflected a number of key factors. The largest driver was employee costs impacted by wage inflation, and increased headcount driven by investment in strategic initiatives. This was followed by COGS, which increased due to more than doubling in our audience maximizer penetration, higher marketing costs in part due to the timing of Ready 25, which was not in the prior year and spend on the [ Ashes ] and our new Australian open sponsorship. And technology costs, which increased due to price increases of licenses and investments in AI tech. At a headline level, group jaws were opened by 2%, with revenues growing by 5% and OpEx by 3%. And on an underlying basis, jaws were flat with revenue and operating costs both at 8%. We've had a strong and consistent track record of continued investment in product development and platform health to drive better consumer experiences and deliver more value to our customers. You've seen this over the last 5 years with Australian CapEx growing 14% per annum compound. In half 1, this investment included a number of new products and experiences across all lines of business with a focus on AI, video and platform health. CapEx to revenue was 7% in the first half, and we anticipate a rate close to the middle of our 7% to 9% target range for the full year. FY '26 depreciation and amortization is expected to be in the range of $138 million to $147 million, modestly lower than our previous guidance due to the exiting of Housing Edge in India. Turning to our cash position. We ended the half with a strong closing cash balance of $478 million. The group delivered operating cash flows of $373 million, which allowed us to continue to invest in the business organically through M&A and continue to deliver strong shareholder returns in the form of increased dividends. The FY '26 interim dividend grew 13% to $1.24 per share, with DPS outpacing NPAT growth as we increased returns to shareholders in the form of a higher payout ratio. In addition, as Cam mentioned earlier, we have today announced an on-market share buyback of up to $200 million. Our balance sheet is incredibly healthy, and we believe we have the right balance going forward of returning capital to shareholders and flexibility for future growth ambitions should the right opportunities arise. Finally, on the FY '26 outlook. While comparables will become easier as we progress through the second half, the group now expects national residential Buy listing volumes to decline 1% to 3%, reflecting larger-than-expected year-to-date declines in the Perth and Brisbane markets. January listing volumes were down 8% year-on-year with Melbourne and Sydney declining 1%. The group anticipates 12% to 14% residential buy yield growth with the magnitude of growth potentially impacted by geo mix movements across the remainder of the year. Positive group operating jaws are targeted with Australian jaws expected to be open modestly. Expectations for mid-single-digit operating expenses growth is unchanged, reflecting high single-digit growth for Australia, the consolidation of iGUIDE, divestment of PropTiger and exiting Housing Edge. On an underlying basis, high single-digit cost growth is expected. And India and Associates guidance is also unchanged, with India EBITDA losses expected to be in the range of $40 million to $45 million and contributions from associates losses expected to be marginally improved in FY '26 compared to FY '25. In summary, we are very pleased with this result. We continue to execute our strategy, deliver on the things in our control and invest prudently for the long term. The whole team is excited by the new opportunities we see, leveraging AI to enhance our consumer, customer and employee experiences. It's great to have Cam's feet now firmly under the desk, and I've known Andrew Cramer for over 6 years now, and I'm confident he will do an excellent job. I have loved every minute of my time at REA and will really miss the incredible talent across the whole company with a special shout-out to my finance team. I will see most of you over the next few days on the roadshow, so I look forward to catching up with you all then. I'll stop here. Operator, can we now please open the line for questions? Operator: [Operator Instructions] Our first question will come from the line of Lucy Huang with UBS. Lucy Huang: Thank you, Janelle, and all the best for the new chapter ahead. I've got 2 questions. So firstly, the cost growth guidance is unchanged, but Australian jaws did narrow a bit in the first half. And I understand it was mainly listing driven. But can you give us some color around kind of your confidence on the ability to manage costs moving ahead, particularly given the ongoing AI investment pressure and tech price rises and maybe flesh out some areas in the cost base, which you can keep flexing to make way for AI investment. Should I ask the second question now or after? Janelle Hopkins: Yes. Why don't I take that 1 first off, Lucy, and thanks for your nice comment. Look, you're right, our guidance is unchanged. So we're very confident in the fact that we have been investing in AI and continue to invest in AI within that cost guidance that we've provided. I think 1 of the key points and a differentiator is that we have never underinvested in the business. We've always talked about that 7% to 9% CapEx to revenue ratio and our overall investment profile continues to grow as we deliver value to customers and consumers. When we think about the ability to flex costs, we've always been able to flex costs up and down should we need to. And the sort of things that we can do is -- and the things we have been doing is looking at our offshore service delivery centers in both India and Manila. We can tweak up and down should we want to the phasing of our investment. But overall, we're very confident in our ability to continue to target open jaws. And you're right, the question around the modest -- the fact that we're expecting jaws to be open modestly, it's just more on the fact that we've updated our estimation around listings, and that's playing through into the revenue. Lucy Huang: No, that sound quite clear. And then just my second question. Obviously, a lot of chat around kind of ChatGPT traffic. So maybe if you can talk through how much traffic you're now sourcing or getting from ChatGPT or how that trajectory has changed over the last few months? And I think offshore, we've seen some more deals recently from your peers partnering to be on the ChatGPT app. Is this -- like how are you thinking about that as a potential next step for REA, like are there merits to it now? Should we be doing it now? Just keen to hear your thoughts more broadly. Cameron McIntyre: Yes. Thanks, Lucy, I'll take that question. So look, in terms of overall traffic, I mean, it's a fraction of a fraction, and that fraction is -- has declined, not increased more recently. So it's -- you're talking sub-1%. In terms of how we think about it going forward, I mean, it's another growth path for us in terms of traffic acquisition. So longer term, we're encouraged by the partnership that we have with Open AI and look forward to, at some stage, having their app store open up to us. So I think that's an ongoing opportunity. But at the moment, it's a very immaterial component of our traffic. I mean some of the other AI innovation that we've deployed that you've seen through the pack is very encouraging. When it comes to things like realAssist and so on that you saw there, just very happy with how all those things are performing. But in terms of that ChatGPT, it's very, very small. Operator: Our next question will come from the line of Eric Choi with Barrenjoey. Eric Choi: And Janelle, I just wanted to echo Cam's thoughts as well. Thank you for your help over the last 7 years in making these conference calls and the numbers are a little bit more interesting and fun. But anyway, Cam and Janelle, did you want all the questions at once or 1 by one? Cameron McIntyre: I think 1 by one. Eric Choi: Okay. So maybe just on AI, I guess there's a lot of negativity. I just wanted to go the other way and talk about potential monetization opportunities. And specifically on FY'27, I know you haven't announced anything -- announced anything around pricing yet, but on top of whatever price increases you guys eventually announce and the tailwind from year 2 of your AMAX and Pro packages, I'm just wondering if you announced anything significant to drive depth and Luxe uptake, just because I know you guys are doing a lot of things on immersive listings and AI and developing in your slides today and some of your competitors might be trying to package things into their highest tier depth packages as well. So just wondering on your potential to do the same. Cameron McIntyre: Yes. I guess, holistically, Eric, as you know, the company when it thinks about prices to value, and -- as you can see in the deck, we've been heavily engaged around building innovative solutions throughout the organization. And limited -- unlimited to or not limited to things like even AI-based training for our customer base and delivering based integrations into places like Ignite and so on. And from our perspective, that all forms part of what we call value. So that's probably the answer to that question. Eric Choi: Got you. And sorry, just jaws is obviously a big talking point today in costs. I guess that first half cost growth was 9% is a little bit misleading because of timing and COGS. So I just wanted to make sure you guys are still gunning for positive Australian jaws into FY '27 and beyond? And you previously said you can invest in AI within the current cost envelope. That sounds unchanged. And then I guess that AMAX/COGS steps away next year as well. So yes, can you just confirm that to draw into the medium term? Janelle Hopkins: Yes. Absolutely. We will continue to target open jaws for Australia and for the group. And yes, as we've already said, yes, AI costs and investment is increasing. But on the flip side, there is additional productivity that is starting to come through. We're already evidencing it and will continue to come through into the future. So that gives us the ability to increase the velocity of what we deliver and/or if we wanted to, to drop it out to the bottom line. So that's why we're confident around being able to do more with AI within our cost envelope that we set. Eric Choi: Got you. Just the last one, just finally on capital management. Just -- can you just quickly talk us through the thinking behind the $200 million buyback? I suspect the share price is still too much and you guys have got $500 million of cash balances. So I suspect we shouldn't read too much into whether this makes M&A any more or less likely? Cameron McIntyre: No. I mean the rationale is clearly that we believe that we've got surplus capital. And given that we have a very strong balance sheet and cash flow, which you can see and the business generates. And it also, I guess, reflects the confidence that we have in the outlook of the company, while also enabling us to sort of continue to invest as opportunities arise in the future. So we think it's just -- it's a good tool to add in terms of delivering good outcomes for shareholders when it comes to capital management. But from our perspective, we keep our powder dry to when it comes to thinking about opportunities to invest in other things as we go along. Operator: Next question is going to come from the line of David Fabris with Macquarie. David Fabris: Look, my first question, can I just ask about the AI investment a little differently? I mean you guys have been making small acquisitions. But if acquisitions slow down or take a pause, does that mean you need to spend more to keep up and innovate, so OpEx and CapEx would theoretically increase? Can you clarify that, please? Cameron McIntyre: No, thanks for the question, David. I don't think so. I mean, if you look at the M&A that we've done more recently, it's adding incremental capability to the organization. It's adding nice to have a capability to the organization, particularly around data, which you can see through the likes of Arealytics and Neighbourlytics. So I think -- I don't think it changes the profile of CapEx or OpEx spend going forward. As you've seen, the transactions are small. And we've been investing in AI for a very long time. And you can see the CapEx to revenue ratio has not changed. In actual fact, it's come down in the last 6 months. So I don't think any M&A would change our profile. David Fabris: Yes. Perfect. And then just my second question. Look, there's been a lot of discussion out there in Australia at the moment about possible changes to capital gains tax on housing. Have you got any views on how this may impact listing volumes, be it positive or negative, if something does pass? Cameron McIntyre: I guess we seem to go through this debate or discussion every 5 years or so. I guess we won't know until we see regulatory change, but I guess from an REA perspective, any change that increases listing volume is good for us. So if capital gains tax changes and has people thinking about changing houses, well, that would be a good outcome for us if that was the case. Operator: Our next question will come from the line of Nick Basile with CLSA. Nicholas Basile: Cam and Janelle. Two questions from me. First one, just if I can get some comments or thoughts on how you're seeing the competition from, I guess, CoStar-owned Domain at the moment. What changes are they making and how you're responding? And then second one, just on AI. I guess, interested to know your thoughts on, I guess, what metrics matter in this environment? And of the various sort of improvements you've seen in terms of adoption of AI across your developer base or launch of products. How do we think about REA extending the current lead you have versus the competition? Cameron McIntyre: Thank you for the questions. Look, I guess, as a market leader, we're very focused on our strategy, our clear path, our direction and where we're heading as a business. And if I just focus on things like traffic, we've continued to build our traffic. We've continued to build engagement with our members. We've seen strong demand in terms of things like leads on the buyer side, yes, I think we're seeing the strongest buy-side leads that we've seen in 4 years, focused on sell-side leads as well, how we bring opportunities to our agents to sell homes. And so our focus is around addressing the needs of our customers and addressing the needs of consumers and providing them with better capability to reduce friction as time goes on. And so that's our focus as a business and what happens in the competition space is good for us. It keeps us sharp, but we're very focused on running our race. And just in terms of AI metrics that matter, I mean, you've seen some of the metrics in the slide pack. I mean, as an organization, we've been very focused on becoming an AI prime company, which means as individuals, as teams, AI is at the core of the things we do. And you can see that inside REA with things like our AI tools like Glean, and just the number of agents that are now in Glean, and the usage of Glean through the technology and the usage of many of the tools available to our tech team in the AI space and how they're being adopted and where they're being adopted. I mean they're all prime data points for us in terms of measuring how we're evolving as a company. And I guess the other thing that I tend to focus on too is just the speed at which we're now developing new capability. And with AI and the opportunity that we have with AI, what I'm seeing is that we're actually able to develop product much, much quicker than what we have historically done. And the quality of that product is very good. And a good example of that is just in terms of search. You saw in the slide pack just examples of conversational search and natural language search that we now have on the platform that we're experimenting with. I mean the time that it would have taken to build that sort of capability 10 years, it would have taken probably 2 years to build, and now it takes days to a month. And so what I'm seeing is acceleration of product deployment into market as being a prime metric that matters. And as we get product to market faster and address the needs of our customers and consumers faster, I think that sets us up for great outcomes into the future. Operator: Our next question will come from the line of Bob Chen with JPMorgan. Bob Chen: Two questions for me. Just the first one, just a follow-up on some of the earlier comments on AI monetization. I guess like what sort of pathways of AI monetization have you guys thought about? Like how will we be able to sort of measure that in sort of the medium term as you develop these new products and launch them into market? Cameron McIntyre: Yes. So I'll go back to my earlier response to Eric, which is, when we think about monetization, we think about it in the context of value that we're adding to our packaging. And so AI forms a component -- 1 of the components of that. And as we continue to build our AI capability through the business, we'll continue to add value for our customers in the AI space that they get to -- they get to leverage from over time. But I mean some of the other, I guess, indirect monetization that we see through AI is just some of the things that happened in the back end of the business as well. And -- if I think about what we're doing in the space of financial services and the automation that we're seeing there, and there's some illustration on that in the slide pack. I mean what that goes to is our ability to enhance the performance of our brokers, help them sell more finance in a more efficient and productive manner, and that all goes to monetization, too. So when we think about it, we think about it in the front end, and we also think about it in the back end, too. So... Bob Chen: Okay. Great. And then maybe just on the flexibility with the buyback and thoughts around M&A. I guess what is your current level of appetite for M&A? And are you thinking sort of smaller bolt-ons like we've been seeing over the last year? Or could there be a larger strategic M&A down the pipe? Cameron McIntyre: Look, I mean, I wouldn't make any comment on size, big or small. I mean, all I'd say is that REA remains a growth-orientated business. It's an acquisitive business, and you've seen us do acquisitions in the last 6 months as well. And what it comes down to is the opportunity and what that opportunity delivers to us, but more importantly, to shareholders in terms of returns to shareholders. And we're very focused on that as an organization. And so it will come down to opportunity. There's no 1 size that sort of fits all. Operator: Our next question will come from the line of Entcho Raykovski with E&P. Entcho Raykovski: Janelle, thank you for all the help over the years. Best of luck for the future. My question is, I mean, the first 1 is sort of obligatory AI-related question, but you've obviously launched a whole bunch of new products. I'm just curious, firstly, what sort of usage you've seen of realAssist and AI search to date since the launch? And just more broadly, in your view, is natural language search the future of search? Or do you expect there to be a high level of stickiness with filter-based search given that consumer experience. So that's the first question. I've got another one, but I might wait for the answer to this one. Cameron McIntyre: Okay. So look, I mean, the answer to search, and you can see we've got 2 forms of search that we're experimenting with, natural language and conversational search. Now for me, natural language search is a nice extension to traditional keyword search, but through a sentence as opposed to a key word. But the limitation with that is it tends to be searched by search. Whereas conversational search is quite a different experience because conversational search, you're -- it's contextual, it involves an AI agent that's responding and it generates a conversation, which takes you down interesting -- more interesting pathways. And I think it's more engaging from a consumer perspective. But we want to trial both because search, in particular, is an evolution, not a revolution. And you've got to allow