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Krista: Afternoon. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Reddit, Inc.'s Fourth Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw that question, again, press star one. Thank you. I would now like to turn the conference over to Jesse Rose, Head of Investor Relations. Jesse, you may begin your conference. Jesse Rose: Thanks, Krista. Hi, everyone. Welcome to Reddit, Inc.'s fourth quarter and full year 2025 earnings call. Joining me are Steven Huffman, Reddit, Inc.'s Co-Founder and CEO, Jennifer Wong, Reddit, Inc.'s COO, and Andrew Vollero, Reddit, Inc.'s CFO. I'd like to remind you that our remarks today will include forward-looking statements, and actual results may vary. Information concerning risks and other factors that could cause these results to vary is included in our SEC filings. These forward-looking statements represent our outlook only as of the date of this call, and we undertake no obligation to update any forward-looking statements. During this call, we will discuss both GAAP and non-GAAP financials. Reconciliation of GAAP to non-GAAP financials can be found in our letter to shareholders. Our fourth quarter letter to shareholders and earnings press release are available on our Investor Relations website Investor Relations subreddit. And now I'll turn the call over to Steven Huffman. Steven Huffman: Thanks, Jesse. Hi, everyone, and thanks for joining our Q4 earnings call. 2025 was a breakout year for Reddit, Inc. We surpassed both targets, built real momentum across our business, and improved our unique community model at scale. We crossed $2.2 billion in revenue, up 69% year over year, and delivered $530 million in net income. In Q4 alone, we welcomed over 121 million daily active users to our platform, up 19% year over year, and over 471 million weekly active users, up 24%. None of this would be possible without our team. Thank you to our employees for a phenomenal year. The momentum we're seeing across the business, especially in all three sections of our ad funnel, is the result of years of foundational work coming to life. I know we are all eager to build on this success. The numbers tell just a small part of an important story. Reddit, Inc. is at the center of a once-in-a-generation shift. And it's not a coincidence. We're now operating in a fundamentally different Internet. One shaped by opaque algorithms, generative content, and growing distrust. And yet, amid this shift, more people are turning to Reddit, Inc. Not just to aimlessly scroll, but to connect, learn, and research. That's because Reddit, Inc. is the most human place on the Internet. In a world flooded with AI swap, people are seeking real community, lived experience, and trusted opinions. That's Reddit, Inc.'s differentiator. To put it simply, more people than ever are coming to Reddit, Inc. because Reddit, Inc. is for everyone. One of the main reasons Reddit, Inc. is the go-to place for community is the candor of our conversations. This authenticity is rare. And it's what makes conversations on Reddit, Inc. uniquely helpful and influential. But in the age of AI, you can't easily distinguish a real person's thoughts or recommendations from a bot that trust erodes. That's why we're actively working on ways to preserve our authenticity and conversation quality. Then we'll quickly move to bot verification and labeling next. This begins the launch of verified profiles for brands and individuals in Q4. We're making good progress here, and we're excited to share more updates in the coming weeks. Our consumer product work remains a top priority. Particularly driving user growth, retention, and deeper engagement through more seamless experiences. Two areas of especially high priority are improving new user onboarding and integrating our search interfaces. Let's dig into how these are going. On the onboarding side, we deployed numerous experiments in Q4. We're actively iterating on these learnings and working fast to improve retention for new and casual users. That retention supports growth, engagement, monetization, and more effective marketing. Next, search. In Q4, we made significant progress in unifying our core search with Reddit Answers, our AI-powered search feature. Together, they drive more search volume and queries per user with over 80 million people searching directly on Reddit, Inc. every week in Q4, up from 60 million just a year ago. We released Reddit Answers in five new languages with more on the way, and are piloting dynamic agentic search results that include media beyond text. Reddit, Inc. is already where people go to find things. Making our platform an end-to-end search destination is how we meet that demand. As the industry evolves, how we think about our product and users must evolve too. We've historically reported logged-in versus logged-out users, as some of our work to streamline onboarding, instant personalization, for example, blurs the line between these states, the distinction between them makes less sense. As such, we plan to phase out reporting on logged-in and logged-out later this year. In 2026, we're focused on making Reddit, Inc. faster, more relevant, and more accessible to everyone, everywhere. A big part of this effort is improving feed relevancy. Using AI and machine learning to make Reddit, Inc. feel more personalized and useful from the second you open the app. These are high-impact investments that help shape how new users experience Reddit, Inc. and how often they return. I'm encouraged by the team's focus and velocity, I'm confident we'll feel the impact of the work this year. To rise to this occasion, leveling up our execution, and that starts with leadership. I'm thrilled to welcome Maria Angella Dew Smith as our new chief product officer. She brings a solid track record in scaling product organizations, and is already helping us move faster and focus on the highest impact areas for users and growth. I have full confidence that Maria will be a great partner to the business and significantly up-level our pace and quality of results. We're seeing strong commercial momentum right now and are confident in where we're headed. We have a special business model that is generating a lot of cash. Which is why we're excited to announce a $1 billion share repurchase program today. It's a testament to our growth and our commitment to delivering for our shareholders as we continue to invest in the business. Our work ahead is ambitious, and that's by design. We have the right team, the right road map, and the right moment. Now it's about execution. As always, thank you to our employees, communities, partners, and investors for being a part of this journey. With that, I'll pass it to Jennifer Wong to share more about the business. Jennifer Wong: Thanks, Steve. Hello, everyone. It was a strong quarter and finish to the year for Reddit, Inc. Our unique community proposition and ad platform investments continue to drive differentiated growth, and positive outcomes for our advertisers and partners. Total revenue in Q4 grew 70% year over year to $726 million. And for the full year, revenue grew 69% year over year to $2.2 billion. In Q4, the advertising business grew 75% year over year to $690 million driven by broad-based strength across objectives, channels, verticals, and regions. Four revenue drivers fueled our growing. First, performance ads outperformed. And revenue from lower funnel objectives such as purchase conversions and app installs doubled year over year. As we see the benefits of our investments in ML and new ad formats like shopping ads, start to pay off. Second, we saw strength across channels. With year over year growth ranging from mid to high double digits within both our large customer segment and scaled segment. Which includes mid-market and SMBs. SMB revenue doubled year over year. Third, we saw broad strength across verticals, 11 out of our top 15 verticals grew revenue by 50% or more year over year. Led by retail, pharma, financial services, and tech. And fourth, we saw strength across geographies. U.S. Revenue grew 68% and international revenue grew 78% year over year. Our ML and signals optimization efforts are making every impression work harder. In Q4, impression growth was the main driver of revenue growth. While pricing grew year over year as we delivered more outcomes and efficiency for advertisers. We also continue to expand our advertiser base. Total active advertiser count grew by over 75% year over year in Q4. As we added new accounts across all channels, including large, mid-market, and SMBs. Now moving to our ad stack. Our strategy focused on making all businesses successful on Reddit, Inc. By, one, driving performance of our ad solutions across the funnel, two, improving usability for advertisers and productivity of our sales force, through automation, and three, offering Reddit, Inc. unique solutions and ad formats. We made meaningful progress against each of these areas in Q4. First, our investments in ML signals and models are driving for advertisers to bring more outcomes and lower cost per action. In Q4, click volume in the mid-funnel grew over 60%, and lower funnel conversion volume doubled year over year. One example of our optimization improvements was our Q4 beta launch of campaign budget optimization for the mid-funnel traffic objective. CBO dynamically allocates budgets and reduces manual adjustments, to maximize performance and lower cost per click for advertisers. Our shopping solution, dynamic product ads or DPA, emerges a lower funnel driver in Q4. Fueled by strong performance during the Black Friday and Cyber Monday period. While we are still early in our shopping ads journey, we are growing advertiser adoption and improving performance. Since last year, enhancements to our shopping ad ML models delivered over 75% improvement in advertiser ROAS. To strengthen our lower funnel strategy, we continue to make it easier for businesses of all sizes to adopt our measurement tools including pixel and conversion API. Q4, CAPI covered conversion revenue tripled year over year. Like it has done each quarter in 2025. Second, improving usability for advertisers and productivity of our sales force through automation. At CES, we announced the public beta launch of Reddit Max campaign, our AI-powered campaign platform that uses Reddit, Inc. community intelligence to optimize performance for middle and lower funnel objectives. In testing, Max campaigns delivered an average 17% CPA reduction and a 27% conversion volume validating it as a performance driver for our partners. We're encouraged by this progress and believe Reddit Max campaigns can be a powerful tool to unlock performance, make it easier to onboard new customers, and deliver valuable business insights for advertisers from large brands to SMBs. Third, offering advertisers Reddit, Inc. unique solutions and ad formats. We continue to grow our suite of Reddit, Inc. unique ad products in high engagement formats, including free form, AMA, and conversation summary add-ons. In Q4, we launched interactive ads to beta through our partnership with Paramount, to promote their movie Running Man and debuted reminder ads to beta, which is a tool for advertisers to drive performance and engagement around product launches and events, including live streams and AMAs. To expand our Reddit Pro tools, we launched verified profiles, that empower businesses and professional entities to build trusted identities and relationships with their audience on Reddit, Inc. For example, global brands ask Reddit, Inc. communities for product reviews and feedback, and then they use that as a foundation for their marketing campaigns. Early results from verified profile tests show that verification helps drive content creation and community trust. Verified users post over 10% more in their first week and generate more consumer engagement. Now looking ahead, we believe we are well positioned for 2026. And our ad strategy this year will be focused on a few key themes. The first is scaling automation through our ads manager in Reddit Max. We plan to use Reddit Max as a foundation to streamline advertiser onboarding particularly for smaller customers and enable them to leverage the AI-powered tools and automation to simplify campaign creation from setup to creative, and augment performance from optimization to campaign insights. And through 2026, we plan to expand access and build automation that leverages Reddit, Inc.'s 24 billion posts and comments turning them into powerful signals to drive further improvements in ad performance. The second theme is delivering more advertiser value across the full funnel. In the upper funnel, we'll drive more outcomes and efficiency with our investments in brand auto bidding and video view objectives. In the lower funnel, we have a lot of headroom to scale our ML models and drive more outcomes and performance. For shopping ads or DPA, we're improving relevancy in ad formats to improve advertiser ROAS and the user experience. And for app ads, we're optimizing the ads to drive more in-app action that can translate into higher lifetime value users. We're also expanding our measurement capabilities, including first-party measurement tools, third-party partnerships, and enhanced attribution capabilities to show Reddit, Inc.'s impact. And the third theme is expanding the Reddit for business ecosystem. Our strategy is to build partnerships around our Reddit, Inc. unique community insights and tools to expand our connection to global brands and businesses. Building on our API partnerships with Smartly and WooCommerce, we are expanding our partner ecosystem to scale audience reach, creative automation, and full funnel measurement. And finally, as more businesses leverage Reddit, Inc. as a signal for the ever-evolving consumer intent, AI-powered insights from Reddit, Inc. community intelligence can accelerate how brands turn community conversation into actionable media strategies. Facilitating faster product feedback and more strategic consumer customer relationships. Overall, I'm incredibly proud of the progress this year. As we turn our attention to 2026, we're excited about the opportunities ahead for Reddit, Inc. Thank you for joining us and for your continued support. Now I'll turn the call over to Andrew Vollero. Andrew Vollero: Thank you, Jen, and good afternoon, everyone. Q4 was a solid finish to a standout year for Reddit, Inc. Both the strength and the consistency of our results continue to shine. These strong results included, first, total Q4 revenues grew 70% year over year. That's a particularly solid result given the tougher comp of 71% in 2024. Second, profitability hit a new high. Net income reaching $252 million, 35% of revenue. And adjusted EBITDA hit $327 million, 45% of revenue, making us a rule of 115 company this quarter, also a high. Diluted EPS reached $1.24, up more than 3x 2024. And third, for the first time, cash flow crossed $2.5 billion in a quarter, reaching $264 million in Q4. Free cash flow was 36% of revenue this quarter. The consistency of the results is also worthy of review. First, Q4 was Reddit, Inc.'s sixth consecutive quarter of over 60% revenue growth. Next, it was also Reddit, Inc.'s sixth consecutive quarter of 90% gross margins. Third, stock-based compensation expense was below 20% of revenue the third consecutive quarter. Hitting 13% in Q4. It was nice to see negative dilution for the year, with total shares outstanding falling slightly to 206.1 million, well below our medium-term dilution guide of 1% to 3%. These strong and consistent results enabled our business to scale successfully in 2025. On a full-year basis, 2025 revenues were $2.2 billion, up 69% and gross margins were 91.2%, up 70 basis points. Total adjusted costs grew 35% for the year, about half the rate of revenue growth. Full-year net income was $530 million, 24% of revenue, and adjusted EBITDA was $545 million at 38% margin. Reddit, Inc.'s incremental adjusted EBITDA margins for the year were 60%. Full-year free cash flow was $684 million, more than triple 2024. Diluted earnings per share reached $2.62, up from a loss last year. Now provide more color on our Q4 results. Q4 revenues of $726 million grew 70% year over year driven by a ramp in ad revenue, which grew 75% in Q4 to $690 million. As we saw broad-based strength across all three sections of the ad funnel. Other revenue, which includes revenue from our content licensing business, reached $36 million, up 8%. U.S. revenues were up 68%. International revenues were up 78%. Average revenue per user or ARPU grew 42% year over year. To $5.98. Moving to expenses. Our Q4 total adjusted costs, which included both our adjusted cost of revenue and adjusted OpEx, were $399 million in Q4, up 46% year over year. The expense growth rate was slightly elevated from the prior two quarters, which had averaged about 38% and the full year where costs were up 35%. Building on that thought, the main cost driver continues to be operating expenses, which on an adjusted basis were $340 million in Q4, about 85% of total adjusted expenses. Adjusted OpEx costs grew 41%, driven by investments in two areas: hiring and marketing. On hiring, our pace was similar to prior quarters. The company ended with 2,555 total headcount. Up 14% versus last year and up about 3% sequentially from Q3, the same pace as the prior quarters. In Q4, we added slightly less than 70 net people. With hires continuing to be focused in revenue-generating functions. Our ROI from sales and ad tech investments remains strong, multiples of the cost. G and A headcount was lower than last year and about the same as year-end 2023 as we continue to leverage back-of-house resources. And secondly, on marketing, we invested more this quarter. The spend was in the mid-single digits as a percentage of Q4 revenues. We target our spend in two areas. User marketing and brand marketing. To drive traffic and awareness. On user marketing, spend levels were sequentially higher than in Q3, driven by increases in volume and price. Price increases were driven by both seasonality as media costs rose in Q4 versus Q3, and geography, as most of the spends were targeted in the U.S. Market. On the brand side, we launched new audience campaigns focused in areas like parenting, entertainment, and sports, which had some encouraging results, but there's more to do. So rounding out Q4 with a few more numbers, Reddit, Inc. remains capital light. Continue to benefit from AI in many ways without the AI costs. CapEx was $3 million. We ended the year with a strong cash and liquidity position, Cash and cash equivalents on the balance sheet ended at nearly $2.5 billion, up $250 million sequentially and over $630 million from last year. So that covers Q4 and the full-year results. Let me speak to a couple of additional items. First, earlier today, we announced that our board of directors authorized a share repurchase program of up to a billion dollars with no set expiration date. For many leading companies, strategic capital deployment has been an important driver of their total shareholder returns, And specifically, repurchasing shares could be an attractive incremental tool to drive TSR, the medium and long term. For Reddit, Inc., we're proving our ability to grow durably at scale with our inflecting profitability underscoring the attractive incremental margins inherent in our business. As we think about our three capital allocation priorities, we will continue to prioritize investing in our core business first. Next, we'll look to do M and A where it makes sense, both tuck-ins and more scaled opportunities. Looking to buy capabilities, technologies, and companies. And third, when it makes sense, we'll repurchase shares. Our differentiated financial profile gives us the opportunity to invest in all three priorities. We plan to be in the market from time to time to buy shares opportunistically, We'll continue to be prudent about the financial management targeting to keep over a billion dollars of cash in the balance sheet consistent with our capital framework. So switching gears to the second item, I'll now share an update on our user reporting. Big picture, we want to make sure the metrics we share align with how we're managing the business. As you heard from Steve, product strategy is evolving. We're focusing on making it easier for all users to engage with content on the platform and find immediate value regardless of whether users logged in or logged out. Our goal is to grow all users. As a result, the distinction of whether a user is logged in or logged out has become less of a management focus and less important to how we think about and manage the business. As a result, we were updating our disclosures starting in 2026. To better reflect the metrics we use to run the business and evaluate our operating performance as we scale. Specifically, starting with Q3 2026 disclosures, we'll continue to report The US and international DAUQ and WAUQ numbers as we've done historically. But we will no longer report logged in and logged out metrics. Between now and Q3, we will continue to report logged in and logged out metrics for the 2026. Turning now to the outlook. We'll share our internal thoughts on revenue and adjusted EBITDA for the 2026. As well as some additional thoughts on stock-based compensation. In the 2026, we estimate revenue in the range of $595 million to $605 million representing 52% to 54% year over year revenue growth with a midpoint of about 53%. Adjusted EBITDA in the range of $110 million to $220 million representing approximately 82% to 91% year over year growth and an adjusted EBITDA margin of 36% at the midpoint. The Q1 guide implies a total adjusted cost base of $385 million which would be down sequentially to Q4 expenses. I'll also share a thought on the full-year stock-based compensation expenses SBC was $387 million or about 18% of revenue in 2025. Similarly, in 2026, we're aiming for stock-based compensation to be in the high teens as a percentage of revenue. Similar to our historic revenue trends, expect nominal SPC expenses to increase each quarter. We'll target dilution at the lower end of our medium-term guide of 1% to 3%. So overall, it was a strong finish to a solid 2025 for the company, and our attention now turns to 2026 as we continue to focus on converting our leading revenue growth and high margins into meaningful cash flow and returns for our shareholders. That concludes my comment. Let me turn the call back over to Steven Huffman. Steven Huffman: Okay. Thanks, Drew. Normally, we will take a couple of questions from the community. First, I want to acknowledge the R Reddit stock community and their earnings call bingo card. I just want to confirm, I will refer to everything bad as an opportunity that's what they are. And Drew will use the word corpus many times. Thank you all. Love you. Okay. Question from the community. Why do a buyback instead of putting that money towards future growth, product initiatives instead? Andrew Vollero: Yep. Take that one, Steve. I think the short answer is we can do all of our three capital priorities. That's the idea. The strategy here is really to return capital to our shareholders, and that's the right strategic decision for the company. I think if you look at your great companies, your leading creators of total shareholder returns, It's obviously the revenue growth and the margin expansion that drives the bulk of it. But the good companies that are the leaders in TSR for their shareholders also have capital allocation strategies. And so this is a strategic move being made by the company to return capital to shareholders. Our priorities haven't changed, Steve. We've got three priorities here. First and foremost, it's investing in the business. Second, it's M and A. Third is share repurchase where it makes sense. I think by the numbers, now have $2.5 billion on the balance sheet in cash or very close to it. We want to keep a working capital on the balance sheet as it were of about a billion dollars in cash. So you now have an ability to do all three priorities, which we haven't had before. Obviously, the business last quarter had a terrific quarter. Cash flow was $264 million. What you're seeing is the model is starting to inflect, and you're seeing the model really shine. You know, CapEx for the full year for this company is under $10 million. So you're really seeing the model start to throw off cash. And so I think that just gives us the ability to execute on all three dimensions. First priority, investing in the business. Second priority, doing M and A where it makes sense. And then third, share repurchases will be opportunistically in the market from time to time when it makes sense. Great. Thanks, Drew. Thanks, Steve, Jen. Krista, let's please open up the line for questions from the folks there. Thank you. Krista: Thank you. Your first question comes from Ron Josey with Citi. Your line is open. Ron Josey: Hey, thanks for taking the questions. Maybe one for Steve. On product and one for Jen on Reddit Max. So Steve, given the amount of commentary and focus on the consumer product work, I want to understand a little bit more based on what you've seen around the revamped onboarding as well as incorporating answers in the web. Just talk about early benefits maybe on the onboarding flow change, around retention. And then on search in integrating search with Answers, any impact there? Talk about the impact of user experience. So that's on product. And then, Jen, you mentioned, Reddit Max to use to streamline onboarding. I'd love to see how you believe that that might pan roll out throughout the year. And if that and how that channel mix might evolve across vetted advertisers being large, medium, and SMBs. Thank you. Steven Huffman: Okay. Thanks, Ron. Because Consumer products. So let's start with onboarding. We ship a bunch of stuff in Q4. Some worked. Some did not. Lots of learnings across the board. I'd say that the core thesis remains the same. Streamlining that process does improve retention. Think we've got some interesting things about using LLMs to how to help triangulate users' interest. I think one of the other learnings also, I think it's pretty straightforward. Bringing users into the feed faster requires the feed to be better. And so we'll be making pretty good investment into ML to improve that kind of cold start feed for new users. So I think lots of lots of opportunity there and more to come. And then on search, we did bring the search bars together for the most part. So you're on search bar. You can go into ask. And then if you run a traditional search, we'll often pop an answer there. Red answers queries, I believe we're up from 1 million to 15 million queries over the last year. And then 60 to 80 million overall search queries. So we're seeing nice growth there. Then as I mentioned in my remarks, we're gonna continue to invest in Answers. And you know, I think where this is going is we'll just handle more and more queries with answers. Because it lets us respond in a more flexible way to the kind of wide range of things that users ask. Okay. And then, Jen, the question to you was on RedMax. Jennifer Wong: Yeah. So thanks for the question. So right now, we're in the process of converting our lower funnel advertisers into Reddit Max. Obviously, there are thousands of advertisers that need to be converted. That's you know, an effort. So that's where we're focused first for existing customers to have that experience. They're very familiar with Reddit, Inc. And then, you know so I'd say it's still you know, quarters out to really start to do the new onboarding. Of new advertisers on because we're so focused on conversion right now. But if I pull up you know, I think Reddit Max will make onboarding easier think it will drive productivity and performance gains. For folks coming into the lower funnel for the first time and get that in the benefits to creative. And the optimization. So you know, I think this is we think this will take out more friction and help us, you know, continue with our acquisition growth. Your next question comes from the line of Benjamin Black with Deutsche Bank. Your line is open. Benjamin Black: Great. Thank you for taking my questions. Steve, in the letter you spoke about Reddit, Inc. being a source for humans, but I'll be curious to hear your thoughts on AI-generated content on the platform. Know, how do you see that evolving from here? Could it ultimately prove additive and support engagement in certain instances? Just interested to hear your thoughts there. And then secondly, you know, in a world where we're moving closer and closer to potentially going to agentic commerce, I'd love to feel and sort of I would love I'd love to sort of hear how you think you're positioned. Right? Mean, I can imagine the value of your data or your content goes up dramatically, but how do you think about the impact to users, you know, contribution rates, and certainly the ad side of the business? Thank you. Steven Huffman: Thanks, Benjamin. Okay. So first question. AI-generated content, how do we think about it? Could it be additive? Well, look, Depending on how you look at it, right, machine translation is AI-generated content. So there's certainly a role for using like, AI to communicate better. Right? We do that. Our users do that. I think there's also a version of this where know, there's a you know, we see more and more of this, I think, just on the Internet, where people write with AI. And I think we're going through this transition right now. It's my opinion. It's kind of annoying. But there's still a human behind the prompt. And then there's, like, full, like, bot-like behavior. The latter, don't want on Reddit, Inc. And to the extent that is automated uses of Reddit, Inc., we want those basically to be part of our developer program apps. And so we do see things like this on Reddit, Inc., like the remind me bot and the haiku bot and things like that. So think the answer to questions like these for Reddit, Inc. is almost always in transparency and intentionality. At the end of the day, Reddit, Inc. is for humans to talk to other humans. So to the extent that there's anything know, automated or generated, that needs to be very well labeled. It doesn't mean we have to outlaw entirely. Just needs to be you know, marked as what it is because there are times when it's helpful. Okay. Jen, the question to you is Agentic Commerce and how we think about that. Jennifer Wong: Sure. I think Reddit, Inc. is very well positioned for the changes, you know, the ever-evolving consumer decision journey and very well positioned for what's coming in Agenda Commerce. You know, Reddit, Inc. is the point of trusted recommendations. It's where the human who actually has to deploy resources and make decisions is actually searching for what it is that they're interested in buying. I think the layer after that, which is when you do the price comparison and when you do the last click and the execution of that, could be commoditized, frankly, because that's where the agent will get the job done. But the human, the last point of decision making of what to buy and allocating resources is at the recommendation, and Reddit, Inc. has the best recommendations for products and services and that's present on Reddit, Inc. and in our partnerships with LLM. So I think we're really well positioned because marketers are always going to want to talk to the customer, and the customer is going to be the one to deploy the resources and make those decisions. And that position is very, very important for all marketers, I think, for any business. Your next question comes from the line of Thomas Champion with Piper Sandler. Please go ahead. Thomas Champion: Thanks very much. Good afternoon, everyone. Steve, can you talk about the monetization opportunity with logged-out users? Does removing the reporting distinction imply monetization can come closer to parity between logged in and logged out? And maybe you could just talk about mechanisms to get there, if so. Thank you. Jennifer Wong: Thanks, Tom. I can take that. Sure. So logged-in users and logged-in users both see ads. And on an impression basis, the value of those impressions is the same. There's actually no differential between them. The real differential is around engagement. So our strategy is to increase engagement. Right? So what we want is the weekly users that we have to become daily users. And we don't want having to be logged in to be a criteria for personalization to get the best to get a better Reddit, Inc. experience. And that's why, you know, this change to remove the log in, log out metric because it'll be blurred. It's about this creation of increasing the engagement. And as they, you know, want to say, the LogDot user in gets a more personalized experience, and, you know, increases engagement, that's where you can get more value because every imprint you'll be able to see more impressions with that engagement. So the opportunity is an engagement via those product improvements that Steve talked about. Your next question comes from the line of Justin Post with Bank of America. Your line is open. Justin Post: Great. Thank you. Maybe a couple of Steve, just wondering if you could talk a little bit about the AI deals with Google and OpenAI. How are they using their data? And you think it's it's really growing in importance for for their models? And and second, you kicked it off with some comments on bots. Do you expect any user impact, or is there any revenue opportunities around? Thank you. Steven Huffman: K. So on thanks, Justin. So on the AI deals, really, our partnerships with Google and OpenAI I think we can see the growing importance of Reddit, Inc. Reddit, Inc. per profound is the number one cited source in AI answers. Our relationships with both companies are very healthy. The conversation is shifting from know, a purely business deal to you know, more of a product partnership. And so you know, I think the exchange will be we help you build the best version of your products. You help us build the best version of our products. Specifically, what we're looking for in any relationship like this is can we bring users into the community parts of Red? Right? Red is product. Is human connection, is conversation, is communities. And we want to bring users into that experience on Reddit, Inc. That, of course, generates more conversation, and makes that whole kind of partnership flywheel work better. So that's where our head's at right now. But both relationships are great. On things like bots, no user impact. We remove and have the lifetime of this company. Know, anything that we believe is a bot, we remove from our users. Before we share anything. But we do see more and more agentic usage of Reddit, Inc. specifically somebody might be writing a comment with ChatGPT and that sort of thing. There is a culture of labeled bots on Reddit, Inc. already. So this is what I mentioned before, the remind me bot, the HaiQ bot, some things like that. And I think with the Reddit, Inc. developer program, there's more opportunities to expand the functionality of Reddit, Inc. But that means that those sorts of interactions need to be well labeled. But the default assumption on Reddit, Inc. has been and should be you're talking to humans because that's what Reddit, Inc. is for is people talking to people. The AI version of this challenge is just a new chapter in this challenge. We've seen this sort of challenge. Right? It's just spam in general, really, is what we're talking about. The spam challenge has been something we've been fighting for two decades on Reddit, Inc. So this is really an evolution of that challenge, which we'll continue to stay vigilant on. Krista: Your next question comes from the line of John Colantuoni with Jefferies. Please go ahead. Your line is open. John Colantuoni: Okay. Great. Thanks for taking my questions. I have two. As you've seen more users engaging with Reddit Answers, and search, I'm curious how you've seen that impact monetization in the near and long term with your ad products within search still at nascent stages? And, number two, Jen, you mentioned pricing has been a driver of revenue growth. I was wondering if you could put a finer figure on how much pricing contributed to revenue And as you think about what drove pricing, I'd be curious to get your perspective if pricing's contribution will remain low or start to grow over time and how you see that impacting advertiser adoption if your pricing starts to converge with other platforms? Thanks. Jennifer Wong: Sure. Okay. So the first one was about Answers and Search. I know there's a surfaces where we don't have monetization on, but, obviously, is an enormous market and opportunity for us. The behavior of searching, both navigational and agentic, right now seems incremental and additive to the existing engagement. And so that's great because that's an opportunity for us to have another touch point and a very specific touch point that often has a shopping, lower funnel, high intent, you know, converting mindset to it. So it's something that we're really excited about. And I think, you know, that opportunity is ahead of us. But it's, you know, it's incremental to our opportunity today. The next was a question about pricing. So we, you know, we don't break out impressions and pricing numerically, but it was a growth driver. You know, what's driving pricing is our strategy. Right? So our strategy is to make every impression more valuable by delivering more hard marketing outcomes per impression to our advertisers increasing the click-through rate and response rate so we have more traffic, to advertisers for research, you know, in consideration. More conversions, more app installs, more app in-app events. Right? And so that's what's driving you know, the competition and the pricing is the value of those outcomes. Obviously, you know, when you increase when pricing increases, it's a result of the demand for those outcomes. And what matters is the ROAS equation. It's the return on ad spend. So you know, if I'm getting a high LTV quality user, Is that customer incremental to what I had? So the measurement piece becomes very important. In, in supporting those gains. And that's why measurement's been a big focus for us. It's constantly demonstrating the unique value of Reddit, Inc. You know, you're getting incredible marketing outcomes with great with improving returns from all the ML and signals work. That's actually what's driving, you know, our strategy. In in in in driving the the success of the marketplace. Your next question comes from the line of Richard Greenfield with LightShed Partners. Your line is open. Richard Greenfield: Hi. Thanks for taking the question. I got a couple. So first, on Reddit, Inc. search, Steve, you know, I when I click on the small magnifying glass, I see the new experience where it kind of dynamically expands across the screen, and I've got the ask button as an option. But search overall is still this, like, little magnifying glass in the upper right corner. I'm wondering, as you think about sort of the starting point or how you think about using the home page real estate specifically on the app to make it more especially if you've improved the search experience, and it seems like such a key part of you know, in terms of the growth of usage. How do you make it more visually focal focused on by consumers from a homepage standpoint over the course of 2026. And then just to follow-up on the the commentary you had around Google and OpenAI in terms of, the renewal or the how you're talking about them in terms of more of a partnership going forward. The way that these companies sort of cite not just you, but everybody on the Internet is they paraphrase the content, and then they put a little circle with a number, you sort of click to get more information from where the sources are. How do you like, if if you could wave a magic wand or on your blackboard, like, what do you want it to look like so that you have a way to drive people more deeply into the Reddit, Inc. conversational content? Steven Huffman: Okay, Rich. Thanks. On the search bar, you are in one of the variants. There's another variant, the one that I happen to be in. Has a big fat search bar at the top. So you can go on the natural journey or if you want to follow-up after a can put you in the big search bar there. Anyway, we're testing lots of things there. I like the bigger one. On Google and OpenAI, how we feel about the citations, look, I think there's a lot of movement there. You know, if I could wave a magic wand, I think what we really want is to you know, say I go to some other platform I say, what's the best speaker? Reddit, Inc. helps you you know, get a few options for what the best speaker is. I'd like to make that user aware, hey. You can go to the R audio file community and talk to other speaker geek. I think that's the sort of thing that really differentiates Reddit, Inc. and would be additive to, you know, that user's experience. But there's so much movement in both of these products. On the other part of my brain, I just have some empathy for product people who are moving really, really fast. So we're in close connection with them. Relationships are healthy. Obviously, there's a lot of movement there, and I expect there will continue to do continue to be. But, you know, we'll continue, I think, to evolve together through this. Thanks. Krista: Your next question comes from the line of Vasily Karasyov with Cannonball Research. Your line is open. Vasily Karasyov: Hi. Good afternoon. I wanted to follow-up on what you said earlier about the new advertising solutions across the funnel that you're launching. So it seems like brand and performance growth rates in 25 converged. And yet in 24, performance was outgrowing brand by a lot, two to three times. Right? So given all the solutions you're launching, DPA, Max, and so on, should we expect performance to outgrow brand again given the brand has upper comps too? Or are there any solutions on the brand side that should have said that? Thank you very much. Jennifer Wong: Yeah. Thanks for asking. We are a full funnel solution. So that's the you know, Reddit, Inc. delivers value for marketers from the top to the bottom of the funnel. And brand, you know, is absolutely a piece of that of that full funnel solution. We've actually been investing in brand as well. And when I think about 2026, it's an area we'll continue investing in. So the first is around Reddit, Inc. unique experiences. So, you I've mentioned the interactive ads that we started to test in Q4. I think there's a nice road map there for, you know, high impact engagement, engaging ad units that are Reddit, Inc. unique. The second is, last year, we invested in video and deeper video views and video view optimization. And I think we're gonna go deeper on that. For video forward advertisers, they can run campaigns on Reddit, Inc. For maybe even longer video links. It's something we're interested in. And then just raw optimization automation. You know, we're we want to get auto bidding adopted broadly. Gonna work on things like auto targeting. Some of those optimizations that we have at the lower funnel, we want to do for the brand experience. And then finally, measurement. Is another area that's really important to us. We're gonna be really focused on the measurement partners and, you know, demonstrating Reddit, Inc. brand value. So, yeah, this it'll be work in brand. Again, we're a full funnel solution. We care about delivering value across every piece. Your next question comes from the line of Mark Mahaney with Evercore. Your line is open. Mark, your line is open. Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open. Jason Helfstein: Thanks for taking the question. Jen, just can you elaborate a bit more or maybe help us understand around the progress as far as hiring, training, sales and support, to catch up with basically what seems like more advertiser demand than you could handle. So just like, I guess, how long does it take to catch up and just kinda where are you in that journey and just any color you wanna share? Thanks. Jennifer Wong: Sure. Yeah. I mean, look. We have a process, like, which we continually invest in our Salesforce, you know, and we continually work on their productivity as well through tools and technology. And when we see an opportunity, I mean, the ROI is so high that you know, we'll invest behind new verticals, new geographies, you know, expanding channels. So something that we do, frankly, all the time. I you know, I there is you know, maybe the maybe the behind the question is, like, you know, could you grow faster if you added more resource something like that? You know, I think, again, all of this is a process by which you take these products to market and customer digestion. And adoption. That's just the reality. And that we have you can see we have so much going on in our road map across the funnel. In terms of new products and services and adoption. Think the team's doing a great job, you know, shouldering something like Cappy that doesn't drive revenue today. While also, you know, servicing marketers' needs know, in the marketing platform. So really are very thoughtful about that digestion. I think, you know, six quarters of 60% growth, like, we are fueling this business, you know, as much as we can, and we're always looking for opportunities to do it more. Andrew Vollero: I don't if you had anything to No. I I think that's right. I think there's a really good partnership, and I I think you're talking about you know, are we chasing demand? I mean, at times, but it's really about the enabler. Like like, we really gotta work cross functionally, but but Jen and I are looking at it We're meeting multiple times a month on this very topic. And when we see an opportunity, mean, it really behooves us to to go and make investments, with the margin profile that we have here. It it's really easy to make this invest these investments. It's getting, you know, three to six times our our return out in that in one calendar year. Like, you can really and I love the fact that it's, you know, immediate returns and and easy to track. You know, you added this account or you you can see the sales in this geography or vertical. So, anyway, we're we're really pleased with it. It's really the enablers and and sometimes the enablers in our control, and sometimes we're waiting for customers on some of the enablers. Krista: Your next question comes from the line of Josh Beck with Raymond James. Josh Beck: Thank you for taking the question. I wanted to ask a little bit about the large advertiser category, kind of where you are with respect to wallet share and kind of how much headroom you think there is with some of these large advertisers? Obviously, you're having great momentum bringing on a bunch of advertisers, but kind of interested in that segment specifically. And then, you know, with respect to the outlook for Q1, I think going back to last quarter, you aired a little bit conservative because of some of the tariffs dynamics. Is there anything to be mindful of just with respect to the broader environment relative to Q1? Thank you. Jennifer Wong: Sure. I can take the first one on the large customer. So how much you know, from a share perspective, I think that there's opportunity to go deeper with these partners when I look at it. You know, some know, often start with us in The US territory but can become global partners, and some are just you know, still mid-flight in that journey. Think the other is, you know, some of these large customers, they have like, a portfolio of a 100 different brands. And still haven't penetrated all those brands. It's still in the minority percentage. That we've covered at this point. So there's a lot more ground to cover in terms of the LOBs and lines of business. Then finally, I'll say, you know, we with the large customers, we typically started at the top of the funnel, you know, in in in a lot of cases, the opportunity is to move into the lower funnel. A lot of the lower funnel groups is actually fueled by the scaled segment, more and more by the large customer segment, but that's still an opportunity for us. And some of the reasons why is just because laying down CAPI and some of that infrastructure for lower funnel just takes a little longer with larger advertisers. We're making good progress. But there's still headroom there. So, I mean, these advertisers are are are massive. And, we're still, I think, scratching surface in terms of our opportunity given the footprint, you know, of Reddit, Inc. that keeps growing 20% year over year, really settled. Andrew Vollero: Josh, hey. On the guide, let me give you a a couple of kind of pieces of information. Let me specifically address your question. Like, what's different? Is there anything different in first quarter? I think the guides that we gave for this quarter, of 52% to 54%, very similar to the last couple of quarters. We've been in kind of a low to mid 50 range in Q3 and Q4. So very similar, you know, kind of profile on the guides. I think the double click on the quarter itself is we were pretty strong from start to finish in in Q4. Like, we we had a good October. Had a good November. We had a good December. Like, it was it was a good quarter for us. So so we end with with momentum in the business. Think in the margin, you know, we're still on the on the forecasting side, we still ran around quarter with work to do. We still have, you know, 40 to 50% of our orders to write in quarter. I think, specifically your question, in the first quarter, your business comes a little bit later. March tends to be your biggest month. And so you you you gotta you gotta make March happen. And that, for us, in a lot of cases, can happen intra quarter. That's really the only dynamic on the margin. But overall, very similar guide to the last couple of quarters. And there was momentum as we were leaving the fourth quarter kind of toward the holiday season. Does that make sense? Krista: Your next question comes from the line of Naved Khan with B. Riley Securities. Naved Khan: Thank you very much. I have a two-part question, if I may. So maybe just on the on the user marketing I'm curious how you're looking at the ROI on the on the user marketing spend. And what are your thoughts on scaling this further and and as we enter 2026? And then the other question I have is just on the on the M and A. Drew, you mentioned includes even scale. Yeah. Acquisition scale capabilities, I'm just thinking what what what these kind of what these might be. So just any color would be helpful. Thank you. Andrew Vollero: Sure. Sure. Let me let me take that. On the on the ROI side, I mean, pretty consistent with how others are are modeling it. We're looking at the costs for particular advertising, and then we're looking at the users that bringing in, and then we're looking at a retention curve. Pretty similar to, I think, how other companies look at it. I think the longevity of our model tends to be a little kinder than most because of the high gross margins that that that a user can bring here at Reddit, Inc. But overall, you know, pretty linear model, really valuing on sort of the income statement basis, what's the value that it creates. And and a pretty straightforward ROI payback in, you know, a relatively short period of time. So not a whole lot different than than most of the other models that you may see in the business. I think we do have a little bit of an advantage because of the high gross margin. So the revenues that we are able to bring in with the user do give us a little bit better ability to to pay back. Okay. On the second one, on the M and A side, look. I'm trying to say there is we continue to look at a lot of opportunities. I probably wouldn't overthink scaled opportunities. I would just at it as sort of a spectrum of opportunities. We're looking at capabilities. We're looking at companies. Looking at technologies. Think, you know, we've we've been successful here tucking in a number of technologies. It's actually relates to Jason's question a couple of minutes ago. It's really been one of the secrets of our success on the revenue side. The ad tech team has done an outstanding job in how they've been able to really kinda drive our business. One of the ways is they tech in technologies rather than build it themselves. Saves us six months to market, saves us twelve months to market, and you have a proven product. So we we have been able to kinda tuck things in successfully, particularly on the ad tech side. It's really helped us in the monetization journey. I would say that's really been the primary focus of where we are today. But we're not ruling anything off the table. That's why I mentioned the scale and the setup. Krista: Your next question comes from the line of Andrew Boone with Citizens. Your line is open. Andrew Boone: Thanks so much for taking the question. Jen, I wanted to ask about your shopping ads. What do you need to do from either a tool or an ad format perspective to grow that vertical faster? And then, Steve, going back to Seekers and some of the generative AI tools that are now available, can you flesh out what your view is or what the experience is that you're trying to build in terms of people coming to Reddit, Inc. and looking for x y z? Thanks so much. Jennifer Wong: Sure. I can take, I can take personal on DPA. So I think that we have been our our product today is competitive certainly with like, say, tier two peers. Pretty consistently, both on a prospecting and retargeting basis. But when you think about tier one, you know, companies, I think we want to do more work on ML in terms of the signals that I think can improve our ROAS to be even more competitive. I mean, shopping is a pretty numerical return exercise. But we are quite competitive today with, you know, very quickly. You know, we only released it in April with a number of peers, and that's allowed us to grow shopping. The second piece is just raw work on adoption. So with shopping, you have to get product feeds in You want Capi, you know, because you want that real-time signal. So there's a little there's definitely more work in the setup, for our sales team that we are the team is doing a really good job working through, but they're, you know, just working through the customer list. Yeah. I mean, you saw our strong growth in retail, That's fueled by the success we've been seeing in DPA. Now it's very early, There's a lot more advertisers and a lot more opportunity there. But it gives you a sense of, like, I think, you know, that of of DPAs possibility. Steven Huffman: Okay. And for search, you know, we spent most of last year talking about how do we unify these two search experiences. The traditional search on Reddit, Inc. and then the Gen AI search. I think the main thing that we've learned is that the Gen AI search results, I think, will just be better for most queries. There's a type of query there I think, particularly good at. I would argue, the best on the Internet, which is questions that have no answers. Where the answer actually is multiple perspectives from lots of people. Right? What should I watch? Where should I go? What's the best x y z? I think Reddit, Inc. is really great at this. When we thought about traditional search, it's more like navigation. Right? Take me to this topic, to this subreddit. But we're actually finding that the LLM search results is, in many cases, better for this as well. That's the direction we're going. Right? Search WAU in the last year is up 30% from 60 million to 80 million. The Answers WAU, so the LLM search, went from 1 million in Q1, 7 million last quarter, 15 million this quarter. So we're seeing a lot of growth there. And I think there's a lot of potential. The other thing I mentioned in my script is with the LLM answers mostly in text now, we'll start making those responses more media rich as well. So one of the primary use case I think there's three use cases that people come to Reddit, Inc. for. One of the primary ones is searching. But the other is being for the feed or for the community experience. But search is a big one, we see a ton of opportunity there. Krista: We have time for one more question, and that comes from the line of Colin Sebastian with Baird. Please go ahead. Colin Sebastian: Thanks. Good afternoon. Appreciate the questions. We're hearing that Reddit, Inc. is sort of evolving as a gateway for brands that want to surface more consistently in LLMs. And if you agree with that, does that create a pathway for more of those companies to also experiment with ads on the platform? And then secondly, maybe, Jen, do you see an opportunity to shift the perception that some advertisers still have of Reddit, Inc. as more of a niche content platform rather than an essential full funnel opportunity at their marketing or outreach you can do to sort of the market catch up? Thank you. Steven Huffman: Thanks, Colin. Jen and I are gonna try to take the we'll tag team this first one together. So it's it's really interesting when when I talk to customers so brands, increasingly, we've seen this steady increase over the years of first, what is Reddit, Inc.? Okay. What is community? Okay. I get it. How do I show up well? To now, they're like, I have to be on Reddit, Inc., and I have to show up in the right way. And I want a way to do this, not just as a paid customer but organically. I want to provide great customer service. I want to get my content there. Because increasingly, they realize that the best way to do well in external search to show up in LLMs is to show up well on Reddit, Inc. So we're actually starting to see a shift in their thinking. Multiple brands told me we're reorganizing our social media team to be the Reddit, Inc. team. So they're really starting to appreciate the differences with Reddit, Inc. And the opportunity that it brings. And, of course, I think if they can have great organic experiences, which we're trying to help them with, this is our Reddit Pro line of work. So the profiles the official accounts, the labeled accounts, even some of that app and bot labeling that I was talking about before are all ways to allow brands to show up as first-class citizens, well-labeled and intentional. And of course, this we believe, will open the gateway for the customer relationship as well. Jennifer Wong: The only thing I'll add to that is I think I think marketers really they they do they are they do understand that the reason why Reddit, Inc. is so valuable valued for its recommendations and LLMs is because, you know, LLMs don't know anything. Unless it's from humans, and Reddit, Inc. has the best know, answers and recommendations. And I think their perspective is, you know, yes. They would they would love that, but, obviously, you know, nobody knows what comes out of an LLM until it does. But the opportunity on Reddit, Inc. where that human conversation is happening is the opportunity in front of them today to engage that audience and set a conversation with them through our marketing platform. And that is the best way to do it and to take advantage of marketing outcomes with that very influential audience today. So that is that is, yes, a part of of conversations we have. The second part is I think you asked about Reddit, Inc. you know, appearing niche. You know, this is one of those myths we always had a myth bust on Reddit, Inc. because we show up as a 100,000 communities that cover every topic on the planet. But when you put it all together, we're over half a billion you know, monthly, and we're a 120 million daily. So it all adds up to a very large at scale audience. Know, it is constant education to to to remind people of that. And because we can show up in with with with those communities that can seem so so niche. I think the other piece, you know, we'll be doing is as we build on our community insights and tools, we're gonna be bringing that closer to our ads manager so that there's a nice connection between the insights the audience that you see, and the volumes that you can actually touch on Reddit, Inc. and and engage with and then the opportunity in the marketing platform. So we want to bring that all together a little bit more so that that that volume and that scale is a little more present in the insights. Steven Huffman: Great. And, Krista, I think we'll end the call there. Just want to thank everyone for joining, and look forward to speaking again soon. Thanks, all. Bye bye. Krista: This concludes Reddit, Inc.'s fourth quarter 2025 earnings call. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to LiveRamp Holdings, Inc.'s Fiscal 2026 Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And to withdraw your question, simply press star one again. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Drew Borst, Vice President of Investor Relations. Please go ahead. Drew Borst: Thank you, operator. Good afternoon, everyone, and thank you for joining our fiscal 2026 third quarter earnings call. With me today are our CEO, Scott Howe, and CFO, Lauren Dillard. Today's call and the earnings press release may contain forward-looking statements. Drew Borst: That are subject to risks and uncertainties that could cause actual results to differ materially. For a detailed description of these risks, please read the risk factors section of our public filings and the press release. A copy of our press release and financial schedules, including any reconciliation to non-GAAP financial measures, is available at investors.liveramp.com. Drew Borst: Also, during the call today, we'll be referring to the slide deck that is also available on our IR website. With that, I'll turn the call over to Scott. Thank you, Drew, and thanks to everyone joining us today. Scott Howe: You'll hear three main themes during my remarks today. First, our business continues to demonstrate durability, predictability, and scalability, as evidenced by our solid performance in Q3. Second, AI is a tailwind for our business since we provide critical foundational infrastructure that allows our partners to utilize AI more effectively. And third, our focus on rule of 40 is unwavering, and we intend to achieve membership in this exclusive club in FY 28. Let's start with the quarter. Yet another proof point of the durability, predictability, and scalability of our business. We delivered a solid third quarter with revenue and operating income exceeding our guidance for the eleventh consecutive quarter. Overall, our team is executing well, and we made notable progress with several key growth initiatives, including expanding our data marketplace to include AI models, agents, and applications, and strengthening our go-to-market by expanding our usage-based pricing model to reseller customers. More on these in a minute. First, let me hit the highlights from Q3. Q3 revenue growth was 9%. Scott Howe: Inclusive of a four-point acceleration in subscription revenue also to 9%. ARR increased $11 million quarter over quarter and 7% year over year, driven by use cases for commerce media, CTV, and cross-platform measurement. Total customer count increased by quarter over quarter, the largest increase in more than three and a half years. And our million-dollar-plus customers increased by eight to a high of 140. In Q3, we signed several million-dollar-plus upsell deals, including with the world's largest e-commerce retailer, a major social media platform, and a leading QSR. The deals were mostly for expansions for connectivity and clean room insights. We had record quarterly operating margins on both a non-GAAP and GAAP basis, and record quarterly free cash flow. We continue using the bulk of our free cash flow for share repurchases. Clearly, there was much to like about the Q3 results, and we'll provide additional details. While the quarter's performance highlighted our durability and predictability, I'm bullish on the future. In contrast to what Wall Street may believe about the software overall, we believe AI is a tailwind, a true force multiplier for our platform as the advertising ecosystem looks to adopt AI in a trusted, secure way. While AI is capturing headlines, its real-world impact in advertising depends on something far less visible but absolutely essential. A trusted data network that allows AI to operate across partners, clouds, and platforms, while meeting rising privacy and regulatory expectations. And this is where LiveRamp Holdings, Inc. plays a critical role. We are starting from a position of strength, with competitive advantages that become even more powerful in an AI-driven world. Some of you will recall the four strategic moats we outlined at our Investor Day just last year. Each of these directly maps to what AI systems require to function effectively in marketing environments. First, identity. We have the largest, most accurate consented identity graph in the industry, enabling a precise consumer view across channels. And this is foundational for AI-driven personalization targeting and measurement. Second, interoperability. We operate the industry's only truly interoperable platform, connecting data from anywhere to everywhere, across any cloud and any partner. As AI workflows increasingly span platforms, and data collaboration becomes the norm, this interoperability becomes even more critical. Third, data governance. We provide enterprise-grade data controls and protection, and we are a leader in privacy-enhancing technologies, including clean rooms and advanced encryption. These capabilities are prerequisites for deploying AI responsibly in regulated environments. Finally, and most importantly, network scale. We operate the largest data collaboration network in the industry, with thousands of interconnected customers and partners, stretching from advertisers to publishers and commerce media networks and all the major ad tech platforms in between. Our network scale provides the data AI needs for relevance, reach, and compounding value. Each of these competitive modes is difficult to replace at the scale we have achieved, and even more so collectively. Enter AI, which is fundamentally resetting the advertising landscape. For LiveRamp Holdings, Inc., AI doesn't replace our platform; it amplifies it by increasing the velocity, frequency, and value of the data moving across our network. Simply put, our value proposition is increasingly differentiated in an AI-driven world. Our customers and partners are focused on two major dimensions of AI adoption. First, on the consumer side, AI is creating new context-aware services that are reshaping how consumers discover, evaluate, and transact with brands, shifting the moments of awareness, consideration, intent, and conversion. Second, enterprises are adopting AI-powered applications to run their marketing organizations more efficiently and more effectively, delivering faster execution, lower cost, and better outcomes. AI is streamlining, if not eliminating, manual workflows, accelerating the iterative advertising cycle: plan, activate, optimize, measure, plan, activate, optimize, measure. Rinse and repeat. AI enables this loop to run faster, more frequently, and with increasing precision. Both dynamics directly benefit LiveRamp Holdings, Inc. because they result in more data moving across our network, and our revenue scales with this data activity without a proportional increase in cost. Our revenue model is not seat-based; it never has been. And we're taking steps to embrace even more usage-based pricing. AI services, applications, and agents become new nodes in our network. AI-powered workflows are sending far more data, more quickly, more frequently, and delivering better marketing outcomes. At the impression level, every exposure can be more personalized and context-aware. At the portfolio level, entire media plans can be continuously optimized and budgets dynamically allocated and reallocated based on real-world outcomes such as reach and frequency, conversions, that is actual sales, and customer lifetime value. In short, AI improves outcomes. Better outcomes drive spend. Increased spend drives more data across our network, and that drives our revenue. A real flywheel. Our platform, with our four competitive advantages, is exceptionally well-positioned to serve as the core data network for AI-powered marketing. While still developing, we are making steady progress. We have enhanced our architecture so AI applications and agents can securely access our network alongside humans and APIs. Expanding our network to new advertising services is something we've always done, like we did with social media, retail media, and CTV, helping emerging advertising platforms scale their advertising businesses more quickly and responsibly. We are actively partnering with the AI ecosystem, having signed over 20 AI partners to date. Now this group includes AI natives, where a representative example would be the startup scout, which offers AI tools to optimize advertising in major walled gardens. It also features established incumbents such as Google, where we are connecting brand loyalty data to deliver a better consumer experience in its AI shopping mode. Right now, no one truly knows who the winners and losers in AI will be. But like we've done throughout our history, we're taking a portfolio approach, partnering with a broad array of companies, so we help power which emerges as the winning use cases and AI providers. Our value proposition is strong, and it's differentiated. AI tools depend on scaled, trusted data to deliver impactful results, making us a desirable partner for innovators. We have a robust pipeline of additional AI partners that we expect to bring onto our network in the coming quarters. We've also expanded our data marketplace to support data licensing for AI training, as well as licensing third-party AI models, applications, and agents. This transforms our data marketplace into a centralized hub for AI-powered marketing, helping our customers quickly and easily deploy AI. For example, we work with a gaming company that is licensing data to build AI models that predict gamer behavior and deliver a more personalized experience. Another example is Chalice, a nascent data company that will be on stage at our ramp-up conference next month. They're licensing AI models to help brands build higher-performing audience segments for customer acquisition and other marketing outcomes. To better capitalize on greater data volume, we continue our pivot towards a usage-based pricing model to unlock incremental revenue growth. We are in the final quarters of a year-long pilot with our brand direct customers, and we are seeing benefits to both our land and expand sales motions. The new model enhances our land motion with a lower cost of entry and a more flexible usage-based structure, which is of particular interest to midsized brands. It also accelerates our expand motion by utilizing fungible usage tokens that can be seamlessly applied across all of our platform capabilities and are valid across the entire twelve-month contract period rather than being limited monthly. Given the positive customer feedback from the pilot, we're excited to deploy this usage-based pricing model more broadly in FY 27. We are also implementing usage-based pricing with our reseller customers, such as ad agencies and ad tech platforms. Our recently expanded partnership with Publicis exemplifies this shift. This new agreement is a significant expansion, functionally and financially covering all of our platform capabilities, moving beyond just connectivity. Since it came up on the recent Publicis earnings call, I'll highlight a few key points that really reflect how we're thinking about industry partnership more broadly. First, our subscription usage revenue will now be more directly linked to the growing use of our platform by the partners and customers. Consequently, we are now economically neutral on whether a customer uses LiveRamp Holdings, Inc. directly or indirectly. Second, we're encouraging partners to innovate using our foundational technology. For instance, the Publicis partnership integrates their AI model library with our measurement solutions to deliver off-the-shelf cross-platform measurement and optimization solutions. This is potentially a really nice benefit for their clients and one that should stimulate incremental demand for our clean room products. Perhaps most importantly, as we've upgraded our capabilities in recent years, we're able to work more flexibly across all partners, agencies, ad tech platforms, data platforms, where we provide the foundational components of identity, clean room, and a scaled network, while each partner brings their own unique capabilities and services to differentiate their offering to customers. Another example of this partnership model is Uber advertising, who also mentioned us in their earnings call this week. Our technology underpins its new Uber intelligence platform, a new planning tool that allows brands to close the loop with data-driven audience insights. We are in active talks with a handful of others about implementing this expanded usage-based model. It will take some time to negotiate and integrate these deals, but we believe this will both unlock greater value for clients and also accelerate our future growth. So let me end my prepared remarks by returning to our rule of 40 ambitions, where our focus is on unwavering. Let me reiterate. Our target is to achieve rule of 40 by FY 28, consisting of revenue growth of 10% to 15%, and a non-GAAP operating margin of 25% to 30%. Our operating plan and goals are almost maniacally focused on accelerating revenue growth and improving long-term operating margins. With one quarter remaining in this fiscal year, we expect to achieve rule of 31 in FY '26 with 9% revenue growth and a 22% operating margin. Given the strong momentum in ARR, growing tailwinds from AI, and our pivot to usage-based pricing, we are confident that we can get back to ten-plus percent revenue growth. With that level of revenue growth, our operating margins should naturally expand because our costs are highly fixed. Plus, we have ongoing cost efficiencies from our offshoring initiatives. We have a strong track record of driving operating margin under a range of top-line conditions. Over the trailing five years inclusive of FY '26, our operating margin has expanded annually by an average of three points. In the current fiscal year, we are on track to deliver four points of margin expansion while still prudently investing in key growth initiatives to support future top-line growth. In summary, we remain firmly on track to reach our rule of 40 target by FY '28. So in closing, let me reiterate my key takeaways. First, amid seeming market anxiety about everything, we're doing what we've always done. We tune out the noise, we focus on the performance of our clients and partners, and we just keep grinding away. Our business is durable, it's predictable, and it's scalable. And our Q3 is just another proof point. We posted strong customer growth, meaningful net new ARR for a second consecutive quarter, record quarterly operating margin, free cash flow, while continuing to prudently invest to support future revenue growth. Second, as Wall Street works to decipher the winners and losers in an AI world, we like our position. AI is a tailwind for our business, creating new nodes for our network, and accelerating data volume growth. To better capture this, we continue our evolution to usage-based pricing models with brand direct customers as well as with reseller customers such as agencies, ad tech, and data platforms. Finally, we're not satisfied. Not even remotely satisfied. We're unwavering in our commitment to achieve our rule of 40 goal by FY '28, an increase from rule of 31 this year fueled by incremental revenue growth from AI and ongoing cost efficiencies. Before turning the call over to Lauren, let me mention two last points. First, I would like to personally invite all of you to attend our annual customer and partner conference ramp-up, taking place in San Francisco on March. This is a perfect opportunity for our investors to see LiveRamp Holdings, Inc. and so many marquee advertisers, publishers, and partners throughout the marketing ecosystem who benefit from using LiveRamp Holdings, Inc.'s data collaboration network. Please reach out to Drew if you are interested in attending. Second, I just came back from the IAB's annual convention. It's a gathering of thousands of clients and partners in the advertising industry. While there, the IAB gave me some really nice recognition. A lifetime commitment award for impact to the advertising industry. To me, it's really an acknowledgment of the impact LiveRamp Holdings, Inc. has made on the ecosystem we serve. And all of our achievements are simply the result of the company we keep. So many thanks to our exceptional customers, partners, and all of my colleagues here at LiveRamp Holdings, Inc. We only succeed by making the industry around us successful. With that, I'll turn the call over to Lauren. Thanks, Scott, and thank you all for joining us. Lauren Dillard: Today, I'll review our Q3 financial results and then discuss our updated outlook for FY '26 and Q4. Unless otherwise indicated, my remarks pertain to non-GAAP results and growth is relative to the year-ago period. I will be referring to the earnings slide deck posted to our IR website. Starting with Q3, in summary, we delivered strong results exceeding our expectations on the top and bottom line, reflecting strong execution by the team, and continued sales momentum. Revenue increased by 9% and was $1 million above the midpoint of our guide. Non-GAAP operating income increased by 36% and was $6 million above our midpoint. GAAP operating income more than doubled for a second consecutive quarter, net new ARR was $11 million plus, and finally, we had strong growth in total subscription customers as well as million-dollar-plus customers. Let me provide some additional details. Please turn to slide six. Total revenue was $212 million, up 9%. Subscription revenue was $158 million, also up 9%. Within subscription revenue, fixed grew 8%, accelerating by two points and solidly in the high single-digit range. And usage increased by 13% year over year. ARR increased by $11 million quarter over quarter, and 7% on a year-over-year basis. Our million-dollar-plus subscription customers increased by eight, quarter on quarter to a new high of 140. Total customers increased by 15, the best performance in the past twelve quarters. This improvement was driven by both lower customer churn and higher gross ads. Next, subscription net retention was 101%, in line with our 100 to 105% near-term expectation. Total RPO or contracted backlog was up 23% to $710 million and current RPO was up 9% to $471 million. RPO and CRPO increased nicely sequentially, consistent with the historical pattern driven by seasonality in contract renewals which skew to our fiscal second half. Turning to the selling environment. We delivered a strong quarter overall with healthy demand across the business. While performance naturally varied by product and sales channel, we saw notable strength in our reseller channel, including the Publicis upsell Scott highlighted, and continued momentum in our clean room insights offering, which is increasingly supporting commerce media and measurement use cases. Customer churn remains a bright spot reflecting the durability of our relationship. And we maintained stable average deal cycle and conversion rates sequentially, underscoring consistency and execution. Marketplace and other revenue increased 8% to $54 million, landing modestly below our expectation due to timing-related dynamics, including slower data marketplace growth early in the quarter, and the sequencing of certain services projects. Importantly, data marketplace demand reaccelerated meaningfully in mid-November, returning to a double-digit growth territory that has persisted through December and into January, reinforcing our confidence in the underlying demand environment. In addition, we expect services revenue to show strong growth this quarter, based on the projects coming online. Moving beyond revenue, gross margin was 74%, a few ticks higher than expected due to the timing of customer migrations to our upgraded back-end platform. Operating expenses were $95 million, down 6% year on year, and lower than expected due mostly to the timing of project-related spending. Operating income was $62 million, up 36%, and our operating margin expanded by six points year over year to a record of 29%. Staff operating income was $40 million, up from $15 million a year ago, and the margin expanded by 11 points to 19%, driven in part by a more disciplined approach to stock comp. Free cash flow was a record $67 million, of which $39 million was used for share repurchases in the quarter. Fiscal year to date, we repurchased $119 million in stock, compared to $108 million in free cash flow. We have $137 million remaining under the authorization that expires on December 31. Our balance sheet remains in a very strong position with cash and short-term investments of approximately $403 million, and we have zero debt. In summary, Q3 was solid, coming in ahead of our guidance on the top line and especially on the bottom line. Record operating margin and free cash flow, a second consecutive quarter of strong net new ARR, strong growth in subscription customers, and ongoing returns to shareholders through our buyback. Let me now turn to our financial outlook for FY 26 and Q4. Please turn to Slide 12. Please keep in mind, our non-GAAP guidance excludes intangible amortization, dot com, and restructuring and related charges. Starting with the full year, we're increasing our FY 26 revenue guidance by $1 million at the midpoint, passing through the Q3 beat. With just one quarter remaining in the fiscal year, we've narrowed the range mostly by lifting the low end. We now expect revenue of between $810 million and $814 million, which equates to roughly 9% growth. We expect gross margin to be in the 72-73% range, down one to two points as we complete the final phases of our back-end platform upgrade in Q4. We expect non-GAAP operating income to be $180 million, unchanged from the midpoint of our prior guide, reflecting the push out of some project spending from Q3 to Q4. Operating income is growing 33% this year, and the margin is expanding by four points to 22%. The combination of offshoring and general cost discipline continues to afford us the ability to invest in key growth areas while at the same time driving significant margin expansion. Stock comp is now expected to be approximately eighty-one, a 25% decline year on year, again reflecting a more disciplined approach to stock-based comp. We now expect that GAAP operating income to be approximately $84 million, equating to a record margin of 10%, up 10 points year over year. Lastly, we continue to expect free cash flow to be up slightly this year, with savings from the new federal tax legislation, offsetting a normalization in working capital compared to Q4 of last year. Our EBITDA conversion rate is expected to be above our 75% target rate. We will deploy a substantial portion of this year's free cash flow towards share repurchases, consistent with our recent practice. And as always, we will be opportunistic depending on market conditions. Like last year, our repurchases will more than the shares issued for f SBC, driving a reduction in our share count. Now moving to Q4. We expect total revenue to be between $203 and $207 million, non-GAAP operating income of approximately $38 million, and an operating margin of approximately 18%. A few other call outs for Q4. We expect subscription revenue to be up high single digits. Marketplace and other revenue is expected to be up in the low double digits, reflecting the growth rebound in the trailing two months. And finally, we expect gross margin to be approximately 72% as we complete our platform upgrade and customer migration effort. Let me wrap up before Q and A. In summary, we delivered a strong quarter, exceeding our expectations, posting record margins and free cash flow, strong ARR, and notable growth in customer count. We are seeing strong and broad-based sales momentum, driven by a value proposition that is increasingly differentiated in an AI-driven world, and by continued improvement in our go-to-market execution. Beyond product market fit, initiatives like our new pricing model are helping us sell more effectively and consistently, giving us clear visibility into 10% plus growth next year if current execution holds. Finally, we're on track for 33% operating income growth this year and four points of margin expansion. We continue to balance margin with investing in growth initiatives, like our new pricing model and platform upgrades, to support future top-line growth. The strong OI growth is resulting in strong free cash flow, which will be primarily used for share repurchases, underscoring both our confidence in the business and our commitment to long-term shareholder value. Thanks again for joining us. We're excited for what's ahead and grateful to the customers and teammates who make it possible. Operator, will now open the call to questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your questions, press star one again. Our first question comes from the line of Jason Kreyer with Craig Hallum. Please go ahead. Jason Kreyer: Great. Nice quarter, guys. Good to see the growth in customer count. Scott, I wanted to double click on your comments on Publicis. Maybe if you can just talk about what key features or functionality that LiveRamp Holdings, Inc. brings to the table that was kind of the reason why they selected to work with you guys. Scott Howe: Yeah. Well, first, Craig, thank you. And I would tell you that this is probably a few years in the making, not with Publicis, but just our readiness for really expanding our partnerships with all potential resellers. If you recall over the last few years, I've talked a lot about our efforts in terms of modernizing our platform. And then more recently, over the last year, we've been rolling out changes to our pricing model. And the combination of those two things really makes us ready to work in a different way with these reseller partners and not have any fear of cannibalizing ourselves. And in particular, you know, Craig, if you remember the old Intel Inside campaigns from I don't know what fifteen, twenty years ago. I mean, we kinda have a similar philosophy here at LiveRamp Holdings, Inc. We want every major platform and agency to use our modular composable platform and innovate on top of it. And so, you know, I talked about how they are working with us in a really different way that's gonna add value to their clients. And Jason, I think that there's an opportunity to do this with dozens of these kinds of partners, each of whom are already competing in their own unique way. But by building on top of LiveRamp Holdings, Inc., by building using LiveRamp Holdings, Inc. pieces, they can deliver better products to their customers. Jason Kreyer: That's great. Thank you. Maybe a Lauren question here. So we're solidly into the back of your fiscal year. We know that you've got a lot more customer renewals in the back half of the fiscal year. Maybe you can just give us a little bit more on what kind of the upsell cross-sell conversations, how those progress. And, again, you know, what kind of capabilities, like cross-media intelligence or what kind of capabilities customers are looking for. Thank you. Lauren Dillard: Yeah. Happy to. And maybe just to re-highlight something in my prepared remarks. Q3 was a very strong sales quarter for the business. In fact, our bookings were up in the quarter strong double digits, and this was mostly driven by expansion with existing customers. And specifically, to your question, the cross-sell of our clean room to support things like cross-media intelligence, but also just to support broader commerce media use cases as well as other measurement use cases. So we continue to see clean room be a catalyst for expanding with existing customers upon renewal. Jason Kreyer: Great. Thank you. Operator: Our next question comes from the line of Shyam Patil with Susquehanna. Please go ahead. Shyam Patil: Hey, guys. Congrats on the results, really appreciate all of your commentary on AI. I wanted to focus my question there. Scott, with all of the AI partnerships that you guys have, and just kind of you know, how you talked about the importance of it and being a tailwind. Can you just talk about your approach to prioritizing these different opportunities, especially given kinda how large and dynamic the market is? Scott Howe: Yeah, Shyam. You know, on this, we are remarkably consistent. Because we have always been all about client and partner-led innovation. And so in this case, we already know what we need to do. And that's ask our clients and partners what use cases they find most important. And so we prioritize that. Not surprisingly, as a result, if you look at the 20 or I guess 21, different live partnerships that we have active. You know, the majority of them, call it two-thirds, are kinda legacy companies that you've heard of that have built AI. And so there's just an opportunity when you're talking about, you know, Google is the example I gave in the prepared remarks. Our clients are already working with companies like that, they're spending a lot of money there. And so naturally, those are the first priorities in terms of AI adoption. But at the same time, we're also making a real effort to prioritize some of the native use cases. And so those count for about a third of the partnerships that we've signed, and we have a lot more of those in the hopper. Those are things that either our clients tell us are important or we believe are going to grow in importance as they roll out their advertising models. And so we think you have to have a portfolio approach here because across the incumbents versus the new start-ups, I don't think anybody in the market has evidence by the chaos on Wall Street this week, knows who the winners and losers are gonna be. The good news is we're betting on all of them, and so we know that we will be affiliated with the folks who emerge as the winners. Shyam Patil: Great. Thank you, guys. Thank you, Scott. Operator: Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Lucas: Hey, Scott. Lauren, this is Lucas on for Elizabeth Porter. Thanks for taking my questions here. So the first is, as you expand commerce media with new partners like Uber and PayPal, in which other verticals are you seeing the most growth? And then could you talk about the revenue opportunity from these non-retail commerce networks compared to the traditional ones? Thanks. Scott Howe: Yeah, I think these are gonna grow very fast because they're coming off a smaller base right now. And we're seeing it in a few areas. So travel, nearly every major airline has launched a commerce media network. It just makes sense because they already have their travel partnerships in place, they have a captive audience when you're flying with the feedbacks. So that's one. A second would be kind of the food delivery, the Uber's DoorDash's of the world. Once again, they have a captive audience. Sometimes when you're traveling where you're looking at the back of a screen, or you're looking at your phone and maybe potentially ordering food. So there's a lot they can do there. And then finance is a really nice one for us. Now, in each case, it exposes us to very different type clients than we've historically worked with. And this is what gets us back to why the pricing model we talked about, super important for the resellers, it's also really important for all these commerce media networks who we look at as potential reseller partners as well. Because so often, they have smaller SMB type clients with food delivery. It might be the local or chain restaurants. And travel, it could be any number of different hotels or travel partners. And in payments, it's anything any vendor that a merchant that a user spends money with. So all of those become potential clients. Historically, we couldn't have served those clients. Because our product didn't have enough self-serve capabilities, nor did we have the pricing model. But the things that we've done over the last couple of years, we feel have positioned us to really take advantage of this. And so I think those three areas will be really for us in the next couple of years. Lucas: Great. That's super helpful. Then I was hoping you guys could talk a little bit more about CTV. With the Netflix integration gaining strong momentum over the past couple of quarters, great if you could share, you know, more about how many brands are leveraging the integration, the typical spend levels, and then how it compares to other CTV platforms in the network. Lauren Dillard: Sure. I'm happy to take that. And I would just note that CTV continues to be a very strong growing component of both our data marketplace and then just traditional activation network. We talked about, you know, Netflix earlier in the year as well as a handful of other new CTV integrations. They continue to perform very well for us. Scaling nicely, albeit off small bases. Today. With respect to our data marketplace, we continue to expect CTV data purchased off our marketplace to outpace the growth of overall Data Marketplace growth. And of course, this is just one of many areas where CTV is benefiting our business. As an example, across our activation or connectivity network, about 70% of our largest our 50 largest integrations today are either pure play CTV providers or ad tech or media platforms enabled to buy CTV. Then a final point I would just make is it continues to also be a catalyst for clean room adoption, especially for measurement use cases. So, you know, taken together, it's a nice tailwind for our business this year and one we expect to continue in FY '27 and beyond. Lucas: Thanks, guys. Operator: Our next question comes from the line of Timothy Nolan with SSR. Hi, everyone. Sorry for the background noise. Warren, hope you can hear me okay. Scott Howe: Yeah. It's fine, Tim. Timothy Nolan: Okay. Great. Thanks. I've got a couple if I could. One is a follow-up on the AI topic. Again, appreciate you addressing it head-on, Scott. I'm curious. One of the concerns, I guess, is that AI will disrupt, you know, the software subscription business model. But that's gonna be a very general statement. I just wonder if you could maybe give us some assurance that your customers are doing well. Everything is going well. Spending looks intact. Just any comments you could make as to that concern? To help maybe ease some of the worries that are out there? And, actually, indeed, maybe if you could talk to any acceleration that you may be able to see in your business, to respond to that. My second question is to come back on the topic of AgenTik AI. And the universal complex protocol. I remember the name right, UCP that you've developed and made available to organizations like the IAB. Can you just talk if there's any progress toward commercialization of these and what the status of those efforts might be? Because I think it's very important for the future of ad transactions. Thanks. Scott Howe: Yeah. Tim, we agree. So handling your questions in turn, first off, on AI, I think 40 and what our targets are, you know, I'm very firmly committed to getting back to double-digit growth. I think AI helps us do that. Because after all, even if AI does disrupt elements of software, for AI to perform you need to have data. In the marketing space. And if all you're doing is using models that are based on the world's publicly available information, then you're gonna be accessing the same models that everyone else is. And there will be no competitive advantage. The advantage comes from every client's ability to bring their own first-party data. But to bring your own first-party data, you better be darn sure that you have control and visibility over it. And that is what we do. And so you should think about us as an enabler of AI. We are essential for safe AI usage. And so as these AI use cases expand, we think that is really good for our business. Now in your second question, you get to, you know, what are the conditions of more widespread adoption of AI in the marketing space, and that is standards control and visibility. We developed something that we gave to the IAB, which has continued to commercialize it. They talked about that a lot in their annual meeting this week that I was at. In addition, there's another standard out there called ADCP that one of my board members has developed, Brian O'Kelly. I will tell you we don't care which standard is adopted. It is good for the industry to have common standards about how data is going to be organized such that it can be ingested by large models. And so, yeah, again, there are at least two, there may be more, we don't care. As long as one standard emerges. And the fact that we have line of sight to two of them suggests that one of those, if not a combination of them, is ultimately going to emerge as the standard of choice. Lauren Dillard: And, Tim, I might just provide a little bit of quantitative color against your first question, which is around whether or not we're seeing AI impact demand for our products. The short answer is we're not. As I mentioned in my prepared remarks, we had a remarkably strong sales quarter in the third quarter. Conversion rates, deal cycle length, consistent sequentially, our average deal size was up double digits. Individual rep productivity up as well. And so we're simply not seeing that dynamic right now. Scott Howe: Yeah, and you know, the last data point that might be useful, and it's a little squishy. There's a little squishy math, I'll tell you. But we tried to look at all of our different activations and say, all right, what percentage of the activations are already going to things that we would consider AI? And if you look at either AI partnerships or AI-enabled partnerships, because we don't always have visibility into what algorithmic logic is driving a decision at a partner. We think there's probably 10% of our activations already going to AI. Again, it's a little bit of a squishy number, but we just wanted to get a sense of what that looks like and start to extrapolate what that looks like over time because I think it's gonna be an important stat to share with Wall Street, something like that. Because, you know, we don't see a threat here, and we wanna make sure our understand that this is a tailwind, not a headwind. Timothy Nolan: K. Thank you both. It just seems like you could be a good gauge on this health of the market here. And so to hear those comments from you is helpful. Operator: Our next question comes from the line of Mark Zgutowicz from Benchmark Company. Mark Zgutowicz: Thank you. Good evening. I wanted to maybe address the, you know, just the pricing tests that you're doing. And maybe you could just back up a second and just talk about sort of the go-to-market there. Like, how are you, you know, going after these clients? What's the what are the I guess, the challenges there in terms of finding those clients, acquiring those clients versus the pricing itself. And then if you think about next year, in ARR incrementality from SMB, if you have something that you're targeting or if there's a point in time where you think you might have better visibility on what kind of incrementality you expect from SMB, that'd be helpful. Scott Howe: Yes. And I'll start here and then Lauren will, I'm sure, come in with some analytical support. But I would tell you, that since we launched the pilot, we've taken a very methodical approach to how we are communicating this. And more specifically, you know, we're not going to clients who are under contract and retrading their deals. Rather, our priority to date has been new logo opportunities. And the new pricing has helped us land those new logos. What we found historically is one of the sticking points in a conversation has been the presence of a large fixed upfront commitment. And so to the extent that we can lower that and have more of the ultimate value be usage-based, then we win together. And they can scale into the opportunity. Over time, we think that will improve our churn as well because we're not gonna be in the position where we're, you know, renegotiating with a client that signed up for a large fixed price contract and then grow into that. This is particularly important as we approach those smaller type clients. And in fact, you see that in the numbers like so far, like the average contract for someone on one of these new usage-based pricing is a lower ACV than a legacy contract. Well, stands to reason because they tend to be smaller and they're newer and we haven't grown them over time yet. Now, based on what we've learned, it's gonna be it's gonna put us in a position to again be very methodical as how we roll this out with existing clients. So as clients come up for renewal, in the coming year, then we will introduce this as part of the renewal process to existing clients, and we'll continue to use it as a I think a really attractive feature for new clients. Lauren Dillard: And then just with respect to revenue incrementality, Mark, I would expect we'd have more to share on our May call. It's certainly gonna take a few quarters for this to play out in our results, but we do expect some modest upside in the back half of next year as a result of this pricing initiative. Mark Zgutowicz: That's helpful. Thank you. And maybe just a couple quick follow-ups so I could. Lauren, your OpEx guide looks like upper teens sequentially. I'm just curious what may be driving that. In this course specifically. And then if you can or else we can take it offline, just curious if you look at your SNR and adjust that for the two large clients that churned earlier in the year, what that might look like in might have looked like in the quarter? Thanks. Lauren Dillard: Yeah. Happy to. And you're right. Sequentially OpEx is growing about $15 million quarter on quarter. And this is very consistent with the step up we've seen in prior years. So in FY '25, that sequential increase was about $12 million in 'twenty-four, 'eighteen. So as a reminder, Q4 is our seasonally high expense quarter. Due to events and conferences like ramp-up as well as just some compensation-related step up. This accounts for the majority of the sequential increase. In addition, and I noted this in my prepared remarks, we also had some projects spend related to our growth initiatives that shifted from Q3 into Q4. You know, all that said, we're still projecting very healthy year over year growth in OpBank north of 50% in the fourth quarter. And a six-point margin improvement year on year in the fourth quarter. And for the full year, expect op inc to grow north of 30% and for a four-point margin expansion. So, you know, rest assured, we're in a good position to deliver on our operating margin targets and, you know, continue to do so as we look ahead to FY twenty-seven. And then on SNR, I would expect if you normalized for the couple large events in the early part of the year, SNR would be closer to the high end of our 100 to 105% near-term range. Mark Zgutowicz: Perfect. Super helpful. Thank you both. Operator: Our next question comes from the line of Alec Brondolo with Wells Fargo. Please go ahead. Alec Brondolo: Trade Desk is implementing a new data pricing model. You white-labeled their current data I think both their model and the broader industry trend to be shifting from purchasing data on an a la carte basis to data and audiences automatically being appended to campaigns by AI. Could you help us what that trend means for the data marketplace business, either on kind of a Trade Desk specific basis or the broader industry trend? Thanks. Lauren Dillard: Yeah. I think you're referring to some of the changes that Trade Desk announced in the fall of last year, which I believe were implemented in December. So not really a factor in Q3 and would likely take some time to scale. At a high level, you know, we're aligned with Trade Desk on these initiatives to stimulate incremental demand from customers who didn't historically purchase data either because it was too complicated or costly in their view. From our perspective, if the scales, it would represent incremental transaction volume above our base case. And shouldn't change our take rate. So potential upside but not anything we're seeing in our numbers today. Operator: Thank you. Next question. Our next question comes from the line of Peter Burkly with Evercore ISI. Please go ahead. Peter Burkly: Yeah. Thanks, guys. This is Peter Burkly on for Kirk Materne. This guy's maybe just to start with you, kind of on the topic of AI again. You've talked fairly explicitly in the past about not being an AI company, but rather being the pipe and the plumbing that sort of enables your customers to have success with AI. Just given the increased volume and velocity of data that AI requires. So I'm curious if you could just give us any updated thoughts on that front. Any change in your thinking there that sort of continue to be the core strategy? And then, Lauren, maybe for you, you know, really nice solid accelerating ARR growth sounds like really continued strong bookings. Just curious with the CRVO growth sort of bit. And, again, understanding that, you know, you're up against tougher comparing at three q. So mechanically, that's an impact. But I'm wondering if you could help bridge that gap, maybe if it's the mix shift towards the usage-based pricing that's not being captured in CRPO or if there's anything with timing of renewals or any duration changes that might be impacting that. Thanks. Scott Howe: Yeah. Boy, Peter, I hesitate to make the comparison I'm about to make. And you'll realize why when I talk about Apple. And when they launched the iPhone, you'll remember that you know, they built an app store. And you could access anything. And, you know, they enabled all kinds of functionality on top of the iPhone. But at the same time, what did they have like seven or eight organic native apps that they built? And in part, it was because they thought it was core, or no one else was building them. And so, I would tell you our philosophy is very similar that, you know, the vast majority of the AI functionality we think our clients are going to unlock is going to be through our partners. It's their business. And what we do is enable the data utilization of the signals that make the models better, into those AI applications. At the same time, don't for a second think that we don't talk about AI all the time internally in our own product builds. In fact, I am pulling up on my own computer screen a slide that someone gave me yesterday right now of the twelve Hack Week projects that we have underway that our engineers are working on. And all of them are improving our core capabilities and allow our clients to extract better value from working with LiveRamp Holdings, Inc. Things like, you know, automated error signaling. So if someone like writes the wrong query, immediately flags it and corrects it, or I talked in my prepared remarks about building more AI models into data marketplace. So there's a lot we can do internally. And, you know, I'll talk about that if it's interesting to people. But make no mistake, I don't want anybody to think that we're trying to out AI companies that specialize in AI, we're trying to accelerate their growth. We're trying to catalyze their success by connecting to them. Lauren Dillard: And then, Peter, with respect to CRPO, as we've discussed in the past, our RPO metric is very sensitive to the timing of renewals and the length of contracts. I mean, you called those two factors out. Specifically, quarter, CRPO was impacted by the runoff of some large multiyear deals that are in their final year. Expect these deals will renew ahead of their next renewal cycle, and we Importantly though, I would point you to the strength of total RPO, which was up 23% in the quarter and reflects the recent sales momentum Scott and I talked about today. Peter Burkly: Very helpful. Thank you both. Operator: Thank you. At this time, we have no further questions. I will now turn the call back over to Lauren Dillard for closing remarks. Lauren Dillard: Great. Well, thanks again for joining us today. We're very pleased with the quarter we reported and with our building top-line momentum. As Scott mentioned, investors and analysts are invited to join us at Ramp Up San Francisco on March. Where we plan to host a Q and A session for analysts and investors. We'd love to have you. Please reach out to Drew for more information and to RSVP. So with that, appreciate your time today and look forward to catching up over the coming days and months. Thanks. Operator: This concludes today's conference. You may now disconnect your lines.