consumers to evolve to it over time, and you don't want to rush it. If you rush it, you can come unstuck. So we're taking a very responsible approach to this to ensure that we're still maintaining and building on our traffic and engagement with consumers, which is why you're seeing multiple variations that we're testing. What was the other element of your question? I can't remember much? Entcho Raykovski: So just the comparison to filter-based search, which obviously is being used by a lot of consumers. So are you seeing a level of stickiness? Or are you seeing a willingness to adopt -- have a natural language or conversational search? Cameron McIntyre: Yes. I'll just say, too early to call on both. I think when we get to the full year, we will have much more data and insight to share with you. Entcho Raykovski: Okay. Great. And then the second one, I mean, I know you've spoken about this in the past, but I'm just conscious that sort of the environment is evolving. You've got a competitor out there who is, I mean, frankly, making some noise. So I'm curious on pricing for FY '27. Will it be impacted in any way by what your competitors do? Or do you view it as something completely independent of the competitive environment and effectively based on your product and what you see as your value proposition? Cameron McIntyre: You answered the question. As market leaders, we're absolutely focused on running our race. We're focused on delivering more value to our customers. We're focused on delivering more capability to our customers. And when we think about price, we think about value. So we -- and that's what we think about entirely. Entcho Raykovski: Okay. So I mean just for the avoidance of doubt, if you don't see hypothetically no price increases from some of the competitors, that doesn't sound like an impact to what you do. Cameron McIntyre: We think about our value. Operator: Our next question will come from the line of Roger Samuel with Jefferies. Roger Samuel: My first question is just on your yield growth. In particular, your guidance of 12% to 14% growth in FY '26. So you already did 13% in Q1, and you reported 14% today. So you're easily at the top end of that 12% to 14% range. I was just wondering, what are the moving parts? I mean you mentioned about geo mix before. Is there any reason to believe that geo mix could be a headwind in the second half? Or perhaps you need to think about your pricing in response to competition. And if I can just extend the question a little bit, are you still thinking about double-digit your growth going forward regardless of what the competition is doing? Janelle Hopkins: Yes. Thanks. Look, yes, we are targeting double-digit yield growth into FY '27, and that's -- we talk about yield deliberately, not -- which is price plus a number of other things. And look, on the 12% to 14% expectation, the moving part is geo mix. And that's really all it is. And the challenge we're seeing is that we saw it moves around. Q1 geo mix is flat. Q2 was up. We're seeing in the mix of where the overall listings are, it's very skewed, melt -- and it has been very skewed so far year-to-date. Melbourne and Sydney have been unbelievably strong in Q2, whereas Perth and Brisbane have been substantially behind where we thought they were going to be. Now at some point, that's got to start evening up. Now whether Melbourne and Sydney come back a little bit or Perth and Brisbane come up a little bit, that will have an impact on geo mix. And even within that, where the listings are in Melbourne and Sydney, are they in the high-yielding inner city or the lower yielding further out suburbs. So we're just flagging that. Our expectation at the moment is it's more likely that geo mix will be some form of a likely flat or drag. Very hard to predict that. Roger Samuel: Yes, just really the geo mix, then. Okay. My second question is maybe a slightly different question on AI. I mean what are you doing to improve the workflow of your customers being the real estate agents? Presumably their day-to-day activities would be impacted by new AI tools as well. Perhaps they're using some AI tools to improve their own workflow. But what can you provide potentially to that? Cameron McIntyre: Thanks, Roger. I'll do that one. So look, I mean, AI agents are at different levels of AI-based sophistication. And so you've got larger agent groups that have good technology, good thinking around AI and then there's a long tail of smaller agents that, frankly, probably don't have the time to think about AI. And our position is as market leaders, we need to lead, and we need to help the market understand and evolve with AI. And so we see it's our job to step in and where we can educate the market around what's coming with AI, where the opportunities are for them to generate productivity improvement from -- for their own -- within their own operations. So there's that element. There's the element, as I just mentioned before, delivering AI capabilities into areas like Ignite. And you'll see in the slide pack, there's some illustration of some of the things that we've already done for agents using AI. And you'll find over time that we'll just keep adding to that capability. But what we want to make sure is that the network understands AI -- they understand the opportunity and that we're helping them in that process of understanding it, too. That's probably the last question. Thanks, everyone, for joining the call this morning, and look forward to seeing you all over the course of the next couple of days. Thanks very much. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Claus Jensen: Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for 2025. My name is Claus Jensen, and I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Cecile Hillary. We aim to keep this presentation to around 20 minutes. And after the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten. Slide 1, please. Carsten Egeriis: Thanks, Claus, and I would also like to welcome you to our conference call, where I'm pleased to share the highlights of Danske Bank's financial results for 2025. Although the geopolitical situation overall continues to be challenging, the macroeconomic backdrop for our customers and thus our business in the Nordics continued to be stable and slightly improving during the year. This is clearly reflected in our financial results as 2025 has been a year of solid performance for Danske Bank. Measured in terms of profit before impairment charges, 2025 represented the best result ever. Net profit for the year came in at DKK 23 billion, equivalent to a robust return on equity of 13.3%. The result was based on improved income due to higher customer activity and furthermore evidenced by positive volume development. I'm pleased to see that despite the sale of our personal customer business in Norway and several rate cuts during the year, we were able to maintain net interest income at the same level as in 2024. The slightly lower net profit in 2025 was solely due to a more normalized but still a low level of loan impairment charges compared to net reversals in 2024. When comparing to the preceding quarter, core income came in better as a result of higher NII from an increase in lending and deposits and significantly higher fee income based on growth across all fee categories and in particular, from record high performance fees within Asset Management. Operating expenses came in line with expectations and credit quality remains strong. And as a result, net profit for Q4 amounted to DKK 6.3 billion, up 14% from the preceding quarter. And Cecile will comment on the details of the financial results later in this call. Let me talk about our strategy execution. It remained on track. And as we continue to see robust commercial momentum and invest in our business also as laid out in our strategy plan. During 2025, the scaling of our digital and our GenAI technological capabilities across the bank has been in focus, and we are now starting to see tangible results in our workflows, leading to improved productivity. And I'm really looking forward to presenting a more comprehensive update with our strategy update in connection with the presentation of our Q1 results on the 30th of April. And then I would like to comment on our capital distribution. Based on our strong earnings and our solid capital position, I'm pleased to announce the distribution of the full net profit for 2025. Ordinary dividend will account for 60% in accordance with our dividend policy. In addition, we propose an extraordinary dividend of 20%, taking total dividend per share to DKK 22.7 and a new share buyback program of DKK 4.5 billion in total, a payout ratio for 2025 of 100%. And then finally, on the financial outlook for 2026, which Cecile will elaborate on later, we expect a net profit of between DKK 22 billion to DKK 24 billion, driven by growing core banking income from continued efforts to drive commercial momentum. And then let me continue with the performance on the business units, and that's Slide 2, please. At personal customers, the financial performance has been solid with total income up 2% relative to the same quarter in 2024 and up 3% quarter-on-quarter. The performance was based on good customer activity that led to higher lending and deposit volumes, up 1% and 5%, respectively, relative to the level in 2024. The uplift in activity and volumes came from all our Nordic businesses, driven in particular by private banking and also home loans in Denmark and Sweden. In the Private Banking segment, 2025 was a year of strong momentum based on the continued execution of our strategic priorities. The investment business was supported by strong net sales, which helped lift assets under management to record high levels with Danske Invest retail funds reclaiming the market leader position in Denmark. In the housing market, activity improved in 2025. In Sweden, lending increased 1% in local currency with improving momentum towards the end of the year. The better traction in Sweden came from higher customer activity supported by a strengthened customer offering. In Denmark, housing market activity also improved in 2025, especially in the larger cities. Total lending was stable year-on-year, but our bank home loan product, Danske Bolig Fri grew another 12% compared to the preceding quarter and 44% year-on-year. The product now accounts for more than DKK 70 billion in lending, and the positive development is a testament to our flexible loan offering and ability to cater to the changing customer preferences. Furthermore, total income in Q4 was supported by a 14% increase in fee income, driven primarily by high refinancing activity for adjustable rate mortgages and by investment fee income. Costs came in higher in Q4 due to expected higher seasonal expenses, which explains the higher cost/income ratio. And then Slide 3, please. At business customers, 2025 was a year of solid financial performance based on strong customer activity that continued throughout the year. Total income was up 8% compared to the same quarter in 2024 and 5% quarter-on-quarter. And this was driven primarily by a positive development in net interest income based on a strong uplift in volume and activity-driven fee income. Lending as well as deposit volumes were up 5% based on growth in all countries. The increase in business momentum reflects the continued execution of our growth agenda as we welcomed new corporate customers. And as a result, we gained market share across all four Nordic countries. Return on allocated capital as well as cost/income ratio were in line with our targets. The increase in ROAC was supported by reversals of loan impairment charges on the back of continued strong credit quality. Business customers continues to be a key strategic focus for us. And in 2026, we will continue to strengthen our advisory capabilities, for instance, by investing in analytics to generate leads for advisers and improving the One Corporate Bank digital platform. And then Slide 4, please. Turning to our large corporate and institutions business. We are pleased that our continued focus on advisory solutions for our customers and our sustained efforts over the years to improve our business offering have shown positive results in 2025. Thanks to strong execution and customer focus, 2025 was a record year for LC&I. Firstly, we continue to see strong volume growth with corporate lending up 14% from the level in the fourth quarter of 2024, which supported a 15% increase in NII. Deposits, which by nature are more volatile, have seen a healthy overall trajectory, but also sizable fluctuations related to large corporate transactions. Secondly, in line with our strategy of growing our Nordic footprint, we are expanding our One Corporate Bank concept in the Nordic region. In 2025, we continue to win new house bank mandates within daily corporate banking. And in addition, 2025 has been an exceptionally strong year for our investment solutions. Assets under management grew 16% relative to last year and reached all-time high. Besides higher asset prices, we have successfully been able to grow net inflow and add new customer mandates within the institutional as well as the private banking segment. The impressive investment performance in asset management enables us to recognize performance fees of DKK 0.9 billion, up 27% from last year, which was already a year of strong performance. And then with respect to profitability and cost efficiency, the strong performance in 2025 has enabled LC&I to deliver significantly better compared to our targets. And then with that, let me hand over to Cecile for a walk-through for our financial results for the group, and that is Slide 5, please. Cecile Hillary: Thank you, Carsten. 2025 was a year of solid financial performance. Net profit for the group came in at DKK 23 billion compared to DKK 23.6 billion the year before. Total income improved mainly due to a 3% increase in fee income, reflecting increased customer activity and strong performance in asset management. NII was unchanged as the positive effects from increased volumes and a positive contribution from our structural hedge were able to mitigate lower rates. Operating expenses were in line with the level in 2024. Loan impairment charges came in at a more normalized but still low level, whereas we had net reversals in 2024. The results for Q4 came in at DKK 6.3 billion, up 14% from the level in the third quarter, mainly due to higher core income. NII benefited from positive volume effects. When excluding the tax-related contribution, NII was up 2%. Fee income was up 39% quarter-on-quarter as all fee income categories contributed positively with performance fees in asset management as the single most important source of fee income in the quarter. Trading income saw a decline in Q4, mainly due to seasonally lower customer activity in fixed income markets. Income from insurance activities was impacted by a model recalibration for the health and accident business that led to a net negative effect of DKK 200 million. The impact follows the annual update of model parameters as well as adjustments following an inspection by the Danish FSA. When looking at the net financial results in isolation, we saw a positive development from a better investment results. We continue to focus on repricing, preventive care and reactivation initiatives in the health and accident business to improve the financial outcome of insurance contracts and respond to current market trends related to long-term illnesses. Operating expenses came in higher in Q4 due to year-end seasonality related to performance compensation and severance costs. And finally, as credit quality continues to be strong, loan impairment charges were kept at a very low level. Slide 6, please. Let us take a closer look at the key income lines, starting with net interest income. NII for the full year remained stable as the headwind from deposit margins due to lower Central Bank rates was mitigated by an increase in lending and deposit volumes as well as improved lending margins and a positive contribution from the structural hedge, which grew to circa DKK 180 billion at the end of Q4. Relative to the preceding quarter, NII increased more than 4%, supported by a DKK 200 million tax-related effect. As interest rates were stable during the quarter, the impact from margins was insignificant; however, NII benefited from a continually positive development in volumes, particularly evident on the corporate side, whereas the impact from the structural hedge was similar to that in Q3. With respect to the deposit margin development, as I mentioned in Q3, the increase observed in Q3 relates to changes to our funds transfer pricing framework implemented in Q2 with the objective of allocating NII from the structural hedge to the business units. It is important to note, it is not driven by changes to customer pricing and does not impact group NII. Our NII sensitivity remains unchanged quarter-on-quarter. With respect to the outlook for 2026, we expect NII to grow, supported by stable rates and structural growth, particularly within lending. The outlook is, as always, subject to markets and balance sheet developments. Now let us turn to fee income. Slide 7, please. In 2025, fee income amounted to over DKK 15 billion, corresponding to a 3% increase compared to 2024. This represents a record high level for Danske Bank based on high customer activity and strong performance in asset management throughout the year. Relative to the third quarter, fee income was up 39% in Q4, mainly driven by sustained strong performance in asset management that led to record high performance fees, up 40% from the same quarter in 2024. In addition to higher performance fees, fee income was supported by continued growth in assets under management with positive net sales for all categories of clients. AUM ended the year at an all-time high of over DKK 1 trillion. Income from financing had a positive effect in Q4, driven by higher corporate activity and a seasonally solid refinancing activity at Realkredit Danmark. Within our Capital Markets business, fee income in Q4 benefited from a continuation of good DCM momentum and a rebound in activity in ECM. Next, let us look at net trading income. Slide 8, please. Overall, we have seen a stable development for trading income in 2025. With positive value adjustments in treasury, the headline number was up 8%. Stable customer activity, mainly within fixed income, further contributed to the results. In Q4, trading income came in lower due to seasonally lower customer activity at the end of the year. This concludes my comments on the income lines. Let's turn to expenses. Slide 9, please. Looking at the development for the full year, operating expenses are in line with our full year guidance of up to DKK 26 billion. We have managed our cost base as expected and mitigated the impact of inflation, which supported a slightly improved cost-to-income ratio of 45.5%. Relative to the level last year, costs were in line as the intended structural cost takeouts and the lower contribution to the resolution fund mitigated the impact of wage inflation and performance-based compensation. The relatively modest increase in digital investments in 2025 should be seen in the light of the significant ramp-up we made in 2024. Furthermore, we executed structural cost takeouts within our Financial Crime Prevention division. Going forward, ongoing efficiency in that division will mainly come from technology improvements with a limited reduction stemming for post-resolution rightsizing. Relative to the preceding quarter, Q4 costs were impacted by year-end seasonality, including performance-based compensation, severance costs and investments in our tech transformation. We intend to maintain the same focus on cost discipline in 2026 whilst continuing to invest in our digital and commercial agenda in line with our growth strategy. Accordingly, we expect expenses in the range of DKK 26 billion to DKK 26.5 billion in 2026. Slide 10, please. Turning to our asset quality and the trend in impairments. Throughout 2025, our well-diversified and low-risk credit portfolio benefited from a benign macroeconomic environment, particularly in Denmark, with sustained low unemployment, real wage growth, improving household finances as well as strong corporate balance sheets. In Q4, our strong credit quality underpinned another quarter of low impairment charges amounting to DKK 35 million, which took full year charges to DKK 294 million, equivalent to 2 basis points of our loan portfolio. Actual single name credit deterioration remains modest, and we continue to benefit from modest stage migration. Charges related to our macro models were negligible in the quarter, and we continue to apply both the downturn and a severe downturn scenario. With reduced external uncertainties in the commercial real estate sector, including lower and stable rates, our post-model adjustments review resulted in net releases of DKK 300 million in Q4. Although the PMA buffer has overall been reduced, we have bolstered the buffer related to global tensions further, and we continue to apply a prudent approach to cater for potential risks and uncertainties that are not captured through our macroeconomic models. We will continue to review the PMA buffer sector by sector going forward. I would also like to emphasize that our impairment guidance for 2026 of around DKK 1 billion remains below our normalized level but is not predicated upon significant PMA releases. Slide 11, please. Our capital position remains strong and has consistently been supported by a healthy capital generation throughout the year. At the end of Q4, the fully phased-in CET1 ratio was 17.6% when including the effects from the adoption of the new conglomerate directive that took effect on January 1. Furthermore, the ratio includes the full deduction of the additional 40% distribution of the net profit for 2025 announced this morning in addition to the already accrued dividend of 60%. The increase in risk exposure amount in Q4 relates to higher operational risk REA, which as per normal practice, is subject to an end-of-year calibration that reflects a higher top line and profitability as well as lending-related credit risk REA. We continue to operate with a healthy buffer to the regulatory requirements as we steadily execute towards our capital target of above 16%. We will provide more detail on our capital trajectory with our strategy update in connection with the presentation of our Q1 results. With that, let me turn to the final slide and outline our financial outlook for 2026. Slide 12, please. We expect total income to be around DKK 58 billion. This will be driven by growing core banking income and the continued commercial momentum and growth that we see in our markets. Income from trading and insurance activities remain subject to financial market conditions. We expect operating expenses in the range of DKK 26 billion to DKK 26.5 billion in 2026, reflecting our growth ambitions and continued investment spend alongside a sustained focus on cost management. Cost-to-income ratio is expected to be around 45%, in line with the target for 2026 announced at our strategy launch. We expect loan impairment charges to be around DKK 1 billion below our normalized loan loss ratio as a result of continued strong credit quality. We expect net profit to be in the range of DKK 22 billion to DKK 24 billion. Slide 13, please, and back to Claus. Claus Jensen: Thank you, Cecile. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by e-mail. A transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session. Operator: [Operator Instructions] We will now take the first question from the line of Gulnara Saitkulova from Morgan Stanley. Gulnara Saitkulova: So my questions are on NII evolution. You saw a negative contribution from the structural hedge this quarter as well as the strong positive contribution from other income. Could you walk us through the key drivers behind the higher contribution in other income? And how should we think about it going forward? And looking ahead to 2026, how should we think about the main moving parts of NII, including the expected impact for structural hedge? And my second question also on NII. You mentioned that NII expected to grow in 2026. Based on current visibility, do you think the consensus estimates for this year NII are appropriately calibrated or the market may be over or underestimating the outlook? Carsten Egeriis: Thanks for that. Let me take the first more general question, and then I'll hand over to Cecile for the other income and the moving parts on NII evolution, including the structural hedge question. I think overall, we're guiding to higher core income. So we expect to see an increase both in NII and in fees and the higher -- the total income we've guided to around DKK 58 billion. So I think you can sort of roughly calibrate that against current consensus. Cecile, do you want to talk about the moving parts of other income and then the structural hedge? Cecile Hillary: Yes. No, absolutely. So obviously, beyond these effects that Carsten mentioned, I'll talk about the structural hedge and then I'll talk about the other income. On the structural hedge, look, the lift that you've seen year-on-year is obviously the one to focus on. I wouldn't focus too much on the quarterly effect in the sense that, look, we've got obviously a roll-off from our bond portfolio and those roll-offs happen in different quarters, right? So you might have slight ups and slight down in one quarter. But the overall effect for the year is the one to focus on, which leads me to talk about the structural hedge for 2026, and then I'll take the other income question. So the structural hedge for 2026. We will continue to provide lift. So year-on-year, you can expect a positive contribution from the structural hedge. I would note as well that you've seen that we've increased the structural hedge notional from DKK 170 billion as at end of Q3 to DKK 180 billion. So that's on the structural hedge. On the other income, and you can see indeed the other, including treasury of DKK 262 million from Q3 to Q4. Look, this is mainly the tax effect of DKK 200 million. And then the remainder -- so obviously, that tax effect is by definition a one-off, right, which you shouldn't assume going forward. And then the rest is a treasury effect. And obviously, we see ups and downs mainly down to the sort of market value impact of derivatives year-on-year. That's typically linked to the hedging we do on the cross-currency side. So that's on the other income. So obviously, again, 2026 in terms of your expectations, you should see an NII that is slightly up compared to the 2025 results overall. Operator: We will now take the next question from the line of Shrey Srivastava from Citi. Shrey Srivastava: Two for me, please. The first is, I believe you were at DKK 150 billion notional in Q2, and now you're at DKK 180 billion. So you've increased the size of the hedge quite significantly. Could I ask first for the rationale for this? And secondly, do you have a target notional for the structural hedge in terms of a percentage of stable and operational deposits? Or how do you think about it? And my second one is you've obviously done fairly well in large corporates. You've had double-digit loan growth for the year. And you previously remarked how you maintain -- you remain below your natural market share in certain segments. Can you talk a bit about what specific areas you expect to drive growth in the future? Carsten Egeriis: Yes. Thanks for that. Let me take the second question, and I'll hand over to Cecile for the for the question on the hedge increase and the target hedge and rationale. On the loan growth side of things, and now I talk across the sort of corporate banking business, so both our business customers and our large corporate institutions business. Our strategy is to continue to build a leading Nordic wholesale bank and a leading bank for business customers with more complex needs. That was the strategy we launched back in June '23. And we've seen solid growth and continued market share gains in those segments. And it's really all about how we bring to life our total One Corporate Bank and institutional platform, utilizing our strong product factories, utilizing our strong advisory capabilities and combined with our strong digital and technology platforms. And really, when you look at all the Nordic countries, we still believe that we have plenty of growth opportunities. Our market shares continue to be relatively small outside of Denmark. So we have much more opportunity to grow across Norway, Sweden and Finland. And then at the same time, we also believe that with a strong and growing economy in Denmark, we have opportunity to continue to grow there as well. And I think just again, in terms of like whether there are sectors, industries, et cetera, I mean, I would say it's pretty broad-based growth we've seen. There is no question that we believe that we're going into one of the larger investment cycles of our time, driven by energy transition, by defense, by the changes happening in technology. But at the same time, also, again, a pretty robust and healthy Nordic economy more generally. So broad-based growth, but clearly also some pockets of extra opportunity. Cecile? Cecile Hillary: Great. So I'll take the -- your structural hedge question, Shrey. So you've asked two questions. One about the rationale for increasing the hedge to DKK 180 billion in Q4? And then secondly, what is the target notional. So on the rationale, well, look, the structural hedge is well, exactly what it says, which is there to really hedge our stable deposits and liabilities. You've seen the increase on the deposit side, particularly in the retail sector, which is obviously part of our stable deposit base and the strong performance there, right, with 5% year-on-year on the deposit side in the PC sector. That increase in deposits and that stability allows us to continually look at the size of our structural hedge notional and that has led to the increase alongside our objective to be hedged for NII and provide the NII stability or NII uplift that you can expect in the current rate environment. So that hedging focus on the one hand and also the trajectory of our deposits explain where we are. On the target notional, look, I think at DKK 180 billion for the bond portfolio, we are well hedged. Having said that, I would also point out that we obviously have a loan hedge portfolio in addition to the bond hedge portfolio. The loan hedge portfolio is about DKK 200 billion. I would also point out that, that loan hedge portfolio has got some optionality. It's not as perfect a hedge as the bond hedge portfolio, which itself has a 3.5-year average life, but these are the details I can give you. So going forward in terms of the target notional, we're pleased with DKK 180 billion. Where will the trajectory go? Look, I'm not calling for any increase at this stage, although we may see some modest increases in 2026, but it will be either stable or potentially slightly increasing. We also have to see the trajectory on our deposits, of course. Operator: We will now take the next question from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So my first question would be, we have elections in Denmark, if I'm not mistaken, in the second half of the year. There has been some noise in the local press about, I think one of your ministers is kind of suggesting that maybe the fees that the banks are charging are too high. Do you see any risk for any fee caps to potentially be introduced in Denmark? And what could that potentially mean for Danske Bank? And then my second question would be on price competition. We saw, I think, last week, both Nykredit and Danske cutting some of the pricing on the mortgage products. Could you just walk us through the competitive environment? What does these price cuts that you announced last week mean? And how should we think about the margin evolution in 2026? Carsten Egeriis: Sure. Thanks for that. I don't expect that there will be any intervention in terms of sort of price or usually caps. I mean the discussions in -- by the Business Minister has been around competition and increasing transparency and increasing ease of moving bank accounts. And those are all things that, in fact, we support in Danske Bank. So we continue to deliver very competitive products, continue to focus on how to make it even more transparent and easy to move banks. So we're not concerned about any intervention in terms of caps or the like. On the price competition in mortgages, we, in fact, continue to be very focused on competing in the segments where we believe that we can differentiate for our customers. And the mortgage market in Denmark is an important market in the sense that it's an important product for our customers, and we continue to be focused on delivering sort of a broad banking relation for our customers. And therefore, we have chosen to -- on a more sort of focused and targeted competitive approach to lower pricing on some of the fixed rate interest-only mortgage products. And we don't -- again, keep in mind, this is a relatively small pocket of the -- of our overall lending. And therefore, we don't see that this will impact margins. We -- looking into '26, I think at a very high level, we continue to believe that margins, and I'm talking overall now margins across deposits and lending will be fairly stable. Operator: We will now take the next question from the line of Tarik El Mejjad from Bank of America. Tarik El Mejjad: I just want to come back on your growth opportunities and with a focus on Sweden. In the past, you've been giving some snippets on -- hints on where you would grow. Can you tell us a bit where -- how do you see the corporate actually competitive environment in Sweden and how a franchise like yours can actually fit within this competition? And then second question on capital return. I know you will present all this with Q1. So it's more on the on the way you would think about distribution, not the quantum. A few banks now have moved into -- start to distribute the ongoing earnings earlier, like by executing buybacks earlier, which shows as well of confidence on earnings delivery. Is that something you would consider? Or it will be, let's say, '26 earnings with execution in '27? So just to understand whatever distribution you announced with Q1 results, how quickly this could be implemented? Carsten Egeriis: Thanks. Let me take the first one and then, Cecile, I hand over to you for the capital return dynamics and distribution dynamics. On Sweden, we have, over the last few years, increased our market share steadily across all of corporate banking and the institutional business for that matter as well. And we have seen since the launch of the new strategy, a larger inflow of new cash management customers than what we had targeted back when we launched the strategy. This is a very focused part of our strategy is to grow our customer base to get new cash management customers in and then again, to deliver our total One Corporate Bank for our clients in Sweden. The customer intake is really broad-based. There is some customers that are growing and therefore, need a second or third bank, and there are also some customers where we become their first bank. And also when I look at sector and industry, it's broad-based. We've continued to invest in advisory capabilities and talent in Sweden as well as continue to invest, of course, in our One Corporate Bank platform, which, of course, benefits all of our customers. So we see our strategy working. We see it in the market share. We see it in the activity. We see it in the customer satisfaction, where we're also strongly positioned on the Prospera customer satisfaction, not only by the way, in Sweden, but also across the Nordics. Cecile Hillary: So let me take your question, Tarik, on the capital return and the distribution. And let me outline how we view our regular capital distributions. Indeed, in terms of split, it's a 60-20-20. That's in line with last year, 60% ordinary dividend and 20% extraordinary dividend, 20% share buyback. As far as the rhythm of this regular capital distributions are concerned, they're annual. And really, this is not something that we've got any plan to change at this stage. Operator: We will now take the next question from the line of Mathias Nielsen from Nordea. Mathias Nielsen: Congratulations on the strong end to '25. So my first question goes a bit about cost and cost inflation. Like obviously, it seems a bit high in Q4, but I also understood the comments about compensation and seasonality. But you also guide for a bit higher cost inflation next year of between 0.5% and 2.5%. Is there anything that has changed there? And like how should we think about the point in time where we start to see productivity from AI investments and so on offsetting the investments, so to say, so like you get back on that? And then secondly, related to this and maybe a bit on private banking in general, it seems to lag a bit on the cost income target versus where you want to be. It also seems like the lending growth is a bit subdued compared to what we see in the other segments. Is there anything structurally that is not well working at personal customers yet? Or is it just a matter of time? Or how should we think about that before that is also on the same trajectory as we see in the other segments that you have? Carsten Egeriis: Thanks for that. Let me start by personal customers. In fact, since we launched our strategy, we see the following sort of really positive momentum, and that is we see customer inflow in private banking. We see customer inflow in the personal customers with more heavy advisory needs, and we typically segment those as customers with potential wealth above DKK 1 million that really require not just the product set, but also the advisory capabilities. So we see customer net flow in those areas inflow. And we also see market share gains on the investment side, and we overtook -- again, we took our first position as the largest investments market share in Denmark, which, of course, also has a very close link to the fact that both our private banking and the higher end of the personal customer segments are doing more business with us. We're also seeing increased insurance, Danica insurance penetration into those customer segments. And you see that really reflected, of course, in the solid fee income progress. Where we'd like to see more progress is on the mortgage side and is on the sort of mass retail flows. And there, you're right, it is something that takes a little bit longer. There's both sort of rebuilding reputation, continually being out there in the market from a marketing and positioning perspective. But we believe that our digital and technology platform, all the investments we've made, both on Panorama, which is our sort of comprehensive advisory platform to our mobile banking platform, including the housing portal in the mobile bank to our rollout of, for example, our AI chatbots, which provide a better customer experience. All those things, we believe, position us to be able to increase not only the growth in the focus segments, but also in the mass retail. Just a comment on cost, and then I'll also ask Cecile to comment on it. It is true that you see slightly higher costs into '26. '26 will be the largest investment year we've had. So we are investing heavily in our business, in technology, in advisory, in digital. At the same time, we are seeing beginning impact on productivity. I mean we've seen impact from productivity over the last few years, but we're seeing increasing impact of productivity as we roll out various different AI solutions. It is also something we'll talk a little bit more about when we get to our strategy update. So important to say we're investing heavily in the business. We are seeing productivity. We're also seeing continued benefits from lower costs on financial crime and other remediation. But perhaps, Cecile, you also want to comment on the costs. Cecile Hillary: Yes. Let me comment on the -- on the cost, Mathias, and I'll take your questions, which were about 2025 and Q4 specifically. And then, of course, the outlook into 2026, and I'll try and unpack a bit this guidance as well to give you more information there. So on the 2025 side, clearly, we're pleased to have ended the year on expenses in line with our guidance of under DKK 26 billion at DKK 25.85 billion as we guided all along. And as