Operator: Good day, everyone, and welcome to Knowles Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, I would like to hand the conference over to Ms. Sarah Cook. Please go ahead, Sarah. Sarah Cook: Thank you, and welcome to our fourth quarter and full year 2025 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and with me today are Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans, and prospects for Knowles Corporation, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal security laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses, and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings, including, but not limited to, the annual report on Form 10-Ks for the fiscal year ended 12/31/2024, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles Corporation disclaims any duty to update such statements except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call, please note in our press release posted on our website at knowles.com and in our current report in Form 8-Ks filed today with the SEC. This will include a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis, with the exception of cash from operations or unless otherwise indicated. We've made selected financial information available in webcast slides that can be found in the Investor Relations section of our website. With that, let me turn the call over to Jeffrey Niew, who will provide details on our results. Jeff? Jeffrey Niew: Thanks, Sarah, and thanks to all of you for joining us today. 2025 was a breakthrough year for Knowles Corporation, marked by the completion of our portfolio transformation at the end of 2024 and the beginning of our journey as an industrial technology company. Our organic growth in 2025 exceeded our Investor Day expectations and demonstrates our strategy of leveraging our unique technologies to design custom-engineered solutions and then deliver them at scale for blue-chip customers in high-growth markets that value our solutions. Before I discuss this a little more in detail, let me cover our Q4 2025 results. Q4 was another quarter of strong financial performance. Revenue was $162 million, up 14% year over year, exceeding the high end of our guided range. EPS was $0.36, up 33% year over year and above the midpoint of our guided range. Cash from operations was $47 million, also exceeding the high end of our guided range. On a full-year basis, revenue of $593 million was up 7% year over year, and EPS was $1.11, up 21% compared to 2024. As I said last quarter, I believe our results continue to demonstrate that our focus on markets and products where we have significant competitive advantages results in increased organic growth and positions us well for future growth. Now turning to our segment results. In Q4, medtech and specialty audio revenue was $73 million, up 4% year over year. Full-year revenue was $264 million, up 4% from 2024 and at the high end of the organic growth target of 2% to 4% we presented at our Investor Day in May. In hearing health, Knowles Corporation is known for its superior technology and reliability. Our customers depend on our ability to deliver unique solutions to improve comfort of fit and performance with extremely low power. Our unique technologies coupled with strong intimacy with our customers' applications is allowing us to win next-generation designs for MEMS microphones as well as balanced armature speakers. We also see the opportunity to increase our content for the device in next-generation hearing health products. Beyond the hearing health market, we remain optimistic about the future growth opportunities within our microsolutions group that we detailed at our Investor Day. In the Precision Device segment, Q4 revenue was $90 million, up 23% year over year. As channel inventory levels are now normalized, and orders are matching end-market demand, we saw strength across all our key end markets, leading to an acceleration of revenue in the second half of the year. Total year revenue grew 10% year over year, exceeding the high end of the organic growth target of 6% to 8% we presented at our Investor Day in May. Within precision devices, as I stated earlier, we saw growth in all our end markets: medtech, defense, industrial, EV, and energy, with revenue growing year over year. Let me provide a little color by end market. In the medtech market, we have new design wins ramping and repeat orders in production spanning across multiple product lines such as high-performance ceramic capacitors and pulse power film capacitors. The number of medical devices being used to extend life expectancy and to ensure sustained quality of life is on the rise. Our custom high-reliability capacitors can be found in a multitude of implantable devices, medical imaging, and life-extending treatments. Our defense business continues to be strong. As a sole source supplier on a number of key programs, order volumes continue to grow. As I mentioned on our last earnings call, our capacitors and RF microwave solutions serve a wide variety of military applications, spanning from radar communications to munitions. Defense spending is increasing and shifting toward electronic warfare, and our products are in high demand. In the industrial markets, we have seen inventory levels normalize with our distribution partners. Our high-performance ceramic film electrolytic capacitors serve a diverse set of applications from robotics to welding and induction heating in the industrial sector. The energy market continues to be an exciting opportunity for growth in 2026 and beyond, with our new specialty film line expected to start producing and delivering high-volume horsepower capacitors late in the second quarter of this year. On a more quantitative basis, to summarize, we saw another quarter of healthy bookings even with extremely strong shipments in Q4, with a book-to-bill greater than one in our Precision Devices segment. Our continued collaboration with our customers has led to a robust pipeline of new design wins as our customers continue to choose our innovative and differentiated solutions. This, coupled with strong secular growth trends in the markets we serve, gives me confidence in our ability to continue to grow revenue throughout 2026 and beyond. Across the company, we are leveraging our unique technologies, creating custom products through our customer application intimacy, and then scaling into production with our world-class operational capabilities for end markets with strong secular growth trends. Our 2025 results demonstrate this is a winning combination leading to revenue and EPS growth on a year-over-year basis. I would like to reiterate what I had previously said. I'm excited about the momentum and strength of our business. We have entered 2026 positioned well for continued strong organic revenue growth above historic levels. While the first quarter of the year is typically seasonally low, I expect to see strong year-over-year growth in the first quarter. New design wins are ramping, we have a very healthy backlog of existing orders, and we are seeing increased demand for our products. Our organic growth and increasing EBITDA continue to produce robust cash generation resulting in a very strong balance sheet which will allow us to pursue synergistic acquisitions and continue to buy back shares while keeping our debt levels at very manageable levels. To close, we are laser-focused on what we do best: designing custom-engineered products and delivering them at scale for customers and markets that value our solutions, positioning us well for growth in 2026 and beyond. Now let me turn the call over to John Anderson to detail our financial results and provide our Q1 guidance. John Anderson: Thanks, Jeff. Reported fourth-quarter revenues of $162 million, up 14% from the year-ago period and above the high end of our guidance range. EPS was $0.36 in the quarter, up $0.09 or 33% from the year-ago period and above the midpoint of our guidance range. Cash generated by operating activities was $47 million, also above the high end of our guidance range, driven by both increased EBITDA and lower than expected net working capital. In the medtech, Specialty Audio segment, Q4 revenue was $73 million, up 4% compared with the year-ago period, driven by increased shipment volume. On a full-year basis, revenue increased by 4% over prior year levels, due primarily to growth in specialty audio and an increase in shipment volume of stamped metal cans. Q4 gross margins were 51.9%, up slightly from the year-ago period. As expected, segment gross margins for full-year 2025 were above 50%. The Precision Devices segment delivered fourth-quarter revenues of $90 million, up 23% from the year-ago period. On a full-year basis, revenue increased by 10% over prior year levels, driven by strength across all our end markets and product lines. Revenue accelerated throughout the back half of the year as inventory levels normalized at our distribution partners. Segment gross margins were 40.1%, up 230 basis points from 2024 as higher end-market demand and production volumes in ceramic capacitors and RF microwave product lines resulted in increased factory capacity utilization. This was partially offset by higher scrap costs and production inefficiencies in connection with our specialty film line. For the full year, segment gross margins improved 140 basis points from 2024 levels despite headwinds from our specialty film line. We experienced production volume increases in RF microwave products and ceramic capacitors driving the gross margin improvement. I'm confident in our ability to continue to improve segment margins further in 2026 as capacity utilization increases and efficiencies in connection with our specialty film line are realized. On a total company basis, R&D expense in the quarter was $9 million, flat with Q4 2024 levels. SG&A expenses were $27 million, up $2 million from prior year levels driven primarily by higher incentive compensation costs. Interest expense was $2 million in the quarter, and down $2 million from the year-ago period, as we continue to use cash generated by operations to reduce our debt levels. Now I'll turn to our balance sheet and cash flow. In the fourth quarter, we generated $47 million in cash from operating activities, and capital spending was $15 million. During the fourth quarter, we repurchased 451,000 shares at a total cost of $10 million. We exited the quarter with cash of $54 million and $114 million of borrowings under our revolving credit facility. Lastly, the net leverage ratio based on trailing twelve months adjusted EBITDA was 0.4 times, and we have liquidity of more than $340 million as measured by cash, plus unused capacity under our revolving credit facility. Before turning to Q1 guidance, I want to briefly highlight our performance relative to our full-year 2025 outlook and five-year targets that we provided at our May 2025 Analyst Day. Full-year revenue was $593 million, up 7% versus 2024, which was above the high end of our outlook of $560 to $590 million. Revenues exceeded the high end of our organic growth target of 4% to 6%. From a segment perspective, medtech and specialty audio revenue grew by 4% and precision device revenue grew by 10%, with both segments meeting or exceeding the organic revenue growth targets of 2% to 4% and 6% to 8%, respectively. Adjusted EBITDA from continuing operations was $140 million, up 9% from 2024, driven by higher gross profit margins and increasing operating leverage, and within the outlook range we provided. Cash from operations was $114 million or 19.2% of revenues, above the midpoint of our full-year outlook. Moving to our Q1 guidance. For 2026, revenues are expected to be between $143 and $153 million, up 12% year over year at the midpoint. R&D expenses are expected to be between $9 million and $11 million. Selling and administrative expenses are expected to be within the range of $25 million to $27 million. We're projecting an adjusted EBIT margin for the quarter to be within the range of 18% to 20%. Interest expense in Q1 is estimated at $2 million, and we expect an effective tax rate of 15% to 19%. We're projecting EPS to be within a range of $0.22 to $0.26 per share, up $0.06 or 33% year over year at the midpoint. This assumes weighted average shares outstanding during the quarter of 88 million on a fully diluted basis. We're projecting cash from operating activities to be within the range of negative $5 million to $5 million. Capital spending is expected to be $10 million. We expect full-year capital spending to be approximately 4% to 5% of revenues as we continue investments associated with capacity expansion related to the large energy order we received in 2025. In conclusion, we delivered strong year-over-year revenue, earnings, and cash flow growth in the fourth quarter and for full-year 2025. As we exited the year, we have a robust backlog and increased order activity, which gives me confidence in our ability to continue to achieve revenue, earnings, and cash flow growth, which is expected to drive shareholder value throughout 2026 and beyond. I'll now turn the call back over to the operator for the Q&A portion of our call. Operator: Thank you, sir. And everyone, if you would like to ask a question, please press star one on your telephone keypad. Once again, that is star one if you have a question today. We'll take the first question from Christopher Rolland from Susquehanna. Christopher Rolland: Hi, guys. Thanks for the question. And yeah, I guess the large energy order and the thin film capacity products, I guess, first, an update there. Have you guys seen a broadening in new customers for that product? And if you could remind us on your capacity addition plans, and timing of revenue, and any TAM detail or something around that would be great as well. Thank you, Jeff. Jeffrey Niew: Yeah. So, you know, first on the energy order, being no different than we've kinda talked about earlier last year, which we expect this to be in the neighborhood of $25 million, north of $25 million revenue this year. And really getting going in the back half. Well, we should have it fully ramped by the end of Q2. So, you know, I think you'll see more of that, a big portion of that $25 million in the back half of the year. Overall, for the specialty film line, you know, I think we are seeing a definite broadening of the customer base, you know, beyond some of the medical applications, you know, defib, radiotherapy, downhole, fracking, military applications like rail guns, a definite broadening of the applications. And I think, you know, we've talked about this a few quarters ago. That overall, including the energy order, our expectations were in that, I would say, $50 to $65 million range for revenue off this product category in 2026. You know, I think that still holds that we're still in that range for this year. So I think what I kinda see here is, you know, that the specialty film line, including energy, really has a bright future as we look toward the future, Chris. Christopher Rolland: Excellent. Great. And then as we start thinking about the future, kind of what your next big hit might be. I guess, first of all, do you have some prospects that you've identified organically or internally, some next kind of big hits? And or are you really looking outside? You know, you did mention acquisitions. If you could give us an update there, are you finding some high-value targets here and speaking of valuation, are they reasonable? Jeffrey Niew: Yeah. I mean, obviously, it's very hard to comment, like, specifically, but, you know, our pipeline continues to be good on the acquisition front. But to be honest with you, our organic opportunities, you know, over the next twenty-four to thirty-six months look pretty promising. And I'll just kinda go back to beyond the energy order, you know, situation and of the Pulse Power specialty film line, a couple of other things that, you know, that we talked about on the Investor Day to give a brief update. First, our microsolutions in within MSA. Where we are taking our existing technologies, our existing capacity, our existing R&D capability that we use for our hearing health and putting that into other medical applications. I would say I'm incrementally more positive about this than I was, say, two quarters ago. We got a lot of new medical applications where we're collecting NREs at this moment that, you know, we should start ramping into higher volume production in 2027. I mean, it's not gonna generate a ton of revenue this year, but, you know, remember, these medtech designs are typically three to five-year design windows. And, you know, we're getting to the beginning of that, that three years in the 2027 year time frame when we started this. So that's pretty positive. You know? Defense spending, you know, I just sit there and I see you read it every day. You know, we're well-positioned with the defense spending. With our RF and our capacitive products. I think that's more of a secular growth trend where we have some very differentiated products. And then lastly, I think we're doing some work in terms of ceramic caps, you know, in terms of, you know, doing, I would say, in defense under munitions, doing some assembly work. There's a lot of good stuff going on here. And so generally speaking, you know, I think I've been pretty positive. We said our organic growth of 4% to 6%, our first year out the gate, we're at 7%. I think we're pretty excited about, you know, how we think about our organic growth opportunities over the next twenty-four to thirty-six months. Christopher Rolland: Thank you so much, guys. Congrats. Jeffrey Niew: Yep. Operator: The next question today comes from Anthony Stoss, Craig Hallum. Anthony Stoss: Jeff, John, and Sarah. First off, John, maybe I missed it. Gross margin guide for March, I think in the past, you were thinking about 42%. You maybe just confirm that. And then just curious what you think the June gross margin might look like if the ramp is gonna occur until late Q2? Does that spill into the June gross margins? Thanks. John Anderson: Yes, Tony, we really we kind of moved away as we transitioned to an industrial tech company. We kinda moved away from gross margin. So the guide, the focus on our guide is, obviously, revenue, EPS, and cash flow. I would say from if you give a little detail on gross margin, you know, we're at, call it, full-year 2025, we're at 45.5%. And MSA was, as I mentioned, above 50%. I think the MSA margins are gonna kinda hold in that area in '26, but there is potential for margin expansion, especially in the back half of 2026 as we get to higher production volumes or ramped-up production volumes on that specialty film line. So I think there's, again, an opportunity to increase above that 44.5% in '26 by, you call it, 50 to 75 basis points, but weighted toward the back half of the year. Anthony Stoss: Got it. Thanks for that. And Jeff, I'm curious if you could kind of highlight the fastest-growing markets or what you expect in 2026. I got to believe it's military, and I'm curious if you have exposure on the satellite side as well. Jeffrey Niew: We do have some exposure in satellite, but just a comment. You know, I think I mentioned in the prepared remarks that we had a very strong PD and a very strong bookings quarter. And even with that, the book-to-bill was 1.06. Even with that very strong shipment quarter, and, you know, I think we're already cut we're already through January. We had a very strong January bookings month as well. And so and it's pretty broad-based. You know, we tried to cut this up a number of different ways. You know, in terms of your key markets of being defense, med, industrial, then we put EV and energy together. All of them are looking pretty strong right now. The bookings have been strong in supporting that. And so I think from our perspective, it's very broad-based, and I look, you know, OEM versus distribution, same thing. Both our OEM business and distribution business is doing very well. And so I think to pick one out and sit there and go, this one is doing the best, I mean, is doing well, but so is MedTech. Our MedTech business is doing well. You know the energy story. And I think the one that we're seeing more and more momentum in is energy. Sorry. Sorry. Industrial. We're seeing more momentum in industrial than we did six months ago. So I think that that seems to be a pretty big positive change since the last six months. Anthony Stoss: Perfect. Congrats. Nice execution. Jeffrey Niew: Thank you. Thanks, John. Operator: The next question comes from Robert Labick from CJS Securities. Robert Labick: Hey. This is Will on for Bob. I know you talked about the timeline of the energy orders, but can you talk more specifically about the production build-out? Has the new capacity been completed? Tested? Where does it stand? Jeffrey Niew: Yeah. So, I mean, you know, we get we have weekly calls with the team. This is obviously happening in, you know, outside of Greenville, South Carolina. And so we have weekly calls. It's like every week there's something new. A couple of weeks ago, we got the permits to start producing product in the facility. The equipment's being moved in. You know, we've got a team actually, you know, in Greenville from all over the world to help support this ramp-up of Green in manufacturing engineering team from across the globe to help with the ramp-up. So there's a lot going on. Plus, at the same time, we're still delivering, you know, low volume units on this order. But, you know, the goal here, you know, is we're gonna ramp this up, like, 10x in the next five months from where we are today. So, you know, I think we're on track, you know, a lot to be done here, but we're on track in order to get to by the end of Q2. The full volume production that we committed to. And, again, I think it depends a lot about auto orders and the rest of the specialty film business. You know, exactly what we deliver on this energy order, but, you know, I think we're thinking in that, you know, $50 to $65 million range from, you know, in the twenties. This year. For 2025. And, Will, I would just say very modest amount in Q1. So it will help drive sequential growth from Q1 to Q2. As we ramp up. Robert Labick: Yeah. So I think that's a good point. I think obviously, we're guiding to pretty decent organic growth year over year, but that's not being driven by the energy order, obviously. That's very helpful. Thank you. And can you remind us, can that capacity be used for other pulse power applications beyond the energy order if the demand arises? Jeffrey Niew: Yeah. I mean, like, how we're setting this up, you know, quite frankly, is setting it up probably in the same facility, but a little separated. Because the normal specialty line is much higher mix. This is essentially, you know, a low mix production and we're working on a lot of things. That will make the standard specialty line film line more productive over time too. Like automation, you know, we're doing a lot of things. That will help longer term with the standard specialty film line, but we're setting them up right next to each other as opposed to trying to build, you know, one high volume customer against more of, like, I call higher mix customers. Robert Labick: That's all for me. Thank you. Operator: As a reminder, everyone, please press 1 if you have a question. We'll go next to Tristan Gerra from Baird. Tristan Gerra: Hi. This is Tyler Bomba on for Tristan. Thanks for taking the questions. Touched on it briefly already, but could you give us a more detailed update on the supply-demand dynamics in industrial? You expect the second half to see industrial revenue rebounding if the first half is kind of back to supply and demand balance. Jeffrey Niew: Yeah. So, you know, when I look at, like, our numbers, you know, in our forecast here, you know, I think we expect in the first half right now we expect pretty strong industrial shipments in the first half. Off of, you know, what was pretty strong in 2025. And then I would sit there and say, right now, the back half of the year looks more like, now it looks more flattish to the back half of 2025. For industrial. For industrial specifically. But overall, we expect growth for industrial for the full year. So, you know, like, you know, obviously, if you go back to, Tyler, to when we were talking earlier last year, the 2025 was still relatively, you know, meagerly weak. We're seeing a fair amount of growth. In 2026. And then I think, you know, it's a little early. Industrial is a lot more turns business. The lead times are shorter. But right now, you know, I think what I see here is, you know, we're gonna it's gonna be flattish year over year in the back half. Tyler Bomba: That's very helpful. A quick follow-up. Starting to hear about shortages of components across the industry. Is this impacting your demand? And are the supply constraints expected to positively impact price in the second half? Jeffrey Niew: Well, I mean, we're always looking at price, Tyler. So I think, you know, I think you're absolutely right. I mean, there are a number of things here and dynamics that I think are going on. And we continue to see, I mean, like I said, in a previous question, with the book-to-bill, when we were having these strong book-to-bills in the front half of 2025, it was off of weak shipments. So you could you gotta take that book-to-bill with a grain of salt. But when you look at, you know, the Q4 numbers in terms of the revenue being $90 million and we still booked, you know, at a book-to-bill of 1.06. And I said, January's already in the books, and the bookings in January were already strong again. And so it's definitely a topic here, about capacity, capacity utilization, pricing. It's all intermixed. And to be honest with you, I would sit there and say, we are starting to see some concerns as we enter towards the back half of the year that we got to make sure we're prepared for all the orders we're receiving. So, you know, I think, you know, if this demand keeps continuing at this rate, great. Tyler Bomba: That's all for me. Thanks. Operator: And everyone, at this time, there are no further questions. That does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is [ Freilla ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mike Sabella, Vice President of Investor Relations. You may begin. Michael Sabella: Thank you, operator. Good morning, and welcome to Patterson-UTI's earnings conference call to discuss our fourth quarter 2025 results. With me today are Andy Hendricks, President and Chief Executive Officer; and Andy Smith, Chief Financial Officer. As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations or predictions for the future are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the company's actual results to differ materially. The company takes no obligation to publicly update or revise any forward-looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website at patenergy.com and in the company's press release issued prior to this conference call. I will now turn the call over to Andy Hendricks, Patterson-UTI's Chief Executive Officer. William Hendricks: Thank you, and welcome to our fourth quarter earnings conference call. We closed 2025 with a strong fourth quarter, delivering steady results through what's typically a seasonally soft period. Our teams remain highly disciplined with strong operational execution in the field and a focus on cost controls. We are pleased with the performance across all our businesses during 2025, particularly given the challenging commodity environment we faced throughout the year. Patterson-UTI once again demonstrated its ability to generate strong free cash flow, delivering $416 million in adjusted free cash flow in 2025. Notably, the fourth quarter marked our highest adjusted free cash flow quarter since we completed our strategic transformation in 2023. This achievement highlights our ability to adapt to changing market conditions and underscores the effectiveness of our teams in maximizing our potential throughout all phases in the cycle. We are showing greater resilience to market fluctuations as we use our technology edge to deliver operational excellence. I'd like to extend my sincere appreciation to all our employees for their hard work and dedication throughout 2025. Your efforts were instrumental in our success, and we look forward to moving Patterson-UTI forward again in 2026. The industry overcame numerous challenges in 2025, including an increase in OPEC+ supply and ongoing macroeconomic uncertainties. Despite these pressures, the oil market has remained resilient with crude prices today at a similar level to those on our last quarterly earnings call. Although commodity prices remain unpredictable, in any scenario, at Patterson-UTI, we will remain committed to our core principles: delivering safe and efficient execution for our customers, investing capital responsibly in differentiated technologies and maximizing returns while generating substantial adjusted free cash flow for our investors. Our free cash flow profile continues to be robust, which gives us confidence to increase our quarterly dividend by 25% to $0.10 per share in the first quarter. We are confident that our free cash flow will exceed our dividend commitments, providing the opportunity for additional share repurchases or other investments aimed at creating further shareholder value. From a macro perspective, uncertainties remain regarding the sustainability of U.S. oil production at the current pace of activity. Recent data suggests that reduced drilling and completion programs in 2025 are beginning to impact production figures. The industry is likely approaching a point where we'll need to decide between declining production volumes or increased drilling activity to maintain production trends. Although there may be a moderate decrease in U.S. oil activity in the near term, we do not believe that the industry can continue operating at lower drilling levels without causing a more significant impact to production than what has been seen so far. We remain optimistic about the long-term prospects for natural gas, and we anticipate that a multiyear increase in drilling and completion activity will be needed to meet future demand. While there have been some incremental increases in natural gas-focused activity and natural gas prices have rebounded sharply due to winter weather demand, we expect most large customers will wait for clear commodity price signals after peak winter demand before making changes to their plans. As physical demand for natural gas for both LNG and power generation grows, we expect to see additional demand for our services in the second half of 2026. In response to the macro environment, we have reduced our gross CapEx budget by around 15% to roughly $500 million in 2026. After accounting for the expected proceeds from a typical cadence of asset sales during 2026, we continue to expect that our CapEx net of asset sales will be below $500 million this year. We have made significant progress in lowering our unit level maintenance CapEx requirements. We continue to successfully implement new digital processes that improve preventive maintenance, high grade our asset base with new technologies and consolidate facilities as we move further through the integration process of our businesses. Importantly, our 2026 CapEx budget reflects funding for high-return projects that will further enhance the quality of our operations and ensure we are well positioned with new technology that supports the next leg of customer demand. While we are substantially reducing our overall CapEx budget, we fully expect to exit 2026 with a more advanced and higher-quality asset base than at the start of the year. During the fourth quarter, our U.S. Contract Drilling Business saw a relatively steady activity and pricing compared to late third quarter levels, and this stability continued into 2026. Our focus remains on identifying investing in assets and technologies that bifurcate drilling performance and create unique value for both our customers and investors. Of note, we have seen increasing acceptance of performance-based commercial agreements, and this shift reflects growing customer interest in partnering with service providers who can enhance operational efficiency. Our ability to deploy advanced APEX rig technology that enables faster drilling of more complicated wells is resonating with our customers. We are also seeing strong results from the broader adoption of our drilling automation packages. Nearly all of our rigs are now equipped with our proprietary Cortex automation applications, and demand remains high as we continue to develop new software applications to further improve drilling operations, with many of these in partnership with our customers. Looking ahead, the evolving shale landscape is characterized by more complex well designs, requiring rigs with increased load capacity that control deeper geological formations as well as longer and more complex laterals into higher pressure zones. Future demand will increasingly favor differentiated rig technology, positioning Patterson-UTI and our fleet of advanced assets and technology with a distinct advantage over much of the competition. The benefit of this differentiation has already been reflected in our ability to sustain margins at higher levels than we have seen during periods of activity moderation in prior cycles. As the market continues to favor high-quality drilling solutions, we anticipate that our advanced technology will further strengthen our position as we aim to sustain pricing and margins as customers seek out the best available drilling contractor to meet their increasingly complex needs. In Argentina, we are excited with our recent agreement to lease 2 high-spec rigs for work in the Vaca Muerta field. The multiyear agreement is a capital-efficient way for us to put idle assets in the U.S. to work internationally. The opportunity in Argentina is one of the most promising that we see to put our idle assets to work globally, and our fleet of rigs in the U.S. are well suited to meet the region's growing demand for unconventional drilling over the next few years. The expansion also complements our established position in drilling products, including Ulterra drill bits in Argentina. We believe that further planned increases in drilling activity in Argentina will reduce the available supply in the U.S. Our Completion Services segment delivered strong results in the fourth quarter. Segment adjusted EBITDA for the second half of the year was higher than the first half, reflecting the quality of our operations and the steps we have taken over the past year to add new technology to our portfolio, streamline operations through our digital platform and improve our cost structure. Our team effectively managed holiday downtime across several of our larger fleets, successfully securing work to maintain high utilization. Pricing and activity remained steady compared to the third quarter. Our frac assets remain highly utilized in the first quarter with almost 2.5 million horsepower either deployed in the field or in normal maintenance cycles. We have very little spare capacity, and our idle horsepower consists entirely of older diesel equipment that is not part of our long-term strategy. As we direct our capital towards high grading our asset base with additional Emerald 100% natural gas equipment, we are likely to have fewer fleets in operation as we continue to idle lower-quality diesel assets and focus on the premium market. Our equipment that can utilize natural gases and fuel is fully utilized. Our asset base will continue to reflect this high-grading strategy. Our nameplate horsepower totaled 2.7 million at the close of 2025, which is down more than 600,000 horsepower from 2 years. And we are likely to see a further reduction this year. Within our Completion Services segment, we continue to see growth opportunities in high-end natural gas powered frac equipment in our industry-leading and proprietary digital completions platform, which we call eos. Our Emerald 100% natural gas-powered footprint will grow again in 2026. And by the end of the year, we expect that more than 85% of our assets will be capable of using natural gas as fuel in some capacity. We believe our asset quality is among the best in the industry and the strong demand and returns for our high-end equipment position us to maintain resilient margins across our higher technology assets. We will reduce capacity of our older assets, and we believe the industry is also doing the same. Although public estimates of U.S. industry fleet count shows a decline, the total horsepower deployed has not declined and has remained roughly consistent. The frac industry is evolving towards larger fleets at the well site, a trend that we believe is being overlooked by public industry data on the number of active fleets, resulting in the frac fleet count becoming less of a reliable metric to determine industry completion activity. At the same time, the significant increase in pumping hours per day over the past several years has likely run its course. Some providers are encountering technical limitations on most of their fleets with our average frac fleet now pumping over 22 hours per day. With continuous pumping, our team has been leaders in executing on the growing trend to achieve 24-hour operations. But continuous pumping fleets require significantly more equipment on location relative to a more normal operation, which increases the cost of continuous pumping and further restrict supply. We have successfully executed several continuous pumping jobs to date as customers are currently evaluating whether the incremental increase in uptime justifies the additional cost. During the fourth quarter, we launched our proprietary eos Completions Digital Platform. Eos connects our customers directly with their live field data, allowing the customer and our Completions teams to improve real-time decision-making on the same platform. Our customers can eliminate the need for multiple third-party software platforms in their data flow and improve their overall data quality with a direct link to our digital performance center. The eos platform is hardware-agnostic, allowing our completions data and also third-party data sets to be delivered to customers on the same platform with no delays. The eos platform includes our advanced Vertex automated frac controls, which to date have been deployed across most of our active fleets and regardless of frac power type. Eos also supports our other services such as waterline, pump down, natural gas delivery and proppant logistics. This takes our completions segment to the ultimate goal of push button frac, and soon, with closed-loop decision-making, which will deliver more consistent completions to our customers and over time lower our operating and equipment maintenance costs. We have revenue-generating agreements in place now and are seeing increased customer interest for deploying this platform. Our Drilling Products segment delivered another strong quarter in North America, Revenue per industry rig remained close to company record levels in both the U.S. and Canada, underscoring our robust market position in drill bits. Additionally, we are having continued success with new downhole tool product innovations helping us to maintain relative strength in these markets. Internationally, revenue experienced a slight decline from the third quarter, primarily on lower-than-expected revenue in the Middle East. However, we achieved revenue growth in several important regions, including Latin America and Asia Pacific. Looking ahead, we remain optimistic that the international outlook for our Drilling Products segment will improve as we progress through 2026. We have opened a new manufacturing facility in Saudi Arabia that is now manufacturing drill bits in country, which should give us an advantage as growth resumes in the Middle East. Patterson-UTI continues to look to extend our leadership position while the U.S. shale industry undergoes significant changes. The company's operational excellence within both the drilling and completions segments has provided a competitive advantage, enabling effective navigation through the current commodity environment. Target investments across businesses will remain a potential focus. These strategic efforts are evident in the company's ability to generate robust free cash flow and maintain relatively resilient margins, even through periods of activity moderation. Even with ongoing commodity volatility, we are well positioned to deploy capital in ways that add value for shareholders, including through additional shareholder returns. We will continue to be flexible with capital deployment and evaluate a mix of dividends, buybacks and other potential growth opportunities. I'll now turn it over to Andy Smith, who will review the financial results for the quarter. C. Smith: Thanks, Andy. Total reported revenue for the quarter was $1.151 billion. We reported a net loss attributable to common shareholders of $9 million or $0.02 per share. Adjusted EBITDA for the quarter totaled $221 million. Our weighted average share count was 379 million shares during Q4. During 2025, we once again showed the cash generation potential of our company with adjusted free cash flow totaling $416 million for the year. As expected, the fourth quarter was the strongest cash-generating quarter of the year by a wide margin. It is important to remember that given the timing of some working capital items, including significant customer prepayments that we typically receive in the fourth quarter for work to be performed during the first half of the following year, it is far more meaningful to analyze our free cash flow on a full year basis as the quarterly results can show greater variability. For year-over-year comparisons, the customer prepayments we received in the fourth quarter of 2025 were roughly $15 million higher than those we received in the fourth quarter of 2024. Before we get into the segment discussion and the outlook, I want to give an update regarding the impact from severe winter weather that has already occurred during the first quarter. The January 2026 winter storm disrupted large portions of our operations for several days, and we believe the full impact of the disruption will have a negative impact on our first quarter adjusted gross profit, particularly in our Completion Services segment. The estimated impact of this event is included in the quarterly guidance numbers we will discuss. In our Drilling Services segment, fourth quarter revenue was $361 million and adjusted gross profit totaled $132 million. In U.S. Contract Drilling, we totaled 8,596 operating days for an average operating rig count of 93 rigs. Our successful cost reduction measures mostly offset the revenue decrease during the quarter. For the first quarter in Drilling Services, we expect our average rig count to be in the low to mid-90s. We expect adjusted gross profit within the Drilling Services segment will decline by less than 5% from the fourth quarter. Revenue for the fourth quarter in our Completion Services segment totaled $702 million with an adjusted gross profit of $111 million. Activity and pricing were mostly steady compared to the third quarter with minimal seasonal downtime. For the first quarter, we expect Completion Services adjusted gross profit to be approximately $95 million with slightly lower activity given the impact of the first quarter winter weather. Fourth quarter Drilling Products revenue totaled $84 million with an adjusted gross profit of $34 million. Revenue per industry rig in the U.S. remain near company record levels. We saw a decrease in revenue from our international operations, mostly from lower-than-expected sales in the Middle East, although we did see revenue growth in several markets, including Latin America and Asia Pacific. For the first quarter, we expect Drilling Products adjusted gross profit to improve slightly with slightly lower revenue in the U.S. offset by an increase in activity and revenue from our international business. As we move through 2026, we expect to see an improvement in international revenue in the Drilling Products segment as activity improves, primarily in Saudi Arabia. We also expect to see growth in downhole tools and new product development. Other revenue totaled $5 million for the quarter with $1 million in adjusted gross profit. We expect other adjusted gross profit in the first quarter to be steady compared to the fourth quarter. Selling, general and administrative expenses in the fourth quarter were $62 million. For Q1, we expect SG&A expenses will be approximately $65 million. On a consolidated basis for the fourth quarter, depreciation, depletion, amortization and impairment expense totaled $221 million. And for the first quarter, we expect it will be approximately $225 million. During Q4, total CapEx was $139 million, including $61 million in Drilling Services, $59 million in Completion Services, $15 million in Drilling Products and $4 million in Other and corporate. For 2026, we expect gross CapEx to approximate $500 million and to be below $500 million net of asset sales. We expect CapEx will be weighted towards the first half of the year as we bring in new technologies into both the Drilling and Completion Services businesses. We closed Q4 with $421 million in cash on hand and we did not have anything drawn on our $500 million revolving credit facility. We do not have any senior note maturities until 2028. During 2025, we returned $119 million to shareholders through dividends and share repurchases. Since the start of 2024, we have returned roughly 2/3 of our adjusted free cash flow to shareholders through dividends and buybacks, and we remain committed to returning at least 50% of our adjusted free cash flow to shareholders. Our Board has approved a 25% increase in our quarterly dividend to $0.10 per share, payable on March 16 to holders of record as of March 2. I'll now turn it back to Andy Hendricks for closing remarks. William Hendricks: Thanks, Andy. I want to close the call with some comments on our company and the industry. I'm very pleased with how our segments performed in the fourth quarter, where we were able to show improvements in controlling costs and keeping them in line with the activity changes. This is a testament to focusing on what we do best: providing products and services to efficiently drill and complete wells. The result is that we were able to generate strong free cash flow to close out 2025. As well, I'm pleased to see the stable activity continue into the first quarter of 2026. The outlook for 2026 has the challenge of some commodity uncertainty. With oil prices trading near $60 per barrel, my expectation is that activity in oil basins remains relatively steady from where we are today. Oil markets have remained resilient, looking ahead to continuing economic growth, along with some geopolitical unrest. Gas markets remain steady and have the potential for some activity upside later in the year. It's early to predict how 2026 will play out, but I'm encouraged by our current activity levels so far in the first quarter. We continue to invest in new technology in both drilling and completions, where we are seeing strong returns on our capital investments. In Drilling Services, we are being asked for new Cortex automation applications by our customers, along with upgrades to our APEX rig structures to drill deeper geological horizons and longer laterals. In Completion Services, we will continue to add new Emerald 100% natural gas fuel technology to our fleet and continue the rollout of the eos platform, which includes the Vertex automated frac system. In Saudi Arabia, Ulterra manufactured their first drill bit in-country in December. And this new manufacturing capacity, combined with our strong performance in the region and the planned increase in drilling in Saudi Arabia, gives our drill bit business some international upside this year. These technology and manufacturing investments allow us to continue to differentiate ourselves versus our competitors and maximize the margins we were able to earn. And we're doing all of this while reducing our overall capital expenditures in 2026. We remain focused on generating strong free cash flow for our shareholders and, over the last year, we have a higher level of cash than what is currently required to sustain our business. Given our cash generation potential, I am pleased that our Board has approved a 25% increase in our quarterly dividend as part of our overall commitment to return cash to shareholders. With our current cash position and after capital expenditures, we will continue to repurchase shares in the market where it makes sense and also continue to look for growth opportunities. Once again, I'd like to thank the men and women of Patterson-UTI Energy for their outstanding performance in 2025 and for helping to responsibly provide energy to the world. Thank you for joining us today for our Q4 2025 earnings call. We'd now like to open the lines for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Scott Gruber with Citi. Scott Gruber: Andy, I appreciate all the color on the dynamics at play in the frac market today. How do you see the U.S. frac supply/demand balance today given the enlargement of the average fleet? It's grown a long way here over the last couple of years. And do you have a sense of roughly the fleet utilization for the market? And can attrition alone drive us back to a relatively tight market balance in the not-too-distant future? William Hendricks: Yes. In terms of fleet activity, it's really an interesting situation. We've been trying to explain for a while now the dynamics in the data that you're getting from various public sources. If you look at what we did across 2025 last year, public data is showing a reduction in our fleet count. But at the same time, the size of our fleet, the amount of horsepower on location has just been continuing to grow. We're doing more simul-frac. We're doing more trimul-frac. And even on the same simul-frac, we're getting requests for higher rates and higher pressures. So that's causing us to put more equipment on location. When we do put more equipment on location, we certainly factor that into the pricing for the job. We're committing more assets so it costs the operator more, but they're getting a cost benefit. They've done their economic evaluation on what it takes to maximize production out of their wellbore and that's what they've determined. So in some ways, it's been a win-win. But the challenge for people trying to understand the business is that while the fleet count looks like it's going down, we've actually remained really relatively steady in the amount of horsepower that's been deployed. So we've been moving horsepower around to different places and growing the amount that we have on the well site. And I see that trend continuing at maybe a measured pace in 2026, but you see that trend continuing. And what that means is it continues to reduce overall supply in the frac market. And all the equipment that we have that can burn natural gas is certainly not working, and that has a cost benefit to operators when they convert natural gas. So that market still remains very tight because of the amount of horsepower growth on a per fleet basis. Scott Gruber: I appreciate all that. And then I think your current power business is looking at some opportunities to supply energy storage systems at data centers and other applications outside of oil and gas. Can you provide some color on that initiative? William Hendricks: Yes. We do have an electrical engineering division. It's called Current Power. And they've built and engineered very specific micro grids and they do battery storage for mainly our drilling rigs. There may be an opportunity in the future for them to do some measured type of storage for data centers, but that would be a pretty large-scale project even for us. There's some technology there that could be interesting, but I'd say it's very early to see if that pans out to anything. Operator: Your next question comes from the line of Saurabh Pant with Bank of America. Saurabh Pant: Andy, maybe I'll just start with a bigger picture question. I think you were talking about increasing differentiation in your prepared remarks. And honestly, I see that in the kimberlite data as well, right? I think your performance, your value proposition seems to be improving in the eyes of the customers in both drilling and completion. As I think about what it means for financial, right, it seems to me like the gap between the top 2, 3, call it, 4 players, including yourselves, and the other small medium-sized providers is actually increasing, right. So it should be good for your pricing power in the market. So maybe just talk to that dynamic a little bit, differentiation and pricing power and how pricing has held up a lot better. William Hendricks: Yes, I appreciate that question, and thanks for noticing some third-party data that shows that we continue to improve our operations. Really pleased with how the teams have improved execution over the years. And also, it gives us confidence to continue to fund them with capital for a new technology. And we do think that, that continues to differentiate us in the market, both on Drilling Services and Completion Services. So really pleased with the performance overall for the teams. We're working for some of the biggest E&Ps in the U.S. in both drilling and completions. And it's the size and scale of the operations, the breadth of services that we can provide, the level of technology we can provide and the execution that we're providing in the field that's really driving all that. So it's not just one thing in particular but it's multiple factors, and just really pleased with how that's been working out. In terms of pricing, one of the things that we've shown here over the last couple of years is even though you've seen especially in drilling a decline in the rig count, you haven't seen compression in margins like you've seen in previous years. And technology is a big part of that driver where we can differentiate certainly for much smaller companies. And it helps to really kind of shore up our ability to protect the pricing and margins where we can. Our business is certainly still competitive in nature, especially in West Texas, where you're seeing a little bit more slowdown in the oil markets versus the gas market. So there's still competitive market out there. But really pleased with how we're performing in general and also very pleased at how well we've been able to keep the margins up relative to previous cycles. Saurabh Pant: No, that's fantastic, Andy. And then maybe just a quick follow-up on what Scott was asking on the supply/demand side of things. I know it's very early to asking about pricing power coming back to the market, but I know it will at some point, right? So in some ways, Andy, how should we think about how much incremental demand maybe on the rig side and on the frac side would it take for soft pricing power to come back to the industry? Now I don't know when it happens, but just some sense of what kind of demand pull we might need for that. William Hendricks: Yes. It's a really interesting situation, especially for us, where all of our equipment that can burn natural gas is out working today. And so if we see the activity increase in the natural gas basins towards the end of this year to supply both LNG demand initially and, over time, increasing power demand in the U.S., that draw on natural gas is going to cause an increase in activity in both drilling and completions. And on the completions side, we are essentially sold out of all of our equipment to convert natural gas. And when you're working in those gas markets, the operators, the E&P certainly want to fuel that equipment with natural gas. And we would have to add to our asset base at that point and that's going to cause a significant inflection in pricing in that point. So my expectation is that once we see an activity increase in these gas basins, it's really going to drive an increase in the pricing on the completions as well because we're going to have to add assets to do that. Saurabh Pant: Got it. Right. No, I think things move pretty quickly on both sides, right? So we should not forget that. And a very quick follow-up for Andy, if you don't mind. Andy, you were talking about some weather impact on your first quarter guidance. Did you quantify the impact, if I missed that, if you have any color on how big that impact is. C. Smith: We didn't quantify it, but it's in the range of $5 million to $10 million. It's included in our guidance. So it's certainly not incremental to anything. It's already included, but it's probably in the $5 million to $10 million range. Operator: And your next question comes from the line of Jim Rollyson with Raymond James. James Rollyson: Andy, you kind of talked about the demand side with your technology and all the things you've been going through this kind of market over the last couple of years. One of the things that's really been pretty notable here over the last -- at least the back half of '25, if not longer, is what you guys have been doing on the cost side. It showed up really in Completion Services kind of first. It certainly showed up in Drilling Services this quarter. Maybe just spend a minute on kind of what all you're doing to bring your cost structure down and kind of what inning you might be in just as we think about -- it may be a stable market, not that, that happens, but how margins proceed in both those businesses going forward. William Hendricks: Yes. So my hats off to the teams. They've really been digging in hard as to how we're spending every dollar out there both in OpEx and CapEx. And you look at things like maintenance CapEx, what are we spending our money on? Are there things that we can do to refurb versus buy new parts? Are there things that we can do to negotiate with some of our suppliers given the state of the market? There's just a number of efforts out there to try to rein that in. I'll also say that the teams have worked to become more efficient so they can do more with the same amount of people and get more accomplished from a maintenance standpoint. So maintenance has been a big driver in the cost savings in both the Drilling Services and Completion Services segment, both OpEx and CapEx. C. Smith: Yes, Jim, I would add to that. So yes, as Andy said, crew sizes particularly around in the Completion Services area as well as the support structure footprint, as we have consolidated these businesses over time, we've looked to co-locate where we can or slim down sort of our fixed asset footprint in terms of our support facilities. And then on the SG&A side, as we've gone through and tried to integrate the back office even more, consolidate, centralize, it allows us to control some of those costs, get them out of the businesses and let them be managed, quite honestly, from the corporate side. So we turn the business units loose to sort of focus on their operations more so than kind of what they're doing on the back office side. So I would say all of those things have an effect, and we'll continue to do more on those. But yes, it's been a real focused effort over the last year or 2. James Rollyson: Yes. Well, it's been impressive. And then just as a follow-up, you kind of took upon this path of returning at least half your free cash flow a couple of years or so back. And you've obviously exceeded that number pretty candidly each year. You just raised the dividend by 25%. And I presume with all the things going on, your free cash flow conversion rate should probably be pretty stable at least. Just curious, you didn't buy a whole lot of stock back in 4Q. And even with the dividend hike and kind of where numbers are, you have quite a bit of room to be able to buy back stock throughout 2026. Just maybe your philosophy on that given that your share price hasn't ripped but it's certainly improved a little bit from where it was at the bottom. So I'm just kind of curious the philosophy there. C. Smith: This is Andy Smith. I would say that nothing has really changed philosophically for us, Jim. Look, it's pretty clear for those that have been following us for a while that we run this company to maximize free cash flow. And so as we look at anything on the capital allocation front, that's kind of our primary focus. Whether it's looking at reinvesting into our fleet, whether it's looking at buying back shares, whether it's looking at M&A, we kind of look at them all in terms of how much cash flow per share accretion can we get out of those opportunities. And I would say in the fourth quarter, the reason there was a little bit of pause on the buyback was more about lumpiness of working capital and things like that, and it kind of came in late in the quarter. And so nothing really has changed. But we continue to look at all of our capital allocation priorities through that sort of free cash flow per share metric. And we ultimately think that in the end, that serves us pretty well and that's how we run the business. So again, I wouldn't say to read too much into that. I don't think anything has really changed in terms of our philosophy. William Hendricks: Yes, I agree. I don't think anything has changed in how we look at that. But one thing, when you look at the bigger macro and you look at what's happening in the industry over the last couple of years, the market has softened over the last couple of years, but yes we're still generating strong free cash flow, that's our focus. And so that gave us the confidence to go ahead and just raise the dividend. Because here we are in a softer portion of the market but yet we're still producing strong free cash flow, and we still have forward visibility on that. Operator: And your next question comes from the line of Derek Podhaizer with Piper Sandler.. Derek Podhaizer: I know you mentioned some of the comments around Argentina and setting some of your idle rigs down there. Maybe just give us a sense of you walk around the world, you're seeing all the unconventional development pickup. I think it's specifically about your turn well JV over in the UAE. What can we think about you guys explore these international regions, starting with Argentina, maybe UAE, anywhere else? Just some comments and thoughts around that. William Hendricks: Yes. We've looked at these markets for more than a decade to try to see where we can fit in and where it makes sense and where we can get decent earnings out of it. And these markets have various competitors, but they also have rig specifications that differ from the U.S. in a lot of markets. The interesting thing about Argentina, it's almost an identical rig specification to what we have here in the U.S. And so it's easy from a technology transfer and even a capital efficiency standpoint to say, okay, yes, we can move a drilling rig down in Argentina and work in that environment without big technical changes. And so as the Vaca Muerta activity continues to grow in activity and they continue to use the available supply in Argentina, they're looking to the U.S. to bring rigs down from various drilling contractors. This agreement worked out for us to partner up with a local supplier who, has a good reputation in the region and is working for some of the biggest E&Ps there. And so this worked out really well for us to be able to get to an agreement with them to provide them with a couple of drilling rigs to go down there. And while it's only 2 rigs leaving the U.S. market, I think everybody who's been following Argentina knows that you've got operators that are over there currently. You've got U.S. operators that are looking to move into Argentina. And activity will continue to grow in Argentina over the next 5 years and those rigs are going to come out of the U.S and, over time, that's going to reduce the U.S. rig supply. And so we'll continue discussions with companies that are currently there and companies that are going down there, and we'll provide rigs where it makes sense for us to provide rigs. Derek Podhaizer: Got it. That makes sense. Very helpful color. And then just thinking about the frac side of things, I appreciate the comments quantifying some of the impact here in the first quarter due to winter. But maybe you can take a chance on walking through second quarter, third quarter, what you see out there, your customer conversations. Will we get a snap back in utilization? Just trying to think through the different crosswinds around pricing resetting. Just maybe some help understanding, as we move through the year, what we could see out of the completion side of the business. William Hendricks: Yes. We were really pleased to see that the first quarter was still relatively steady. In the fourth quarter, we were able to exceed expectations in overall activity relative to how a fourth quarter normally plays out. And then relatively steady into the first quarter, the weather issues aside that everybody went through. As we go through the year, if the commodity prices stay in the $60 range, my expectation is that the oil markets stay relatively steady. I think that as a lot of E&Ps were working on their budgets in December, you had oil commodity prices at various levels in December, which kind of made it challenging for a number of our customers to decide what their activity is going to be during the year. But we've seen more resilience, I think, than many of us have expected. And if that resilience persists and oil stays in that upper 50% to 60% range, then the market likely to remain relatively steady. Operator: And your next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: I guess, on the frac side, I was just curious what your view is on two things. One is if you think we'll see further consolidation in the business. And maybe tied to that, do you feel like over the last, I don't know, 6 months or a year that the behavior of the industry and the peers has been fairly good? Or do you still see some people who are underpricing the market? William Hendricks: So I think the frac market has been evolving from a technology standpoint, and I think that you're seeing differentiation with the top 3 or 4 players versus others. And I think that technology differentiation continues for the next few years. You can certainly see it in where we're investing dollars. So we continue to invest in the 100% natural gas Emerald fleets that we have deployed. There's still very strong demand for equipment that can burn 100% natural gas, and we're going to continue to do that. And so we're going to continue to grow our capacity of that high-end frac equipment probably higher than some of the others are deploying today. So we see that. And then you see digital. Digital still has a lot of evolution to go in the frac space. And so we announced, it was a big event at an industry conference this week in the Houston area where our teams rolled out the new eos platform for digital. It allows our customers to be able to aggregate all their data without various third parties, put it all in one place, visualize it, work with it, do what they need to do with it. But that platform is not just about data aggregation and moving data. It's also about the controls and working with the control systems that we have, which are proprietary to our equipment. And we have the Vertex automation on the frac. And so it's these kind of investments in the higher-end technology on the equipment side, but also the investments on the digital, which will allow us to continue to differentiate. And I think that it's going to roll up to the top 4, maybe just 3 players that can do that and differentiate from the others. Stephen Gengaro: Okay. That's helpful. And just the other quick question. Just on the rig side just on the North American market, do you feel like pricing has stabilized? William Hendricks: I think where we are today, you've got some available rigs in West Texas. It's still a price competitive environment out there. But I'm pleased with our ability to protect our pricing and margins the way we have. And we'll just have to see how it plays out. I think where the commodity price lands as an average for the year will be a lot that drives that. So if it stays upper 50s to 60s, then I think pricing remains relatively stable. It will get a little bit more competitive if we see a different commodity price if it's lower. But I think where we are now, that it stays relatively stable. Operator: And your next question comes from the line of Arun Jayaram with JPMorgan. Arun Jayaram: I was wondering if we could start with the CapEx. You mentioned how you're reducing CapEx by around 15% to less than $500 million. I was wondering if you could maybe unpack the year-over-year decline, what that kind of represents, maybe a little bit of a mix between drilling and completions and perhaps how much of the CapEx is going to be earmarked for the Emerald direct drive kind of horsepower. C. Smith: Yes. So I can give you a little bit of color on that. So of our total CapEx projection or CapEx guidance, about 40% of it is going to drilling, about 45% of it going to Completion Services, a little over 10% is going to Drilling Products. And the rest is sort of Corporate and Other on a percentage basis. And in Completions, of that 45%, gross dollars, about $65 million or so is going to new Emerald equipment that will be coming into the fleet over the course of the year. Arun Jayaram: That's super helpful. Andy, for you. I wondered if you could maybe elaborate on this trend you're seeing with continuous pumping. I think in one of your previous slides I've seen that you've talked about how simul-frac now is representing about 30% frac activity today. Where are we in terms of continuous pumping? And is it advantageous for operators such as Patterson to pursue continuous pumping? Just obviously, I assume you're getting paid for the extra horsepower on site. William Hendricks: Yes. Continuous pumping is interesting in that there are certain advantages for the E&P to -- if they don't have to stop, you're basically pulling production forward. So there's a value to the E&P to do that. And the E&P has to work through those economics to decide what that value is. Because on average, if we're pumping 22 hours per day across all of our fleet, and you want to take that number from 22 to 24, we may have to deploy in terms of capital another 20% to 30% of capital allocation with more frac pumps, more high-pressure iron, more valves to be able to have a system out there that can achieve that. And so the E&Ps -- and we charge for all that equipment when it goes on location. So the E&Ps have to do their own earnings math to decide, is that worth the extra equipment that's on location to be able to accomplish that? Is that value of bringing production forward on that particular pad or multiple pads really worth that effort? So what we see today is we see a number of E&Ps that are trialing it to see how it works, to see what the costs are going to be. And we're working with a number of our customers to reduce those costs so we don't maybe have to put so much equipment on it on there. So it's all evolving at the same time. But at the end of the day, it's going to be up to the E&P to decide, does it make economic sense for them. Technically we can do it. Technically we know how to do it. We are working to continue to reduce the cost to do it. But it's the E&P's economic decision at the end of the day. Arun Jayaram: Andy, you said it's 20% to 30% more horsepower at the well site to do that. William Hendricks: I would say 20% to 30% more capital in general because you've got pump equipment. You've got maybe redundancy on a number of things. You've got more piping, more valves out there. Because if you're going to pump for multiple days straight, you still need to be able to access pumps to maintain them. So you have to have more pumps than you're using so that you can swap pumps in and out of the lines while you're circulating without stopping the circulation. So you're going to have more equipment on location so you can manage all that. Arun Jayaram: Okay. If I could just sneak in one more. Andy, I believe you were anticipating running around 2 million-horsepower plus or minus in 1Q or currently. What is your average fleet size in terms of horsepower today? William Hendricks: There's no average fleet size. I mean, I can tell you, every fleet that we have deployed is a different size. Is it in the Midland Basin? Is it in the Delaware Basin? Is it a simul-frac in the Delaware Basin? Is it pumping in the Haynesville? And so everyone is different. Everyone has become very bespoke to whatever operation the operator is trying to accomplish. As I mentioned earlier, just even a simul-frac job, we might have a simul-frac job today that's got another 20% of horsepower versus a simul-frac last year because they want to do it at higher rates and higher pressures because they're seeing increases in production. So it even changes from pad to pad. It may be a high amount of horsepower on one pad. And for the same customer, moves and it shrinks for the next pad. So it's constantly changing. Operator: And your next question comes from the line of Ati Modak with Goldman Sachs. Ati Modak: Andy, I was wondering if you could give us color on the private versus public customer conversations as we think about your exposure in the U.S. William Hendricks: Yes. So we work for some of the biggest publics and we also work for some of the biggest privates in the U.S. And I would say that the large privates think of things long term just like the large publics think of things long term. They take a multiyear view to everything and that's how they view it. We do some work for some of the small private equity-backed privates but that's a very small percentage of what we do. We're heavily weighted to the largest E&Ps in the U.S., whether they're both public or private. Ati Modak: Got it. And the Saudi opportunity, it sounded like it's mostly on the bit size because of in-country value. Is that the right way to think about it? Or are there other strategic opportunities for you down the road? William Hendricks: Saudi for now is focused on drill bits for us. And you're absolutely right. It's the in-country value equation that the country uses. And so if you manufacture in-country, it improves your score. It allows your customers to buy more products from you. If you're manufacturing in-country and exporting out to other countries in the region, that improves your score and allows your customer there to buy more from you. So we think that, that's certainly a benefit for us, and our team has done a great job of getting us to the point where we can manufacture the first one in December. And we'll continue from here. Operator: And your next question comes from the line of Keith Mackey with RBC Capital Markets. Keith MacKey: Just wanted to start out on the rig side. Can you just talk through some of the technology offerings on your rigs? How has that changed? And what sort of revenue or just net benefit uplift do you get from the technology in this market? And finally to that, more of your customers are starting to talk about robotics on the rig floor. What's your view there? William Hendricks: So in our Cortex automation is a number of applications that enhance our control systems and automate a number of the functions that a driller might normally do when he's operating the drilling rig and working with his crew. And we've developed a number of these applications over the years, and it's been an interesting evolution because as you start to develop applications, then your customer comes back with what ifs. Well, what if we do this or what if we do that? And that either improves the existing applications where you tweak them some more, where our data analytics team will look at the data in different ways and decide how to best fine-tune these applications, or the customer works with you to come up with a new application that they see as beneficial and ask for priority on that. And so over the years, we've continued to develop those out. And there's revenue involved. We certainly charge for these. But it also means that we become more important for that customer when we're offering these things. And we tune these applications to their specific procedures or their workflows or their specifications on how they want to see the drill bit go back to bottom or what kind of weight on bit or they want to carry on the drill bit or what kind of differential pressures they want to maintain. And so it just allows us to be closer with the customers on how we run those types of operations. In terms of robotics, our teams have certainly -- they're looking at it. There are some advantages. There are also some big costs. And we've done a lot of the groundwork to deploy that on either our APEX-XC plus rig or APEX-XK. And I think over time, we'll do that as well depending on what the customers are requesting. Keith MacKey: Got it. And just finally, Q4, we're expecting a lot more seasonality from you and several of your peers. Can you just give us a little bit more color on really why you think that didn't happen and things were a lot more resilient? Is there some element of the E&Ps just not being able to slow down given where current activity levels are? Or are there pricing incentives given to keep fleets going? Just what is your sense of really why activity was so resilient in Q4? William Hendricks: I think for us, it was a combination of two main things. It was our customer base. As I've mentioned before, we work for some of the largest customers in the U.S. And those customers have stayed even more resilient than we've thought and just kind of kept working through the quarter maybe more than they normally would. And then the other piece is for some of those customers that may have slowed down, our teams have done a real good job placing that equipment in other places to be able to do that. Certainly wasn't pricing concessions but really more working with the customers. But again, I think it goes back to our customer base and the ability of our teams to know all the customers so that when we do have to move something around, then we can do that efficiently. Operator: And your next question comes from the line of Eddie Kim with Barclays. Edward Kim: Just wanted to dig into the Completion Services guide for the first quarter. You said you expected gross profit of around $95 million, which represents about a 14% sequential decline. At the same time, you said you expected activity to decline only slightly in the first quarter due to winter weather. So I mean, that would seem to imply a not insignificant pricing decline from fourth quarter to first quarter. Is that a fair assessment? And should we expect that to be sort of a headwind for you as your fleets move on to this lower pricing level as we move throughout the year? William Hendricks: No, not at all. I wouldn't say this is any significant pricing decline by any means. I think this is all more activity related. You can go back and look at the number of days below freezing in the Permian or the number of days that Pennsylvania had heavy snowfall, and that's where we were held up in activity in the first quarter. So that's just pushing revenue from the first quarter eventually into the second quarter. So that's how that's kind of moving. In terms of pricing decline, what we've said before even at the last earnings call, we're going to have a slight decline because of various tenders that have happened in the second half of last year, but that's in the single digits. So any price decline on average is single digits. But certainly, that's not what's driving what you're seeing in the decrease in gross profit. It's more had to do with weather activity and some mix in activity during the quarter. Edward Kim: Got it. Got it. Okay. My follow-up is just you opened up a new manufacturing facility in Saudi. You said you're manufacturing drill bits in the country. Could you sort of talk about the growth ramp-up you expect in Saudi maybe this year and next? And do you think Saudi demand is going to be sufficient to absorb all that capacity coming out of that new facility? Or is there going to be opportunity to sell drill bits into other countries in that region in a couple of years? William Hendricks: Yes. We've seen -- of course, we follow the rig count, the announcements on increasing rig counts in Saudi because that's what drives our drill bit business. They've had a big slowdown over the last 1.5 years in both onshore and jack-up drilling rigs over in Saudi, and we're seeing the calls to put the onshore drilling rigs back to work. And so you've had a number of drilling contractors that operate in Saudi that have made those announcements, and that will start to drive an increase in drill bit demand. We do expect the customer over there to consume some of their existing drill bits that they might have in a warehouse. But as they go through that, then they'll be calling for new drill bits. And we'll have some manufacturing capacity over there to be able to meet that need. We'll probably still likely ship drill bits from the U.S. at the same time. So it will be a mix of local manufacturing plus drill bits coming into the U.S. until we expand our manufacturing over there. But real pleased with what the team did given some of the constraints and challenges we had over there to get manufacturing set up. We've been doing remanufacturing in Saudi for years. So it was really a matter of expanding the space, the types of machines that we needed over there and also the skills that we needed over there to be able to go to full manufacturing. But they were able to produce that first drill bit in December. Operator: And we'll take our last question coming from Jeff Bellman with Daniel Energy Partners. Jeffrey Bellman: Andy, bit of a high-level question, and definitely related to some of what you've already addressed, but I wanted to get your take. If I had a thesis that the U.S. industry has gone a long way working through their Tier 1 inventory and activity is going to have to increasingly shift towards, let's say, more complex or Tier 2 resources, how do you view that transition for Patterson? And how does your asset base help operators kind of extend their economic life and expand the resource base if that shift actually has to occur? William Hendricks: Sure. There's a lot of talk about shifting from Tier 1 to Tier 2 and I really think that's operator specific. We work for some E&Ps that tell us they have another decade of Tier 1 that they're still working on. And then we have some E&Ps that say, yes, we're going to start to look at some of the Tier 2 or some of the deeper geological horizons. For us to do that, that means more service intensity, and more intensity means that it's positive for our pricing. But on the drilling side, it means we may need to continue to add capacity on the size of the rig that we're using. So we'll continue to do that. And on the completion side, it may require more horsepower on location for some of the deeper plays. And so it just increases overall service intensity, which is positive for us. Operator: And that concludes our question-and-answer session. I would like to hand it back to Andy Hendricks for closing remarks. William Hendricks: Thank you. I appreciate everybody dialing in today, and we'll wrap up this call for the Q4 2025. And look forward to talking to you again in April. Thank you. Operator: Thank you, presenters. And this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to the Matrix Service Company conference call to discuss results for the second quarter of fiscal 2026. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to today's host, Ms. Kellie Smythe, Senior Director of Investor Relations for Matrix Service Company. Kellie Smythe: Thank you, Victor. Good morning, and welcome to Matrix Service Company's Second Quarter Fiscal 2026 Earnings Call. Participants on today's call include John Hewitt, President and Chief Executive Officer; and Kevin Cavanah, Vice President and Chief Financial Officer. Following our prepared remarks, we will open up the call for questions. The presentation materials referred to during the webcast today can be found under Events and Presentations on the Investor Relations section of matrixserviccompany.com. As a reminder, on today's call, we may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking results because of various factors, including those discussed in our most recent annual report on Form 10-K and in subsequent filings made by the company with the SEC. The forward-looking statements made today are effective only as of today. To the extent we utilize non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on our website. Finally, all comparisons today are for the same period as the prior year, unless specifically stated. As we open today's earnings call, let's take a brief moment to focus on what matters most, keeping ourselves and each other safe. With about 6 weeks to go before the official start of spring, this winter has already brought a range of extreme weather across the country from blizzard and ice storms to record-breaking cold snaps and heavy rainfall. These conditions disrupt daily life and create serious safety challenges for everyone, especially those working outdoors. But the challenges go beyond just physical safety, shorter days and colder temperatures take this toll, not just physically, but mentally and emotionally. Challenges to mental health are as real and as important as physical risk. This is especially true for those in construction and field work, where teams often face harsh outdoor working conditions and are also far from home and their personal support networks, all of which can lead to increased stress, fatigue and isolation. That said, regardless of where we work, it's important to take time to check in with ourselves and those around us. Watch for signs of stress, start a conversation, listen and offer support. When we look out for one another and use the resources available, we help keep our teams and workplaces safe, healthy and strong. If you or a colleague needs help, reach out to someone you trust or use the support resources available. Let's keep safety, both physical and mental, at the forefront, especially during challenging times. Together, we can make sure everyone goes home safe every day. I will now turn the call over to John. John Hewitt: Thank you, Kellie, and good morning, everyone. Before we address our second quarter results, I want to highlight important developments announced yesterday regarding our succession planning at Matrix. Over the past year, Matrix is focused on actively advancing our strategic objectives and our leadership succession plan while continuing to evolve our organizational structure to support long-term growth and success. As you might recall, as part of this effort, Sean Payne was promoted to President of E&C in May of 2025. Yesterday, in our leadership transition release, we announced that Sean has now been elevated to the Chief Operating Officer of Matrix. And then per our succession plan, I will step down as President and Chief Executive Officer on June 30, 2026. At that time, Sean will assume the role of Chief Executive Officer, ensuring a seamless leadership transition. I've worked alongside Sean for nearly 30 years, first at a previous employer and later by recruiting him to Matrix in 2012. Sean is a proven leader with exceptional operational expertise and unwavering commitment to our people and our stakeholders. He has been instrumental in the growth of our backlog, our business turnaround, organizational streamlining and strategic planning, and he will actively participate in future calls and investor meetings throughout this transition period. I'm confident in Sean's leadership, and I'm excited about the future of Matrix as well as our market strength and the unprecedented generational infrastructure investment underway across the country. Now moving on to second quarter results, which reflect continued positive execution across our business and culminated in revenue growth of 12% compared to the second quarter of last year. And while our underlying results for the quarter reflect strong growth and solid execution, we did record an unfavorable adjustment related to warranty responsibilities and miscellaneous subcontractor and vendor commercial items we are working to resolve on a substantially complete storage project. EPS was a $0.03 loss for the quarter, which included the negative $0.13 impact from this issue. Kevin will discuss this in more detail during his comments. That said, given our overall positive execution, current backlog of $1.1 billion and projects already in flight, we are reiterating our full year revenue guidance of $875 million to $925 million and we will achieve profitability in the second half of the year. Turning to awards. Project awards during the second quarter were approximately $177 million, resulting in a book-to-bill of $0.8. The overall volume of project awards has been tempered due to uncertainty around trade policy, permitting and the government shutdown that occurred in late 2025. This uncertainty has delayed FIDs and award progression on many projects in our specific market pipeline. While this will likely persist through the end of this fiscal year, it does not represent a fundamental slowdown in our end market demand. In fact, our overall opportunity pipeline continues to expand, increasing to $7.3 billion at the end of the fiscal second quarter. As we gain more brand recognition and momentum in the power and data center infrastructure market, this will add to the pipeline in future quarters. Now I want to step back and provide a clear overview of the macro environment we are operating in, our strategic response and our outlook for the future. Matrix and our entire sector has experienced a once-in-a-generation surge in demand for critical energy, power, rare earth and industrial infrastructure. Companies like Matrix with proven expertise in safely delivering complex projects on time and on budget that are essential to addressing the nation's vast infrastructure needs. We firmly believe we are still in the early stages of this transformative build-out. The shortage of reliable, cost-effective power generation has steadily intensified nationwide and the surge in demand from AI data centers, which require continuous and substantial power has only compounded this issue. Demand for natural gas widely recognized as the essential bridge fuel for a cleaner energy future has soared by over 100%, while pipeline capacity has grown by only 50%. At the same time, the onshoring of manufacturing, electrification of devices, transportation and equipment are increasing electricity needs. The United States is now critically short of affordable, reliable electric generation, most of which depends on natural gas and abundant energy source in North America. Crucially, the global race for AI dominance hinges on electricity availability. Governments increasingly recognize that this is not merely a matter of business efficiency or quality of life, but at its core, a national security imperative. Today, the urgent need for affordable, reliable power and connectivity and the fuels that enable them has ignited an unprecedented investment cycle backed by strong political resolve. In addition to power generation and electrical infrastructure, we're seeing a compelling multiyear opportunity in mining and minerals. The push to onshore and secure critical and rare earth material supply chains in the U.S. is accelerating investment in mining, processing and associated infrastructure, signaling the early stages of a new multiyear upcycle in project demand. This generational investment cycle has not only had a direct impact on wages, productivity and a growing domestic manufacturing base that combined with federal fiscal and tax policy changes as well as private and public investment will continue to drive a positive economic environment and GDP growth, all of which will create positive tailwinds for our industry. Against that backdrop, Matrix is especially well positioned as a leading end-to-end EPC general industrial contractor that designs, builds and maintains critical energy, mining and industrial infrastructure. We possess market expertise, specialized capabilities, resources, relationships and a proven track record to deliver comprehensive, high-quality services safely. Matrix meets these standards and is exceptionally well positioned to benefit from this opportunity. Over the past 5 years, Matrix has proactively transformed our organization to meet these challenges and capitalize on the opportunities ahead. We have strategically exited non-core businesses, invested in our people, systems and processes to strengthen our core expertise in energy, power and industrial projects. We have streamlined our operations to deliver on our purpose and value proposition to all stakeholders. And as a result, we have built a business positioned at the intersection of powerful macro growth drivers, one that will deliver sustainable and profitable growth for years to come. Our recent project awards, including those secured this quarter and a robust pipeline in LNG facilities, power generation, electrical connectivity, substation, mining and minerals underscore the strategic evolution of our business. While we continue to serve traditional energy and industrial clients, our future growth and sustainable performance are firmly anchored in this generational investment cycle. This quarter, for example, we secured the LNG storage component for the first phase of a peak shaving facility in the Virginia AI corridor, additional storage to support 2 gas-fired generating facilities in the Southeast and multiple smaller strategic electrical connectivity projects in the Northeast, which is ground zero for this huge data center investment cycle. Subsequent to the end of the quarter, we were awarded the FEED study and are currently developing the full scope of work for a Midwestern utility to provide them the ability to run dual fuel on 2 of their gas-fired power facilities. We are frequently asked about our role in power generation and delivery and more specifically about our role in supporting data centers and advanced manufacturing facilities. So I want to take a few minutes to share with you at a high-level overview of the work we do supporting these critical growth markets. Matrix has a strong legacy in power generation and power delivery. This includes simple and combined cycle plant construction, centerline erection, HRSG erection, balance of plant mechanical and electrical as well as construction of greenfield substations, brownfield substation upgrades, including grid interconnects. This, together with our expertise in both LNG peak shaving and backup fuel facilities, provides our clients with the integrated solutions needed to meet existing and increasing demand for electricity to power homes and businesses, including data centers, stabilize the grid during peak periods and ensure reliable operation during emergencies. This same expertise is needed by data center developers, OEMs, owners and others who are pursuing their own energy infrastructure to ensure reliability and redundancy in their operations. In short, Matrix does not build the data center or advanced manufacturing facility. However, we do build the required critical energy infrastructure needed to power them. Through both organic and inorganic growth, Matrix is positioned to accelerate its momentum as a critical provider of the services demanded by this massive infrastructure build-out. Our momentum was fueled by the steady conversion of opportunities into awards and those awards into revenue, all executed by the business we have purposely built for this moment. In summary, I'm proud of the team's continued execution as we proceed through this critical chapter of growth for Matrix. We have plenty of opportunities ahead, and I'm confident that our focus on our core pillars of win, execute and deliver will drive compounding profitable growth and long-term value for our shareholders and customers alike. I'll now turn the call over to Kevin. Kevin Cavanah: Thank you, John. Let's start with the results for the second quarter of fiscal 2026. Revenue was $210.5 million, an increase of $23.3 million or 12% over the second quarter of last year, driven by growth in all 3 segments with utility and power infrastructure accounting for over 60% of the increase. We expect to achieve our full year revenue guidance of $875 million to $925 million on strong growth in the second half of the fiscal year, particularly in the fourth quarter. This growth will be driven by large LNG and NGL projects already underway in the Storage and Terminal Solutions segment. Consolidated gross profit increased 21% to $13.1 million in the second quarter compared to $10.9 million in the prior year. Second quarter gross margin was 6.2% as compared to 5.8% for the second quarter of fiscal 2025. Higher revenues resulted in improved recovery of overhead costs and project execution was generally strong throughout the business. That said, costs associated with items arising during commissioning of a specialty tank project in the Storage and Terminal Solutions segment resulted in a $3.6 million reduction of gross profit during the quarter or about $0.13 per share. Adjustments to project cost estimates and therefore, direct margin, both positive and negative, are a normal aspect of our business, especially as we work to close out a project. During the course of the year, these variations generally net to a positive and improved direct margin across the portfolio, which we expect to occur this year as well. Year-to-date, the direct margin performance, including this issue is above plan. As backlog converts to revenue and activity levels continue to ramp, if these types of project level dynamics occur, we expect them to be absorbed more efficiently across the P&L, reducing quarter-to-quarter variability. Moving down the income statement. SG&A expenses decreased to $15.1 million in the second quarter compared to $17.3 million in the prior year. The 13% decrease is primarily due to cost reductions resulting from our organizational realignment and lower stock-based compensation expense, which decreased $0.7 million associated with the variable accounting for cash-settled awards as a result of fluctuations in our stock price. As we previously discussed, our ongoing SG&A quarterly run rate is about $16.5 million. As we return to profitable performance, that will be impacted by variable compensation expense tied to earnings. We also incurred restructuring costs of $0.2 million in the second quarter, primarily facility-related costs. We will incur additional expenses in the second half of the fiscal year related to the CEO transition. Details of that CEO transition are included in Item 5 of the Form 10-Q, which will be filed this afternoon. The company generated $1.5 million of interest income in the quarter from a strong balance sheet that has been built up through effective working capital and contract management. For the quarter, the company had a net loss of $0.9 million compared to a $5.5 million net loss in the second quarter of last year. EPS was a loss of $0.03 compared to a $0.20 loss in the prior year. And then adjusted EBITDA in the second quarter improved $4.6 million to a positive $2.4 million compared to a loss of $2.2 million in the second quarter last year. Now moving to the operating segments, starting with Storage and Terminal Solutions, which represented 47% of consolidated revenue. Second quarter revenue was $99.9 million compared to $95.5 million last year. The growth was a result of an increased volume of work for LNG and NGL projects, partially offset by lower volumes for crude oil projects. We expect specialty storage projects, including LNG and NGL to drive robust growth for the Storage and Terminal Solutions segment as we move through the remainder of fiscal 2026. Storage and Terminal Solutions segment gross profit of $4.8 million represented a $2.5 million decrease in the quarter compared to the same period last year. The segment gross margin of 4.8% was lower than segment gross margin of 7.6% last year. The decrease occurred due to the $3.6 million charge we previously discussed. We expect to see significant margin improvement in the remainder of the year based on expected project execution on our high-quality backlog and improved overhead cost recovery resulting from increased revenue levels. Moving on to the Utility and Power Infrastructure segment, which accounted for 36% of consolidated revenues. Second quarter segment revenue increased $14.3 million or 23% to $75.4 million compared to $61.1 million in the second quarter of fiscal 2025, benefiting from higher volumes of work associated with LNG peak shaving and power delivery projects. Segment gross profit of $7.2 million increased by $3.8 million or 112% in the second quarter compared to $3.4 million in the same quarter last year. The increase resulted from higher