we guided as well in the last quarter, Q4 would be higher. You can see that we've had an increase of about DKK 350 million versus Q3 with respect to the staff costs, including severance and performance-based compensation, which obviously allow us to adapt our workforce to the new skills that we require and the new services that our clients also expect from us as well as beyond the staff costs, obviously, the investments, including digital investments, which you can see as well of above DKK 270 million, which we've done quarter-on-quarter. So as Carsten mentioned, our growth and our transformation strategy obviously require these investments, but also these staff costs, particularly when it comes to severance and performance-based compensation. So that's Q4. Now let me talk a little bit more about 2026 and our cost outlook. So you will see that we've provided effectively a dual guidance. One, we reiterate our circa 45% cost-to-income ratio. for 2026, which is the same as we guided at the launch of our strategy. So that hasn't changed. And then we gave a further range of DKK 26 billion to DKK 26.5 billion in terms of the cost outlook because we thought it would be helpful to effectively range bound the lower and upper bound of our costs for the year. So let me give you a little bit more insight into this cost range. So firstly, you can assume an inflation headwind around our cost from 2025 of about 3%. That inflation headwind will be fully mitigated by the efficiencies under the 428 strategy from our investments, which Carsten was mentioning. And as Carsten mentioned, we will go into these efficiencies and the tech and AI impacts, in particular, a little bit more during our Q1 update on the strategy side as well on 30th of April. Then beyond this inflation headwind of 3% mitigated by efficiencies, we, of course, have costs linked to our growth. So we assume growth in the business. But the rest is really investments, digital, including tech and AI as well as nondigital. And the approach that we have, which is why we wanted to show this range is a stage-gating approach. So effectively, depending on the momentum in the business, we will adjust our costs and our investments to be within this DKK 26 billion to DKK 26.5 billion and obviously meet our cost/income ratio target as well. Mathias Nielsen: Maybe just a follow-up on the Personal Banking. So when we look at the cost income like moving a bit above where you want to be, do you see that as an income issue or mainly a cost issue? How -- didn't really come across like Super clear, what is the delta to reach the target from your perspective? Cecile Hillary: Yes. No, absolutely. Look, a couple of things I would say. I mean, firstly, obviously, I would point you to the ROAC, which is extremely strong in that business. I mean you can see that it's actually above our target. And in terms of run rate in the fourth quarter ended up at 31%. So we're obviously very pleased with the profitability in that segment, which is led by all the initiatives and outcomes that we've seen, including in private banking that Carsten went through earlier. When it comes to the cost to income, look, we are investing, obviously, heavily in that area. These investments are clearly digital. We've upgraded our mobile app. For instance, we've provided some very significant tools that are already showing a very good amount of traction in terms of our relationship advisers and the tools that they have for their clients. And we will continue to invest. And that obviously is something that we're doing with an eye on the overall group costs, as I mentioned earlier, and again, on the ROAC of the area. Operator: We will now take the next question from the line of Martin Gregers Birk from SEB. Martin Birk: Just coming back to one of the last questions on volume growth and especially volume growth in this quarter and perhaps zooming in on large customers and also business customers, a quarter where you should have had quite decent benefit from FX. And it seems like Q-on-Q volume growth is fairly muted and it sort of breaks the trend from the previous three quarters. What's happening in this quarter specifically? And then also coming back to asset coming in -- talking about asset quality. Your impairment guidance is for lower than your normalized next year. I appreciate that you have reduced PMAs by roughly DKK 1.3 billion over the recent two years, but the DKK 5.4 billion still seems relatively high, both in Nordic and in a European banking context. Where would you see this go? Or what is it normalized level for this given your positive outlook on impairment charges? Carsten Egeriis: Thanks for that. I think on the volume growth Q4, on BC, in fact, we continue to see growth quarter-on-quarter. So pretty solid continued momentum. It's true that in LC&I, Q4 was more flattish, but it's not something that concerns us. I mean we -- when we look into 2026, we believe that pipeline and activity looks good. And again, of course, the stable Q4 is on the back of a growth rate of 14% year-on-year. On the asset quality, we see very solid asset quality. And as you also see in the staging, very solid sort of trends in Stage 2 and 3. So it is true that although we do have a little bit of release on the post-model adjustment side, it is still a high level of post-model adjustments that we have. If I sort of look at it through the cycle, that is very much driven, of course, by continued macro and geopolitical uncertainty. But as I've also said before, you should expect those PMAs to come down gradually as we get more certainty and visibility. That's, in fact, also what you've seen, particularly in commercial real estate as inflation and rates have come down and that, that has normalized more. So again, yes, continued view that it is on the higher end and that with the current economic environment, our base case, you should expect that to continue to come down somewhat. But again, also being very clear that there is an exceptional amount of geopolitical uncertainty. And therefore, we're also being cognizant of that, which is reflected in the PMAs. Martin Birk: And you wouldn't say that the volumes development that you see in Q4 is a function of particularly one player increasing its appetite on Swedish SME and corporate markets. I didn't hear that, sorry. Carsten Egeriis: No, no, I wouldn't say that. Claus Jensen: Operator, can we have the last question, please? Operator: We will now take the last question from the line of Riccardo Rovere from Mediobanca. Riccardo Rovere: Two, if I may. The first one is on the capital target. You technically have more than 16%. That is unchanged, but your common equity Tier 1 ratio stays more or less in line with the rest of the Nordic bank anywhere between -- in the range of 17.5%. So I was wondering how should we read the more than 16% because I would guess that this is interpreted at maybe 16.5%, but your common equity is way ahead of that. The second question I have is not clear to me if you have -- if your guidance on losses includes the use of PMAs or some of the use of PMAs in '26. And then if I may, a final one, the new conglomerate direction gives you some more headroom or some regulatory advantage in -- for bolt-on acquisitions in the asset management or insurance space eventually? Carsten Egeriis: Yes. I mean just a short comment on the last one. It's not something that we are looking at actively. Of course, we have a life insurance company in Denmark. But otherwise, it's not something that we're actively looking at, but there could be benefits in the future from accounting, but it's not something we're focused on. On the loss guidance, the loss guidance excludes any changes for post-model adjustments and the loss guidance of DKK 1 billion, much in line with last year is our best view given kind of the benign macro environment that we're looking into and the benign asset quality that we're seeing. And then Cecile, maybe you can comment on the capital targets. Cecile Hillary: Yes, absolutely. So on the capital targets, obviously, Riccardo, it hasn't changed, right? So it's still above 16%, and we're not going to -- we're not planning to change it at this stage. You are right that at a CET1 of 17.6%, we obviously have excess capital, which is something that we've obviously discussed and it's a regular topic of discussion with analysts and investors alike. We are planning to address this topic and the glide path when it comes to our capital in the context of our Q1 results. So that will be on the 30th of April. So I will ask you to bear with us until then. But look, I mean, I think in terms of capital, obviously, we benefit from a very strong capital generation year-on-year. That's been the case certainly since we launched our strategy, and we've been constantly quarter-on-quarter hovering between the sort of 250 and 300 basis points annualized capital generation, which is obviously a positive thing. So the 17.6%, just to confirm, obviously includes fully loaded, so the impact of the conglomerate directive as well. And I will also -- just one last thing. Obviously, you know that our capital requirement is 14.8%, right, on the risk side. So above 16% is obviously the target. Carsten Egeriis: Okay. Well, thank you very much, everyone, for your interest in Danske Bank and your questions. Much appreciated. And as always, please reach out to Claus and our IR department if you have any other questions. Thanks very much.
Operator: Good morning, ladies and gentlemen, and welcome to Modine's Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations. Kathy Powers: Hello, and good morning. Welcome to our conference call to discuss Modine's third quarter fiscal 2026 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. The slides that we will be using for today's presentation are available on the Investor Relations section of our website, modine.com. On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. With that, I will turn the call over to Neil. Neil Brinker: Thank you, Kathy, and good morning, everyone. Before launching into our quarterly results, I'd like to take a moment to review some of the details from last week's announcement regarding the future of our Performance Technologies segment. Since launching our transformation at our first Investor Day, we have made significant progress evolving our portfolio of businesses by investing in high-margin, high-growth businesses while improving our lower-margin businesses and making strategic divestitures. This past summer, we launched a process to divest our remaining automotive business and instead identified an opportunity to accelerate our transformation by spinning off the Performance Technologies segment and combining it with Gentherm, a leading player in thermal management and pneumatic comfort technologies. Modine will receive approximately $210 million in cash and Modine shareholders will receive stock in the new business in a tax-free distribution equaling 40% of the combined ownership. The combined business will provide renewed focus on investment and growth for Performance Technologies business and create cross-selling opportunities for Gentherm across new attractive markets. This values the Performance Technologies business at $1 billion or 6.8x the 12-month trailing EBITDA. This recognizes and reflects the hard work we put into improving margins in the business and allows current Modine shareholders to participate in future synergies and the strong earnings conversion we expect from the business once market volumes improve. The transaction presented an exceptional opportunity to find an ideal home for our PT business while maximizing value for our shareholders and further accelerating our transformation. The remaining business will consist of our current Climate Solutions segment plus corporate support functions. This is a business where we've been focusing on our investments for growth, including 6 acquisitions over the past 3 years and the significant CapEx for expanding capacity for our data centers product. The transaction will allow us to further concentrate on these high-margin, high-growth businesses, allowing us to become a pure-play, highly focused diversified climate solutions company. This is the right transaction for Modine and for the shareholders at the right time, allowing us to further our vision of always evolving our portfolio of products in pursuit of highly engineered, mission-critical thermal solutions. Now turning to our quarterly results and the strategic updates. Please turn to Slide 5. Our end markets in the Performance Technologies segment continue to be challenged and volumes remained down this quarter. However, commercial execution and cost recoveries resulted in revenues increasing 1% from the prior year. The segment's adjusted EBITDA margin increased by 400 basis points to 14.8%, reflecting the hard work done over the past year to reduce costs and reallocate resources to the Climate Solutions segment. Now that we've reached an agreement with Gentherm, the next several quarters will be spent preparing the business to be spun off in anticipation of the combination. We will also be working on getting the necessary regulatory approvals for the transaction, which we expect to close in the fourth quarter of this calendar year. The Performance Technologies team has worked very hard to improve the business over the past several years and deserves the opportunity to grow. I'm confident that Gentherm will provide a great home for this business and the structure of this transaction will allow Modine shareholders to continue to participate in their success. We are at a major turning point for Modine. We are making unprecedented investments in the future of our company while simultaneously accelerating the transformation of our portfolio by merging our Performance Technologies segment with Gentherm. Please turn to Slide 6. Our Climate Solutions segment delivered another quarter of outstanding growth with a 51% increase in revenues, including the contributions from acquisitions. Organic revenue growth from the segment was 36%, driven by a 78% increase in data center sales. Our capacity expansion remains on schedule, supporting the sequential margin improvement we saw this quarter. We commissioned 4 new chiller lines this quarter, including the first 2 lines in Jefferson City, Missouri. We have 4 lines scheduled to come online in the fourth quarter, the final 2 lines in Grenada, Mississippi and the first 2 lines in Dallas. We have also launched initial production in Franklin, Wisconsin, providing additional capacity for the products currently produced in Calgary, including air handling units and modular data centers. We are often asked if we are concerned about ending up with too much capacity. And the simple answer is no, not at all. Our current projections fully support the capacity we're putting in place based on known demand with existing customers. In fact, we had record order intake this past quarter, further solidifying our confidence in our strategy and financial projections. Looking forward, if there's change in the mix of the products that we need to produce, we'll easily be able to pivot to other data center products on the same lines we are building today. A chiller line can be converted to produce modular data centers or large air handling units. This gives us flexibility to manage future demand and meet customer requirements in what continues to be a dynamic environment. We've also received many questions regarding the recent comments on the ability of next-generation chips to operate at higher temperatures and the potential impact to the future of data center cooling. First off, none of this was a surprise to us. We are constantly working with our customers to ensure that we are designing the data center cooling solutions they need today and into the future. Having a higher ambient temperature for water running through the liquid cooling loop is a positive development as it potentially reduces the energy required to run mechanical cooling processes by leveraging a hybrid technology utilizing free cooling options currently available on our chillers. In fact, we recently announced the launch of a new 3-megawatt turbo chilled chiller platform that is specifically designed to provide advanced free cooling heat rejection for high-density next-generation GPU-powered data centers. Power remains a focus for data center operations, so increasing PUE by reducing energy consumption in the cooling process is a major advantage and why we continue to gain market share. It is also important to realize that there are many different approaches to data center cooling, and our goal is to provide a full range of solutions that are customizable at scale. We see our market opportunities continue to grow as we continue to invest in both capacity and product development to cement our position as a technology leader in the market. We previously shared our target of delivering over $1 billion in data center sales this year, and we remain on track to deliver on that goal. We have also shared that our current capacity expansion will allow us to reach $2 billion in data center sales by fiscal 2028. And I'm happy to report that we remain confident in this target as well, further supported by our record order intake last quarter. We've recently updated our data center revenue projections and currently expect to deliver 50% to 70% annual growth in data center revenue over the next 2 years, which would put us comfortably ahead of this target. Our confidence in this target comes from understanding our customers' long-term strategic road maps. The industry is moving towards long-term supply agreements that lock up supplier capacity in advance. Our team is actively engaged in these discussions, which we expect to lead to multiyear orders. Our recent success and growth stems from our 80/20 focus and market-leading technology. The feedback from our customers is clear. Our products are the most efficient on the market, resulting in substantial savings from lower energy costs. This allows us to be a key partner in developing next-generation cooling products, cementing our role as a key strategic supplier. As we scale our production capacity, we are in a prime position to continue capturing market share. I'm very proud of all the hard work put in by the Climate Solutions teams this year. We've completed 3 strategic acquisitions and embarked on the largest capacity expansion in the history of the company, all squarely in line with our strategic goal of investing in high-growth, high-margin businesses. With that, I'll turn the call over to Mick. Michael Lucareli: Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to begin reviewing the Q3 segment results. Performance Technologies revenue increased 1% from the prior year, including a 3% decrease in heavy-duty equipment, offset by a 6% increase in on-highway product sales. Despite typical Q3 seasonality and end market challenges, adjusted EBITDA improved 38% from the prior year, and the adjusted EBITDA margin increased 400 basis points to 14.8%. The margin increase was driven by significant cost reductions and improved operating efficiencies across labor, overhead and materials. Pricing was also a benefit in the quarter, driven by tariff recovery through surcharges and our normal pass-through mechanisms. In addition, with the reorganization of this business, SG&A expenses were nearly $7 million lower versus the prior year. As we look to Q4, we expect a sequential ramp in revenue, which will be primarily driven by the typical seasonal pattern. We remain focused on costs and operating efficiencies, which will allow us to drive higher operating leverage and margins when market volumes begin to recover. Please turn to Slide 8. Climate Solutions delivered another quarter of strong revenue growth, increasing sales by 51%. The main growth driver was data centers, which grew $130 million or 78% as we begin to capitalize on our investments and utilize the new capacity. As anticipated, there was a 31% sequential revenue growth for data center products in Q3, and we expect significant incremental volumes in the fourth quarter as well. HVAC Technologies sales increased $35 million or 48%, driven by our recent acquisitions and stronger heating product sales. Heat Transfer Solutions sales grew 14% or $17 million, mainly due to higher coils and coatings demand. Climate Solutions third quarter adjusted EBITDA improved 29% given the strong top line growth. We made good progress this quarter with sequential improvement in the adjusted EBITDA margin to 17.9%, and we continue to expect further margin improvement in Q4. The Q4 margin improvement is expected to be driven by the increasing data center volumes and leveraging our recent capacity investments, along with the ongoing integration of the last 3 acquisitions. Before moving on, I want to reiterate that as the demand for Modine data center solutions continues to grow, we are again increasing our revenue outlook for the current fiscal year. Now let's review the total company results. Please turn to Slide 9. Third quarter sales increased 31%, driven by revenue growth in Climate Solutions. Gross profit increased 24%, driven primarily by higher data center sales volume in Climate Solutions, along with the margin improvement in Performance Technologies. SG&A expenses increased 9% due to increases in Climate Solutions, which were partially offset by the Performance Technologies cost savings initiatives. Looking at earnings, I'm pleased to report a 37% improvement in adjusted EBITDA and a 70 basis point margin improvement to 14.9%. With regards to EPS, the adjusted earnings per share increased 29% to $1.19. Please note that this excludes the $116 million noncash settlement loss recorded in connection with the termination of our U.S. pension plan. I'm happy to report that this project was completed, removing a liability from our balance sheet, along with the time and expense of the ongoing administration. To summarize our consolidated results, Q3 represents another good quarter of revenue and earnings growth. As we look to Q4, we continue to expect that the adjusted EBITDA margin will sequentially improve and begin to reach more normalized levels as the data center production volumes ramp up. Based on this outlook, we expect to exit the fiscal year at the highest quarterly margin rate and expect further margin improvement next fiscal year. Now moving on to cash flow metrics. Please turn to Slide 10. Free cash flow was negative $17 million in the third quarter. As discussed last quarter, the lower cash flow is primarily due to inventory builds and higher CapEx in Climate Solutions. However, this represents much needed and temporary investments to prepare for additional sales growth for our data center products. Also, third quarter free cash flow included $24 million of cash payments primarily related to the U.S. pension plan termination and restructuring. Net debt of $517 million was $238 million higher than the prior fiscal year, including the 3 acquisitions completed earlier this year, along with the incremental data center investments. Our balance sheet remains quite strong with a leverage ratio of 1.2. And based on our earnings and cash flow outlook, we expect that it will decline further by fiscal year-end. We anticipate generating positive free cash flow in the fourth quarter and are now expecting CapEx to be in the range of $150 million to $180 million for the full fiscal year. From a timing perspective, we anticipate that some of the data center capital investments will now carry over into the next fiscal year. And looking ahead to next year, we anticipate that our free cash flow will rebound, aligning with our long-term goals of improving the free cash flow margin. Now let's turn to Slide 11 for our fiscal '26 outlook. As we enter the fourth quarter, we're happy to announce that we are raising the revenue and earnings outlook. For fiscal '26, we now expect total sales to grow in the range of 20% to 25%. For Climate Solutions, we're raising our outlook for full year sales to grow 40% to 45%, up from 35% to 40%, with data center sales expected to grow in excess of 70% this year. For Performance Technologies, we're holding our sales outlook with revenue anticipated to be flat to down 7%. We expect that the end markets will remain depressed over the next quarter. As expected, more favorable foreign exchange rates and material cost recoveries will support sales, but the underlying market volumes are not recovering yet. With regards to our full year earnings, we're raising our fiscal '26 adjusted EBITDA outlook to be in the range of $455 million to $475 million. This reflects the strong performance this quarter and further improvement in Q4. To wrap up, we're encouraged with our Q4 outlook and fully expect to deliver another fiscal year of record sales and earnings. The teams have worked very hard to execute on our strategy using 80/20 as a guide. And the recent announcement to spin off Performance Technologies is truly historic. We remain confident that these actions are setting the stage for long-term sustainable growth for Modine shareholders. With that, Neil and I will take your questions. Operator: [Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson. Matt Summerville: So I want to understand a couple of things. Can you talk about kind of the puts and takes embedded in the margin outlook for both Climate and PT in the fourth quarter? On the last conference call, you had sort of led us down a path whereby Climate kind of ends the year in Q4 with further sequential margin improvement maybe in a range of 20% to 21%. So if you can kind of backfill on the margins across the 2 segments? And then also help us understand what defines kind of the high and low end of the algebra on that 50% to 70% CAGR because obviously, you extrapolate that out 2 years, it's a pretty wide range. Is it demand? Is it capacity? So a little bit of help there as well. Michael Lucareli: Yes. Neil, Matt, it's Mick. I'll go and then Neil can add on the CAGR comment. So yes, as we look at the outlook and for the balance of the year, I want to be clear about that. We are comfortable with the margin improvements in Climate Solutions after the 120 basis point sequential in Q3. We're still on track for a 200-plus basis point sequential improvement in Q4. So we still see Climate Solutions in that 20% to 21% range. On the PT side, we do expect a step down in the EBITDA margin. So that might be one thing that you're trying to model out. And we -- a couple of things happening there. One is we see this as a Q4 temporary dip. We've got some material pass-through mechanisms that will be catching up. We've had a spike in aluminum, copper, steel. We also have some timing of the tariff recovery and also some Q4 inventory cleanup write-off work that's been tied to our 80/20 PLS activities and some of the plant conversions we did from going from PT plants to data center plants. So we're comfortable. I should also say we're comfortable with analyst estimates and dollars that have been out there in Q4, and that would imply we're trending above the midpoint of the range -- so we are trending towards that above the midpoint of the range in dollars. But again, CS fully on track for a Q4 margin improvement, and that's being led by HVAC and data centers. And then a Q4 dip in margin for PT, and we expect PT to rebound in Q1 back to that 14-plus percent type range. So let me throw it over to Neil and then you can come back, Matt. Neil Brinker: No, I think that's covered well, Mick. Any other questions on that, Matt? Matt Summerville: On that note, if we can get to the kind of data center question on what defines kind of that high low-end range when you extrapolate out 50% to 70% growth off a '26 base of $1.1 billion plus, you get a wide range. Is it capacity? Is it timing? Is it demand? Maybe you can just help out a bit there, that would be great. Neil Brinker: Yes. When we think about that in terms of the capacity expansion, we're giving ourselves plenty of space there. As we get to further -- as we get further along in our project launches in the U.S., particularly in Jefferson City and Dallas, I think that we'll have -- we'll be at a tipping point of having the majority of capacity in place and online, and that would give us more confidence to tighten that range. Matt Summerville: Perfect. And then as a follow-up, can you maybe talk about how we should be thinking organically around the non-data center businesses in Climate over the course of calendar '26? Neil Brinker: Yes. At a high level, we're seeing good business, particularly in the HVAC side in our heating product line. We've seen great business in orders in the indoor air quality portion of the group. We've seen obviously, really good results from the acquisitions. And then we've seen some softness in the HTS business relative to the margins. There's been some pressure on the margins there as we've seen a spike in materials, and we've been able to obviously counter that through commercial activities like pricing, but we -- there's a lag there. So we've got a little bit of time to catch that up. Operator: Our next question comes from the line of David Tarantino with KeyBanc Capital Markets. David Tarantino: You mentioned record order intake in data center. Could you give us some color around the profile of these orders? How much of the growth is being driven by expanding relationships with customers and/or adding new ones versus your existing customer set? And what do you have embedded here in the longer-term growth profile around expanding these relationships beyond what you currently do? Neil Brinker: Yes. So that's a good question in terms of the profile and the concentration. This expansion is coming with our existing customer base primarily. Certainly, we are actively working with all the hyperscalers, but at different degrees and different levels. And there's potential for even greater upside when you think about some of these hyperscalers if we were to win orders at the order rates that we have with the ones that we have the longest relationships with. So this order intake and the upside that we see is with our strongest relationships with our longest customers, and we're still working through and doing quite well with the other hyperscalers and some of the N cloud providers as well. David Tarantino: Okay. Great. That's helpful. And then maybe just on free cash flow. The CapEx investments are pretty well documented. But could you talk about the working capital investment side of things related to the ramp and specifically what gives you the confidence that free cash flow begins to return to more normalized levels next year? Michael Lucareli: Yes, it's Mick. We've been trending about 19% to 20% working capital to sales. So I think that's going to hold relatively well. But 2 things that were happening that will kind of cause us to get back to more normal free cash flow levels was the rate of the ramp that when we did the expansion this year when we announced it beginning of the year, a lot of prebuy. So we actually have spiked above our normal inventory carrying levels. And then secondly, the amount of CapEx, whether you look at it as onetime spends or percentage of sales also had a spike. So I think what will happen, David, is we'll trend back down. I don't think it will be a step function. Inventory working capital will trend back towards normal ratios to grow with sales. And same with CapEx. We'll still have some CapEx carrying over into next year and elevated. But as a ratio or driver of capital, we won't have -- this year is probably $200 million. We probably had $400 million that we invested in capital spending and working capital builds. Operator: Our next question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: And good to see folks earlier this week at Expo. It was really helpful to get your commentary just now on the Climate Solutions margin outlook for 4Q. Basically, this is going to be then if you hit that a couple of quarters in a row where you get roughly, call it, 200 bps, 100 to 200 bps margin expansion sequentially even as you're adding a bunch of new chiller lines, right? So I guess the question is really how do we extrapolate this and thinking about where margins could be going here. You've talked about kind of mid- to high 20s as a longer-term target. But should we think about that kind of margin progression as continuing into the future quarters as you continue to add more lines but get better absorption? Michael Lucareli: A couple of things, Noah, that -- I wouldn't extrapolate and we're not implying that we'll have 200 bps sequentially every quarter. I think this was -- and we talked about it in Q2, we had a significant decline and was tied to the amount of fixed costs we added. So to climb back out, we said we'd expect it to be kind of 2 quarters to pick up whatever that was, 400, 500 basis points. And then from there, it's going to be more of a normal climb step by step up. We've been clear with Climate Solutions that the goal next year would be 20% to 23%. We'll provide some guidance in our Q4. And a reminder for the group when we announced our announcement on Performance Technologies, we're going to split and have 2 Climate Solutions segments. So we can provide some other color in Q4 for data centers. But I'd say short until we come out with specific guidance by the 2 Climate Solutions segments, I think next year being -- taking that midpoint of that range is a fair starting point, and we'll tighten that up and give you some more color in Q4. Noah Kaye: Very helpful. Neil, it's good to hear you talk about the record orders intake. Obviously, not historically disclosed orders. But can you talk a little bit about just sort of a sense of magnitude of that orders intake and also the composition, how diversified it is among the customer base? What does it imply about kind of your customer mix as we head into next year? Neil Brinker: Yes. Thank you. It's roughly 50-50 in terms of the products where 50% of it is with chillers and 50% is with the rest of the products that we have for the full solutions in data center. It's a larger -- more of the majority of the revenue is with our hypers. And what gives us great confidence is these are projects and programs that we've seen that have been in the funnel for a while, and they're starting to come to fruition in terms of purchase orders. So long-standing relationships, strong relationships with these customers, seeing these things progress through our probability funnel moving from 40% or 50% probability into the 80% to 90% category at a much heavier and faster rate than we've ever seen. So those are the things that give us confidence in terms of our customers who we're serving as well as the products, knowing that we have the capacity to keep and it consists with our ramp schedule that we're public about a couple of quarters ago. Operator: Our next question comes from the line of Chris Moore with CJS Securities. Christopher Moore: So obviously, as you talked about, the 50% to 70% growth in '27, '28 recognizes the market dynamic, the mix of products there might change. I think on the follow-up call on the PT spin-off, you talked about chillers potentially being better than 50% of the mix in '28. Maybe can you just talk a little bit about how the ultimate mix impacts your margins and kind of what the biggest wildcards are? Michael Lucareli: Yes. I'll go first and Neil can add. It's pretty uniform across the data center space. And so just take a step back, one thing I think Neil had covered and will help as we -- now that data centers has gotten to the scale, we think it's the right time to carve that out as a segment. But when you peel back the onion and Climate Solutions, what we've had over the last few quarters, right? So total segment is the 3 acquisitions we brought on and then Neil said on the coils or HTS side, we've had some lag effect on material pass-through. So kind of putting that off to the side, that's had some impact in the margins that you've all seen. Across the data center then product portfolio, it's a pretty uniform margin profile. Obviously, we really like the service element. So I don't think it's as much there. I would leave it at. It's a pretty uniform mix is not going to be as big of a driver for us. The other one then the factor, as you know, over the last 3 to 6 months was just the amount of fixed costs we brought on with greenfield facilities. So not to punt on your question, I think the main drivers are in data center capacity utilization and then less about product mix. Christopher Moore: Got it. I appreciate that. And maybe just a follow-up in terms of the capacity ramp. So is the expectation that by the end of fiscal '27, you will have the capacity in place to manage the high end, the 70% CAGR for both '27 and '28, '28 specifically. Is there more -- if you're doing that 70%, that implies in that $3 billion range in '28, Will you have that capacity in place by the end of '27? Neil Brinker: We would expect to have the capacity in place by the end of '27. However, they may not be at full utilization yet. Operator: Our next question comes from the line of Neal Burk with UBS. Neal Burk: Apologies if I missed this on capacity utilization, but I think your guidance based on my math at least has annual data center revenues kind of exiting the year at $1.6 billion. Is that the correct way to think about the annual number? And what is the kind of capacity utilization that, that assumes? Michael Lucareli: Yes. A quick -- I'll jump in on that where Neal, where you're going. Yes, our Q4 has implied a $400 million plus sales quarter. So yes, that would be an annualized run rate of $1.6 billion. Neil, do you want to add anything on capacity here? Neil Brinker: Yes. Again, capacity is in line with where we want it to be. We're -- it's as expected. We're getting more efficient. You saw it in the margin improvement this quarter, and we're very comfortable in terms of getting back into that 20% range as we continue to add more capacity to data centers. Neal Burk: All right. And one more follow-up, again, on the point of demand. I know you said record orders in the quarter, but maybe just like taking a step back, like the data center pipeline as you see it, can you talk about how that's trending? And like specifically, do you have more visibility on future orders and revenues than you did, say, 6 to 12 months ago? Neil Brinker: Yes. And that's an interesting question because I say yes to that every time that's asked every 6 to 12 months because it just gets bigger and bigger and the visibility gets broader and broader. So if you go back 3 years ago, we had 8 to 12 months visibility. And you go back a year ago, we had 24 months visibility, 36 months visibility. Now we're looking out as far as 5 years. And certainly, the top of the order funnel is swelling for sure. Operator: Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities. Jeff Van Sinderen: Just kind of maybe this is a little bit premature, but given that your next fiscal year is upon us and you're ramping production, how do you think we might see the growth cadence of the Climate Solutions business trend in the next fiscal year? And might we anticipate sequential revenue growth for the next several quarters? Michael Lucareli: Total Climate Solutions. I want to make sure I understood your question. Yes. Yes. Well, I think I'd separate them again. I would expect, again, Neil can jump in that at the greater growth in order intake on the data center side, and that's becoming a much bigger piece, right, of the entire Climate Solutions segment, that we will see sequential growth for quite a while on data centers. I have to go back and study a little bit the HVAC side. We get seasonal patterns with heat. And then you have a coil HTS business that can be heavy replacement and also some of that tied to residential OE customers. So I think of that as more normal and that we've said that's probably a high single-digit organic grower annually. last thing I'd say, I don't want to be too repetitive, but it will help when we give you some more color in Q4, and I could split those 2 dynamics. HVAC is a very different dynamic, HVAC&R versus data center. So hopefully, that's enough color to give you some direction. Jeff Van Sinderen: Okay. And I'm sorry, just to clarify for Q4, are you going to start breaking out in the P&L, the 2 segments for Climate Solutions? Michael Lucareli: So beginning our Q1 with our new fiscal year, we will have 3 segments. We'll have a data center segment, a