revenue and an improved gross margin, which increased to 9.6% compared to 5.6% in the same period last year. The margin increased due to strong project execution and improved construction overhead cost recovery as a result of higher revenues. Finally, the Process and Industrial Facilities segment accounted for 17% of consolidated revenue or $35.3 million in the second quarter compared to $30.6 million last year. We expect similar revenue levels until we capture additional project opportunities from the strong market and our expansion efforts. Segment gross profit was $1.2 million or 3.5% in the second quarter compared to $0.4 million or 1.2% last year. The current margin level is due to the mix of work, which is primarily lower margin reimbursable activity and the low revenue level, which results in under recovery of construction overhead costs. Both issues should improve as the company captures additional revenue opportunities. Moving to the balance sheet and cash flow. Cash increased $7 million in the quarter, ending at $224 million as of December 31, 2025. The balance sheet and liquidity remain in a strong position, with liquidity of $258 million and no outstanding debt. We also expect to maintain our strong cash balance through the remainder of fiscal 2026 and have the financial strength and liquidity needed to support and grow the business. As we stated previously, the improvement in our consolidated revenue, combined with continued focus on execution excellence and leverage of our construction overhead and SG&A cost structures will allow us to return to profitability in the fiscal year and make significant progress towards the achievement of our long-term financial target. That concludes our prepared remarks. So we'll now open the call up for questions. Operator: [Operator Instructions] Our first question will come from the line of John Franzreb from Sidoti. John Franzreb: I'd like to start with that onetime issue or the issue you called out, the $3.6 million in storage. I'm curious, is that bleeding into the current quarter? And is there any other large issues similar to that, that we should be cognizant about? John Hewitt: No. I mean we think we've captured the issues associated there and that we would not expect anything leading, as you said, leading over into the third quarter. We think we've got our hands around what the issues are and a path to get them resolved. John Franzreb: And is there anything similar... John Hewitt: Nothing similar hanging around someplace else. John Franzreb: Okay. Good to know. You also called out in your prepared remarks the opportunity pipeline. It looks like it's up roughly 10% or $600 million from last quarter. What's driving that growth? John Hewitt: I think probably -- I don't have the statistics in front of me, John. I think a lot of it is -- a lot of it is in the LNG market space and NGL space, but we're also seeing more activity in mining and minerals, and we're seeing more activity in, I think, in electrical. And while those projects aren't necessarily as big, but they're strategically significant for the business. John Franzreb: Okay. Got it. And again, you did reference this in your prepared remarks about the backlog. I'm kind of curious, not only in aggregate, has the backlog kind of been weak the last couple of quarters, but also notably in utility, which I really thought would have been stronger. Can you kind of talk about what's going on in the overall marketplace? John Hewitt: Yes. I think the award cycle, obviously, we feel as though it's been a little muted. And I think some of the uncertainty in energy markets and permitting, the process of permitting is difficult. I think some of those things is just taking a little bit longer for a lot of those projects to get from our opportunity pipeline into a situation of FID and award. We think all the projects in there are good solid projects that we're going to have an opportunity to bid and win our fair share of them. There has not been -- so we track what comes in and out of our opportunity pipeline on a monthly basis. And so if you go look at that, that isn't a lot of those things are getting won by someone. It's not a high percentage of them that are getting won by competitors, right? They're either moving out of our opportunity pipeline back into our prospects because of some permitting delay or a client's investment decision. And then we have projects moving in out of prospects into opportunities. But I can't tell you, we're looking at our statistics every month, every quarter and it's saying, oh, wow, we're not winning any of this work. The stuff is just kind of moving around on us. And you got to remember, too, a decent chunk, and I think we've said in the past, probably $70 million to $100 million worth of stuff happens for us every quarter. It's just small projects and maintenance activity and all that. It just -- it's not in that opportunity pipeline. Because we don't think it's relevant to have mixed in with all that other stuff. So we have this baseline of awards and work that comes in and out of -- can come in and out in the quarter, not in that opportunity pipeline. And so it makes it sort of -- it almost makes it sort of invisible. And -- but that stuff is continuing to happen for us. And we're focused to continue to expand our maintenance operations and maintenance work, and we're geographically looking into new areas to expand our refinery maintenance and some of the other maintenance activities we have. So while we certainly would like to have big book-to-bills every quarter, but I think we've communicated to you guys in the past that we're going to have a quarter with a big book-to-bill and then we could have 2, 3, 4 quarters where it's going to be below one. So I think it's okay. I think we're in a good spot. I would say, if you look at the details, the book-to-bill for the year, the book-to-bill in storage is above one. So we're continuing to have a strong bookings in that, and it represents a big chunk of the business. John Franzreb: So John, just a follow-up. Do you expect these awards to be moved to the right such that they're going to be awarded in the second half of the fiscal year? Or they move to the right that they're going to be a fiscal 2027 award? I'm just kind of curious about maybe the exit velocity of backlog in fiscal 2026. Because we kind of talked about it being around 1.0 overall and maybe if that dynamic has changed at all. John Hewitt: Right. I think what we've said and what we've communicated in the past and I'll use an NFL term chunk place, so like chunk projects, right? So the big chunk projects that drive -- really drive a big book-to-bill in the quarter, they're out there. We're positioned for them. Those big chunk projects are the ones that I think are going to be -- we're going to see in our award cycle in fiscal '27, which starts July 1. And -- but we're going to see some -- probably some strategic awards, some smaller awards that are going to be in the next 2 quarters, but it probably isn't likely that we're going to exit the quarter over 1.0 collectively across the business. But you continue to see a strong book-to-bill in any one of the segments. Operator: Our next question will come from the line of Brent Thielman from D.A. Davidson. Brent Thielman: John, maybe just to follow up on the conversation about all the things you can do around data centers, I sort of bundle things you can do directly on those sites with the power component of that as well, which just seems to be sort of feverish demand here. Why wouldn't that be more influential to your bookings here in the next few quarters, just given the appetite and the fact that you have these capabilities that seem to be in the sweet spot of that. John Hewitt: Yes. So I think it's a good question. We're -- we've been focused on that market here. It didn't just start yesterday, right? So we've been working on it probably over the last 12 months and we recognize like everybody else that there's a significant amount of spend there. But you got to remember, a lot of those clients are new clients to us. Yes, we've got a power generation capability in-house. We've built some significant power plants that's on our resume. And obviously, the electrical connectivity issues that our electrical connectivity capabilities that's principally in the Northeast and then all the backup fuel and all that stuff. So -- but we're kind of entering that market, and we've got to sell our resume. We've got to build relationships with those clients. We have got to want to make sure we're positioning ourselves for work that's fits our risk profile and our financial profile. We need to appreciate how we compete and how we win in that market. And so all that stuff is going on. And I think we're starting to see some fruits of that work by our business development and operations people. And so as we said in the prepared remarks, my thoughts are that we're going to start to see some growth in the opportunity pipeline as some of this stuff gets to -- hits where we can -- are going to be choose deciding to bid or being invited to bid on certain projects. But we're already bidding projects from an electrical infrastructure standpoint on new substations that are directly connected to a data center power needs. And so we have several of those that we're bidding now, and I would hope that we're going to be able to put some of those into backlog in this second half of the year. And so we're also working with EPC power plant constructors where we can come in and provide our services and any one of the things that I mentioned there, whether it's putting the turbines in or doing the mechanical work or electrical work or erecting the boilers or whatever that is, all those things we've got capabilities and skills for. And so we're -- so we're -- I think we're doing a good job. We're working into those markets. And I think we're going to see here over the -- we're going to start to see some impact to that effort in our opportunity pipeline and to a small degree into our award cycle this fiscal year, but it's going to really start to grow, I think, as we move into '27. Brent Thielman: Appreciate that, John. Any thoughts on the midstream side? I mean, as you talk about all the demand around gas power coming, I mean it's becoming pretty evident with some other companies. Is there -- are there things that you're starting to see in the midstream arena pop up for you that could also be an opportunity? John Hewitt: So when you say midstream, are you talking about crude oil or are you talking about gas? Brent Thielman: Yes. Yes. John Hewitt: Yes to both. Brent Thielman: Yes. John Hewitt: Yes. So I think the crude market is fairly muted. There's some new tanks getting built. There's certainly tank maintenance repair works going on all the time. We do that work. But I think a lot of our storage resources have been a little more focused on the specialty vessel stuff we're doing, where it's more complex construction, better margins for us, less competition. And so while we're still doing -- we continue to offer services on the crude storage and midstream side of the company, it's become a smaller and smaller piece of the revenue of the business. So there's activity out there. On the natural gas side, certainly, we've got a great position in gas storage in LNG and in NGLs, both from a storage perspective, but also the balance of plant construction for those facilities and whether they're utility connection or there for fueling or whatever. So I think we're -- the activity level there, I think, related to gas is strong, getting stronger. A lot of permitting issues around that. As we said in the prepared remarks, there's a lot of pipeline issues out there in the marketplace because of permitting challenges. And so you have companies that are unsure about tying up dollars when they're uncertain about the ability to get a permit pushed through. So one of the projects that we announced an award last quarter, we're building the balance of plant for NGL facility, which we're also building the storage tank for. And we had expected more revenues in Q2 on that project, but the permitting delays have kind of pushed has slid the [indiscernible] our ability to go burn revenue into the back half of this fiscal year. The project is in flight. We're starting to get permits. We're starting to work through it. But that's certainly one of the issues, I think that's impacting probably a lot of people in the midstream market. Brent Thielman: Okay. And then you did mention minerals and mining. Obviously, critical materials become more topical here lately. your positioning there and kind of maybe waited for us to size the opportunity for you? John Hewitt: Yes. So we've got a legacy history in mining and minerals. We used to -- we had -- when that market was stronger, we had an operation in Arizona and did work for some of the big miners down there. And then that market kind of fell apart. And so we've kind of kept our hand in there from a sales perspective, but really haven't done any work. That market is coming back strongly, copper, rare earth minerals, gold. And so we're seeing a lot more opportunities finally get off the drawing board. And we've got a couple of really nice projects that we're bidding now in the mining and minerals market. And again, we're -- we think our brands continues to be strong there. And so we're kind of rebuilding those relationships and I think there's a real opportunity for us here. Plus you got the -- besides the demand for those kind of nonferrous metals related to what's going on with all this infrastructure build-out, you've also got the federal government now that is -- again, from a national security issue is investing money in rare earth minerals to make sure that from a national security issue that we've got those minerals here in this country. So I think there's a lot of good tailwinds associated with that market. And I think we've got a resume and the relationships to be able to take advantage of it. Brent Thielman: Okay. And just last one, guys. I appreciate you taking all these. I think about the outlook for the rest of the year, the return to profitability you're anticipating and what seems to me like a lot of green shoots here in the business, notwithstanding some of the uncertainty in some of your markets here in the short term. And you got a lot of cash on the balance sheet. I mean, John, just to refresh on buybacks, why wouldn't they make sense here? It just seems like business is heading in the right direction. You've got some good things coming for you. Maybe just update on your thoughts there? John Hewitt: I think as we've always said, I think our -- as we want to -- as we return to profitability, yes, we have cash on the balance sheet. We're going to be focused on -- we've been pretty lean as an organization on how we spend our capital internally for our operations. And so there's some catch-up for us to do there. We are going to be looking for inorganic opportunities that round out our business offering. And certainly, the inability to find inorganic opportunities to add to the business could result in us making the decision that maybe we buy back shares. So I would say all that stuff is on the table. And so we're -- as we've said in previous calls, we're waiting -- we're driving the business to return to profitability to win, execute and deliver. And as that happens, then we're going to be looking for more expanded things to do with the cash on the balance sheet. Operator: We have a follow-up question from John Franzreb from Sidoti. John Franzreb: Yes. I'm just actually curious about the competitive landscape. Are new jobs being written at target margins? Or is there pressure in certain end markets versus others? And I guess on the flip side of that, are some being written at above target? Can you just kind of talk a little bit about that? John Hewitt: Yes. I mean the work that we're booking on a collective basis is falling within our targeted margin ranges. So I would say we're not -- it's not the same as it was 3 years ago where contractors are out chasing projects and driving margins to the bottom. That's -- we're not experiencing that. John Franzreb: And any of the markets above target margins at all? John Hewitt: Yes. I mean it depends on which piece of our business. Some pieces will get a higher margin. Some of the bigger the job, sometimes we're able to get a higher margin. So I think we've talked about a margin range of 10% to 12%. Some pieces of our business are in the high end of that range, some are a little bit above. And -- but some more of the maintenance activities and those things are certainly at the lower end of those margin range or even below. So -- but the portfolio overall, I think the margin ranges there in the backlog is well within our expected range. Operator: I'm not showing any further questions in the queue. I'd like to turn it back over to Kellie for any closing remarks. Kellie Smythe: Thank you. As always, our approach is to be open and transparent with our investors. And as such, I would like to invite you if you'd like to have a conversation with management to contact me through Matrix Service Company Investor Relations website. You can also sign up for MTRX News by scanning the QR code on your screen. Thank you so much for your time. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good afternoon, and welcome to Banco de Chile's Fourth Quarter 2025 Results Conference Call. If you need a copy of the financial management review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarce, Head of Financial Control and Capital Management. Before we begin, I'd like to remind you that this call is being recorded, and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed notes in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead. Rodrigo Aravena: Good afternoon. Thank you for joining our conference call. Today, we will present Banco de Chile results for the fourth quarter and the full year 2025. We are very proud of the bank's performance this year. Once again, Banco de Chile delivered market leadership and superior financial outcomes, reinforcing the strength and consistency of our business model. Starting with our financial results. Banco de Chile ranked #1 in net income and return on average assets, #1 in net fee income and #1 in net interest margin among peer banks. This result reflects the resilience of our core revenues, solid customer activity and disciplined balance sheet management. For the full year, we generated the highest net income in the local banking industry amounting to CLP 1.2 trillion, which translated into a 2.2% return on average assets, significantly above the 1.3% achieved by the industry. We also maintained the largest market value among private banks in Chile of almost $20 billion, and we are leading the market in average trade volumes with over $25 million per day, demonstrating strong investor confidence and liquidity in our stock. On capital, Banco de Chile remained the most highly capitalized bank as demonstrated by a CET 1 ratio of 14.5%, [indiscernible] regulatory requirements and peers. Also, our risk indicators continue to be among the strongest in the industry, supported by a 223% coverage ratio and CLP 661 billion in additional provisions reflecting our sound [ with ] management culture. From a cost perspective, we delivered a 3.5% real contraction in operating expenses, consistent with efficiency efforts that we have implemented over the past several years that have leveraged on a digital strategy that has benefited productivity across all business and operating processes. On the Commercial side, Banco de Chile continues to stand out in customer experience, ranking first in service quality and top of mind awareness. We also reinforced our ecosystem with the launch of Banchile Pagos our new acquiring and payment processing subsidiary, which strengthen our positioning in digital payments. In addition, Banchile mutual funds remains the largest mutual funds managed in Chile, excluding pension funds with a 22.5% market share in assets under management. Finally, our strong performance has been widely recognized as shown by the awards on the right side of this slide, including recognition for Best Customer Satisfaction, Best Corporate Governance, Best Place to Work and Best Bank in Chile. In the remainder of this presentation, we will provide a detailed analysis of our quarterly and full year results of 2025. Before moving on, I'd like to share a brief analysis of the macroeconomic and business environment. Please go to Slide #4. Chilean economy growth continues posting above trend figures with a favorable shift in the composition of GDP as shown in the chart on the left. The [indiscernible] expanded by 1.6% year-on-year in the third quarter, resulting in an average expansion of 2.5% year-to-date, although the annual growth rate accelerated, it's important to highlight the statistical effect of the higher comparison base from a year ago when the economy began to improve. However, the positive news come from the composition of growth. Domestic demand increased significantly by expanding 5.8% year-on-year in the third quarter primarily driven by a strong recovery in gross investment, which rose 10% year-on-year, led by a 22% year-on-year increase in machinery and equipment. As shown in the other right chart, the acceleration in local investment has offset the slowdown in exports, which remained unchanged in the quarter. The [ growing ] contribution from domestic demand is relevant not only because it supports positive GDP growth, but also because loan volumes are more closely linked to domestic demand than the overall economy. This could have narrowed the gap between loan growth and GDP growth that we have observed in recent years. It's reasonable to expect the trend to continue in the near term. Monthly GDP data shows that the commerce sector grew 6.7% year-on-year in the fourth quarter, while capital good import, which is a good leading indicator for investment activity increased 19.6% year-on-year in the fourth quarter after rising 30.6% in the previous quarter. Looking ahead, several factors suggest that this positive momentum will persist through the year. One of them is improvement in consumer confidence as shown in the bottom right chart apart from the upward trend in the overall continent, the sub index that measures the 12-month economic outlook for the country rose to 59 points, surpassing the neutral level of 50 and reaching its highest value since the first half of 2018. Now please go to Slide #5. Overall, we have seen a normalization of the main nominal figures prices, interest rates and the exchange rate. Regarding inflation, the 12-month CPI variation ended the year at [ 3.5% ], down from 4.4% in September and 4.5% in 2024. The [indiscernible] convergence over the Central Bank's 3% target was driven by lower inflation in the fourth quarter to just 0.1% quarter-on-quarter from 1.4% in the third quarter due to lower contribution from food, energy and core goods. Core inflation, which excludes volatile items also declined from 3.9% year-on-year in the third quarter to 3.3% in the fourth quarter. It's noteworthy that the decline occurred in an environment of economic recovery, particularly in domestic demand, suggesting improvements on the supply side, such as lower unit labor costs due to productivity gains. Depreciation of the Chilean peso against the dollar also showed to ease inflationary pressures. Given these trends, the Central Bank continues normalizing monetary policy by reducing the policy rate by 25 basis points in December to 4.5%. According to the forward guidance provided in the December monetary policy release, further rate cuts are expected this year toward the estimated neutral rate of 4.25%. Updated macro-forecast and guidance will be provided by the Central Bank in its March monetary policy report. In these more favorable environment, the Chilean peso has strengthened against the dollar, narrowing the gap relative to the global dollar index, the DXY as shown in the bottom chart. Key drivers include improved terms of trade supported by higher copper prices and better expectations for the Chilean economy. I would now like to present our baseline scenario for this year. Please move to Slide 6. We expect about Chilean economic growth of around 2.4% in 2026. This expansion should be supported by strong domestic demand, driven by both investment and consumption as confidence improved, monetary ease continuing to take effect and corporate price rise. Given better-than-expected global conditions and potential improvements in domestic factors, we are now led in our bias to beat GDP outlook. We also expect inflation to convert to the 3% target in 2026. This forecast is based on the absence of further adjustment in regulated prices comparable to those seen in electricity tariffs in previous years, the impact of peso appreciation on tradable inflation and lower unit labor costs resulting from improved productivity. In this scenario, we expect the Central Bank to reduce the policy rate to the neutral level of 4.25%. We can roll out an additional reduction to 4% if the peso appreciate further or if supply side pressures is more than expected. As we mentioned in previous webcast, this forecast are subject to risk. The evolution of the global environment is particularly relevant for Chile given our high degree of integration into world market. Developments such as U.S. and Chinese GDP performance as well as geopolitical tensions remain critical to monitor. On the domestic front, the geopolitical agenda, will also be important considering the recent government transition and the possibility of a more market-friendly quality framework. Before moving to our quarterly results, let's begin with a review of the industry landscape. Please go to Slide 7. The banking industry continued to show resilience even as inflation and interest rates move toward more normalized levels as shown on the chart on the top left. Quarterly net income for the industry was CLP 1.2 trillion with a 15% return on average EBIT, a moderate result from peak levels, but it's still in a healthy and sustainable range. Turning to asset quality. The top right chart shows that NPLs remained steady at 2.5% with a coverage ratio at 1.4x. In terms of loans to GDP, this ratio reached 75% as of December 2025, extending the below trend behavior observed in recent years. Loan demand remains subdued in 2025 despite lower interest rates and signs of improving investment, particularly over the second half of the year. The bottom right chart further reinforces this. Since December 2019, total loans for the industry have contracted 2.6% in real sense with consumer lending down around 17% and commercial lending down close to 11%, while mortgage remains the only segment showing growth, rising 19% over the same period. Looking ahead, industry projections point to a rather reactivation in 2026. According to our baseline scenario as presented in the fourth quarter 2025, financial management review report, total loans are expected to grow around 4.5% in nominal terms this year, with commercial lending returning to positive real growth helped by improving business sentiment, a big capital expenditure by companies and a more supportive interest rate environment. Consumer and mortgage loans are expected to expand between 4.5% and 5% nominal, consistent with a moderate rebound in household consumption and a demand for housing that is expected to keep on growing. In terms of profitability, it's likely to stabilize, as the industry net interest margin is expected to ramp from 3.5% and 3.7%, reflected a yield curve that remains relatively flat and normalized inflation near to the Central Bank's 3% target. Credit risk metrics should continue to improve gradually with NPLs projected to decline toward 2.2% to 2.3% and the credit loss expense ratio should read a range of 1.2% to 1.3%. Overall, this trend suggest a more balanced rate environment as the sector transitions away from market-driven revenues and back to our fundamental base growth. Now I'll turn the call over to Pablo to discuss Banco de Chile results for the quarter. Pablo Ricci: Thank you, Rodrigo. Let's turn to Slide 9. Before discussing the financials, I would like to briefly review our business strategy and our core aspirations that guide Banco de Chile's actions. At the core of our strategy is our purpose: to contribute to the development of the country, its people and companies. Everything we do across our business, our culture and our digital transformation flows from that principle. Our model is built around three strategic priorities, placing the customer at the center of our decisions, operating with efficiency and productivity and maintaining a strong commitment to sustainability and [ de ] Chile. Together, these pillars support our long-term ambition and delivering sustainable and profitable growth supported by strong governance, disciplined risk management and the collaborative culture. In line with these aspirations, we have defined clear midterm targets, as shown on the right. That reflects both our competitive position and the standards that we set ourselves. We aim to remain top one in return on average capital among our relevant peers, and maintain a cost-to-income ratio below 40%, which we have revised down from 42% based on the solid improvements we have achieved in the recent years. We also seek to strengthen our market leadership by leading market shares and demand deposits in local currency, commercial loans and consumer loans. From a customer standpoint, we are committed to delivering a Net Promoter Score of at least 73%. While on the reputational front, we aspire to rank among the top 3 institutions in Chile based on the Merco ranking. Together, these goals anchor execution of our strategic plan and reinforce our long-term vision to be the best bank for our customers, the best place to work for our people and the best investment for our shareholders. Let me now move to Slide 10, which highlights some of the most relevant business advances we achieved during 2025. This year, we launched our new acquiring and processing subsidiary, Banchile Pagos which seeks to give us a stronger position in the payment ecosystem and allowing us to broaden our value proposition for companies ranging from SMEs to corporations. As discussed in previous calls, this initiative reflects our strategy of deepening digital capabilities and strengthening fee-based income streams. We also continue to expand and enhance our FAN digital accounts, which have met a sustained demand for a fully digital on-boarding and transactional solutions from customers. Total FAN accounts reached 2.4 million in December 2025, representing a 25% year-on-year increase while balances per account rose by 32% over the last year. In parallel, we stepped up cross-selling initiatives for credit cards and micro loans within the FAN base driving higher engagement and further deepening relationships in this fast-growing segment. Likewise, we continue to advance in our leadership ambitions in lending. Originations and consumer loans increased by 7.2% year-on-year, reflecting disciplined growth and improved origination capabilities across our distribution channels as we continue to benefit from increased originations through digital channels. At the same time, our SME client base continued to expand with current accounts growing around 12% year-on-year reinforcing our role as a primary bank for a broader base of small- and medium-sized enterprises. Within this segment, non-government guaranteed installment loans for SMEs showed particularly strong momentum, growing 9.4% year-on-year, highlighting healthy underlying demand beyond support programs. In addition, our investment in AI-based virtual assistance enhance both customer and employee experiences by speeding up response times, improving service availability and boosting internal productivity. These tools have become an increasingly important part of our digital transformation journey. We also made significant progress in improving productivity across the organization, supported by the steady expansion of digital channels, higher levels of automation and continued adoption of advanced technologies in their commercial and operational processes. Additionally, we managed to deepen operational synergies with our subsidiaries by centralizing functions, standardizing processes and leveraging shared platforms to capture economies of scale and simplify our operating model. The successful integration of our collection subsidiary, SOCOFIN, represents a concrete example of this strategy and marks a major step towards a more centralized, efficient and simplified operating model without compromising service quality or collections performance. We have also continued to strengthen talent and capability development across the organization. Throughout the year, we deepened our leadership in commercial training programs, broaden internal mobility opportunities to support career growth and reinforce a positive collaborative workplace climate. These efforts were complemented by competitive employee benefits and initiatives designed to retain and develop high-performing teams, ensuring that our people remain a core differentiator for Banco de Chile. On the sustainability front, we placed U.S.-denominated ESG bonds under our MTN program to finance social projects, reinforcing our commitment to sustainable development and further diversifying our funding sources. This transaction builds on our long-standing approach to responsible finance and our strategy to support community-focused initiatives. And finally, in the second half of 2025, we presented the 4270 Project, a unique audio-visual initiative that documented Chile's 4,270 kilometers from North to South through a 90-day drone journey. Beyond this cultural value, the project reinforces our brand by linking Banco de Chile with national pride and long-term commitment to the country. Conceived as a gift to Chile and made more than 500 royalty-free images available for educational use and has received international recognition. Turning to Slide 12. Our results once again position us as the leader in the Chilean banking industry. We closed the quarter with a net income of CLP 266 billion. And for the full year, we reached CLP 1.2 trillion, maintaining our historical leadership and profitability. Our return on average capital stood at 21.9% in 2025, above most of our peers and consistent with our long-term track record on this matter, which coupled with an unparalleled capital position, the strongest among relevant peers. In terms of market share, we attained a 22% industry net income comfortably ahead of all of our peers. This performance reflects the quality of our franchise, disciplined risk management and the resilience of our core business. The chart on the bottom right shows the evolution of our return on average assets which continues to lead the system with a clear gap over peers. Even in the year marked by lower inflation, sudden yield curves, and softer loan demand, we maintained the superior result, thanks to solid funding, sound credit quality and efficient operating model. Moving to Slide 13. Our operating revenues remained resilient despite the normalization and inflation and the decline in noncustomer income. Total operating revenues reached CLP 749 billion in the quarter, with customer income increasing 4.4% year-on-year, reflecting the continued strength of our core business. Noncustomer income when compared to the fourth quarter of 2024, declined as expected, given the lower contribution from inflation index net asset position and net interest rate environment marked by flat yield curves yet overall revenue levels remained solid, well aligned with our forward-looking expectations. For the full year, operating revenues totaled CLP 3 trillion, remaining relatively stable when compared to 2024. This performance reflects the expected normalization in noncustomer income, mainly the lower contribution of our inflation index net position and decreased revenues from ALM. On a positive note, the underlying strength of our core business continued to make a difference. In fact, customer income increased by 4.2% for the full year, driven by solid retail loan related revenues, that benefited from improved lending spreads and higher fee generation across transactional services and mutual fund management. These dynamics underscore the resilience of our banking activities and the diversification of our revenue base. Even in the year marked by softer inflation and interest rate environment was marked by both lower short-term interest rates due to the ease in monetary process and a slight term spreads as yield curves remained flat for most of the year. On the right side of the slide, you can see how our margins continue to differentiate us. Our NIM remains the strongest among our peers, supported by our leadership in demand deposits, and the diversified loan mix that continues to provide a structural advantage. A similar pattern is evident in our fees margin where both the strength of our product offering and solid customer engagement allows us to maintain a stable and attractive contribution to operating income. Finally, our operating margin continues to position us ahead of peers. Even though market conditions have normalized, our focus on efficiency, digital adoption, process optimization has allowed us to protect profitability and maintain a clear gap relative to the system. Together, these drivers underscore the strength of our strategy and our consistent ability to convert commercial activity into superior financial performance. Please turn to Slide 14. Total loans rose 0.8% year-on-year, reaching CLP 39.2 trillion as of December 2025. This evolution reflects very different dynamics across mortgage, consumer and commercial portfolios. First, Residential Mortgage loans were the main source of our loan book expansion by growing 5.3% during the period. This growth was supported by higher inflation, lower interest rates, a stable housing market and recent public programs aimed at reactivating this industry. Second, Consumer Loans increased 3.9% year-on-year in line with the improvement seen in household consumption indicators during the year and the gradual recovery in demand reported in the -- by the Central Bank in the fourth quarter, 2025 credit survey. Third, in contrast to individual loans, Commercial Loans fell 3%, consistent with the slower recovery in private investment and the more conservative behavior of large corporates. This decline was further amplified by loan prepayments, a pattern observed across the banking industry among corporate customers. In terms of the composition of our loan book and our main growth drivers, Retail Banking is the most relevant in both cases, representing 67.5% of total loans, growing 4.2% year-on-year. Within Retail, individuals grew 4.4% year-on-year primarily driven by mortgage lending and the gradual pickup in installment loans during the second half of 2025. Meanwhile, SME expanded 3.3% during the same period, although an important note that excluding amortization of FOGAPE loans, SME loans grew 9.4% year-on-year, up from the 8% growth rate posted in the third quarter, reflecting a healthy and accelerating lending activity in this market, which is coupled with our continuous support for entrepreneurship. In Wholesale Banking, performance remains subdued. Total loans from this segment dropped 5.5% year-on-year with corporate banking leading the drop with 8.8%, while large companies posted a slight decrease of 0.5%. This decline was mainly due to the maturity of low spread trade finance operations, lower credit demand from corporations, prepayment and appreciation of the Chilean peso, which reduced foreign currency exposures when converted to CLP. At the same time, sectors such as real estate and construction are showing initial signs of improvement according to the Central Bank's credit surveys, although activity remains weak. In summary, our loan book is well balanced and ready to benefit from a more positive macroeconomic outlook. The economy is showing firmer domestic demand. The labor market is stabilizing. Inflation is heading back towards target and interest rates are expected to continue normalizing throughout 2026. In addition, surveys already reflect early improvements in credit demand from households, SMEs and sectors such as real estate and construction, coupled with increasing consumer confidence levels. With these positive conditions emerging, Banco de Chile is in a strong position to capture new opportunities and continue delivering industry-leading results. Turning to Slide 15. Our funding structure continues to be one of the strongest competitive advantages. As you can see on the left, demand deposits represent 26.8% of our total liabilities giving us a highly efficient funding base that remains structurally superior to the rest of the industry. This mix is further strengthened by time deposits and savings accounts, long-term debt issued and equity, supporting both solid liquidity position and cost efficiency. Looking at the chart on the top right, our demand deposit to loan ratio stands at 37%. Once again, the highest among major peers. This leadership is not only a source of lower funding costs, but also a reflection of our strong franchise, customer engagement and the trust we've built across all of our business segments. More importantly, our demand deposit base is primarily composed of retail depositors, which provide us with enough funding stability in the medium term. At the bottom of this slide, you can see the evolution of our inflation index position in the banking book. As explained in our financial management review report, our net asset exposure to the U.S. reached CLP 8.8 trillion in December 2025, increasing relative to the third quarter, mainly due to the growth in U.S. assets and the amortization of the previously issued denominated -- U.S.-denominated bonds. This position is composed of both our structural inflation index gap, which serves as a long-term hedge for our shareholders' equity against inflation and temporary directional positions managed by our treasury depending on short-term market expectations. Based on revenues obtained from inflation variations over the last quarters, we believe our strategy has more than offset the risks involved. Nevertheless, we continue to closely assess the expected inflation path and fed rate to adjust the exposures if needed. Altogether, the strength of our funding base, combined with the disciplined and effective balance sheet management allows us to sustain one of the lowest financing cost structures in the banking industry. Please turn to Slide 16 to review our capital position. As shown on the slide, Banco de Chile continues to maintain one of the strongest capital bases in the Chilean banking system, consistently operating at comfortable levels that are also well above peers. In December 2025, our CET1 ratio reached 14.5%, and our total capital ratio stood at 18.3% both reflecting a robust capital generation capacity and disciplined balance sheet management. These levels place us comfortably above the fully loaded Basel III requirements applicable in Chile. We achieved this solid position after multiple years of sustained profitability and prudent but attractive dividends, which allowed us to preserve capital even in 2025, a year marked by lower inflation and more normalized revenues. Moreover, moderate loan growth in 2025 contributed to the expansion of capital. Finally, an important regulatory update occurred earlier this month on January 16, 2026, the CMS removed the Pillar 2 charge of 0.13% previously assigned to us, bringing this requirement down to zero. This decision reflects the regulators positive assessment of our risk profile, governance and capital management practices. In summary, our strong CET1 and total capital ratios position us exceptionally well to continue growing profitably, maintaining our leadership in the industry and navigate the next stages of the economic cycle with confidence to grow our portfolio. Please turn to Slide 17 to review our asset quality. Our loan portfolio once again reflects the consistency of our risk culture. In the fourth quarter, expected credit losses were CLP 116 billion, bringing the full year figure to CLP 382 billion, which is 2.5% below the level we posted last year. In terms of cost of risk, this indicator improved to 0.97% slightly below 2024, underscoring the resilience of our loan portfolio and the effectiveness of our risk management practices. Breaking down the quarterly changes. The increase in provisions reflects both the normalization of asset quality indicators and a loan mix effect, given the stronger momentum in retail lending during the period. In the Retail banking segment, expected credit losses rose CLP 15 billion year-on-year, largely due to the low levels of 30- to 89-day past due loans recorded in the fourth quarter of 2024, which created a low comparison base. This was intensified by a pickup in lending activity during the quarter as reflected by consumer loans that increased 2% and credit card balances that grew 7.7% versus the third quarter. By contrast, the Wholesale Banking segment recorded a CLP 6 billion reduction in provisions compared with last year, also driven by a comparison base effect, but in the opposite direction. Specifically, the fourth quarter of 2024 included downgrades in certain real estate, construction and transportation clients, while the reclassifications in 2025 were more moderate. For the full year, credit loss expenses decreased CLP 9.8 billion year-on-year. This was mainly driven by the Wholesale Banking segment where better credit profiles in the real estate and construction sectors together with the reduction in exposures to specific manufacturing clients contributed to lower credit losses. The Retail segment also recorded a modest year-on-year reduction, these positive trends were partially offset by a CLP 19.6 billion loan volume and mix effect, entirely concentrated in the Retail Banking segment as well as CLP 3.4 billion increase in impairment on financial assets. In terms of delinquencies, the chart on the upper right shows that the entire industry's NPLs remain above pre-pandemic levels. Nevertheless, we continue to have a lower past-due loan ratio of 1.7%, maintaining a sizable gap versus our peers and the industry, due to a sound origination standards and monitoring practices. Looking forward, as economic activity improves, inflation moderates, we expect delinquency indicators to gradually converge towards our historical ranges. Nevertheless, as shown on the bottom left, our coverage remains one of the highest in the industry. As of December, total provisions reached CLP 1.5 trillion, including both specific allowances and additional provisions resulting in a coverage ratio of 223%. This robust buffer provides meaningful protection against potential stress scenarios and once again, differentiates our credit risk position from peers. In summary, despite the credit cycle that remains above long-term averages for the system, our asset quality metrics, strong provisioning levels and disciplined risk management practices continue to position Banco de Chile with one of the most resilient profiles in the industry. Please turn to Slide 18. Our structural cost discipline is supporting important efficiency gains, as you can see on this slide. Total operating expenses reached CLP 293 billion in the fourth quarter of '25 down from 3.5% and 6.7% in nominal and real terms, respectively, year-on-year. The decline, as shown on the chart on the top right was led by personnel expenses decreasing 7% year-on-year in nominal terms in the fourth quarter of 2025, mainly due to lower severance payments versus the 4Q '24 and slightly higher growth in salaries as headcount decreased 4% year-on-year as a result of the adoption of our sales and service model. Depreciation, amortization and other expenses dropped 12% year-on-year. This was partially offset by administration expenses that rose 5.1% year-on-year, mainly from marketing and technology-related expenses. For the full year, operating expenses were essentially flat at CLP 1.1 trillion, and in real terms, decreased 3.5% year-on-year. Specifically, personnel expenses fell 2.1% year-on-year, more than offsetting a 3.1% year-on-year increase in administrative expenses which remained below inflation while depreciation, amortization and other expenses also trended lower in 2025 versus the prior year. These positive trends in our cost base reflect a solid cost control culture we have developed over the last 5 years. The benefits we have obtained from successful optimization programs, including improved service and operating models, which have leveraged on targeted IT capital expenditures that are bearing fruit in terms of increased efficiency and productivity. As a result, our efficiency measured as total operating expenses to income reached 37.4% for 2025, comparing well to our history, peers and the industry. Looking ahead, our focus is unchanged. Maintain strict cost control while investing in capabilities that matter: digital, data and distribution so we can continue to post excellent productivity and efficiency levels. For 2026, our baseline guidance forecast efficiency around 39% under normalized revenue conditions. Please turn to Slide 19. Before taking your questions, I'd like to highlight a few key points from this presentation. Chile continues to demonstrate solid and resilient macroeconomic fundamentals, supported by credible institutions, a sound financial system and a stable policy framework. Despite a complex global environment, Chile remains well positioned relative to its peers and continues to offer a favorable environment for long-term investment. For 2026, we expect above-trend GDP growth of around 2.4% driven by stronger contribution from domestic demand, particularly investment, machinery equipment. Inflation and interest rates are also expected to converge to the long-term levels at 3% and 4.25%, respectively. Turning to Banco de Chile. I would like to reinforce our ability to combine strong earnings with robust capital levels. As shown on the left, we delivered $1.2 trillion in net income with a CET1 ratio of 14.5% and a return on average assets of 2.2%. Finally, regarding our full year 2026 guidance, we expect return on average capital in the range of 19% to 21%, efficiency around 39% and cost of risk between 1.1% and 1.2%. We remain confident in our ability to continue positioning Banco de Chile as the most profitable investment in the Chilean banking industry over the long term, supported by a solid strategy, the best customer base, superior asset quality, a sound risk culture and the strongest capital position among peers that will enable us to take advantage of a more dynamic lending environment as the Chilean economy gains momentum. Thank you. And if you have any questions, we'd be happy to answer them. Operator: [Operator Instructions] Our first question is from Ernesto Gabilondo from Bank of America. Ernesto María Gabilondo Márquez: Thank you. Rodrigo, Pablo and Daniel, and thanks for the opportunity to ask questions. My first question will be on the economic and political outlook. Just wondering what have you been hearing in terms of reducing the statutory tax rate and reducing the credit card limit on credit cards? I have seen other banks with a more cautious view on the timing of the approval of both topics. So I just want to hear your view. My second question is on your loan growth expectations. I wonder if you can break down your loan growth expectations per segment? And my last question is on your capital allocation. So shareholders approved a dividend payout ratio of 85%. But Banco de Chile continues to have a very high common equity Tier 1 ratio. So just wondering how you're seeing your capital allocation in the next years? And if you're expecting to take advantage of your strong balance sheet to take market share in the second half or next years? Rodrigo Aravena: Ernesto, thank you very much for the question. Its Rodrigo Aravena. In terms of the economic and the political outlook that we have. I think that there are a couple of things that's important to highlight here. First of all, we have for this year an official outlook for the economy for the GDP of 2.4%. However, we are aware about the potential asset risk in this estimate because we have seen very positive