commercial HVAC segment. and obviously, Performance Technologies until that transaction closes. And we'll report as we have with our other segments, revenue and earnings. What we'll just do in our Q4 is we'll provide some guidance for the new year outlook. But to be clear, I won't be able to give you those segment splits until we hit our Q1. Jeff Van Sinderen: Okay. Fair enough. And then maybe for Neil, as you're talking to your data center customers, what is really top of mind for them at this point in determining their go-forward cooling needs? How are those needs evolving? And then I guess, as a result, how is Modine evolving its products for the future? Neil Brinker: So a few things. One is there's a lot of conversations about them now, which is securing capacity. How do we ensure that the strategic suppliers that they've selected are investing in capacity and investing in production and investing in their own internal supply chains so that they can keep up with the demand as you see the hyperscalers continue to raise their CapEx spend. Almost every quarter, they're raising their CapEx spend. So what are we doing now to ensure that we're in sync and locked in with their progress as well as their build-out? That's one. The next piece is around our innovation and technology. What are we doing to make sure that we deliver products that help them solve 2 critical problems. One is the lack of power, so energy consumption and the other is around water and the amount of water that's used typically in some data centers. So if we can continue to innovate and evolve with better use in terms of power and water, which are often measured through PUE and WUE, we can continue to improve their metrics and stay innovative in that regard. Those are 2 critical problems that we're trying to solve for in the industry in addition to keeping up with the breakneck speed of CapEx deployment. Operator: Our next question comes from the line of Brian Drab with William Blair. Brian Drab: First, I wanted to ask on the capacity expansion. You have the -- it sounds like $1.6 billion in revenue capacity for sure now as you're going into the fourth quarter. But to get to the $3 billion, how much additional investment is this going to take? Just trying to get this whole framework in place. I think that Nick made some comments on the call last week, but we're getting a lot of questions on this. Like how do you get to $3 billion? And does it -- how much additional investment beyond the $100 million that you talked about before -- and then also, are you just getting there from some higher utilization or increased pricing? Can you frame all of that for us? Neil Brinker: Yes. High level, we can get there on the amount of capital that we've been public about in terms of what we needed to spend to get to the $3 billion. But $40 million of that will carry over from this year into the next fiscal year. Michael Lucareli: Yes. And we'll have another -- we had about $40 million of capital spending in Q3. So just in Q4, and this is -- this will be equipment that won't even be producing really much in revenue. We'll have another $40 million to $50 million in Q4 and Neil just mentioned the $40 million plus amount that we'll spend in the new year. So one other maybe data point, if you take that, almost $100 million left of that spending that Neil talked about that we've laid out that isn't even in these production sales numbers yet that will be supporting future sales growth. Brian Drab: How many -- can I ask how many chiller lines would you be at as you enter fiscal '28 to execute on the plan? Neil Brinker: 20. Brian Drab: Got it. And last question is Neil, I don't know if you want to provide or if there's any update to provide on this, but you had talked late last year about a couple of new potential hyperscaler customers for chillers who had not purchased chillers in the past, looking for sample product. And I'm just wondering are you -- how many total hyperscaler customers are you working with? And then can you give a specific update on anything that's developed and potential new customers for chillers specifically? Neil Brinker: Yes. Obviously, we're working with all of them at different levels of engagement. And then if you recall from last quarter, I talked about one of the reasons that we had that miss in the margins in data centers was that we had to cut production with a couple of hyperscalers that we hadn't sold chillers to in the past, and they needed some pilot builds for fiscal year '27 and '28. So pending the results of the field trials, which we would anticipate to be in line with how we typically perform, we'll continue to grow with those other hyperscalers with chillers. Brian Drab: Do they give you any visibility to when you hear about the field trial results? Neil Brinker: Yes. Typically, it will be -- we'll hear about it all the time in terms of -- we'll get feedback regularly, but a decision won't be made for a couple of quarters. Operator: Our next question comes from the line of Matt Summerville with D.A. Davidson. Matt Summerville: I just have one follow-up here. Neil, Mick, how are you strategically thinking about LTAs long-term agreements? How much of your capacity will you ultimately be willing to have sort of spoken for over what kind of time frame? And I guess, in turn, what price kind of considerations are you thinking about? And would you be able to structure these almost as a take-or-pay arrangement such that you're not absorbing risk? Michael Lucareli: Yes. Well, it's not that we couldn't structure. It's not as if we could structure it in a way that it's completely risk-free. But certainly, it derisks substantially, and it gives you higher confidence and great confidence that the commitment of the customer is there as well, particularly long term. So certainly, I mean, we'd be willing to do LTAs for all of our capacity. Why wouldn't you, right? So we're -- that's definitely new and certainly a part of this capacity expansion equation that we're seeing with our large OEM customers. So those conversations are being had. I think you've seen evidence of this happening with other suppliers that these things can happen. And we strategically align ourselves behind our 80s customers that we believe are our best customers, and those would be the ones that we would lean in on in terms of providing more capacity with an LTA. Matt Summerville: Do you think, Neil, obviously, it's been tough for you to name -- use specific customer names. If you sort of begin to go down the road where LTAs start getting signed, maybe absent specific customer names, is this something we can expect to be publicly announced and communicated? Neil Brinker: Yes. Operator: Our next question comes from the line of Brian Sponheimer with Gabelli Funds. Brian Sponheimer: I'm curious, the heavy focus on data centers and yet within this past fiscal year, you found LB White and Climate by Design. I'm just curious about that pipeline, maybe outside of the data center set on Climate from an M&A perspective, you're going to end pro forma, you'll be less than 1x levered when this is all said and done with Gentherm. Neil Brinker: Yes, you're right. CDI, Absolute Air and LV White, certainly inside of that HVAC business as we continue to look at ways to diversify around some of these higher-margin businesses that are not typically in data centers. We believe we have what we need in the data center space. Right now, we continue to cultivate the funnel. We're often in conversations and at different milestones with many potential targets. Probably over the next couple of quarters, it's all hands on deck on our project with Gentherm but we can still work in the background on the active funnel that we currently have around additional businesses and technologies that we see would continue to help evolve our portfolio inside of the HVAC business for sure. Brian Sponheimer: Could you give -- I mean, with the understanding Gentherm probably happened fairly quickly, could you give any color as to what that pipeline looked like prior to you engaging with Gentherm? Michael Lucareli: Yes, it's Mick, Brian. It's good. It's -- there are some things we paused on when that accelerated. But that HVAC space has a lot of privately owned and fragmented businesses. So I'd say I classify it as there's a funnel of businesses from $50 million to $100 million sweet spot in revenue that we can relaunch discussions with. Operator: I'm showing no further questions at this time. I would now like to turn the conference back to Kathy Powers. Kathy Powers: Thank you, and thanks to all of you for joining us this morning. A replay of this call will be available on our website in a couple of hours. I hope you all have a great day. Thanks. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Q4 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Steve Elder, Senior Vice President of Investor Relations. Steve, please go ahead. Steven Elder: Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO; and Jagtar Narula, our CFO. The press release and supplemental materials we issued yesterday and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release and supplemental materials have been included in an 8-K filed with the SEC yesterday afternoon. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we sometimes refer to as ANI, adjusted net income per diluted share, adjusted operating income and related margin as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we'll discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in the press release, the supplemental materials and the risk factors identified in our most recently filed annual report on Form 10-K and in our subsequent quarterly reports on Form 10-Q and other subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa. Melissa Smith: Thank you, Steve, and good morning, everyone. We appreciate you joining us. Let me start today with how we think about our strategy and why we believe our business model is so durable. WEX serves customers in mission-critical areas where reliability, compliance and control matter most. Our focus on and expertise in these areas has allowed us to earn long-lasting customer trust, win market share over time and generate strong reoccurring cash flow. Today, we're modernizing our platforms to reduce friction, deepen workflow integration and expand customer lifetime value, all while executing with discipline to deliver durable growth and expanding margins. Before I go further, I want to connect back to what we said on our Q3 call. We described WEX as reaching an inflection point where the investments we have made in product velocity, go-to-market execution and cost discipline were beginning to translate into stronger performance. In the fourth quarter, we saw that inflection point take hold. Earnings growth accelerated, operating leverage improved and we made tangible progress towards the margin expansion we expect as our investments continue to scale. We're confident in our ability to build upon this progress. Our strategy remains anchored in 3 pillars: amplifying our core, expanding our reach and accelerating innovation. Each of these pillars is designed to turn customer trust into durable growth, margin expansion and consistently strong free cash flow. Now turning to the quarter. Our fourth quarter results reflect the momentum we are building as execution improves across product, sales and customer experience. In the fourth quarter, we delivered revenue of $672.9 million, an increase of 5.7% year-over-year or 4.5% excluding the impact of fluctuations in fuel prices and foreign exchange rates. Adjusted net income per diluted share was $4.11, an increase of 15.1% year-over-year. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q4 adjusted EPS grew 12.1%. For the full year 2025, we delivered record revenue of $2.66 billion, up 1.2% year-over-year with improving performance as the year progressed. Adjusted net income per share was $16.10, up 5.4% year-over-year. Excluding the impact of lower fuel prices and foreign exchange rates, revenue increased 2% with adjusted net income per share up 7.7% year-over-year. A few years ago, we started a journey to reimagine and accelerate how we organically invest in technology and new products. Part of that journey included bringing on a new tech and new product leader who have enhanced our foundational capabilities in technology and augmented our team's expertise in AI and data science. We've been modernizing our architecture, strengthening execution rigor and increasing accountability for delivery. The result is that we're building faster, scaling more efficiently and lowering our long-term cost to serve. By combining operational discipline with an AI-first approach to product development, we increased product innovation velocity by more than 50% year-over-year. These investments are already improving customer outcomes and delivering efficiency. As we move through 2026, we plan to shift from an investment phase to a scaling phase with operating leverage driving meaningful margin expansion over the medium term. Let me give you a few examples of how this is showing up across the business. In Mobility, we continue to invest in our industry-leading fuel card solutions for fleets of all sizes. Targeted marketing investments in 2025 drove a 13% year-over-year increase in new small business customers. On the product side, we've introduced innovative offerings like [ Fleet Plus ], which combines the power of our proprietary closed loop fuel card with open loop flexibility. That translates into superior controls and data, creates a product experience that is difficult to replicate at scale and increases revenue per customer in our mobility business. In the Benefits segment, investments in both sales and product helped drive another strong open enrollment season. A great example is our use of AI to streamline health care claim reimbursements. Our AI-powered solution has reduced processing times from days to minutes with 98% accuracy, supporting our goal of improving participant satisfaction, reducing friction and lowering our cost to serve. We also launched a modernized brokerage experience that enables real-time trading and provides seamless access to HSA cash and investments and is designed to drive higher balances and asset retention. These are key drivers of long-term value creation in the HSA market. Our direct accounts payable product continues to grow rapidly, and our investments in expanding the sales force are delivering as expected with Q4 volumes up approximately 15% year-over-year. The momentum in our direct AP is complemented by early success in our embedded payments offering with a growing pipeline of prospects and customers to support sustained growth in 2026 and beyond. We are deliberately extending our reach and extending addressable use cases across verticals. Our product investments continue to help us differentiate ourselves across this business. For example, we recently launched a global funding engine that enables customers to issue virtual cards in multiple currencies and execute on-demand currency conversions without incurring FX costs. This expands our product capability to better serve customer needs, strengthens our value proposition beyond travel and supports continued operating leverage as volume scales. Looking ahead, we see the potential for additional upside from geographic expansion in travel as well as new digital tools that accelerate onboarding and improve customer productivity. By balancing growth acceleration with operational efficiency, we've built a stronger and more agile WEX that is well positioned to capitalize on market opportunities, scale efficiently and strengthen our long-term competitive advantages. Now let's turn to our segment results for Q4, beginning with Mobility. Mobility is our largest segment and a great example of how we are amplifying our core by protecting profitable share in a down cycle while we continue to invest to drive long-term value. Despite ongoing market softness, fourth quarter Mobility revenue was flat year-over-year as we focused on capturing profitable market share. Transaction volumes declined modestly, consistent with our expectations, broader market trends and the patterns we saw in the third quarter. It's also important to address what we're seeing in the over-the-road trucking market. The over-the-road market remains in a cyclical down cycle with muted freight demand and pressure on small operators. We've seen this pattern before. These cycles are historically temporary. We're executing on what is in our control by protecting profitable market share, maintaining high retention and continuing to invest in differentiated capabilities so that when volumes recover, we exit the cycle with stronger economics and greater operating leverage. As I mentioned earlier, we've been directing sales and marketing investments towards smaller fleets, which we believe represent a large and underserved market with significant potential. 10-4 by WEX expands our reach by bringing new small trucking fleets into the ecosystem while creating a pathway to amplify the core over time through deeper relationships. The discounts that we've negotiated with truck stop chains save the typical user hundreds of dollars each month, helping drive adoption. Momentum has been strong with December accounting for more than half of the total Q4 volume on the platform. Finally, WEX Field Service Management, formerly Payzer, continues to build momentum, delivering healthy double-digit revenue growth in the fourth quarter. Since acquiring this business 2 years ago, we have updated and aligned the brand, refined our cross-sell process, improved retention, made key product enhancements and updated pricing. We remain energized by this opportunity as we deepen our presence in this attractive adjacent market where we believe we can generate up to 10x more revenue per field service management customer than for our traditional small fleet. Now turning to Benefits, which simplifies the [Audio Gap] of employee benefits administration and comprises approximately 30% of annual revenue. Benefits is where our accelerate innovation and expand our reach strategic priorities intersect most clearly. In 2025, we extended our track record of consistently growing HSA accounts faster than the underlying market as reported by Devenir. Our diversified portfolio spanning benefits administration, consumer-driven benefits and HSA custodial services positions us to sustain market leadership as we continue to further strengthen our competitive edge. Overall SaaS account growth was 6% in the quarter, in line with previous quarters last year. Following a strong open enrollment season, we now have more than 9.4 million HSA accounts on our platform. We remain a top 5 HSA provider, powering more than 20% of all HSA accounts in the country and serving approximately 60% of the Fortune 1000 companies. We're very pleased with the results of our 2026 open enrollment season with the direct new sales exceeding expectations and continued strength across our partner channels. As a result, we expect account growth to be in the range of 6% to 7% year-over-year in Q1. Our benefits business continues to outperform the market, and we're confident in its long-term growth trajectory. Finally, let's turn to Corporate Payments, which is the clearest example of how we're expanding our reach, expanding our core capability across industries, geographies and workflows, representing approximately 20% of annual revenue. This segment helps businesses pay their partners faster and more securely while simplifying the workflows. Fourth quarter performance for this segment improved meaningfully from the first half of the year, in line with our expectations. Purchase volume processed by WEX increased 16.9% year-over-year, reflecting the continued strength in travel customers. Travel-related revenue grew more than 30% in the quarter, supported by high existing customer activity and the onboarding of a meaningful new customer in Asia. Revenue from non-travel customers grew in the mid-single digits. The adjusted operating margin for Corporate Payments increased by 450 basis points, reflecting the strong operating leverage in the model as volumes scale. Our direct accounts payable product continues to scale rapidly. New customer wins fall within the construction and health care verticals alongside retail and media, and this growing book of business now represents 20% of segment revenue. Before I turn it over to Jagtar, I want to highlight a governance update we announced last month. As part of our multiyear Board refreshment plan and reflecting input from our ongoing engagement with shareholders, we announced the next phase of the Board's planned evolution. Under this plan, newly appointed Director, David Foss, will assume the role of Vice Chair and Lead Independent Director effective as of our 2026 Annual Meeting of Stockholders. We also announced that Shikhar Ghosh and Jack VanWoerkom will retire from the Board at that time. We're grateful to Shikhar and Jack for their dedicated stewardship, and we look forward to Dave's leadership as we remain focused on long-term shareholder value creation. Stepping back, we entered 2026 with strong momentum. We expect to deliver the strongest new sales year yet based on our current pipeline, improving sales productivity and greater customer demand across all 3 segments. Together, the strength of our platform, the resilience of our model and the returns from our targeted investments give us confidence we're on the right path. As these investments continue to scale, we expect operating leverage to support margin expansion while sustaining strong free cash flow generation. With that, I'll turn the call over to Jagtar to walk you through our financial performance and our 2026 guidance in more detail. Jagtar Narula: Thank you, Melissa, and good morning, everyone. Before I begin, I want to remind you that unless otherwise noted, all comparisons are year-over-year. Overall, we delivered solid revenue growth and strong earnings performance while also continuing to lay the foundation for accelerating both top line growth and profitability in 2026. Total revenue in the quarter was $672.9 million, up 5.7%. The impact of foreign exchange rates and fuel prices increased revenue growth by 1.2%. Notably, revenue exceeded the guidance range we provided last quarter, primarily as a result of higher-than-anticipated fuel prices and a strong quarter in the Benefits segment. Without the fuel price benefit, revenue came in at the high end of our guidance range of $646 million to $666 million. Adjusted earnings per share of $4.11 were up 15.1%, including a 3.1% favorable impact from fuel prices and foreign exchange rates. Adjusted EPS was $0.25 above the midpoint of the guidance range we provided in October, of which $0.18 was attributable to higher-than-anticipated fuel prices and the remainder due to execution. In our Mobility segment, revenue was $345.1 million, which is flat with the prior year. This includes a favorable impact of 1.4% due to fuel prices and foreign exchange rates and a negative impact of 1% from lower interest rates. The market softness that we had highlighted throughout the year persisted in the fourth quarter, in line with our expectations. Our payment processing rate of 1.33% was down approximately 3 basis points, primarily due to the decline in interest rates. In our Benefits segment, revenue of $204.9 million rose 9.6%. SaaS account growth of 6% continues to be above recent industry trends according to Devenir. Custodial investment revenue, which represents the income we earn on custodial cash balances rose 14.2% to $61 million due to the increase in both average asset levels and higher rates. Earned interest yield increased 11 basis points to 5%. Turning to our Corporate Payments segment. Revenue of $122.9 million increased 17.8%. Purchase volume increased 16.9% with particular strength from travel-related customers benefiting from both underlying growth and a favorable comparison to last year. Results also benefited from our incentive contract with our primary scheme provider. Direct accounts payable purchase volume grew more than 15%. The addressable AP market remains very large and relatively unpenetrated. Our virtual card products are resonating with customers, and our sales force remains productive. This continues to be one of our key focus areas going forward and where we plan to invest more in the future. Turning now to the balance sheet. Our business continues to generate strong recurring revenue and reliable free cash flow. That cash flow provides the flexibility to enhance shareholder value through our disciplined capital allocation strategy. Last year, we generated $638 million of adjusted free cash flow compared to $562 million in the prior year. I want to note that as of the end of the first quarter in 2026, we'll have substantially completed our deferred and contingent M&A payments related to our benefits business, which will free up approximately $150 million of cash flow starting in 2027. When it comes to deploying capital, our priorities haven't changed, and we delivered last year in line with the commitments we set. First, we focus on preserving financial strength and flexibility by maintaining a strong balance sheet and appropriate leverage, ensuring we can operate effectively under both normal and stress conditions. We ended Q4 with a leverage ratio of 3.1x, down from 3.25x at the end of Q3 and continue to operate within our long-term target range of 2.5 to 3.5x. We will continue to prioritize debt reduction until leverage is below 3x, which we expect to achieve in Q2 or Q3 of this year. Second, we invest in our core businesses where we see attractive returns and opportunities to strengthen our competitive position. This is aligned with our focus on amplifying our core and accelerating innovation. Tied to what Melissa said earlier about our plan to accelerate revenue growth, this will be driven by innovating and investing more in product development. We are taking a balanced and disciplined approach to margins by driving efficiencies and reducing costs in other areas of the company and reallocating resources towards our growth initiatives. We are applying a rigorous return threshold to every potential investment with clear accountability for growth, retention and margin impact. This is a core of our financial algorithm. Disciplined cost actions fund high-return growth investments. And as revenue scales, we expect margins to expand over the medium term. After addressing these 2 priorities, we evaluate deploying our remaining capital towards accretive M&A opportunities, which must meet strict financial and strategic criteria or returning capital to shareholders through share repurchases. Every step of our disciplined capital allocation process is underpinned by a clear objective to maximize long-term shareholder value. I also want to briefly touch on the important financial advantage we gain from having WEX Bank on our platform. The bank provides greater access to liquidity for our balance sheet at a lower cost than funding solely through capital markets. It also allows us to earn higher yields on our HSA portfolio. The bank is an important differentiator for the business that improves our bottom line. Now let's turn to 2026 revenue and earnings guidance for the first quarter and the full year. Starting with the first quarter. We expect revenue in the range of $650 million to $670 million, which represents a growth of 4% at the midpoint. This growth includes a 2% net drag from fuel prices, FX and interest rates. We expect adjusted net income EPS to be between $3.80 and $4 per diluted share, which represents growth of 11% at the midpoint. For the full year, we expect revenue in the range of $2.70 billion to $2.76 billion. We expect adjusted net income EPS to be between $17.25 and $17.85 per diluted share. At the midpoint, full year guidance reflects revenue growth of 5% and EPS growth of 13% when excluding the impact of fuel prices, FX rates and interest rates. These growth rates are accelerating into the long-term target ranges we set last year. Let me touch on some key factors driving guidance this year. Note that you can find a complete list of assumptions in our supplemental materials. In Mobility, excluding the impact of fuel price changes and FX, we are expecting full year revenue growth of 1% to 3%, which includes a headwind of approximately 1% due to the impact of lower interest rates on merchant contracts that include pricing escalators. We are also prudently assuming no improvement in the macro environment. As for quarterly cadence, recall that Q1 last year had a pull forward of gallons in OTR due to tariff worries, which creates a tougher comp for Q1 this year, followed by an easier comp in Q2. Also note that the incremental BP contribution will be weighted to the second half of the year and then continue to ramp into 2027. Credit losses in Mobility are expected to be between 12 to 17 basis points for the full year and between 17 and 22 basis points in Q1. In Benefits, we are expecting full year revenue growth of 5% to 7%, which includes approximately a 2-point headwind from lower interest rates on the floating rate portion of our nonbank custodial assets. As a reminder, over 75% of our portfolio is in fixed rate instruments and therefore, not rate sensitive. Note, Q1 SaaS account growth is expected to be higher than the rest of 2026 as we lap the benefit of the UAW contract that began in Q2 of last year. In Corporate Payments, we are expecting full year revenue growth of 5% to 7%. As I mentioned earlier, we are investing more in innovation and product development to drive future growth. Embedded in our guidance is $50 million of cost savings actions. A portion of these savings will be reinvested in the business and a portion will drop to margins. The expected lower fuel prices this year impact adjusted operating margins negatively by approximately 75 basis points. As a result, for 2026, we expect the adjusted operating income margin to be flat with 2025. Our guidance does not assume any future M&A activity or share repurchases, and last year's tender offer will continue to benefit EPS growth through Q1 before annualizing. Finally, our guidance assumes average fuel price per gallon of $3.10 for the year and 2 interest rate cuts in line with market expectations. As outlined in our earnings supplement, the sensitivities to these factors are for each $0.10 increase in price per gallon, revenue increases by approximately $20 million and adjusted EPS increases by approximately $0.35 with symmetrical impacts in the event of a decrease. For interest rates, 100 basis points higher than our outlook would translate to approximately $30 million higher revenue and $0.35 lower adjusted EPS, while 100 basis point lower rates would decrease revenue by approximately $30 million while increasing EPS by $0.45. Let me take a moment to review our revenue and earnings trajectory. 2025 was a transition year with muted revenue growth in the first half that accelerated in the second half, while earnings growth benefited from stock buybacks. As we look to 2026, we anticipate continued revenue growth as momentum builds. At the same time, we are actively managing our levers to invest in the business while also driving earnings growth. In closing, our results underscore our disciplined financial execution and the strength of WEX's operating model. We are energized by the momentum we are driving across the business and the tangible progress we are making toward our long-term growth and margin expansion goals. We remain firmly focused on operational excellence, maintaining financial resilience and allocating capital strategically to support sustainable long-term value creation for our shareholders. As we enter 2026, we're well positioned to capitalize on improving market conditions and to continue executing against our strategic and financial priorities. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of David Koning with Baird. David Koning: I guess my first question, just the cadence of the corporate business through 2026, both kind of volumes and yields, just kind of thinking about -- it seems like the first half had much easier comps. So Q4 growth was really good. I assume the first half will continue to be good on easy comps. So that's on the growth side. And then on the yield side, just understanding yield was really good in '25. Some of that was the mix more towards B2B. Is mix going to stay -- I know you have the new Asia client that was big that came on. Can yields stay flat to even maybe up in '26? Melissa Smith: Thanks. Let me start and give a little bit of context around that because you're right, we had really strong growth in the fourth quarter. Some of that, as you point out, are because we had a favorable comp. So the prior year, we saw more volatility in our OTA spend quarter-to-quarter. So that was a headwind in the first half of the year, and it's been a tailwind in the second half of the year. What -- part of what we're really excited about is now that we've successfully got our transition with that major OTA behind us, and we're entering a period where volume is just going to be cleaner, and we think visibility is better. So that puts us in a position where you're going to be able to see more normalized growth in the course of next year. So think of the quarter should play out more evenly year-over-year than what you've seen historically. But we did get a bit of a benefit in the fourth quarter because of the comp year-over-year. Jagtar Narula: And then David, I'll address your questions on the yield rates. So we're expecting yield overall to be flat to slightly down and slightly, I mean, like a basis point. When you look at it, travel will be down a basis point or 2, non-travel will be down 2 to 3 or 2 to 4. But you'll mix more to non-travel, so that will stabilize overall yield. Operator: Your next question comes from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani: I wanted to drill down a little bit on Mobility. I know, Melissa, you talked about over-the-road still seeing choppiness. I guess when we think about sort of organic growth assumptions in 2026, could you just sort of outline what you're expecting? What are the key variables there that could maybe help outperform, underperform? And then I know, Jagtar, you mentioned BP sort of more of a second half contributor. So maybe you could just give us like sort of what the first half versus second half contribution might be in terms of total Mobility in growth? Melissa Smith: Yes. Sure. Sure, happy to. In our mobility business, when we think about the business, about 40% of the volume comes from over-the-road customers. So I'll split the business in those 2 pieces. The way that we've approached this part of the business, and we're thinking about amplifying our core, it's been really leveraging the benefit of our closed loop network, make sure that we're acquiring customers, retaining customers, delighting customers throughout the course of the year. And our actual retention rates have remained strong. Our acquisition rates have gone up year-over-year, as you might imagine, in part because we've invested more in marketing in the small end of the marketplace, but also because we've seen productivity in the large end of the marketplace. And so we're going into the year feeling really good about how we're positioned. And part of the question, I think that's underlying your point is the macro itself is something that we know historically has been transient. We know in the over-the-road marketplace that we're seeing some good signs, although there's still volume weakness in the course of what we're seeing play out right now. But there's tightening of drivers, which is creating spot rates to go up, which we think is overall good for the industry and will make it healthier, more vibrant. The assumption we have in our guidance is that we're going to be in a similar macro environment in '26 as what we've been in, in '25. We'll have continued acceleration in new sales. We'll have strong retention of customers. And so the things that could play out that are different, the macro environment could improve from what we expect. From a sales perspective, we have a pretty good line of sight, but always an opportunity to outperform there as well. Jagtar Narula: And Sanjay, I'll address your question on the guidance bridge and the cadence of '26. So just to think about the guide that we've given for Mobility, if you look at Mobility in 2025 ex fuel prices and ex FX, we grew about 1% in Mobility. So when you think about 2026, you take that run rate and you would say, okay, with BP, with new products that are coming online and with the sales and marketing investments last year, you can understand the increase in growth rates that we have going into '26. From a cadence standpoint, we really expect the growth rate to be even -- roughly even over the course of the year, but there's some puts and takes with that. So obviously, we have BP coming online in the second half, which helps growth in Mobility. But we're also assuming interest rates decrease over the course of the year, especially in the second half of the year. And so that puts an overall drag in Mobility and [ hence ] once you look at those 2 together, you get to the cadence of roughly even growth over the course of the year. Sanjay Sakhrani: Okay. Great. Maybe a follow-up question on Corporate Payments. From a similar vein, as we think about the organic growth assumptions there, I know, Melissa, you're talking relative to the previous question that there'll be more balanced growth over the course of the year for the travel. But how about sort of non-travel? I know you guys have some share -- some wins there. I saw the announcement with Nuvei. Just trying to make sure I understand sort of how to think about that and factor that in. And then even in that direct payables business, sort of what the assumptions are there? Because I know you guys were making some investments there. Do you see an acceleration there as a result of some of these investments? Maybe you can give us -- just elaborate a little bit more on Corporate Payments and the building blocks there. Melissa Smith: Sure. We're really confident in the trajectory of Corporate Payments. I'll just start with that. We're seeing some really great trends across the board, strong volume coming through with our travel customers as well as if you look at the functionality that we've rolled out, so we took the core capability that we have with our travel customers and made enhancements to that so that we've been selling it in the course of this year outside of travel to other embedded payments customers. And really, the core offering that we have for that customer base is leveraging the bank and being able to take really complicated payment flows that are often have quite a bit of regulatory oversight and doing that in one shop. And so we're using our world-class virtual card platform, but we've got our bank combined in that. And so that product in the marketplace continues to have really good product market fit. We're continuing to add new customers. We're going through implementation cycles now. And so we're really bullish about how that product will continue to build in the course of the year. On the AP direct side, I think of that as it's a great engine. We've continued to add salespeople and those salespeople are ramping. We're seeing really good production from that. And so we expect to continue to have double-digit growth in 2026 relating to sales in that. It's coming off a growing base, and so we expect the growth rates to look pretty similar. So if you kind of take all of that in and factor in any contract renewals we have across the portfolio, we are expecting to see a build in the course of the year. So spend on travel will look pretty consistent in the course of the year from everything we know. Outside of travel in these new customer implementations, we [ may ] see that spend volume lift and increase over the course of the year. And so there will be a little bit of an increase in growth. But I would say travel is still a large part of the business. And our embedded payments and our AP direct products are still the minority of the segment. So places we're super excited because we're building on that. We think they're going to become a bigger part of the segment and will drive growth rate acceleration over time. But it's going to have less of an impact in terms of like seeing a huge