signs from the domestic demand. And also in terms of the business confidence, the consumer confidence, for example, we have seen a very positive trend. In fact, today, we have, for example, the highest consumer confidence, the expectation for the next 12 months from the household is the highest since 2018. Additionally, we have very good signals from the capital imports anticipated a good trend for investments. So having said that, I think that it's very important to mention that even though we will likely have a similar economic growth this year compared to the number that we have in 2025 and 2024. I think that the good news is the composition of growth because the main driver of activity this year will come from large domestic demand. In terms of the political agenda, political outlook, the new government will take office, March 11. Only at that time, we will know the main priorities, the main agenda. However, there is an important consensus in Chile, which is part of the agenda of the new government as well in terms of, for example, to propose a reform by reducing the corporate tax rate from the current 27% to -- we have to wait for the announcement of the government, but the consensus that the rate could fall towards, I don't know, 23% something like that. It could be a positive news in terms of the investment, in terms of the economic growth in the future. But again, we have to see what will be their priority for the new government, and we will have information on that only after March 11. But overall, today, we have a more positive view on the economy, especially from the domestic demand. But we have to take into consideration as well that the recent strengthening of the Chilean peso would review the inflationary pressures this year, which could have a potential impact in terms of interest rates. So we -- still we have some mixed trends that we have to pay special attention to. Pablo? Pablo Ricci: Okay. In terms of the interest rate caps and discussions, it's still very early, but obviously, similar to what happened in the past, the reduction leaves vulnerable or the mass market consumer markets unbanked and is precisely what occurred after those regulations that were implemented. This obviously could help return to the segment for the financial institutions. So this would be a positive move, but it's very early in the discussions to see if this will actually come through. In terms of loan growth by segment, what we're seeing for next year in the industry is loan growth growing around the 4.5% level for the industry. So we think that one of the most relevant areas that we should see a return to growth is in the Corporate Banking. So in Corporate Banking, which has been very weak over the last year, we believe that this -- we should start to see an improvement. And in terms of us what we're looking at growing is slightly -- well, above those levels, focusing in our key segments. We're seeing somewhere around the 7% nominal level of growth. Obviously, it will depend on the evolution of changes or improvements in terms of politics. We're seeing a recovery also in Consumer loans, which is very important for us, somewhere in the levels of around 6%. These numbers are nominal. Mortgage loans around the 5%, and Commercial Loans, we should see a pickup that's more around the 8%, which is the area that has had the highest difficulties over the last 5 years, where we've seen an important decrease with a special focus in those smaller and medium-sized businesses, SMEs. The third question was the capital. So I'll pass the call Daniel Galarce. Daniel Ignacio Galarce Toro: This is Daniel. Ernesto, as we have mentioned in the past, we have favorable gaps in terms of capital risk today, of course. And basically, we want to use them in the future as long as the economy gains some momentum. As we mentioned in our quarterly report also, we want to save and we take some market share in the future, particularly in 2026. So we want to grow above the industry in terms of loans. In the long run, and also, as we have mentioned in previous calls, we believe that we should cover, we should flow in capital ratios at least 1% above the regulatory limits. That means that probably we can float even over that margin over than 1% or something like that. But in the long run, important thing is that we want to use the capital in order to take more growth and faster growth than the rest of things. Operator: Our next question is from Andres Soto from Santander. Andres Soto: I have a couple of questions. The first one is regarding your loan growth expectations. I would like to understand two aspects. The first one is, how do you expect this loan growth to happen. Is it going to be more tilted to the second half of the year? Or you are going to see this pickup from the beginning? This considering that at the end of 2025, we actually saw a deceleration of growth for all the Chilean banks, but particularly for Banco de Chile. That will be my first question. Pablo Ricci: Yes. So for loan growth expectations, it should probably be more in the second half of the year, in line with activity and changes that can occur. You have to remember that in Chile, the government takes office on March 11. So all changes and benefits that could occur in the short term, would change after that date as well. So what we've seen in the last quarter of this year was low demand from customers from corporate customers some loan repayments from larger corporate customers and foreign trade loans that were -- that came due -- the retaken. So the fourth quarter was a little bit weaker in the commercial loans, so we should expect that in the second half of the year, we should start to see a larger pickup in terms of loans and in the medium term, we should see the possible benefits more in coming years because our expectations for the industry, remember is 4.5% nominal growth, which is under 1x the loan elasticity of Chile because we're expecting Chile to grow around 2.5% plus inflation of 3%, we're below the 1x. Andres Soto: Understood. And so thinking about 2027, can we assume that you -- there will be additional acceleration in lending based on this regulatory agenda that is being proposed by the new government? Or how do you see the medium-term expectations in terms of Chile GDP and lending activity? Pablo Ricci: If we look in the past, Chile always grew 2x. Probably that's more challenging to achieve by the medium-term goal or level of reasonable is around 1.4x, 1.5x, and they should be times there's higher levels of growth for a shorter period of time. So in 2027 and beyond, we should see better growth in the industry, taking back that level of growth that was lost during the last 4 years, especially in commercial loans and consumer loans. Rodrigo Aravena: Yes. Hi Andres, I think that it's also important to keep in mind that -- it's going to depend on the type of measure that the new government will announce. For example, there is an important consensus about the rules to reduce taxes, but the question is about the timeline of this potential reduction impacts. We have to remember that there is not an important majority in both [indiscernible]. So that's why -- there's going to be some indication between different parties, coalitions, et cetera. So that's why I think that even though we are aware about the potential average buyer now we're forecast for both for domestic demand loan growth for the GDP. I think that it's very important to analyze the specific details of the proposal of the new government especially in terms of the timeline of the potential reduction in taxes, the main area where the government will try to reduce the bureaucracy for investment, et cetera. So I think that the detail of the new proposal and the reform will be very important in terms of the potential timing of recovery of loans. Andres Soto: Perfect. My second question is on your guidance. You said 39% efficiency ratio. And I would like to understand better what drives this view considering your loan growth expectations and your NIM, I get a lower margin -- a lower efficiency ratio. So I wanted to clarify what you're seeing in terms of fee income, expense growth to see this would be the reason why you assume this level of efficiency? Pablo Ricci: Well, our 3-year project that was implemented, and we've seen significant improvements in terms of costs has been mostly implemented. We've seen improvements in efficiencies and productivities across the bank, a reduction in the branch network, optimizing the structure of Banco de Chile and that's permitted us over the last couple of years to have very low expense growth. For 2026, we should think of more in line with inflation expense growth due to last year's inflation affecting basically all of our numbers on operating expenses as well as some slightly higher depreciation levels because of technology investments, et cetera. In terms of operating income, as we mentioned, 4.5% NIM and fees, we should think, as we've said in other calls, our main driver is customers. So we should be having a good level of fee growth, thanks to a rise in customers, which is generally around the 7%, 1/3 is coming from FAN accounts of that number, cross-selling. And particularly this year, we should have more growth related to transactional revenues as well as some of our subsidiaries and will begin to have income from Banchile Pagos, our acquiring business. So it's reasonable to think of a level of around high single digits, low double digits for fee growth. So it should be similar to what we had in the prior year, but the composition of that number will be different because we expect more moderate growth in terms of AUM and mutual fund management, which we've had a very strong growth over the last few years. Andres Soto: Pablo, just to summarize, you are seeing expense growth in line with inflation and fee income above lending growth. Is that correct? Pablo Ricci: Expense growth in line, slightly above inflation and expense and fees similar to 2000 -- the prior year. We also take into consideration in operating expenses, we have in Banchile Pagos and in fees, we have Banchile Pagos as well and the rest is inflation Operator: Our next question is from [ Lindsay Shima ] from Goldman Sachs. Unknown Analyst: First, maybe just a follow-up on Banchile Pagos. Do you have any initial updates on how operations have been going? And then how do you see the overall market and the opportunity set there? And how much it can contribute to earnings in the future? And then my second question is just clarifying if the upside risks to local GDP growth are factored into your loan growth estimates and your overall estimates or if there's some upside risk there? Pablo Ricci: So for Banchile Pagos , it's been going very well. We started this, as you know, in the fourth quarter of 2025. Today, we have a level of around 4% of customers that are SMEs or equipment to the size of our SME book. We have about 4% of our Banchile Pagos customers. It's been growing well. We have a customer base that we're focusing this target of about 160,000 SMEs. And if we look at the smaller like mid-cap companies, that number goes up to 200,000. So we have an interesting level of customer base that we're cross-selling with our account managers, to Banchile Pagos. This number -- this new subsidiary will be adding important value to -- is one of the drivers for fee growth. It's also one of the drivers for a little bit more expensive, but it's coming out positive evolution of Banchile Pagos overall. So we're very happy with the level of growth that this product has had. Rodrigo Aravena: Okay. Thanks for the question. This is Rodrigo Aravena. As you mentioned, we have an up risk in terms of our GDP forecast, which is mainly based on five key drivers. First of all, we have a better [ copper ] price, which is important for the country. You know that the mining sector is important for us, represents nearly 15% of the GDP. So the improvement of the terms of trade is positive for us. Second, we have seen an important improvement in consumer confidence. Third, a similar trend for the business confidence. Fourth, we have seen an important pickup in capital goods imports, which potentially anticipate a better dynamics on total investment. And also, there are positive expectations regarding the measures that can be taken and announced by the new government, especially in terms of the reduction of [indiscernible], bureaucracy and also the potential room to reduce the corporate tax rate in the future. Of course, that when we have a better environment for the GDP, it's reasonable to expect a greater dynamics in loans. However, we have to consider that there is a delay between the GDP cycle and the loan cycle. I mean what I'm trying to say is that when you have an acceleration activity in some quarter, not necessarily, we have a fast acceleration in loans in the same period of time. So that's why I would say that we have an upward risk with GDP for the domestic demand this year that is not necessarily. We have the same asset risk for total loans this year. We can rule out that part of the recovery on loans will happen in the -- during the next year. Operator: Our next question is from [ Daniel Mora Adela ] from CrediCorp Capital. Unknown Analyst: I just have one question. You mentioned that you want to be the most profitable bank in Chile in terms of return of average capital. The new guidance of 19%, 21% since conservative, if we think about the ROE expectation of a key competitor. So I would like to understand if this will be the long-term return on average capital figure? Or do you expect -- and how do you expect to expand profitability? Pablo Ricci: Daniel, well, thank you for your question. I think it's important to consider if we look at different metrics and similar levels of capital, we have a very attractive level of returns. If we look at ROA, we're by far the leader. Today, we have -- it's true we have a CET1 ratio that's higher than our peers, and that generates a lower return on average capital. But our aspiration is to be number one. So in our guidance for this year is 19% to 21%. Maybe there's some things change within Chile. Those numbers can evolve, obviously. But in the medium term, the idea is to use this capital and organic growth, inorganic growth and we need to use effectively our capital. So this should generate better returns for us, and we should begin to see a return and return on average capital similar to what we see in return on average assets which we should return to being leaders as we deploy this additional capital and growth or how we use this to become more sustainable. Unknown Analyst: Perfect. And do you have a long-term figure already incorporating the use of the excess capital that you currently have? Pablo Ricci: No, we don't have a long-term figure, but as Daniel Galarce has mentioned that it's reasonable to see banks should have a reasonable level of capital in order to grow and use during a normal course of business, which generally is in the levels of 1%, 1.5% above the regulatory limits. Operator: Our next question is from Neha Agarwala from HSBC. Neha Agarwala: A quick one on the cost of risk and asset quality. How do you see that evolve going forward? Your cost of risk is slightly higher than what you had for 2025. It seems like it's mostly driven by the loan growth that you're expecting. But is there any other moving factors, if you could elaborate on that? And when I look at your guidance and the growth assumptions, the ROA is 19% to 21%, it seems like we could have a bit of upside risk to that number. Any thoughts that you can share on that? Pablo Ricci: Hi, Neha. Thanks for the questions. In terms of cost of risk, it's true our number of 1.1% to 1.2% is higher than what we've had over the recorded what we -- over the past few years. And that goes in line with the levels that we think are more in line with our long-term levels of cost of risk, and asset quality. We should see a year that's more -- we should see more growth this year, especially a change in mix that is more focused on SMEs, more focused in consumer loans. So the net position should be more profitability in terms of net interest margin cost of risk in the long term as this evolves to more normalized levels where we've been has been very low levels of cost of risk, which don't make sense for the cycle that we're in. We're in the cycle of GDP that's growing around above 2%, but unemployment rate quite high for this level. And coming out of a very high level of inflation that affected household income, and that's affected payment behavior. So we think it's reasonable to consider a cost of risk, which should move slowly return to the levels of our long term of 1.1% to 1.2%, but obviously, there's positive scenarios in that number if the economy improves better than expected unemployment comes down, real wage has increased more. That number could be better. So you can argue both ways. In terms of ROE, its similar to that, what's driving these numbers of ROE of 19% to 21% and part of this is cost of risk and part of this is operating expenses. So as improvements if there's surprises in the year, there can be a positive effect on the bottom line as well. And you can also have the negative effect if the surprises in the year of lower inflation, more unemployment, you can have the opposite. But considering everything that economists are looking at. We think it's reasonable the levels of cost of risk today that we should have and the levels of return on average capital. Operator: Thank you. We would like to thank everyone for the participation today. I will now hand it to the Banco de Chile team for the concluding remarks. Pablo Ricci: Thanks for taking the time to listen to our call and we look forward to speaking with you in the next quarter's results. Bye. Operator: We'll now be closing all the line. Thank you, and have a nice day.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Ensign Group, Inc. Fourth Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Mr. Keetch. Please go ahead. Chad Keetch: Thank you, operator, and welcome, everyone. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on February 27, 2026. We want to remind anyone that might be listening to a replay of this call that all the statements made are as of today, February 5, 2026, and these statements have not been nor will be updated subsequent to today's call. Also, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to the risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review the SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its independent subsidiaries do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, the Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our independent subsidiaries, collectively referred to as a service center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other independent subsidiaries through contractual relationships. In addition, our captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities. Ensign also owns Standard Bearer Healthcare REIT, which is a captive real estate investment trust that invests in health care properties and enters into lease agreements with certain independent subsidiaries of Ensign as well as third-party tenants that are unaffiliated with the Ensign Group. The words Ensign, company, we, our and us refer to the Ensign Group, Inc. and its consolidated subsidiaries. All of our independent subsidiaries, the Service Center, Standard Bearer Healthcare REIT and the insurance captive are operated by separate independent companies that have their own management, employees and assets. References here into the consolidated company and its assets and activities as well as the use of words we, us, our and similar terms are not meant to imply nor should it be construed as meaning that the Ensign Group has direct operating assets, employees or revenue or that any of the subsidiaries are operated by the Ensign Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business but they should not be relied upon in the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release and available in our Form 10-K. And with that, I'll turn the call over to Barry Port, our CEO. Barry? Barry Port: Thanks, Chad, and thank you all for joining us today. We're excited to report another record year and record quarter in several key areas. To start, I want to highlight the extraordinary clinical outcomes achieved by our dedicated and talented caregivers. None of the results, which we will discuss today are possible without the outstanding work being done by these amazing nurses, therapists, dietitians, food service professionals, activities coordinators and the many others whose unwavering commitment shapes the daily care experience for thousands of patients across our portfolio. It's difficult to convey in words how so many individuals work so hard to achieve such amazing outcomes through so many small moments of selfless service. Having a front row seat to these amazing people is humbling to say the least. And while the point of these quarterly calls is to provide investors a financial update, let there be no mistake that our consistent financial results would not be possible without a relentless patient-focused culture that drives our frontline partners to deliver the highest quality clinical outcomes supported by a family-like atmosphere where everyone genuinely cares about one another. There are several measurements that showcase our clinical excellence. For example, according to the most recently published CMS data, same-store Ensign-related operations outperformed their peers in their annual survey results by an impressive 24% at the state level and 33% at the county level. This exceptional performance is only possible by achieving sustained clinical performance over time. In that same data set, Ensign affiliated operations also maintained a 19% advantage in overall 4- and 5-star rated buildings when compared to their peers. This is particularly noteworthy given that the majority of these communities were 1- and 2-star facilities at the time of acquisition. In addition, our same-store operations continue to outperform their industry peers and 5-star quality measure results by delivering 22% better results on a national level and 17% above the state level. Together, these results underscore our ability to become the provider of choice in our communities by delivering consistently better quality of care, creating long-term value across our portfolio, and we'll expand on that more throughout this call. This clinical strength depends upon attracting and retaining top-notch talent in every operation. We are encouraged by the deep bench of incredible talent that continues to flow into our organization, and we look forward to working with them to continue to achieve our mission to dignify post-acute care. On the retention side, we continue to experience improvements in turnover, stable wage growth and lower staffing agency usage even in the face of increased occupancy. We are especially proud of the exceptionally low turnover amongst our directors of nursing. Over the past few years, DON turnover has declined by 33%, placing us amongst the performers in the industry and reinforcing the stability and leadership consistency that drives high-quality care. As we've said before, our people are at the heart of our efforts and seeing these metrics consistently improve is critical to maintaining our path of success and to achieve industry-leading results. Our clinical achievements are bearing fruit in many ways. On the census front, our same-store and transitioning occupancy increased to 83.8% and 84.9% during the quarter, which are both all-time highs. On the skilled mix front, we saw an increase across all payers. More specifically, skilled days increased for both our same-store and transitioning operations by 8.5% and 10%, respectively, over the prior year quarter. We also saw Medicare revenue increased for both our same-store and transitioning operations by 15.7% and 11.3%, respectively, and an increase in our same-store Medicare days of 11% over the prior year quarter. In addition, we saw managed care revenue increase for both our same-store and transitioning operations by 8.9% and 15%, respectively. The primary reason for these improvements is expanding the trust of the communities our teams serve through the clinical outcomes that they have achieved that I described earlier. As each operation solidifies the reputation in their respective markets, they are not only seeing more patients but they are also being entrusted to care for more and more medically complex patients, which includes a larger share of Medicare, managed care and other skilled patients. In addition, we believe we are just now starting to see increased demand for our services related to the strong demographic trends. These powerful tailwinds will only bolster our census momentum we're seeing across our portfolio, giving us confidence in the long-term growth opportunity ahead. While we are thrilled with our current record same-store occupancy, we are actually excited that it's as low as it is. At 83%, we have enough organic growth potential left in our organization to sustain our consistent earnings and revenue growth even if we stopped acquiring. As we point out during each of our earnings calls with specific facility examples, it's not uncommon to see some of our most mature operations consistently achieve and maintain occupancies in the high to mid-90s. Although many of our acquisitions in 2025 are in states that have higher occupancy levels, including California, Alaska, Utah and Washington, their occupancy levels are far below the average levels that we see from our mature campuses in these states. The organic potential in our portfolio continues to remain one of compelling opportunities to continue to drive results. In addition, we continue to acquire new operations with massive long-term upside with many more in the works. Since 2024, we have successfully sourced, underwritten, closed and transitioned 82 new operations across several markets, many of which are already performing at or above our expectations. We're very humbled by what we were able to accomplish in 2025, and we are eager to continue to drive organic improvements and take advantage of the acquisition opportunities that we see on the horizon. We are issuing our annual 2026 earnings guidance of $7.41 to $7.61 per diluted share and annual revenue guidance of $5.77 billion to $5.84 billion. The midpoint of this 2026 earnings guidance represents an increase of 14.3% over our 2025 results and is 36.5% higher than our 2024 results. We look forward to 2026 with confidence that our partners will continue to manage and innovate while balancing the addition of newly acquired operations. This annual guidance comes on top of the extraordinary growth we experienced in the last few years. To put this performance in perspective, over the last 5 years, our total adjusted revenue increased by $2.7 billion or 111%, representing a 16% compounded annual growth rate, while our diluted adjusted earnings per share grew by $3.44 from 2020 to 2025, representing a 16% compounded annual growth rate. In addition, we have seen adjusted net income grow by 121% with a compounded annual growth rate of 17%. This performance is not due to some large event or a single transformative transaction but instead is the result of steady consistent growth and performance quarter after quarter, which comes from a collective belief and commitment that is held by all of our partners to expand our mission in a methodical and thoughtful way. Next, I'll ask Chad to add some additional insights regarding our recent growth. Chad? Chad Keetch: Thank you, Barry. We had another significant few months on the acquisition front, adding 17 new operations, which includes 12 real estate assets during the quarter and since. These include a 7-building portfolio in Utah, 3 in Texas, 2 in Arizona, 2 in Colorado and 1 in each of Alabama, Kansas and Wisconsin. In total, we added 1,371 new skilled nursing beds across 7 states. This growth brings the number of operations in our recently acquired group of operations to 21.7% of our entire portfolio. We were thrilled to complete these acquisitions that span across so many distinct health care markets. In each case, our local clusters are prepared to execute on their specialized building-by-building transition plans several months in advance. Overall, our growth this quarter continues to demonstrate our ability to take on multi-facility portfolios as well as our traditional singles and doubles. We continue to learn from and perfect our transition process and believe that those lessons are showing through in the performance of our recently acquired operations. As we've shown during the quarter and the last few years, our building-by-building approach transition works for single operations, small portfolios and larger portfolios, particularly when a large deal spans several markets and geographies. We've also shown that in certain strategic situations, paying higher prices can be justified for performing assets that have newer physical plants. And while some of those deals may take a bit longer to generate the returns we expect, we've seen these deals pay off over time as our operators implement the proper clinical systems and cultural changes. In the Stonehenge acquisition, for example, the purchase price represented a premium over our historical acquisitions in Utah. However, the high quality of the assets, the strong clinical and financial performance as well as the synergies with our existing footprint in several markets justified a higher price while still leaving room for midterm and long-term upside. And yet just a few months after closing, these operations are performing well ahead of schedule and contributing to both the strength of our clusters in Utah and the company's overall performance. While we certainly will continue to evaluate and consider any deal that's out there, we are also very comfortable growing the way we've grown this year with lots of transactions across many states, including small deals to larger portfolios and where it makes sense, higher-priced strategic assets. As we look at the current pipeline, we continue to see opportunities that include everything from larger portfolios, landlords looking to replace current tenants, nonprofits looking to divest of their post-acute assets and a steady flow of our traditional onesie-twosies. We have several new additions lining up for Q1 of 2026, and our local leadership teams and their deal partners here at the service center are working together to source, underwrite and carefully select the right opportunities. We continue to have lots of success in closing deals with sellers who are not just interested in receiving top dollar but care deeply about the quality and reputation of the company they select to inherit their legacy and choose us because they believe in our mission to dignify post-acute care. We are also pleased to announce a few unique new construction projects we recently completed both in California. The first project involved working together with Omega Healthcare REIT to take advantage of several acres of vacant land on one of our leased properties. With their support and the expertise of our team of health care construction experts, we completed a 40-bed addition at Vista Knoll Specialized Healthcare in Vista, California. The expansion added much needed capacity to our specialty care unit and significantly strengthened our ability to meet the community's growing needs. Only a few months after opening, the new wing has already achieved 98.3% occupancy. We are also thrilled to have recently completed the construction and obtained the license to operate a replacement facility to one of our high-performing skilled nursing operations in San Diego County. Grossmont Post Acute in La Mesa, California, which is located next to Sharp Grossmont Hospital is a pillar of the local La Mesa healthcare community. But the operation was housed in an aging building and the landlord had determined to replace that aging building with new medical office space. Several years ago, we acquired land next door and endeavor to build a brand-new replacement building across the street from the original location. After several years and lots of hard work, we successfully completed the construction and we'll be moving all the patients and staff to a brand-new state-of-the-art building that will replace the old building while also adding 15 beds to the original license. We are thrilled for the city of La Mesa that we were able to find a way to continue at considerable investment to provide these critical post-acute services to the community for decades to come. We are also grateful for the support of our partners at Sharp Grossmont Hospital and look forward to finding ways to continue to provide service to their patients. Both cases illustrate that there are several ways that we can carefully and selectively invest our capital to enhance our service offerings to the communities we serve. We will continue to look for opportunities to add beds to successful operations and where appropriate, to invest in newer construction in markets we know well. Our local leaders continue to recruit future CEOs for Ensign affiliated operations, and we have a deep bench of CEOs and training that are eagerly preparing for their opportunity to lead. During the quarter, we again reached an all-time high for AITs in our pipeline. This high-quality influx of leadership talent, combined with our decentralized transition model allows us to grow without being limited by typical corporate bottlenecks. We also continue to store enough dry powder on our balance sheet to fund a significant amount of growth, including adding even more real estate assets to our portfolio. Therefore, our unique acquisition and transition strategy puts us in an excellent position to continue growing in a healthy and sustainable way. Lastly, we are also pleased with the continued growth of Standard Bearer, which added 12 new assets during the quarter and since. Standard Bearer is now comprised of 154 owned properties, of which 120 are leased to an Ensign affiliated operator and 35, which are leased to third-party operators. We were excited to add to our growing list of relationships with unaffiliated operators, which further diversifies our tenant base and helps our organization as a whole continue to advance our mission by working closely with like-minded operators that want to make a difference in this industry. Going forward, Standard Bearer will work together with our existing operating partners and new relationships we are developing in order to acquire portfolios comprised of operations that Ensign would operate and facilities that high-quality third parties are interested in operating under a lease. Collectively, Standard Bearer generated rental revenue of $34.5 million for the quarter, of which $29.3 million was derived from Ensign affiliated operations. For the quarter, Standard Bearer reported $20.4 million in FFO and as of the end of the quarter, had an EBITDAR to rent coverage ratio of 2.6x. And with that, I'll turn the call over to Spencer, our COO, to add more color around operations. Spencer? Spencer Burton: Thanks, Chad, and hello, everyone. I wanted to share 2 outstanding operations that have achieved sustained financial growth due to their consistent emphasis on clinical outcomes and staff development. South Bay Post Acute located near San Diego, California is a 98-bed skilled nursing operation that has been an Ensign affiliate since 2014. Like many of our same-store operations, the South Bay team, led by CEO, Lisa Simmons; and COO, [ Connie Narvaez, ] maintains a consistent focus on improving both clinical and financial performance year after year. The facility has long been recognized for strong quality outcomes as reflected in its 5-star CMS ratings for quality measures, health inspections and overall performance. Over the past year, the team identified an opportunity to expand its community impact by developing specialized capabilities to care for bariatric patients, a growing but historically underserved population in post-acute care. Successfully serving this population required a disciplined clinical and operational strategy. The facility leadership team started by visiting a highly successful Ensign affiliate that has become the top-performing bariatric operation in Arizona. Building on what they learned, South Bay remodeled rooms, invested in specialized equipment and engaged both external experts and its in-house therapy team to develop protocols and provide staff training to safely and effectively treat bariatric patients. The team also expanded behavioral health support and implemented both group and individual therapies tailored to this population. By addressing the clinical and operational challenges that hospitals face when placing bariatric patients, South Bay positioned itself as a reliable solution for complex discharges. These efforts contributed to both improved patient outcomes and measurable reputational improvement. Health plans and referring acute partners have taken note, and South Bay has recently been awarded additional high reimbursement contracts. These clinical accomplishments have inevitably resulted in financial growth. In the fourth quarter, earnings before income tax increased 127% compared to the prior year quarter. Notably, this growth occurred in an operation that transitioned more than a decade ago and entered the year with very high occupancy. While overall occupancy increased modestly from 96% to 97%, the more meaningful impact occurred in payer and acuity mix. Skilled revenue mix increased 25%, driven in part by an 86% increase in Medicare days, while managed care volume grew 22%. With a continued focus on staff well-being and comprehensive high-quality care, the South Bay team is demonstrating how clinical specialization can drive sustainable occupancy, skilled mix improvement and financial performance and allow a long-time affiliate to elevate year-over-year results a decade after acquisition. The second highlight is Shoreline Health and Rehabilitation located in North Seattle, Washington. This is an example of an operation that recently moved from transitioning into our same-store category. Since acquisition, the 114-bed skilled nursing operation has been led by CEO, Clayton South; and COO, [ Ruby Cor. ] Shoreline is an excellent example of maintaining a disciplined focus on finding, developing and retaining exceptional care staff. For example, in 2025, the facility's CMS nursing turnover rate was 60% lower than the state average and the tenure of frontline staff was over 7 years on average, remarkable in an industry that is challenged by high turnover. This resulted in significant decreases in overtime costs and allowed Shoreline to operate with 0 registry staffing for the second consecutive year. Having stable satisfied staff results in better care, fewer patients returning to acute hospitals and cost savings for health plans and hospital systems alike. Throughout the year, Shoreline served as a preferred provider within the Providence Swedish and University of Washington Health Systems, which allowed facility leaders to meet monthly with acute providers and learn ways to become the solution to their challenges. A clear example of this partnership occurred when the hospitals expressed difficulty placing patients requiring TPN, a complex and resource-intensive service that is normally provided only in the acute care setting. [ Ruby ] and her team evaluated the clinical requirements, implemented additional staff training and coordinated closely with their physician group and pharmacy partners. As a result, Shoreline is now the only facility in the North Seattle area accepting TPN patients. This capability has also driven admissions across a broader range of skilled diagnoses. By investing in its workforce and positioning itself as a solution to hospital discharge constraints, Shoreline continues to strengthen its standing as a high-performing clinically sophisticated provider of choice in its market. As a result of all those efforts, the Shoreline team achieved record financial performance for 4 consecutive quarters. In Q4, Shoreline's revenues increased by 11% compared to the prior year quarter, while EBIT rose by nearly 33% over the same period, while overall occupancy growth was modest and occupancy remains below 74%. The team executed on their strategy to increase clinical capabilities and care for higher acuity skilled patients, which allowed skilled revenue mix to grow to 70%. Medicare days increased 24% and managed care improved 103% over prior year quarter. Because of this acuity strategy, Shoreline accomplished record results in 2025 and has significant opportunity to continue to increase occupancy and grow results long into the future. With that, I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance, and then we'll open it up for some questions. Suzanne? Suzanne Snapper: Thank you, Spencer, and good morning, everyone. Detailed financials for the year and the quarter are contained in our 10-K and press release filed yesterday. Some additional highlights for the year and the quarter compared to the prior year include the following: for the year, GAAP diluted earnings per share was $5.84, an increase of 14.1%. Adjusted diluted earnings per share was $6.57, an increase of 19.5%. Consolidated revenue was $5.1 billion, an increase of 18.7%. GAAP net income was $344 million, an increase of 15.4% and adjusted net income was $386.6 million, an increase of 20.6%. For the quarter, GAAP diluted earnings per share was $1.61, an increase of 18.4%. Adjusted diluted earnings per share was $1.82, an increase of 22.1%. Consolidated revenue was $1.4 billion, an increase of 20.2%. GAAP net income was $95.5 million, an increase of 19.8%. Adjusted net income was $107.8 million, an increase of 23.2%. Other key metrics as of December 31, 2025, include cash and cash equivalents of $504 million and cash flow from operations of $564 million. During 2025, we spent more than $500 million to execute on our strategic growth plan. We made these investments from a position of strength as shown by our record low lease adjusted net debt-to-EBITDA ratio of 1.77x after taking these investments into consideration. Our continued ability to maintain low leverage even during periods of significant acquisition is particularly noteworthy and demonstrates our commitment to disciplined growth as well as our belief that we can continue to achieve sustainable growth in the long run. In addition, we have more than $590 million available on our line of credit, which when combined with our cash on our balance sheet, gives us over $1 billion in dry powder for future investments. We also own 160 assets, 136 of which are completely debt-free. They are gaining significant value over time and adding even more liquidity to help with future growth. During the quarter, the company increased its dividend for the 23rd consecutive year and paid a quarterly cash dividend of $0.065 per common share. We have a long history of paying dividends. And as the company's liquidity remains strong, we plan to continue our long history of paying dividends into the future. As Barry mentioned, we provided our annual 2026 earnings guidance between $7.41 to $7.61 per diluted share and our annual revenue guidance between $5.77 billion and $5.84 billion. We have evaluated multiple scenarios and based upon our strength in our performance and positive momentum we have seen in occupancy and skilled mix as well as continued progress on labor, agency management and other operational initiatives, we have confidence that we can achieve these results. Our 2026 guidance is based on diluted weighted average common shares outstanding of approximately 60 million, a tax rate of 25%, the inclusion of acquisitions closed and expected to be closed during the first quarter of 2026, the inclusion of management's expectation for reimbursement rates with the primary exclusions coming from stock-based compensation and amortization of system implementation costs. Other factors that could impact quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on census and staffing, short-term impact of our acquisition activities, variations in insurance accruals and other factors. And now I'll turn it back over to Barry. Barry? Barry Port: Thanks, Suzanne. As we wrap up, we can't emphasize how -- enough how incredibly honored and grateful we are to work alongside our operational leaders and our service center team here that are behind these record-setting results. We never cease to be amazed by their impressive resiliency as they focus on supporting one another in new and innovative ways. Their commitment has blessed the lives of so many, including our own, and we're excited about our future because of these amazing partners. We have complete faith in them and the culture that they've collectively built. With that, we'll turn it over to our Q&A portion of the call. Operator, will you please provide instructions on the Q&A. Operator: [Operator Instructions] Your first question comes from the line of Clarke Murphy with Truist Securities. Clarke Murphy: Congrats on the quarter and the guide. Just wanted to start out on M&A. It sounds like you're perhaps seeing some more opportunities to come around with a more diverse group of sellers than you've talked about in the past. So can you guys just talk about what you're seeing in terms of the pipeline, valuations, et cetera? And has anything changed about how you guys are approaching opportunities? And then finally, just are there any markets or geographies in particular, where you're seeing opportunity? Chad Keetch: Yes. I appreciate the question. So we certainly are seeing a pretty healthy pipeline. I would probably describe the market as seller-friendly in terms of values have risen. And I think because of that, a lot of people are bringing their stuff for sale. So we're seeing new deals frequently that are opportunities for us. So -- and yes, I would also say that pricing has definitely gone up. All that said, as I said in my prepared remarks, we are seeing tons of our traditional onesie-twosies and smaller portfolios in addition to that, some larger ones. I wouldn't say that the way we've looked at deals has changed. I would just kind of point out, though, is, again, as we talked about in the prepared remarks, when there are high-quality assets that newer construction, have higher occupancies and higher skilled mix, those sometimes deserve a premium. And we've recently shown that we would do that in the Utah acquisition that we closed during the quarter. And so -- and those are performing really well. So for us, when we talk about disciplined growth, we definitely are looking to make sure that there's a pathway both in the short run, medium range and the long term to create shareholder value. But the total cost of the acquisition, it means when you're buying an older asset, sometimes the amount you have to spend to bring it up to current standards and then maintain it over time, the CapEx spend can actually be quite heavy. And so buying newer assets can be something that we're looking to do. And so that's not necessarily new but I just wanted to highlight that as something we're seeing. But certainly excited about the opportunities that we have for 2026. Clarke Murphy: Okay. Great. And then just kind of shifting gears a little bit. Can you guys give us some color on things you're doing on the labor environment, specifically your agency labor continues to come down. You guys talked about the director of nurse and the CEOs and training where you continue to have success. Can you just kind of talk about some of the drivers there and how we should think about continued improvement going forward on the labor front? Spencer Burton: Yes. Great question. A couple of things. I mean there's -- you've got your macro environmental factors, which can influence. But I'd say the way to think about it is health care, especially for us, is a very locally driven business. And as we do better at things like our initiative to decrease Director of Nursing turnover, what you've got is you've got this stability of leadership. You've got relationships that allow the frontline caregivers to feel like they found a home and they can produce great care outcomes. So we believe that focusing on leadership stability then allows those COO and CEO caliber leaders to create environments where people want to stay. We're very optimistic about both our ability to continue to make progress and have good stability in our labor and also in our ability to, as we acquire facilities, have that same model, have the similar results where with time and with the right people, you're going to see labor numbers get better and better. And I would just say, I guess, the final thing is, with this, you've got agency but you've also got overtime, and we're excited to see that overtime is moving in the same direction. Operator: Your next question comes from the line of Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: Congrats on the quarter. Just wanted to ask a reimbursement question, specifically on Medicare fee-for-service, the Part A piece. We've gotten some questions over the new value-based purchasing program metrics and how those factor in. I would assume that you're pretty well positioned that given some of the nursing turnover and retention commentary you've provided. But then just looking at some of the other measures that have kind of rolled on to the program like the health care associated infections, just wondering kind of how you're faring there and what your outlook is given that you do have a higher acuity patient base versus the rest of the industry. Any comments or observations into the year? Suzanne Snapper: It's a great question, Ben. I think when we kind of look across any time a new program is implemented, we get excited when the state or the federal government looks to quality and looks for us to be measured upon quality. And this is another one where when we can look at the quality metrics and it's clearly outlined, we have an opportunity to showcase how we can do it and have our clinical leaders really lead out on that. And so when we look at these quality metrics, we -- like we always do, have dashboards and other things that allow us then to ensure that we are measuring those outcomes and measuring them and giving that information to our frontline staff and then show that we can do it really, really well. Spencer Burton: Yes. And I'd just say with -- I echo what Suzanne said, and with these changes that they make in things like value-based purchasing, the nice thing is we have signals from them years in advance. We know for the most part, where they're going. And so this isn't something that caught us off guard. These are things we've been focused on building foundations to deal with and to be exceptional at for years. And so again, that starts with great quality, local leadership and then having the ability to kind of see around the corner of what's coming, which CMS signals. And so I'm very encouraged that we'll be able to continue to up our quality and do well in these programs. Barry Port: And because we've got a world-class team of clinicians and data services folks that are able to analyze and package the data and create dashboards and tools that our clinicians on the front lines can use. Our ability to adapt to these changes is probably unlike any other post-acute provider. It's an amazing thing to see how our teams are able to kind of assimilate all these changes and get the information assembled in a really useful kind of ready-to-use way. Benjamin Hendrix: Appreciate that commentary. Just a quick follow-up. Is there a risk that these types of programs could steepen the ramp on some of these turnaround acquisition opportunities? Barry Port: I mean, I think that's more a function of the changes we see in acuity that kind of steepen the ramp. When you take on acquisitions that are historically averse to acuity, that's the bigger kind of challenge that we see rather than these kind of unique nuances in how CMS measures things. So for us, our focus is on improving capabilities first and making sure clinical leadership and all the right tools are implemented so that there's an alignment of the direction we're headed. Our leaders are almost uniformly focused on bringing capabilities up to speed when we go into a building. And then as they do that, everything else kind of falls into place because all of the systems that they're able to lean on through our one clinical program align with kind of what they're already trying to do. Operator: Your next question comes from the line of Raj Kumar with Stephens. Raj Kumar: Maybe just one on kind of clicking into the commentary around just further expansion and opportunity with same-store occupancy and that being able to sustain kind of the organic growth momentum you've seen over the past couple of years. Seeing how 2025 showcased 200 basis points of improvement. I'm just kind of curious on what the magnitude in terms of guidance is kind of baked into 2026. And then maybe just any color on seasonality expectations would be helpful as well. Barry Port: Yes, it's a great question. I think that our expectation is that 2026 will, in many ways, mirror what we saw in 2025. We always kind of caution about seasonality, and it's somewhat of an unpredictable factor when it comes to what the summer months will look like in the end. But we're coming off of a couple of really strong years in those months that -- where seasonality has been much lighter. We'll always see skilled mix decline in the middle of the year. But I think the way we look at our -- we forecast our progress in the future, we kind of see overall occupancy headed in a similar direction to what we saw progress through last year. Raj Kumar: Got it. And then maybe just kind of thinking about some of the incremental investments in 2026. I'm just curious on maybe any kind of utilization or integration of AI across different functions of the operations or any build-out of clinical capabilities? And then also maybe just on the one point around some of the construction projects, whether or not that's -- if there's kind of something in the future around that or these are just more opportunistic in nature that you highlighted today and how we should kind of think about that from the longer-term perspective? Barry Port: Yes. Look, AI is kind of the buzzword of the day for sure. We have been highly involved in looking at opportunities where we can leverage mostly our existing partnerships with a lot of our enterprise providers for our different software systems, ERP, our clinical documentation systems and things like that to kind of leverage the data and information that we have in a more effective way. And we've already achieved a lot of great advances in some of those areas, both on the financial side and also now looking more into the clinical side. I think our inclination will be to kind of leverage what our enterprise partners are doing first but we have also undertaken several projects using more kind of off-the-shelf solutions that AI can provide us that are cost effective and allow us to be a little more nimble. We've got a lot of those projects underway. And we've got a great committee and thought leadership assembled that provides us steering and guidance to make sure that we're choosing the right projects in an effective and again, thoughtful and deliberate way that will be primarily helpful to those that have a lot of kind of mundane administrative things that can be solved with some of that technology. But looking more into the future, we're really excited about how we can leverage the data that we have about our patients and residents and use that information and leverage that information by our caregivers to make better and more nimble clinical decisions. So there's some exciting things that are kind of on the horizon in that area for us that we look forward to. Chad Keetch: Yes. On the construction question, we are really excited about the projects that we talked about today, and there's really kind of 2 categories there. One is adding beds to existing operations where there's clearly demand for extra beds but also land and capability to build. So that's something we're looking at doing. And the second was a replacement facility. Building a brand-new building is really time-consuming and expensive, especially when you're starting with an empty operation and going through the Medicare certification process is costly. So where you can do a replacement facility and essentially you start with a new building, but you've moved the staff and the patients over on day 1, it makes for a whole lot quicker return on that significant investment. So those are 2 things we're looking at. We've recently beefed up our kind of construction capabilities, bringing in some experts that do this stuff. And it's always kind of -- anyone that's done any new construction understands that especially COVID and everything, having third parties that are not necessarily aligned with you on how to manage costs and all that can be challenging. And so we've kind of learned some lessons through doing this that having that capability in-house would be really helpful. So we're assessing our portfolio and trying to pick a handful of projects like this that would be sort of the lowest hanging fruit. And it obviously won't ever kind of compare to kind of our overall acquisition strategy but it is an important tool that we have and one that we'll do more and more of, especially in our most mature markets. Operator: Your next question comes from the line of A.J. Rice with UBS. James Kurek: This is James on for A.J. I just wanted to see if you can provide an update on the traction you're seeing in taking on managed care patients on the behavioral health side as some of these MCOs have had some trouble finding facilities to place these patients? And just any update on up there? Barry Port: I mean I think a good example of what you're asking about is, again, we referred to this in our highlighted remarks, although we didn't give a lot of detail on what the purpose for the new addition was at Vista Knoll but that new unit we just constructed that's now essentially full after just a couple of months is entirely dedicated to behavioral patient use and highlights the growing need that you're mentioning, James. So there is a need out there, no question. I would say that it's a focus of ours to do it in a deliberate and thoughtful way in markets that make sense. We have -- and we've mentioned this in prior calls but we've got a strategy to do just that in some of our more mature markets like California, Arizona and Texas. With some others that are looking at it closely, too, and we do it certainly in careful partnership with the managed care plans that are having those needs. And so it's something that I think you'll probably hear more about as we go into the future. I wouldn't call it something that's a critical core strategy, rather, it's a strategy that certain markets are focused on implementing based on the needs that they're seeing. Suzanne Snapper: Yes. And I would just add, it's not just behavioral health but really looking at the specialty programs where there's a need. So it's really partnership like we always have of working with the managed care organizations to see what their needs are and then developing with them solutions to meet those needs. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the O'Reilly Automotive, Inc.'s Fourth Quarter and Full Year 2025 Earnings Call. My name is Matthew, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin. Jeremy Fletcher: Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our fourth quarter and full year 2025 results and our outlook for 2026. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by and we claim the protection under the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31, 2024, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Beckham. Brad Beckham: Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts fourth quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call. I am once again pleased to begin our call today by congratulating Team O'Reilly on another strong year in 2025. We finished the year with a comparable store sales increase of 5.6% in the fourth quarter, which brought our full year comp for 2025 to 4.7%. The 4.7% was at the high end of our revised guidance range of 4% to 5% and above the expectations we set in our initial guidance coming into 2025. Our strong comparable store sales performance coupled with the continued successful execution of our new store expansion drove a total sales increase of [ 6.4% ] to $17.8 billion. To provide some perspective, our total '25 sales reflect an increase of over 50% in total sales volume over the last 5 years, representing growth of over $6 billion since 2020. Our ability to continue to grow our business and capture market share year in and year out is a testament to our team's commitment to providing excellent customer service. I want to thank each member of Team O'Reilly for their daily commitment to our customers and our company. To touch on the rest of our results as we finish out the year, I want to briefly highlight both areas of strength and some headwinds we faced in 2025, before Brent provides more color in his remarks. For the full year, we generated operating profit of $3.5 billion, a 6.4% increase over 2024. On a sales -- a percentage of sales basis, our 2025 operating profit of 19.5% was flat to the prior year and right at the midpoint of the guidance range we maintained throughout 2025. We are pleased with our team's ability to drive robust gross margin results in an environment of rising costs and prices by ensuring that we are providing exceptional value to our customers to earn their business. We are also pleased that our team continues to capitalize on the investments we have made in our business, including enhancements to our distribution and hub store network, expanded inventory assortments and strategic technology investments. We believe our continued sales growth trends reflect share gains won by consistently executing our proven business model while also delivering incremental improvements to further differentiate our service from the competition. We will continue to prioritize these initiatives to lean into our business to sustain our growth momentum. However, we unfortunately also faced substantial cost pressures in 2025, including headwinds reflected in our fourth quarter results, primarily from rising costs related to our team member health care and self-insurance programs. We are certainly not pleased that these headwinds dampened an otherwise strong finish for our company in 2025, but we remain intensely focused on managing our business effectively to deliver the excellent customer service that drives long-term growth and profitability. During the fourth quarter, we generated diluted earnings per share of $0.71, which represents an increase of 13% over the prior year. For the full year, we generated EPS of $2.97, which was an increase of 10% over 2024. As we noted in yesterday's press release, our 2025 results represent our 33rd consecutive year of annual comparable store sales increases and record levels of revenue, operating income and EPS. This remarkable track record of strong, consistent earnings growth is a reflection of the effectiveness of Team O'Reilly's customer service-oriented culture and our focus on profitable, sustainable growth. Now I'd like to take a few minutes to provide some color on our fourth quarter sales results. Our comparable store sales for the fourth quarter grew 5.6%, which was at the high end of our expectations. Similar to the third quarter, growth in our professional business was the stronger driver of our sales results with an increase in comparable store sales of over 10% for the second consecutive quarter. We're also pleased to generate a positive DIY comp in the low single digits as this side of our business also performed largely in line with the trends we saw in the third quarter. Our comparable store sales increase in the fourth quarter reflected growth in both transaction volume and average ticket value, with the average ticket growth representing the stronger of the 2 drivers. Average ticket grew in the mid-single digits on both sides of our business, driven by a contribution from same-SKU inflation of approximately 6%, partially offset by a headwind from the composition of our product mix. As we have noted throughout 2025, the pricing environment has remained rational in response to tariff-induced product cost pressures. After a significant ramp in these cost pressures and corresponding price changes in the third quarter, the fourth quarter leveled out and the inflation benefit was realized in a very consistent -- was very consistent month-to-month. This dynamic aligned with our expectations given the timing of the impact we have seen in tariff and acquisition costs, and we believe also reflects a stable pricing environment in the aftermarket. We were pleased with the positive contribution to comps from ticket count growth in the fourth quarter driven by continued robust growth in our professional business, partially offset by modest pressure in DIY transaction counts. Our fourth quarter performance in our professional business matched the consistent strength we saw throughout 2025. The value proposition we are creating for our customers is clearly distinguishing O'Reilly as the preferred partner to the professional service provider. Next, I want to provide an update on the results in our DIY business in the fourth quarter. As we have discussed throughout 2025, we have remained cautious regarding the impact to consumers from broad-based inflation and macroeconomic pressures. This included our comments on the pressure trends to transaction counts we saw midway through our third quarter and into the beginning of Q4. As we moved through the fourth quarter, we saw stabilization in the demand backdrop in our DIY business, including some modest improvements in DIY transactions month-to-month, but -- both in absolute terms and relative to our initial plan expectations for the cadence of our business. To be clear, we still experienced some pressure that resulted in slightly negative traffic comps as we finished out our fourth quarter. This was most evident in the small subset of our DIY business that is highly discretionary in nature, including categories like appearance and accessories. On balance, we view the current sales trends in our DIY business is pretty consistent with what we have seen for the last several quarters now. However, we are pleased to not see any heightened pressure to the consumer that would indicate a more significant negative reaction to economic conditions. Turning to the cadence for the quarter for our consolidated business. Our results were fairly consistent throughout the quarter, with December being slightly stronger than the first 2 months. This was due in part to a solid performance as we finished out the year in winter weather-related categories. These categories performed well even against tougher comparisons to last year. We view this season, both in the fourth quarter and what we have seen so far in '26, as typical winter weather and consistent with last year. Beyond the strength in our winter weather-related categories, we also saw strong results in the fourth quarter in maintenance-related categories, in line with the trends we have seen for several quarters now. Next, I want to transition to a discussion of our guidance for 2026, starting with our sales outlook. As we disclosed in our release yesterday, we're establishing our annual comparable store sales guidance for 2026 at a range of 3% to 5%. We want to provide some additional color on how we're viewing the economic conditions in our industry and the opportunities -- and our opportunities to outperform the market. Beginning with our industry outlook. We view the fundamental backdrop for the automotive aftermarket as relatively stable. While we believe the industry has experienced some sluggishness over the last several quarters from a more cautious consumer, we believe the drivers for demand in our industry remain very solid. There continues to be a very compelling value proposition for consumers to invest in the repair and maintenance of their existing vehicles to meet their daily transportation needs. The U.S. car parc has seen an increase in total miles driven of approximately 1% over the last 2 years. We expect to continue to see steady growth in this metric supported by growth in the total size of the car parc. Due to the resiliency of our customers and the nondiscretionary nature of our business, we have confidence in a steady industry environment in 2026 even if we continue to see a cautious stance from consumers. Ultimately, our performance this year will depend on our effectiveness in executing our business model, providing exceptional customer service and, in turn, gaining market share. To that end, our 2026 comparable store sales guidance includes expected growth in both our professional and DIY businesses that we anticipate will again outpace the industry. For 2026, we expect to see continued growth in average ticket values, primarily supported by anticipated same-SKU inflation. As a reminder, our 2025 results reflected a muted impact from inflation in the first half of the year before we began to pass through tariff cost increases beginning in the third quarter. In total, 2025 saw same-SKU inflation of just under 3% on both sides of our business, and we anticipate similar levels in 2026. However, we expect to see most of this benefit in the first half of the year as the inverse of the 2025 timing as we calendar the period before the ramp in tariff costs and associated price increases. These projections reflect our typical assumption of only modest incremental changes in prices from the current levels exiting 2025 as we move throughout the year. This assumption also reflects our best read on the broader pricing environment in our industry. As such, our guidance expectations do not anticipate incremental changes in tariffs or subsequent impacts to the pricing environment within our industry. Given the uncertainty surrounding potential future changes in this landscape, we still expect the industry to behave rationally from a pricing perspective and only react as necessary to realize changes in acquisition costs. Consistent with our experience in 2025, we anticipate there will be limited incremental benefit within our average ticket growth outside of inflation. However, as we begin to calendar the comparison to the ramp in same-SKU inflation in the back half of '25, we expect a return to the normal dynamics supporting our average ticket. So for the back half of 2026, we expect growth in average ticket to reflect muted inflation and a more substantial benefit from increasing parts complexity. We anticipate average ticket growth will be the larger contributor to our projected comparable store sales performance, but we also expect ticket count growth to positively support our comps in 2026. We believe professional ticket counts will continue to be strong and will reflect incremental market share gains on this side of our business. Given our history of performance in growing our share in the professional business, our 2026 expectations anticipate some moderation in ticket growth as we compare against the high bar we have set. However, we have been extremely pleased with our team's ability to comp the comp and stack continued professional transaction growth year after year, and anticipate 2026 will be no different. We also continue to believe that we have substantial opportunities to earn a bigger piece of the pie in our DIY business. In 2026, we expect DIY transaction counts to be pressured and slightly negative as a result of the long-term industry trend of better engineered and manufactured parts and extended service and repair intervals, along with our continued caution regarding the confidence of the entry-level DIY consumer. Even though we have seen some pressure to transaction counts on this side of our business, we still believe we're outperforming the industry and gaining share. Before I move on from our sales guidance, I would like to highlight our expectations for the quarterly cadence of our sales growth in 2026. On a weekly volume basis, our guidance assumes our business will be fairly steady in 2026 absent unforeseen seasonal variability in weather. As a result, our quarterly comparable store sales assumptions are primarily driven by the comparisons to the results we generated in 2025. Based on the same-SKU inflation dynamics I outlined earlier, we would anticipate the first half of the year to generate a strong comp, at the high end of our guidance range, with the back half of the year reflecting the more challenging comparisons. We are pleased to be off to a solid start in 2026, in line with these expectations, supported by favorable winter weather in January. Now I'd like to move on to discuss our capital investment and expansion plans. Our capital expenditures for 2025 came in just under $1.2 billion, in line with our revised full year guidance range and up approximately $150 million from 2024. For 2026, we are setting our CapEx guidance at $1.3 billion to $1.4 billion. The primary driver of the increase in our projected investment is centered around our planned acceleration in new store growth. As we noted on last quarter's call, we have established a target of 225 to 235 net new store openings for 2026, an increase of approximately 25 stores over our growth in 2025. This new store target contemplates a step-up in U.S. store openings as well as a similar growth in Mexico to the 25 stores we added in that market last year. The increase in new store openings is motivated by our continued strong new store performance and the confidence we have in our ability to grow strong store teams and effectively execute our business model across our North American footprint. We are also pleased to have opened our first greenfield location in Canada in the fourth quarter of 2025. We anticipate a handful of our projected 2026 new store openings to be opened in Canada as we see the early fruits from the development of our organic growth machine in this expansion market. The second major component of our 2026 CapEx outlook is our continued investment in distribution capabilities. Our anticipated investment in these projects is expected to be down slightly in 2026, but still represents a key element of our business model and growth strategy. Brent will provide an update on our current distribution projects and expectations for '26 during his supply chain update. Finally, our capital investment outlook includes an expected step-up in our ongoing investments to maintain and refresh the image and appearance of our store fleet as well as continued strategic investments in technology projects and infrastructure. As I wrap up my comments before turning the call over to Brent, I want to take a moment to thank our team for their continued dedication to our customers and our company. We once again had the privilege to come together with the entire leadership team of our company at our annual Leadership Conference in January of this year. Our conference theme was "Built for This," and there absolutely could not have been a more appropriate rallying cry to capture the excitement we have for our company's prospects as we enter 2026. Time and again, our professional parts people have proven they truly are the most highly-skilled and customer-focused team in our industry, and they continue to be the key to our success. We couldn't be more excited about the coming year, and I look forward to the next chapter of outstanding performance our team is going to deliver. Now I'll turn the call over to Brent. Brent Kirby: Thanks, Brad. I would also like to begin my comments this morning by congratulating Team O'Reilly on another strong year. Once again, your commitment to excellent customer service drove our performance in 2025. Today I will further discuss our fourth quarter and full year operational results and provide some additional color on our outlook for 2026. Starting with gross margin. Our fourth quarter gross margin of 51.8% was a 49 basis point increase from the fourth quarter of 2024 and above our expectations. Our full year gross margin came in at 51.6%, representing an increase of 39 basis points over last year and in the top half of our guidance range. Our team was able to deliver this strong gross margin performance despite facing a headwind from the robust performance in our professional business for both the fourth quarter and the full year. Our gross margin performance is the result of the collective efforts of our supply chain, store and distribution operations teams. Our supply chain teams, with outstanding support from our supplier partners, were highly effective in navigating the rapidly evolving cost environment in 2025 to drive improved gross margins through incremental improvements in acquisition costs and effective management of the pricing environment. Our distribution teams were equally effective at driving efficiencies and capitalizing on our strong sales momentum. Our DC teams generated improved leverage on our distribution cost while relentlessly delivering the highest standard of service and support to our stores. Finally, our store teams executed at a high level to maximize our value proposition to our customers. Their ability to consistently provide excellent customer service and industry-leading inventory availability enabled us to generate a healthy margin in an environment of increasing acquisition cost. For 2026, we expect to continue to see further expansion of gross margin as we calendar our gains in 2025 and capitalize on incremental improvements to reduce acquisition costs as we progress through the year. We have established a guidance range for 2026 of 51.5% to 52%, which at the midpoint would represent a 16 basis point increase over 2025. Our guidance reflects our continued confidence in the ability of our teams to effectively manage costs and leverage the premium value proposition that they create for our customers to generate improvements in our gross margin rate, despite expected incremental headwinds from a faster growth rate in our professional customer sales. Our gross margin rate also reflects an anticipated benefit from the continued evolution of our business in Mexico, away from a distribution model to independent jobbers. As we continue to increase our store count in Mexico, we anticipate a continued rapid transition away from jobber sales that historically represented the majority of our sales mix in Mexico. The reduction of these lower gross margin sales creates a mix tailwind to our consolidated gross margin rate, but also modestly pressures our SG&A rate as we reduce the leverage benefit of these non-store sales. From a cadence perspective, our quarterly gross margin remained fairly consistent throughout 2025, with the quarter-to-quarter differences reflecting the pace of improvement we realized as we progressed through the year. We expect a similar quarterly cadence for 2026. As Brad mentioned during his remarks, our guidance for 2026 assumes a stable cost and price inflation environment. Our baseline assumptions include the normal puts and takes in the cost environment that we would expect in a typical year and do not include any projections for volatility related to changes in tariffs in either direction. Ultimately, we expect our industry to continue to behave rationally and have confidence in our team's ability to effectively navigate through any changes that we may encounter in the coming year. Next, I want to provide an update on some supply chain and distribution initiatives. To start on the distribution side of our business, we are very excited to report the successful opening of our newest distribution facility in Stafford, Virginia in the fourth quarter. The addition of this DC opens up a new section of the map in the heavily populated and important untapped markets for us in the Mid-Atlantic I-95 corridor. We're also making great progress on the development of our new distribution center in Fort Worth, Texas, and expect this facility to be operational in Q1 of 2028. This new facility will expand our available capacity in some of our most important mature core markets, enabling continued new store growth and support of increased per-store volumes that have grown significantly over the last several years. Finally, our capital investment outlook for 2026 includes dollars allocated to future expansion and development of our distribution infrastructure. Coming into 2025, we had a similar provision in our CapEx plan that was ultimately allocated to the Fort Worth project. So while we do not currently have specific details to announce on the next slate of projects, we are steadfast in our commitment to proactively enhance our distribution network to support the store growth opportunities that Brad outlined earlier. The success of our industry-leading distribution infrastructure is a direct reflection of the professionalism of our distribution operations teams. These leaders have proven time and again their effectiveness in planning, building and seamlessly opening new distribution centers, often successfully executing multiple DC projects at the same time. Moving on to inventory. Our inventory per store at the end of 2025 was $870,000, which was up 9% from the end of last year. The investment exceeded our initial plans on a per store basis, driven by our continued opportunistic investments to support our sales momentum. For 2026, we expect per-store inventory to increase approximately 5%, comprised of investments in hub store inventories and targeted additions in store assortments. We continue to prioritize incremental inventory enhancements to capitalize on the opportunities that we see to accelerate our growth momentum and are pleased with the productivity of these investments. Now I want to spend some time covering our SG&A and operating profit performance for 2025 and our outlook for 2026. Fourth quarter SG&A expense as a percent of sales was 33.0%, down 25 basis points from the fourth quarter of 2024. This reduction was the product of the favorable comparison to the $35 million charge that we recorded in the fourth quarter of 2024 to adjust reserves relating to our self-insurance liabilities for historic auto liability claims. The leverage benefit came in below our expectations for the quarter as a result of an elevated per-store SG&A increase of 3.3%. A portion of this higher-than-anticipated spend reflects incremental expenses in support of our strong sales momentum, which finished the quarter at the high end of our expectations, as Brad noted earlier. However, the larger impact driving our spend in the quarter was the broad-based pressures that we saw from continued heightened cost inflation in our self-insurance programs, including headwinds in team member health care cost, workers' compensation and general claims expenses, litigation costs and auto liability reserves. Average per-store SG&A expenses for the full year of 2025 were up 4%, finishing 0.5 point above our full year guide as a result of these same drivers. Outside of the headwinds that we faced from these discrete expense pressures, our remaining SG&A was in line with our expectations. Our ongoing priorities for our expense management remain focused on improving our operational strength in our stores, opportunistically pursuing enhanced technology and further equipping our teams. As we look forward to 2026, we are planning to grow average SG&A per store by 3% to 4%. Our SG&A expectations reflect ongoing management of our expense structure to support our core operations and lean into the sales growth opportunities that Brad outlined earlier. We have also factored in continued plans to prioritize enhancements to our hub network, development of incremental tools for our teams, and improvements in technology, infrastructure and capabilities. Also included within our assumptions is a cautious outlook regarding potential continued pressure in the self-insurance and legal line items that created the headwinds throughout 2025. While our recent experience for these costs have been more pressured than is typical for our business, at times in our history, we have experienced similar periods of accelerated above-trend increases. Ultimately, we believe the inflation growth rates for these expenses will stabilize over time, but we remain cognizant of the potential to see further pressures in 2026. Based on the anticipated cadence of our SG&A spend during the year and how our comparisons to 2025 lay out, we are anticipating SG&A growth on a per store basis to be higher in the first half of the year than the back half of the year, consistent with the comparable store sales cadence that Brad detailed earlier. Based on our SG&A expectations and projected gross margin range, we are setting our operating profit guidance range at 19.2% to 19.7%, which at the midpoint is in line with our full year 2025 results. Stepping back for a moment from the puts and takes that drove our operating cost dynamics over the past year and our expectations for 2026, we remain pleased with our team's ability to drive consistent top line growth at stable, strong operating margins. Our focus on enhancing our strong competitive positioning to sustain our industry-leading growth momentum is the strategic North Star that drives how we leverage our capital and operating investments to drive long-term growth and high returns. Before I turn the call over to Jeremy, I want to once again thank Team O'Reilly for their continued hard work and unwavering commitment to our customers. Now I will turn the call over to Jeremy. Jeremy Fletcher: Thanks, Brent. I would also like to thank all of Team O'Reilly for their continued hard work and dedication to our customers. Now we will fill in some additional details on our fourth quarter results and guidance for 2026. For the fourth quarter, sales increased $319 million, driven by a 5.6% increase in comparable store sales and a $94 million non-comp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2026, we expect our total revenues to be between $18.7 billion and $19 billion. Our fourth quarter effective tax rate was 21.5% of pretax income, comprised of a base rate of 21.8%, reduced by a 0.3% benefit for share-based compensation. This compares to the fourth quarter of 2024 rate of 19.6% of pretax income, which was comprised of a base tax rate of 20.4%, reduced by a 0.7% benefit for share-based compensation. The fourth quarter of 2025 base rate as compared to 2024 was higher as a result of the timing of recognition of certain tax credits. For the full year, our effective tax rate was 21.7% of pretax income, comprised of a base rate of 22.6%, reduced by a 0.9% benefit for share-based compensation. For the full year of 2026, we expect an effective tax rate of 22.6%, comprised of a base rate of 23.0%, reduced by a benefit of 0.4% for share-based compensation. We expect the quarterly rate to fluctuate due to variations in the tax benefit from share-based compensation and the tolling of certain tax periods in the fourth quarter. As we outlined in our press release yesterday, we have established our earnings per share guidance for 2026 at $3.10 to $3.20, which reflects an increase over 2025 EPS of 6.1% at the midpoint. This year-over-year increase in our guidance range reflects the anticipated headwind of approximately $0.04 from the increase in our expected effective tax rate. Now we will move on to free cash flow and the components that drove our results in 2025 and our expectations for 2026. Free cash flow for 2025 was $1.6 billion, versus $2 billion in 2024. The reduction in free cash flow was driven by the accelerated timing of payment in the third quarter of renewable energy tax credits that were originally planned to settle in 2026, and higher CapEx, partially offset by growth in operating income. For 2026, we expect free cash flow to be in the range of $1.8 billion to $2.1 billion. The expected increase in free cash flow is driven by the inverse impact of the timing of the 2025 tax credit purchase payment and growth in operating income, partially offset by the step-up in capital expenditures Brad outlined in his comments. I also want to touch briefly on our AP-to-inventory ratio. We finished the fourth quarter at 124%, which was down from 128% at the end of 2024 and slightly below our expectations for the end of 2025. For 2026, we expect to see continued moderation resulting from our planned incremental inventory investment, and we expect to finish the year at a ratio of approximately 122%. Moving on to debt. We finished the fourth quarter with an adjusted debt-to-EBITDAR ratio of 2.03x, as compared to our end of 2024 ratio of 1.99x, driven by a modest increase in adjusted debt. We continue to be below our leverage target of 2.5x and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And for 2025, we repurchased 23 million shares at an average share price of $92.26, for a total investment of $2.1 billion. Since the inception of our share repurchase program in 2011, we have repurchased 1.5 billion shares at an average share price of $18.77, for a total investment of $27 billion. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business. And we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I open up our call to your questions, I would like to thank our team for their continued commitment to the excellent customer service that drives our success. This concludes our prepared comments. At this time, I would like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions. Operator: [Operator Instructions] Your first question is coming from Scot Ciccarelli from Truist Securities. Scot Ciccarelli: Based on your history, how long could we see some of these expenses, like the health care that you mentioned, continue to run above historical levels? And then related to that, if SG&A per store growth is expected to moderate in 2H, does that also imply that's kind of the exit rate and we should expect more normalized SG&A growth as we roll into '27? Jeremy Fletcher: Scot, this is Jeremy. Thanks for the questions. I'll probably take the second one first here. I don't know that any of us would feel super comfortable talking maybe to where exit rate would be and how we would think about how we would view 2027, outside of maybe how we would just think in a normal environment, the kind of the structural pieces of where we've been managing spend within our business where we feel good about the efficiency of how we're attacking taking care of customer service and managing kind of all the core day-to-day expenses. And then also have been pretty pleased with the places over the course of between 2025 and really the last few years where we've seen opportunities to lean into our business and I think equip some things that really help to drive that differentiation that helps us gain share and drive our sales momentum. In terms of the first part of the question around the cadence, the timing of that, it's a little bit hard to completely troubleshoot that. I think you heard in Brent's comments that we're still kind of cautious for what we've seen there. The pressure that we've seen, candidly, I think has persisted longer than we would normally expect and has been a little bit of a story of increases on top of increases that we thought were already pretty dramatic. And so we do have a little bit of a cautious posture for that, for how we think about 2026, and in particular as we think about the first part of the year where we're not against as easy of comparisons because of the pressure that really came in over the last, I guess, half of 2025. We understand, at some point, the base of that cost exposure builds up and we expect it to moderate and kind of stabilize over the course of time. But there's still some cautiousness, I think, as we approach how we think about that in 2026. And so that's why you kind of see a little bit of a balanced approach to how we thought about what that spend looks like as we move through the year. Scot Ciccarelli: Any other line items we need to be thoughtful of, just for modeling purposes? Jeremy Fletcher: Within SG&A, Scot? Scot Ciccarelli: Yes, correct. Jeremy Fletcher: Yes. So I mean, I think the component pieces that we talked about there, for sure, the pressured items I think that were different than what we expected as we move through the back half of 2025 were those self-insurance items. But we continue to I think see, and you can see it on our cash flow statement, a pretty heightened growth in the depreciation run rate that we've had. That's the key to the CapEx, and all the places that we're continuing to invest within our business. I think those are the areas. And then for sure, a component piece of how we think about what we're managing and moving forward with and how we're deploying, I think, some tools within our businesses, the technology spend. That continues to be, I think, an important initiative for us. Operator: Your next question is coming from Steve Forbes from Guggenheim. Steven Forbes: Brad, I'm trying to think through the Virginia DC opportunity a little bit more. So I was hoping if you could maybe help frame up how you guys are planning to sort of build out the hub network and thinking through sort of capacity build behind Virginia. So I don't know if you can provide any color on the mix of stores that will be serviced from Virginia in the 2026 class. But really just hoping any color on gauging just how aggressive you guys are going to get sort of exploring the Northeast and the East Coast corridor. Brad Beckham: Yes, absolutely. Steve, thanks for the question. Great one. Yes, we couldn't be more excited about the launch of our new DC. We have an unbelievable leadership team there in Stafford. That's a very large regional distribution center for us that kicked off with maybe 1/3 of its capacity roughly that transition from other distribution centers on the periphery of that area, from Greensboro, North Carolina, from the Ohio side. Not much leverage to the north with our DC that sets up in Boston. But we -- I always like to talk about the fact that, depending on where you draw the line there in the upper Mid-Atlantic, between Virginia and getting all the way through to New York City, you can almost come up with 1/3 of the population of the U.S. and all the vehicles to go along with it, all the market share to go along with it, though you obviously have a lot of tough competitors, large and small. But we look at really the way that we're going to store that market, really no different, Steve, than we look at any other expansion market. We're going to be -- our real estate teams are getting after that market, not only from a greenfield perspective, but also from a potential acquisition perspective. You've heard us talk about the Salvo acquisition of those 7 stores in that Baltimore, Maryland market. And really the whole key to that distribution center, besides the 5 night-a-week replenishment that we can service out a couple of hundred miles, is that model where have well over 150,000 SKUs, once you build that DC out once you build out the store network, that will service not only overnight, but will service that Greater Washington, D.C. market basically every hour on the hour in that greater metro area, which provides just an unbelievable advantage over most every competitor we have, if not all of them. And then we'll backfill that with our hub-and-spoke model no different than we have in any other parts of the country. Knowing there's a lot of traffic, a lot of cars in that market. We're going to make sure that all those runs from that city counter out of that DC, as well as any hub stores, we're going to make sure that it's absolutely appropriate for that market share that we know we can go get. And the thing I would tell you in terms of kind of how that plays into the population that we'll bring in in '26, it will still be -- our new store cohort for 2026 will still be, even with Virginia, will still be really spread out over the U.S. When I think about the ability that our team has given us, from Brent to the entire supply chain team, as we've opened these DCs, we've opened up capacity not just in 1 or 2 DCs. For example, in our network, we don't just have capacity, now that we've opened Virginia, in Greensboro and outside Akron, Ohio, out there in Twinsburg, we actually, when you lever those DCs, you end up levering next layer South and East and back West. And so that enables us to have backfill markets the same in a lot of our core, more mature markets. So even though we're really excited about the Stafford footprint itself and the next many years of progress, our '26 new store cohort will be still evenly spread over a lot of new and existing markets. Steven Forbes: That's super helpful. And maybe just sticking with that a little bit and bringing it back to the expense growth profile, I think some of us, maybe myself for sure, thought there could be some pressure, right? You sort of build out the field to support the initiatives behind the expansion in the Northeast and the East Coast corridor, whether it's district managers, right, or dedicated commercial calling account staff. Is that a pressure in 2026? Like is there some deleverage coming from field build-out? Or is it more methodical and you're sort of expecting the productivity to sort of be onboarded that sort of neutralizes the field build-out initiative? Jeremy Fletcher: Steve, this is Jeremy. It's a really good question. And I would tell you that our model always I think is predicated on that organic growth kind of coming at some cost from a leverage pressure perspective. I mean we have that, I think, component piece every year. Some of it is for the types of infrastructure things that you talk about there. But some of it is just those are going to be the least productive stores when you bring them on. So to the extent that we've seen a little bit of an acceleration I think more broadly there, that's part of how we think about the broader cost structure. In terms of just the how we think about building that infrastructure, I don't know that even within the Virginia DC, that incremental growth is all that different than what we would look at and see in other parts of our business. Maybe the only nuance there that I'd call you to is we've really got a growth machine operating in 3 different countries right now. And some of the, I think, initial stages of building out that muscle in Mexico and Canada have included a little bit of what you're talking about there, where there's some maybe a little bit less efficiency in how we think about some of that growth because, looking at a company like -- or the growth that we're having in Canada right now, some of that infrastructure we're building for the first time, how do you go out and get after finding sites, and being able to build that construction muscle. So there's a little bit of, I think, that, that plays into our guidance. But by and large, it's mostly just how our flywheel was built. Operator: Your next question is coming from Michael Lasser from UBS. Michael Lasser: So your initial guidance for this year at 3% to 5% is 100 basis points higher than you guided originally for the outset of 2025. Is the only difference this year versus last year the visibility you have into inflation and like-for-like pricing? And is that -- if that's the case, what's the prospect that, if tariffs are rolled back, there could be broad-based deflation moving through the year in the industry? Jeremy Fletcher: Yes, Michael. I think it's a good observation. And as we sit here, I guess at the beginning of 2026 relative to where we would have been last year, we do, I think, fundamentally have a different pricing assumption built in. You're aware of what our historical prices is there, that we don't spend a lot of time and energy trying to predict those types of changes moving forward when we kind of set our initial guide. And even this year, I think what we've put in front of all of you is I think consistent with that idea that we're not trying to forecast a lot of different changes in the overall price levels, but we know that we'll calendar this benefit that we've seen. The second part of your question, I can start there and Brad or Brent might want to jump in behind me on this. But historically, I think our industry has been pretty disciplined and pretty rational in hanging onto prices once we pass them through. When we think about the large amount of the business that's done on the professional side, where you're in your customers' businesses on a weekly, on a daily basis, and you're having to talk through those conversations, those are pretty hard-won pricing increases. And over the course of time, you know that even if there is some, I think, relief from a cost pressure perspective, it's typically temporary, you'll see it kind of fill back in as you roll forward. And you don't want to have a lot of volatility in how you approach that from a customer perspective. Ultimately, we'll see. We'll be priced competitively for the market. We think it'll behave rationally. We think we can earn a premium, gross margin premium, for how we take care of our customers and execute our business and the value that we create. And so we think that that holds out well. But ultimately, we'll just have to see where the market goes on it as well. Brent Kirby: And Michael, this is Brent. I would add just on the tariff rollback front. I know that question is hanging out there. But we still believe that there's an environment out there with the administration that's focused on tariffs. And whether the first method worked, we feel like there's other levers that can be pulled. And we -- as Jeremy said, when we think about the outlook for '26, we're assuming what we know now, and we'll see where that goes. Michael Lasser: Okay. My follow-up question is you're starting out the year with an assumption around 3% to 4% SG&A per store growth. Over the last few years, you've under-calculated or the growth rate had been a little hotter than what you had initially expected. What's the risk that the same scenario plays out this year? And we are seeing a similar amount of elevated growth in SG&A from another player within the industry. So to what degree is this just a function of the competitive environment, cost of doing business going up and we should not be expecting this to moderate over time? Jeremy Fletcher: Yes. No, it's a good question, Michael. And I think it's important, I think, for us to probably start where you started in talking about how has this looked over the last few years. Because I think that the story for what we've seen maybe in the last 6 months of 2025 has been a little bit more discrete for us, I think, at least relative to our expectations, and where we've seen a little bit more heightened inflation from items that are obviously a core part of how we have to run our business but are a little bit harder to control and are not some of the elective things we've done. When we think about some of the rest of where we've managed our overall cost structure over the last, call it, 2, 3, maybe even 4 years, a lot of that has been a little bit more predicated upon where we feel like we've seen opportunities to lean into our business, to prioritize certain actions and steps that we think have been effective. And that in and of itself, I think, has moderated a little bit as we've moved year-to-year. And we would tell you that we feel pretty good about how we go to the Street every day and the proposition we have. It doesn't mean that as we move through this year, we won't see additional places and opportunities. But some of what I think you've heard us talk about and what's been built into our model for I think a long time, but are also areas where we've leaned into the business a little bit more, are things like our hub store investments and how we think about the distribution capabilities, and leaning into those as our sales momentum has supported that. So those are always, I think, on the radar screen for us. Those have been very opportunistic types of moves. We think that they have been productive in allowing us to contain -- to drive the sales momentum. And I'm talking about over the last several years. And so I think that's important. I don't -- as we sit here today, I don't think that that's a contributing cause that, industry-wide, that's just now different table stakes. We think that those are things that yield a positive benefit to us as we've moved. As we think some of the other items, we talked about it I think already in the prepared comments and in the first question, I think we're cognizant of the fact that it could be