ramp from a quarter-to-quarter perspective. Operator: Your next question comes from the line of Ramsey El-Assal with Cantor Fitzgerald. Ramsey El-Assal: I wanted to ask a question about Benefits and whether you're seeing any impacts, probably tailwinds from any political or policy-related stuff that's going on out there. I'm thinking the Big Beautiful Bill, lapsing of some Affordable Care Act coverage. Just curious if there's any kind of political overlay to the performance in that segment that you're seeing or expect to see. Melissa Smith: Yes. It's interesting times, right? I would say there's a lot of interest. And pretty much every month, we hear different ideas of how these tax-deferred assets can be further utilized and specifically focusing around the construct of an HSA. There's still a lot of details that need to make their way through. So I believe we're in an environment that is really positive, likely something that we will benefit from, not something we factored into our guidance. And I would say we had a really strong open enrollment season. But we don't think we saw much of an impact from the Big Beautiful Bill in part because the consumers are going through these exchanges. So consumer education takes some time. We do believe that this will continue to be a headwind -- I mean, a tailwind for us in this part of the business. And so we're excited about not just what has happened already in terms of legislative changes, but the conversations that are happening and where we think this is going, but nothing that we factored into our guidance. Ramsey El-Assal: Okay. One quick follow-up. And forgive me if I missed you guys commenting on this a little more. Jagtar, I wanted to ask about the elevated credit losses in the first quarter versus the rest of the year. Is there anything that you had already called out or any kind of finite reasons why that is occurring? Jagtar Narula: Ramsey, great question. Thanks for the question. Really 2 pieces for us. So first, let me say, overall, we feel really good about the quality of our portfolio. We've made investments that we've talked about in the past and our ability to use AI and heavy analytics in managing the credit quality of portfolio, and we still feel really good and really confident about that. Relative to Q1, there's really 2 reasons. So first, just recall that it takes about 6 months for something to be a late payment that eventually doesn't get paid and goes into being written off. So when we're talking about receivables that are now 6 months old when fuel prices were higher. So with fuel prices coming down, but the higher value of those receivables that are being written off, just the simple math of the write-offs against the spend levels with lower PPG just causes an increase in the basis points. A second smaller reason is we went into market in the second half of last year. We were testing a couple of offers. Those offers are no longer in market, but we saw a little bit of elevated credit losses associated with them. Like I said, we've pulled those offers, but those are taking Q1 to work through. But overall, we feel really good about where we are. Operator: Your next question comes from the line of Mihir Bhatia with Bank of America. Mihir Bhatia: I wanted to go back to the direct payables business. You called out making some investments in it, but the growth has slowed, I think, from like 25% in the first half of this year to 20%, I think, in 3Q and now 15% plus, I think you said this quarter. And some of it, I suspect is you're just growing off a larger base. But maybe just talk a little bit more about that, like given the investments you're making, what's driving that? And what do you expect that to look like for 2026? Melissa Smith: Yes. We do expect to see double-digit growth in 2026. Part of why you're seeing that decelerate is there's some lumpiness around when the customers that have been implementing when they actually spend. So I wouldn't read too much into it. It's still prone to having some mix in there. From just what we're adding to the business, I would say it's a very consistent motion of adding salespeople. Those salespeople are out there soliciting customers. Those customers are going through actually a pretty quick implementation process, very high retention rates with that underlying customer base. And so very, very consistent with the investment thesis that we've laid out, and we think that will continue to play out really well into 2026 and beyond. Mihir Bhatia: Got it. Okay. And then maybe turning to Benefits, and I just want to make sure I heard correctly. I think, Melissa, you said 6% to 7% account growth in 1Q for Benefits. Does that include the UAW benefit in there? So like it would be a step down after that? Is that the way to think about it, just given you're just -- assuming like through enrollment season at this point? I'm just trying to understand what we should think about the account growth for the full year. Jagtar Narula: So just to correct, Q1, we expect 5% to 7% account growth. I think I said that in my prepared remarks. Then in terms of UAW, no, we don't expect a step down in Q1. Those accounts will continue. We typically have a step down from Q1 to Q2 just in the number of accounts. We see that year after year just because new onboarding happens in Q1 and then customers that are leaving the system tend to happen in Q2. So you do see a step down. But UAW is continuing, nothing to be worried about that. It's just the year-over-year growth rate that UAW becomes a year-over-year [indiscernible] going in the second half of the year, but not a [indiscernible]. Mihir Bhatia: Right. So the growth rate will step down, though, just to clarify. Jagtar Narula: Correct... Operator: Your next question comes from the line of Rayna Kumar with Oppenheimer. Rayna Kumar: So I just want to ask something about free cash flow. I think your free cash flow conversion this year was a bit below 55%. Any call out there? And how should we think about free cash flow for '26? And then separately, could you just call out the same-store sales growth for your local fleets in Mobility? Jagtar Narula: Sure. So free cash flow, I mean, nothing in particular to call out. We were very pleased with free cash flow in '25 at $638 million. We view that as pretty strong free cash flow and improvement over the $500 million and change that we did in 2024. For 2026, we are continuing to expect north of $600 million. We expect a further increase from the 2025 levels. So we continue to feel confident. With regard to same-store sales, I think what we said overall is that we saw similar trends to what we saw in Q3. I'd say local fleets was a slight improvement over what we saw in Q3. Melissa Smith: And OTR was slightly worse. Jagtar Narula: Yes. Operator: Your next question comes from the line of Nate Svensson with Deutsche Bank. Christopher Svensson: I was hoping to ask about some of the moving pieces for operating margins in '26. I guess for the full year, how should we think about each of the segments and how that builds up to total company margins being flat? I know in Benefits, we'll have the impact of float headwinds. Corporate payments, we're exiting the year a little north of 48%. And then hopefully, we get some operating leverage as that normalizes. Mobility, we have BP coming on, lower interest rates offsetting. And then on top of all of that, you have the investments. So I was just hoping you could put all of that together and maybe talk about margin cadence for the year by each of the segments. Melissa Smith: Yes. And let me start actually just talking about margins overall because it's something that we think a lot about. Jagtar talked about some of the cost actions that we're taking and have been taking in the course of this year. Those are setting us up well. So if you exclude the impact of macro in the midpoint of our guidance, we're assuming 75 basis points of improvement in margins. So -- in the margin improvement. That's coming -- when I talked about product innovation velocity, one of the things that we've really focused on is how to get more through using AI and advanced tools than we have in the past. So we're getting more through, and we're doing it at a lower cost. So that 50% improvement had about 400 less people in our technology group. And you can see that coming through with lower CapEx in the course of 2025. And so we're seeing some material improvements of how we're bringing products into the marketplace from a redesign all the way from a development perspective. We've taken that same philosophy and started to deploy it in our operations group. We talked about the fact that we have a new tool that we put out there within our benefits business, which is claims automation. Great tool because it relieves one of the pain points from our customer in submitting the claim, does it more accurately and quicker than what we were able to do before. And we think of that as just the tip of the iceberg. And so we're really focused on how we can continue to use these use cases, amplify that through increasing our innovation. And those are things that we're factoring in when we're thinking about margin expansion. So as Jagtar said, we're moving -- we're really focused on how we can invest at the same time, how we can create scale within the business. Jagtar Narula: And then, Nate, just how to think about margins per segment. I would say we're pleased because within our guide, all of our segment margins are improving before you include the effects of macro. And so we're pleased with that. Obviously, with macro effects that impacts a couple of our segments. So Mobility and Benefits will be a little bit more flattish because of the macro impacts, while Corporate Payments will continue to improve from the higher revenue and relatively fixed cost base. Christopher Svensson: Makes sense. Appreciate the detail. And then Jagtar, maybe this is one for you. You mentioned it in the prepared remarks, and there are some comments in the supplemental. Just about the incentive with your scheme provider in Corporate Payments. Correct me if I'm wrong, but it seems like maybe incentives were a little bit higher than normal this year, maybe a little more weighted to 4Q. I guess if that's right, what were the reasons for that? And then is there any way to think about incentives with the scheme partner in '26? Are there comp considerations we have to keep in mind with regard to that specifically? Jagtar Narula: Yes. We negotiated a new scheme relationship in the second half of the year. We were really pleased with that. It helped us in the second half, saw a little bit in Q3, a little bit more in Q4. That will continue on into next year. So you'll have good comps on that in the first half of the year and then lower in the second half. Operator: Your next question comes from the line of Trevor Williams with Jefferies. Trevor Williams: I want to start with a bigger picture question on Mobility, just given the sales focus on the lower end of the market. Melissa, maybe you can give us a sense for how much of that segment you think is still up for grabs at the low end? And how you'd frame any of the competitive dynamics with some of the open loop providers? Melissa Smith: Sure, sure. Actually, if you look at the market, we are continuing to -- when you think about the marketplace itself, we have a sales force that's dedicated towards going after larger accounts. It's a place that we've had a lot of success in our business model. We've continued to win those new accounts. And then when we thought about where is the kind of broader open market opportunity, it's in the smaller account arena. We spent a lot of time refining first our credit tools and fraud tools and making sure that we're in a position that we felt really good about opening up our marketing channels. We've opened those up. We're having success in bringing customers through digitally and seeing that continue to be quite profitable for the business. And so the focus for us is continue to build market leadership in the mid and upward part of the marketplace. But we're also keenly focused on how can we increase the market share, which is largely unpenetrated in that smaller end of the marketplace, both for our North American mobility business, but also with our over-the-road business. This 10-4 offering that we have out there, we're really excited about because it allows us to extend into a new part of the marketplace that we historically haven't played in, and that's owner operators. And what they're doing is downloading an application, they're accessing our fuel network. They're doing that at a discount. Fuel prices are their largest operating cost. And so we're saving them meaningful money, but we're also introducing them into our set of products where they're building relationship with us, which if they grow, they can continue to mature into the other products that we have. If we don't, we have an extended credit to them. And so across the board, we think of the small fleet opportunity is a place that we're going to continue to penetrate. Trevor Williams: Okay. Great. And then maybe for Jagtar, on quarter-to-date trends, I'm just wondering how same-store sales in Mobility are looking relative to Q4 between the comps and assuming there's been some weather impact from the last couple of weeks. And then just to clarify to make sure we're hearing you right on the ex fuel growth cadence for Mobility. Is the message that Q1 should be the low point of the year because of the comps and then growth should look pretty similar for the balance of '26? I just want to make sure we have that. Jagtar Narula: Yes. Let me address the second one first. So Q1 is slightly lower because we have -- remember, we had the pull forward last year in the OTR business. So that will impact Q1 a little bit. And then growth, yes, correct. It's pretty similar over the balance of the year for the reasons I talked about earlier, BP coming online, but then you have the drag from interest rates. On the KPIs, what we saw from same-store sales is embedded in the guidance that we've given you. And what we're seeing from KPIs right now is on track for the guidance we've put out there. We did have some weather impacts, what was that, a week or 2 ago, but that's embedded in the guidance. So far, things are looking like they're on plan. Operator: Your next question comes from the line of Darrin Peller with Wolfe Research. Darrin Peller: I want to start off, just I saw the changes with David Foss. We're big fans of his, and it's good to see him taking such an active role on the Board. But more importantly, just curious what the -- I know you [ put a release out ] about the changes on the Board a bit more, bringing down a couple of positions to 10, I think. Help us understand what the thought process is there? What you think the Board wants to see strategically? Has anything changed from a strategic direction standpoint over the last couple of quarters as this has gone on as well? Obviously, you had a process going on. I'm curious what came out of that more so with the new Board. Melissa Smith: Yes. Yes, great question. I think if anything, it has reinforced the strategy that we have in place when we talk about the 3 pillars of how we're really focused on driving strategy and driving growth across the company, both the process of bringing in the external bankers, which just validated the fact that the business is better off together and execution should be our focus, execution of our strategy. And I would say that, that same thing has been true as we've gone through a refreshment process over a number of years. Bringing Dave on is part of that refreshment process of bringing in a new Lead Independent Director. He's great. I'm excited to have him on board. I'm sure he'll have his own perspective. But so far, I'd say it's just reinforcing the strategy that we have. Darrin Peller: Okay. And no change from your perspective to capital allocation decisions versus what maybe we would have thought about a year ago. And maybe just remind us what you're hoping for and looking for from the mix between M&A and buybacks. I know you talked a bit about it in the presentation, but anything that's really changed would be helpful in terms of thought process. Melissa Smith: Yes. It's a great question. When we think about capital allocation, risk-adjusted return is our North Star. And so for quite a period of time, that moved us into M&A. Over the last few years, we've spent $2 billion buying back stock. And it actually kind of leads [ into path ]. When I talked about in my prepared remarks that a couple of years ago, we started on this journey of really focusing on increasing organic innovation. It's really in mind of the fact we're in an environment where we've been doing less M&A, and therefore, we're really focused on how we can continue to go faster and bring new products into the marketplace and commercialize them. And we've seen some really good success in that. So we're actually really excited on the path we're on because we're seeing new products coming in. We're seeing them have commercial success. We feel really bullish on how we're going to continue to increase the pace of that and where that's going to bring the company over time. So from a capital allocation perspective, I would say, our North Star is risk-adjusted return, and we're going to evaluate share buyback versus looking at M&A for the near term, we're very focused on paying down debt. And the multiple we're trading at right now, we'll continue to buy back stock. Operator: Your next question comes from the line of Michael Infante with Morgan Stanley. Michael Infante: There's obviously been a lot of noise around agentic travel booking potentially reshaping OTA workflows and over time, the economics and the routing of travel payments. So I'm curious how you are thinking about that and what you're doing to be positioned for that shift. And as you contemplate the medium term, how should we be thinking about sort of where any potential impact would show up first across volumes, take rates or just changes in channel mix? Melissa Smith: Yes. Yes, sure. And we obviously, we think a lot about the agentic AI across our whole customer segment. When you talk specifically about travel, when we think about the search to book to pay journey, it's evolved for decades, and it's going to continue to do that. So the -- what we think about and what we see actually when we're working with OTAs is that they're structurally embedded in that journey. The large OTAs are effectively partnering with the AI platforms like OpenAI, like Google and the smaller ones are differentiating through curated experiences. And so there's a lot of adoption that's happening right now within the OTA space. What we know is that virtual card payments are really important in the space because it's this unique ability to have buyer-seller protections, you have global acceptance, automated reconciliation, a whole wealth of data that's put in there. So what we're seeing right now is that what we have, the capabilities that we have are becoming, if anything, more important and kind of the way that it's happening is changing, but the OTA is still deeply embedded in that process. And you can see that coming through in our volume growth. We've had really strong volume growth. Michael Infante: That's helpful. And then just one housekeeping follow-up. Melissa, you alluded to this in some of your commentary on Corporate Payments. And I know it's a fairly small part of the portfolio on both an absolute and a relative basis. But have you directly incorporated any impact from a potential renewal of a key OTA customer within the guide this year? Jagtar Narula: Yes, Michael, that -- we have factored that into our guidance. Our guidance includes everything that we're thinking about for the corporate payments business, including potential pricing impact, et cetera. Operator: That concludes our question-and-answer session. I will now turn the call back over to Steve Elder for closing remarks. Steven Elder: I appreciate everyone joining us today, and we've got a couple of minutes over here, but thank you for all the questions and interest, and we look forward to sharing our progress next quarter. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.