pressure. Hopefully, we see that stabilize and it's less of a concerning item. But ultimately, we'll just have to see how some of those other items play out. Operator: Your next question is coming from Greg Melich from Evercore ISI. Gregory Melich: I wanted to follow up on some of the softness and cautiousness that you've talked about from the consumer. I think you mentioned in the last call that you saw some potential DIY deferral. How do you see that trend? It sounded like maybe a little better as we got into the winter. And then historically, linked to that, how do tax refunds, when they're elevated, historically impact both the DIY and do-it-for-me sides of the business? Brad Beckham: Greg, it's Brad. Great question. I'll start out here and let the other guys chime in. So yes, as you know, these last couple of quarters, specifically last quarter, we had, really for the first time, talked about seeing some pressure to some of the larger ticket jobs, which was, again, kind of the first time we've seen that in more of the failure and maintenance categories. We've seen it for a longer period of time with discretionary stuff. But really Q4 [Technical Difficulty]. Gregory Melich: Still there? Brad Beckham: Yes. Are you still there, Greg? Gregory Melich: I am. I just -- I lost you for a second, Brad. Brad Beckham: Okay. But yes, so just kind of wrapping up on that point, Greg, we -- it was really similar to what we saw last quarter on the larger ticket jobs, et cetera, though we did see some pretty good signs there in December as some of the winter weather started to kick in and things like that. But generally, overall, Greg, I think we would categorize the consumer very similar to what we have. Still cautious, still watching expenditures and things like that with heightened inflation across homes and everything they do. But we continue to be cautiously optimistic at the same time with the resiliency of our business, the nondiscretionary nature. And then really coming into tax time, to the second part of your question, every tax season is a little bit different. It's normally a busy time for us. I think it's still yet to be seen. As much positivities there's been on just what those dollars could actually look like, we still kind of want to wait and see just kind of how that really plays out across the different income levels. We obviously have a very low-income to middle-income DIY consumer and then kind of a middle-income to higher-income DIFM consumer. And so again, we just have to wait and see. Weather overall has been pretty conducive to business and we're right all over the tax season here, so we'll see how it plays out. Jeremy Fletcher: Yes. And just to jump in, in case it cut out for anybody else, I think just to summarize where Brad was at on the initial part of your question. Saw that, some of what you talked about in third quarter as we moved into fourth quarter, continue I think to see similar dynamics. They didn't accelerate from there. And I think as we kind of moved through the quarter, we saw a little bit more of a leveling out, to the point that we feel a little bit more like what we're seeing in the DIY business is more consistent with what we've seen over much of 2025 in 2026. Brent Kirby: In addition to what these guys have already said is -- they've outlined pretty well what we see. The other thing is though that we still saw what we feel like we're pretty substantial share gains on both sides of the business even in the quarter. So we feel like we're well positioned or a challenging environment as well as a less challenging environment. Gregory Melich: Got it. And then just a clarification, the 600 bps of same-SKU inflation, if average ticket would have been up, say, 4% to 5% because you had fewer items in basket and mix, is that a fair way to summarize 4Q? Jeremy Fletcher: Yes, that's correct. It's a little bit more of the mix of the basket than it is the pressure on items in basket, although there's a little bit of that there. Part of the mix question too is just the normal kind of differences and how different component pieces of the basket perform. We had a lot of kind of the maintenance types of categories that did really well in the quarter, that are typically a lower ticket or a lower basket size type of transaction. So there's a little bit of that dynamic that's got -- that's probably just the normal course of how mix can change quarter to quarter. Operator: Your next question is coming from Zack Fadem from Wells Fargo. Zachary Fadem: Just want to clarify on the comp guide, maybe asking in a slightly different way, is we do have a couple of feet of snow on the ground, we've got mid-single-digit inflation and largely expect a bigger than typical tax refund season. So I just want to understand, like to what extent you are or are not incorporating these factors in your 3% to 5% guide? Brad Beckham: Yes, Zack. Yes, we always say around here, we're much better selling auto parts and kind of focusing on what we control than we are predicting the future. But we spend a lot of time on this plan and feel really good about where we've landed, balancing out the opportunities with still yet some cautiousness on the consumer. So I think generally, I think again still yet to be seen on how weather plays out over a longer period of time. While we did have some good winter weather, to your point, here in the first part of the year, which really in our industry, the almost 30 years I've spent here, the extremes, long, tough winters and hot, hot summers, obviously play out well for us over a long period of time. That said, there can be a lot of puts and takes in the short term with weather. Some of the weather that's hit some of our southern markets doesn't pay off in the mid to long term near as much as it does when the snowplows are on the road hard and heavy for months on end in some of the northern markets. So some of those can be a little bit of a takeaway, and we'll just have to see if that really plays out beyond what it does the next couple of months. But generally speaking, Scot -- or Zack, again, we feel really good about our guidance, feel good about what we can control this year, but also still have a certain amount of cautiousness with all the pressure on the end consumer. Zachary Fadem: Got it. And then as you think about the margin good guys and maybe bad guys in 2026, at the gross margin line, maybe we could talk about magnitude of supply chain and distribution tailwinds on the do-it-for-me mix drag offset by Mexico potential benefit. And then when you think through just the impact of health insurance and all these other factors, how long or to what extent are you incorporating those elevated levels as you think through 2026? Jeremy Fletcher: Yes. No, great questions. I'll try to make sure we kind of hit on all the points that you asked about there. We think about the gross margin, I guess, dynamics as we move through the year within kind of the context of how we think about the range of our gross margin. The magnitude of, I think, any of the individual drivers that are puts and takes either way are not as large as even that range. So we're talking about items that are typically 10 to 20 basis points, maybe a little bit higher than that in each of the pieces. But for sure, a decent-sized, I think, headwind from the professional business growing as fast as it did, and particularly if you look at the third and fourth quarters where that was heightened. But on the positive end, I would tell you, both, I think, positive drivers. I think the acquisition cost improvement is a little bit a larger piece of that than what we saw on the distribution side, but I think also meaningful efficiencies from a distribution perspective. Now when we look at just how that lays out for next year, I think knowing the gains that we've had this year and the opportunity to calendar those, we feel good about what our gross margin outlook is last year, I think more cautious of what we're going to be able to gain there than what we saw in 2025, which is I think a great gross margin year for us really on both of those, I think, positives that you look at. And then just kind of the changing evolution of the Mexico business is a help. It's probably 4, 5 basis points than it is a big change. But it's a delta that moves us. In terms of the question around how we're thinking about the cautiousness of pressure, that is, I think, on the SG&A side, for some of the types of costs that I think have bit us here in the last couple of quarters, we do think that that's more heightened in the front half of the year. Brent mentioned that in his prepared comments, I think, as much as anything, because the comparisons get a lot easier as you move into the balance of the year. But we do expect that as we think about how the year plays out for our SG&A guide, that we would see more pressure from a dollar perspective on per store growth than in the front part of the year, particularly first quarter, and we would see kind of imbalance for the full year. Now that does match up with how we think about the sales cadence as well that we talked about I know quite a bit on the call already this morning. And so we probably land in a place that's, from a leverage perspective, it's a little bit more consistent quarter-to-quarter for our expectations of operating profit leverage, SG&A leverage. But for sure, kind of the thought process of how the dollars play out is going to be more pressured in the front part of the year. Operator: Your next question is coming from Brian Nagel from Oppenheimer. Brian Nagel: This is Brian Nagel. I want to go back, I know we discussed it a lot, but just the SG&A and SG&A per store guidance for '26. The question I want to ask is, we've been talking about these elevated expenses for a while, as you look beyond '26, given how persistent these expenses have been, I mean, are you starting to identify more aggressively levers that could be pulled, so to the extent these pressures continue, that internally O'Reilly can start to manage these costs better? Jeremy Fletcher: Yes. No, it's a great question, Brian. And interestingly, not -- I think not new questions. I think part of what we've experienced over the course of the last year, and the things that Brent lined out, some of the self-insurance cost pressures, those types of things around how we manage our vehicle fleet and team member expenses around health care and workers' comp, those types of items, it's been a big -- it's a big focus. A big part of how we run our business, has been for a long, long time. And I think part of what we're running up against is it's been a pretty tightly and effectively controlled part of our cost structure for a long time. And so we've had some exposure that as inflation has really rolled in and we've seen it, that we don't have, I think, a lot of easy and quick levers to reduce what something that has always been a key management item for us. Having said that, however, so many of these items are key items in stress and priority. And some of the things that we talk about from a technology perspective are things that we want to lean into to help us to manage safety and how we manage the overall value and what we're able to deliver from a team member benefits perspective. And so those things continue to be important pieces for us to manage and will be things, to your point, at a -- you'll get a high level of attention. But they also have always been I think important parts of how we think about managing our business well. And so that's right -- I think the right outlook for you. But over the course of time, I think that gives us some confidence that not only does the market slowdown and the inflation environment normalize a little bit there, but that we'll continue to work hard to do everything we can and mitigate that pressure. Operator: Your next question is coming from Steven Zaccone from Citi. Steven Zaccone: I want to follow up on the same-SKU inflation. So can you just help us understand the cadence of the year in a little bit more detail? Will the first quarter be similar to the level of same-SKU inflation that you had in the fourth quarter? And then someone asked earlier about this hypothetical if tariffs are reduced. How would that impact you from a timing of inventory perspective, right? If costs come down, would that more likely be like a second half of '26 phenomenon at this point? Jeremy Fletcher: Yes, Steve. I think on the first part -- and Brad talked about the -- how we think about inflation cadence in his prepared comments. It's really mostly a function of what are we comparing it against and what do we see in 2025. As you'll remember, first quarter was pretty muted in inflation. I think it was maybe 0.5 point. So we would expect to see a similar level of same-SKU. We'll ultimately have to see how it plays out. Some of that can be impacted by just the mix of things that you sell too, in terms of the magnitude of some of those cost changes. But when we think about where price levels sit now and understanding that the turn of that same-SKU benefit will benefit us more in the first half than the second half, that's kind of that thought process. And as we start to move up against periods where we realized a benefit in 2025 on a -- think about it on maybe a stacked basis, you're going to have similar results, but kind of a declining benefit as you move through the next year. What was the second part of that? Brent Kirby: On tariffs. Jeremy Fletcher: In terms of how we think about the tariff impact flowing through from a cost perspective, that's -- being a LIFO reporter, and we've been I think pretty straightforward over the course of the last few years in just talking about what we see reflected in our gross margin results and our cost of goods sold line, is more akin to what the current costs look like. So to whatever extent that we see cost reductions, they typically will show up pretty quickly within our gross margin results. And so that's kind of the right way to think about sort of that tariff cadence that we might see in 2026. Again, with I think the note that Brent made earlier that we anticipate a pretty stable environment there. We might see some changes, but ultimately think that there are other methods by which the administration will have to execute what they want to do from a tariff landscape. Steven Zaccone: Okay. And the follow-up I had, Steve asked earlier about growing in the Northeast. Can you just help us understand where you are from a market share perspective maybe DIFM in like the Mid-Atlantic and Northeast, versus where you are from a market share perspective in some of your mature markets? How do you see the pace of that sales lift happening over the next couple of years now that the DC is opening and then probably more to come? Brad Beckham: Yes. No, great question, Steven. Well, the good news is with us and our industry, if we work in this $170 billion industry, we have roughly 10% share, so surprising -- maybe surprisingly, maybe not so much for others, even when you look at our most mature markets, it's not the difference in having a 5% share and a 50%. It's, even when I look at our business here in Missouri or Oklahoma, Kansas, Arkansas, down in Texas, we still have so much market share to go get. And so the differences aren't near what you might think. Now we've operated kind of in that core of the Mid-Atlantic, the Carolinas up into Virginia, kind of southern part of Virginia, like the Roanoke from the west, over to Richmond, over to Virginia Beach. We've been in those markets for many, many years. They were just more on the edge of where Greensboro would effectively service. And so those markets, along with the North Carolina type market, we would be a little bit more mature, but still immature overall. It would be a lot closer to our average 10% share than it would be some dominant position in terms of big percentage. And so we don't necessarily disclose by market what our penetration is, but the markets that, as you get up into Northern Virginia and you look around the D.C. metro and you look at Baltimore and, obviously, as you get into Philly and New York, we don't have any presence. And so it would be a 0 and all opportunity for us. But really, all of that is going to depend on our ability to execute our business model, do well on both sides of the business. And all that happens only by building really great teams at the store level, the sales force, all those things. And so we still have a tremendous opportunity in that market, but we still have a tremendous opportunity from a share perspective even in our most mature markets. Operator: We have reached our allotted time for questions. I'll now turn the call back over to Mr. Brad Beckham for closing remarks. Brad Beckham: Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our first quarter results in April. Thank you. Operator: Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good afternoon, ladies and gentlemen, and a warm welcome to the analyst call. [Operator Instructions] Let me now turn the floor over to your host, Elke Brinkmann, Investor Relations. Elke Brinkmann: Good afternoon, and welcome to our call on the results of the first 3 months of fiscal year 2025-'26. We are here with our CEO, Toralf Haag; and our CFO, Steffen Hoffmann, who will walk you through the figures for the first 3 months of 2025 and '26 and current developments at Aurubis. We will first take you through the presentation and then open the line for your questions. [Operator Instructions] But before we dive, a short reminder of our disclaimer on forward-looking statements. Today's capital markets presentation contains forward-looking statements about Aurubis plans and expectations. These statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Let me now turn the floor over to Toralf Haag. Toralf Haag: Thank you, Elke, and good morning, good day, good afternoon from Hamburg. Aurubis started the new fiscal year with a sound result that was in line with market expectations. Operating EBT was satisfactory at EUR 105 million, driven mainly by higher metal prices and consequently, a higher metals result. Declining TC/RCs, however, partly offset the positive metal result effect. EBITDA was EUR 164 million compared to EUR 184 million last year, which reflects anticipated higher costs in the overall group. Net cash flow was slightly negative at minus EUR 8 million compared to EUR 178 million in Q1 of last year. Free cash flow before dividend was minus EUR 103 million compared to EUR 39 million the year before. Higher working capital at higher metal prices was the main factor in lowering cash flows, and both figures should be viewed as snapshots, as Steffen will explain further later in the presentation. Operating ROCE on a rolling 4-quarter basis decreased to 7.8%, down from 11.7% the year before. This reflects lower earnings in prior year quarters and higher capital employed from our growth investments. Looking ahead to the remaining quarters of the fiscal year, we expect positive effects on earnings, in particular from higher metal prices and strong demand for copper products. In light of these factors, we raised our full year guidance for operating EBT to between EUR 375 million and EUR 475 million. The previous range was EUR 300 million to EUR 400. Once again, our production figures show the broad scape of our multi-metal competence. I would like to briefly highlight the key drivers. Starting with our input, concentrate throughput went up 5% year-over-year to 630,000 tonnes, carried by a good operational performance. Copper scrap/blister copper output, on the other hand, went down by 5% to 115,000 tonnes. This was caused by our input mix in the quarter. Other recycling materials totaled 125,000 tonnes, slightly above last year. On the output end, the stable performance of our Tankhouse resulted in 285,000 tonnes of cathodes produced. Sulfuric acid output increased by 5% to 583,000 tonnes, right in line with concentrate throughput. Wire rod output remained stable at 201,000 tonnes, while copper shapes output dipped by 15% to 34,000 tonnes. Lagging demand, trade barriers and imports were the main factors here. In contrast, flat rolled products and specialty wire increased slightly to 22,000 tonnes. Our output of other metals is another indication of the complexity of our feed materials and varies based on the content of those materials. Let me now take you through the market environment. This chart shows the development of our 4 key indicators since September 2023 based on market intelligence. On the downstream side, European spot copper premiums remained widely stable at a high level in fiscal year Q1. Please bear in mind that premiums for annual contracts differ from spot premiums and will become effective only from fiscal year Q2 onwards. Sulfuric acid prices showed another increase, a move supported by strong demand, especially from overseas markets. On the upstream side, RCs for recycling materials improved in Q1 of the fiscal year because higher metal prices increased the availability of scrap. We expect that this trend will take effect in our results with a time lag. Spot TC/RCs for copper concentrates stayed at low levels in fiscal year Q1, reflecting the tightness in the concentrate market. Our long-term supply contracts and diversified sourcing, however, help us manage this challenging environment. Let me now turn to the price environment for key metals and the U.S. dollar. As all of you have taken notice of in fiscal year Q1, gold and silver prices continue to rise and reached all new-time highs. Copper prices also moved up notably as well with an increase to close to $1,000 per tonne in December alone, with an increase of $1,000 per tonne in December alone. The favorable development of these 3 metal prices positively contributed to our metal result as we see later. Compared to Q1 of the last fiscal year, the U.S. dollar depreciated against the euro. Aurubis' long dollar position remains unchanged at approximately USD 530 million for the fiscal year. 54% of our U.S. dollar exposure is hedged at 1.125. For fiscal year '26, '27, around 40% of the exposure is hedged at a rate of 1.188. As a reminder, please note that there is no direct one-to-one correlation between our P&L and the price development shown here. We hedge part of our earnings and some of the effects are only visible with a time lag. Before we move on the details of our financials, I would like to share an update on our contracting season. Despite the challenges in the concentrate market, we have already secured a very high share of our supply for calendar year 2026. Through long-term contracts that target complex raw materials, we ensure reliable supply to our primary smelters. This also allowed us to close additional long-term contracts, including agreements with new mining projects. At the same time, we also ensure we have the flexibility to obtain additional volumes and steer our market presence as needed. For recycling, the market is still short term in nature and visibility is limited. Copper scrap availability still improved compared to the summer, a development supported by higher metal prices. This, in turn, allowed us to secure a supply of scrap that is enough to cover our needs until the end of the second quarter of '25, '26 at the very least. In the U.S., we are focused on securing the supply for Aurubis Richmond in line with the planned ramp-up. Finally, we are expanding our sourcing presence beyond Europe to broaden our supplier base at the same time as well. In the downstream business, we have mostly wrapped up a very successful sales campaign. Demand for our copper product remains high. This is especially true for wire rod, which we largely supply to the energy, infrastructure and communications sector. We remain on track, moving in the right direction with sustainability, our Tomorrow Metals commitment, foster customer relationships and helps generate new business. Demand for copper shape and flat-rolled products lagged somewhat behind the high demand for wire rod. This was mostly due to the reasons I already mentioned in detail. Looking at sulfuric acid, we are still seeing stable demand from the European chemical and fertilizer industries. Demand from overseas has also stayed high and is supporting the current market terms. Our asset sales book gives us good visibility in the summer despite the higher volatility on the spot market. This reinforces our confidence that we will be able to maintain this high level during this fiscal year. And now let me hand over to Steffen Hoffmann, who will take you through the details of our financials. Steffen Hoffmann: Thank you, Toralf, and a warm welcome from my side, too. Let me take you through the financial details of the first 3 months of 2025-'26 and touch on the KPIs in this chart. Revenues increased by 25% to EUR 5.3 billion, primarily due to higher precious metal revenues driven by the marked rise in metal prices. Gross profit was slightly lower at EUR 426 million versus EUR 433 million in the prior year quarter. Higher cost of materials more than offset the gross margin increase. Operating EBIT came in at EUR 101 million and operating EBT at EUR 105 million, which is 19% below the prior year level of EUR 130 million. Compared to the EBITDA, the decrease of the EBT was more pronounced than in the previous year. Personnel expenses increased by EUR 12 million and depreciation rose by EUR 10 million as planned due to strategic projects. The main positive impact on the result was a significantly higher metal result due to increased metal prices, especially for precious metals. Sulfuric acid revenues on par with the high prior year level and sustained higher copper product revenues provided additional support to the result. Markedly, lower treatment and refining charges with higher year-over-year concentrate throughput, along with a mild input mix-related decline in earnings from the processing of recycling material had a counteracting effect. In addition, anticipated higher expenditures for strategic projects had an adverse effect on the result. With an EBITDA slightly below the previous year, the net cash flow was at minus EUR 8 million, significantly below the prior year level of plus EUR 178 million due to reporting date related higher inventories, coupled with higher metal prices. Here, I would like to emphasize that this cash flow is a snapshot as of December 31, 2025, and inventory buildups will turn into cash flows in future quarters. In contrast, previous year's Q1 net cash flow was exceptionally high, considering the usual seasonal pattern. Operating ROCE, taking the operating EBIT of the last 4 quarters into consideration, decreased from 11.7% to 7.8%. This reflects lower earnings in previous quarters and higher capital employed due to continued investments. Looking at quarterly performance. Profitability improved significantly in Q1 of '25, '26 compared to Q4 of '24/'25. Revenues increased from EUR 4.4 billion to EUR 5.3 billion. Gross profit climbed from EUR 380 million to EUR 426 million, driven by a stronger metal result and good smelter performance in CSP. Operating EBT rose from EUR 68 million to EUR 105 million. The previous quarter was still affected by the scheduled major shutdown in Pirdop. One-off effects in the MMR segment also weighed on Q4 '24/'25. Net cash flow declined from EUR 319 million in Q4 to minus EUR 8 million in Q1, mainly due to the buildup of working capital at higher price levels, which will translate into future cash flows, as mentioned before. Coming to the gross margin. This slide shows the breakup on a group level. Total gross margin was around EUR 546 million, slightly above the prior year level of about EUR 534 million. Metal result was the main contributor to the gross margin and accounted for 45%. This is a step up from last year's 36% and reflects higher prices, especially for precious metals. Products and premiums were the second largest contributor and accounted for 33% of the gross margin. This share is broadly in line with the previous year, which underlines the stability of our downstream business. Higher earnings from products to come as of Q2 fiscal year. And finally, treatment and refining charges for concentrate and recycling input decreased to 22% of the gross margin, down from 31%. This was mainly driven by the marked decline of concentrate TC/RCs as well as slightly subdued RCs for the recycling material purchased in the months before. As Toralf mentioned earlier, improved availability and higher RC levels will support earnings with some operational time lag, most probably starting in Q2 of the fiscal year. Overall, strong metal prices and solid product demand more than offset headwinds from lower TC/RCs at the gross margin level. Coming to MMR. In the Multimetal Recycling segment, gross margin increased slightly from EUR 171 million to EUR 177 million. The main driver here was again a higher metal result that benefited from overall higher metal price levels. The strong increase of the metal result was, however, weakened by lower refining charges for recycling materials sourced in the previous months, coupled with a slight input mix-related drop in throughput. In contrast, operating EBIT declined from EUR 28 million to EUR 20 million and operating EBT fell from EUR 28 million to EUR 18 million. Higher expected costs and increased depreciation, among others, at Aurubis Richmond outweighed the gross margin uplift. Operating ROCE decreased to 0.4%, down from 5.5%. The central factors here were lower earnings and over 20% higher capital employed, mainly for Richmond. Please keep in mind that the rolling EBIT of the last 4 quarters includes quarterly EBITs that were impacted by one-off items. Operationally, the segment's performance was mixed. Input mix-related effects resulting from scrap availability during summer impacted the throughput of copper scrap and blister copper, which moved down from 92,000 tonnes to 83,000 tonnes. Throughput of other recycling materials, however, was stable at 112,000 tonnes, while cathode output in the segment increased slightly to 134,000 tonnes. In the next quarters, we continue to focus on stabilizing higher throughput levels, while enrichment revenues will gradually start to compensate the operating cost of the plant. And generally in MMR, RCs should pick up. In the Custom Smelting & Products segment, gross margin improved slightly from EUR 362 million to EUR 369 million. The powerful increase in the metal result was largely offset by the decline in concentrate TC/RC. The stable contribution of products and premiums to the segment's gross margin reflects just how robust our downstream business is. Scheduled comprehensive maintenance in Hamburg with an EBIT impact of minus EUR 6 million, general cost inflation and anticipated cost increases for strategic projects weighed on operating EBIT. It declined from EUR 125 million to EUR 122 million, while operating EBT decreased from EUR 131 million to EUR 113 million. Operating ROCE was 17.8% compared to 19.4% in the prior year quarter. This decline was essentially due to lower earnings. As in the MMR segment, the rolling 4-quarter EBIT level also took effect here. Concentrate throughput rose from 602,000 tonnes to 630,000 tonnes based on stable operations in Hamburg and Pirdop. In line with higher concentrate throughput, copper scrap and blister copper input increased to 32,000 tonnes and sulfuric acid output went up 5% to 583,000 tonnes. Cathode output reached 151,000 tonnes, which was due to temporarily lower current efficiency in Pirdop is only slightly below the previous year's level. Overall, we are satisfied with the segment's operational performance at the Hamburg and Pirdop plant. We are targeting ongoing high utilization levels to maximize copper supply to the markets. Let's now take a look at cost development in the group. Total costs amounted to about EUR 464 million compared to roughly EUR 441 million in the prior year quarter. This EUR 23 million increase was significantly driven by higher scheduled depreciation in the amount of EUR 10 million for the strategic projects, which are being executed right now. At about 35% of total costs, personnel costs increased slightly. The main factors here were collective wage increases and expanded staffing levels for our strategic projects. Other operating expenses declined slightly to 21% of total cost with logistics and administration as the main items. Active energy management and hedging helped keep energy cost inflation under control and stable at around 7% of total cost. Excluding depreciation, cash costs totaled EUR 401 million compared to EUR 388 million in the prior year. Turning to the cash flow bridge. In line with the operational performance of the business, operating EBITDA amounted to EUR 164 million. Compared to the previous year, the main deviation here is from the buildup of working capital, which was strongly influenced by higher metal prices. Inventories were EUR 495 million higher and receivables increased by EUR 176 million. Factoring was EUR 100 million lower than in last year's Q1. On the other hand, liabilities rose by EUR 404 million, partly offsetting the increase. The position other covers valuation changes for financial instruments that we are using for forward sales. In Q1 '25/'26, the noncash effect amounted to EUR 110 million. Taken together, this resulted in a net cash flow of minus EUR 8 million. Here, I would like to highlight once more that our cash flow is subject to intra-year volatility and that the working capital tends to normalize over the course of the fiscal year. Net cash flow at December 31 should be regarded as a snapshot, in particular, because factoring capacities have not been exhausted in Q1. Finally, we spent EUR 91 million in cash on investment activities. These were mainly linked to Richmond and the new Precious Metals Refinery in Hamburg. Total free cash flow for the first quarter came in at minus EUR 103 million. Before we move to our outlook and guidance, I would now like to take you through some of our balance sheet KPIs. The equity ratio on an operating basis was 49.9%. The slight decrease was caused by the balance sheet expansion driven by working capital that negatively offset the addition of EUR 81 million in earnings to the equity. Let us put the equity ratio into perspective, though. The close to 50% level is still very solid and clearly above our larger than 40% target. And in the next quarters, we expect to exceed the 50% mark again. The debt coverage defined as net financial liabilities over rolling EBITDA was around 0.6 in Q1. Again, the increase of this KPI was primarily the result of higher working capital. Our debt coverage is still well below the 3.0 ceiling. Capital expenditure was EUR 108 million compared to EUR 141 million in the prior year quarter. This quarterly decline reflects the progress on completed projects as well as our disciplined approach. When we take the investments made in our strategic projects in recent quarters in account, the operating capital employed was about EUR 4.3 billion. This represents an increase from the EUR 3.8 billion recorded at the end of Q1 '24/'25. Nevertheless, as a bottom line, it's fair to say that Aurubis remains solidly and conservatively financed. Let us now turn to our outlook for the key drivers of our business. Compared to last year's view on the markets, the outlook for our key macro drivers has improved overall. We all have followed the development of the metal prices. And since we last presented this chart, metal prices have reached even higher levels, which will positively impact our metal result. Regarding earnings from copper products, we anticipated strong earnings levels already last year. Still demand presented itself healthier than previously projected, which supports earnings from product sales even further. So both earnings drivers remain a green traffic light, however, even more positive than anticipated before. Furthermore, as I've mentioned earlier, we are seeing a stable, if not slightly increasing sulfuric acid demand. Our sales book now provides us with visibility into the summer of '26. So we are taking a slightly more positive view than we did at the end of '25 and correspondingly added a touch of green to the yellow traffic light. For recycling, material availability has improved somewhat due to higher prices, and we are seeing better market conditions than last summer paired with improved market visibility. At this stage, we maintain a cautious view as expressed by the yellow traffic light, but see the potential for an improvement in the coming months. The U.S. dollar-euro exchange rate remains an important factor as well, and we anticipate headwinds from the depreciation of the U.S. dollar versus the euro. Since we are somewhat mitigating the impact through our hedging strategy, we keep the yellow light here. While we are confident that we will be able to supply all our assets with raw materials, we are still seeing tight concentrate markets. Consequently, the red traffic light for concentrate TC/RCs remains, in particular, since we have seen a visible TC/RC decline versus the previous year and the corresponding effect in our gross margin. In summary, these developments provide us with higher confidence regarding the outlook for the business in the remainder of the fiscal year. Based on the improved market outlook that I've just shared with you, we have raised our full year guidance for fiscal year '25, '26 last week. As we have highlighted before, the continuous rise in metal prices will have a strong positive effect on the group's metal result. Moreover, we anticipate that higher earnings from copper products and lower concentrate TC/RCs will still be a net positive effect on the EBT. For Richmond, we expect to achieve breakeven on EBITDA level, meaning on EBT level, the contribution will still be a negative item. Finally, due to the recent depreciation of the U.S. dollar versus the euro, we factor in an additional headwind from foreign exchange. Therefore, we now expect operating EBT to be between EUR 375 million and EUR 475 million, up from EUR 300 million to EUR 400 million. And we now expect an operating EBITDA where the range has equally been lifted by EUR 75 million to be between EUR 655 million and EUR 755 million. By segment, we project an operating EBT of EUR 320 million to EUR 380 million for CSP, which is plus EUR 40 million and for MMR, an operating EBT of EUR 115 million to EUR 175 million, which is plus EUR 35 million versus prior guidance. As a result, we upgraded the operating ROCE forecast as well to between 9% to 11% at the group level, which is up by 2 percentage points versus the prior guidance. Breaking it down to the segment level, we anticipate ROCE between 13% to 15% for CSP and between 8% to 10% for MMR, also here up each by 2 percentage points as well. Furthermore, we have refined our net cash flow forecast and expect it to be above last year. This means net cash flow should exceed EUR 677 million for full year '25, '26. And finally, we expect free cash flow before dividend to be at least at breakeven for the full fiscal year. So in other words, we do expect that higher earnings levels will also result in higher cash flows. So the free cash flow guidance is slightly raised to at least free cash flow breakeven. Having said this, please bear in mind that in context of raw material shipments at record high metal prices, a certain degree of imprecision around the balance sheet date may be unavoidable. And with this, I'd like to hand back over to Toralf. Toralf Haag: Thank you, Steffen. Before we come to the final slide of our presentation, I would like to update you on the progress of our strategic projects. To sum up, our strategic projects continue moving forward and every day brings us closer to commissioning. By December 31, around EUR 1.4 billion, which is about 80% of the approved investment volume for strategic projects has been invested. In Hamburg, we successfully installed the converter for complex recycling Hamburg. This is a key project milestone and commissioning is planned for the first half of this fiscal year '25, '26. That puts it in the current quarter. In Pirdop, the Tankhouse Expansion will allow us to process all anodes produced on site. This will increase refined copper capacity by about 50% to around 340,000 tonnes. Commissioning is also scheduled for fiscal year '25, '26. In Richmond, we achieved a number of milestones that highlight the progress made on Phase 1. The first blister was shipped to Europe, generating the first revenues for the plant. Depreciation started in Q1 '25, '26, a signal of the site's technical readiness. The first complex melt was carried out on January 28, another important step in the ramp-up. Looking to the Phase 2, commissioning is still planned for this fiscal year. Reaching the end of our presentation on the first quarter of fiscal year '25, '26, I would like to summarize the key takeaways. We had a sound start to the fiscal year. A higher metal result and strong metal prices drove gross margin expansion despite lower TC/RCs. EBITDA of EUR 164 million and operating EBT of EUR 105 million were in line with market expectations and were carried by good operational performance. Net cash flow and free cash flow came in below last year, in particular on account of working capital buildup at higher metal prices. Operating return on capital employed was lowered by high investment in trailing earnings. However, as the projects ramp up, they will support returns over the medium term. The execution of our strategic CapEx program is on track. Complex Recycling Hamburg, the Tankhouse Expansion in Pirdop and Richmond Phase 2 are all scheduled for commissioning in '25, '26. For the full year '25, '26, we expect higher metal prices and stronger product business to offset the challenging raw material markets. Therefore, we now expect an operating EBT between EUR 375 million and EUR 475 million and a free cash flow before dividends to be at least at breakeven for the full fiscal year. And with this, I would like to hand back over to Elke Brinkmann. Elke Brinkmann: Thank you, Toralf and Steffen. Before we open the line for your questions, I would like to provide you with an outlook on the next event. Next week on Thursday, February 12, we look forward to welcoming many of our shareholders at our Annual General Meeting. And on May 11, we will publish our half year results for '25, '26. With that said, I hand over to the operator for the first question. Operator: [Operator Instructions] The first one is from Adahna Ekoku of Morgan Stanley. Adahna Ekoku: I've got a question on your free metal hedging. So at the Capital Markets Day, you outlined that given the elevated metal prices, you would keep your remaining open position that you had for the rest of this year unhedged. Is there any more color you could give us now on where this hedged versus unhedged exposure is for the rest of the year? Steffen Hoffmann: Yes. Thanks, Adahna, for the question. I mean, as we now have 3 months, let's say, advanced in the fiscal year, we've also advanced a bit on our hedging position. I think what I can share here is that for copper, we are hedged for this fiscal year at around 60%. And for gold, silver, talking about the main pieces on precious metals, we are hedged at around 70% for this fiscal year. Operator: The next question is from Bastian Synagowitz of Deutsche Bank. Bastian Synagowitz: Maybe starting with -- also with the metal prices, I guess we've seen obviously an amazing volatility there. Given the higher value in metals, do you see that your metal terms are changing for the procurement of raw materials? Or do you still see a pretty stable content in free metals in tonnage terms? That's my first question. Toralf Haag: Yes. Bastian, no, we don't see any major change in our contract terms because of higher metal prices. Bastian Synagowitz: Okay. Great. And then just moving on to Richmond. I actually touched on that in the presentation. But just on the current weather situation in -- I guess, in the region, has this become effective for the supply of the business? I guess you said that you are relatively well supplied for scrap overall for the upcoming quarter. But I just wanted to understand how far maybe the weather is causing any effects here upstream or downstream? And then also, have you advanced on the next possible steps for U.S. footprint? If you could give us an update there, that would be great. Toralf Haag: Yes, Bastian, on Richmond, the weather conditions U.S. don't have any major effect on our supply situation. We are currently well supplied with materials for our ramp-up for, I would say, until summer of this year. We also have the different materials available. So no impact of the weather on our tonnage or mix situation when it comes to recycling materials for Richmond. Next steps, we are still in the evaluation phase. We are also in contact with the U.S. government for potential funding. But we stick to our milestone. First, we want to get Phase 2 up and running in the course of this fiscal year, and then we will make a decision on further expansion in the next fiscal year. Bastian Synagowitz: Got you. Okay. Great. And then lastly, on, I guess, the European market. What are you making out of the European plans for securing access to critical raw materials? I guess we have had a bit of noise on that front in the last couple of days. So what does this mean for you? And are there any implications to you on the project pipeline as well? Toralf Haag: Of course, we welcome this, this attention to critical materials in Europe. We hope that also new mining projects will be started in Europe in order to increase the independence of Europe in the magnitude or in the direction of raw materials. Short term, we don't expect any major effect because it takes a while until these mining projects get started or help us supply more concentrates out of mines. But mid to long term, this we see a positive effect for us. We also hope that with this Critical Raw Materials Act that also there will be more focus on the support for the competitiveness of European raw material companies who use raw materials and who produce metals. So we expect more support from the government here. So we see this positive. Operator: [Operator Instructions] The next question is from Maxime Kogge of ODDO BHF. Maxime Kogge: So first question is on the consolidation wave that we are seeing on the mining side. So now there are talks between Glencore and Rio. There has been already talks concluding into a merger between Anglo and Teck. What's your take on that? Because I guess that from the smelting point of view, it's not necessarily great to have this consolidation. You prefer to speak to Rio and to Glencore separately than to a global player? And would you see the need as well to consolidate on the smelting side to somehow mirror this consolidation on the mining side? Toralf Haag: Yes. Thank you for that strategic question. Of course, we monitor these mergers quite intensively. We don't see a big negative effect. We rather see a neutral effect on us because our contracts are, in most cases, directly with the mines, and we have long-term relationships, as you know, with many different mines. So we continue to -- we expect that these long-term relationships and long-term contract agreements will continue. Consolidation talks on the smelting side, we don't see right now. We have a good market position in Europe. We are building up a good market position in the U.S. with our focus on Europe and the U.S. and our -- as is market position in Europe and our to-be-built market position in the U.S., we feel strong enough to stay independent and not have any further consolidation. So no consolidation plans from our side on the smelting side. Maxime Kogge: Okay. And just a second and last question is on the wire rod. So this is really the product that is in hot demand right now. So I guess that you're basically at full capacity there in Europe. So would you see a case for expanding your capacity there? The current program doesn't plan any big capacity increase in Europe. Is this a segment where you would perhaps be more inclined to envisage that thing? Toralf Haag: As you rightfully said, there is strong demand for wire rod. We see that across industries. We are almost at our capacity, where we still have a capacity limit where we still have some capacity left. First, we want to use or expand -- materialize this excess capacity that we have. And then in the second step, we would think about further expansion. But right now, there are no concrete plans. Operator: Next question is from Daniel Major of UBS. Daniel Major: Just first and a couple of follow-ups on the existing questions. You mentioned 60% of copper and 70% of precious were hedged for this year. What sort of levels are those hedges at? Steffen Hoffmann: Yes, Daniel, I think that's the $1 billion question, right? So I think what I can share is that the guidance increase of the EUR 75 million, which is basically linked to more positive view on metals, a very positive view as well on our copper products, a bit more cautious view on Richmond, and obviously, also an update on the foreign exchange. Those comments that we were making were based on, let's say, on data points and on market information from the beginning of this calendar year. So that gives you a rough impression where the metal prices were there. And obviously, we do not know where the next months will go to. But as I said, in the midpoint of the guidance grounds on premises of early calendar year '26. Daniel Major: So if prices persist at this level, you'd be in the range. Is that a fair assessment? Steffen Hoffmann: Can you repeat if prices... Daniel Major: If spot prices were the same for the rest of the year, you would be within the range. There's no upside risk of spot pricing. Is that the right way of thinking about it? Steffen Hoffmann: That's correct. If prices would stay on those levels of early beginning of January, then we would see ourselves at the midpoint of the range. And if prices would be significantly higher than that or significantly lower than that, then it could be the one or the other. Daniel Major: Okay. Second question follows on from Bastian's question a little bit, but specifically on scrap export restrictions from Europe. Is there any update on time line or kind of parameters around that? Toralf Haag: No, Daniel, there's unfortunately no update on the time line. We are in close contact with the political authorities here. They are willing to do something, but we have no concrete time line. Daniel Major: Yes. Next question, just going back to your slide with the variables. So Slide #5, you've seen a pickup in spot refining charges and sulfuric. In terms of the scrap market, you're mentioning improving availability because of the higher price environment. Do you think that's sustainable? Or is this just a destocking of available inventory of low-quality scrap because of the high pricing environment and that will normalize? Or is this a sustainable improvement in scrap availability? Steffen Hoffmann: I mean, Daniel, on -- let's say, we all know that on the scrap side, the visibility is limited. So kind of it's the next 3 months. But we do think that for now, it's -- let's say, for the next few months, it is sustainable. For the next few months, we count on higher RCs starting now with our next Q2. We see it coming. Let's say, new material that's going in is coming in with better RCs than the material we were putting in the smelters in Q1, having been sourced earlier or in the mid of '25 or in the fall of '25. So for the foreseeable few months, we think it's sustainable. And obviously, it will be a function of copper price developments going forward. Daniel Major: And then kind of similar question on the sulfuric market. It's not a market I know very well at all. What are the dynamics that have driven the recovery? And again, what's the outlook as you see it in the near term? Steffen Hoffmann: I mean also here, Daniel, let's say, visibility is a bit limited. But as I can say it that way, we see it at the time of the CMD or when we did the full year disclosure end of last year, we were giving the sulfuric acid market a yellow traffic light, yellow meaning same level as the very good level last year. And now we added some shade of green to it, meaning it's a bit better than that. And we think this is market driven in some of the subsegments, basically in the overseas -- from our perspective, in the overseas subsegments of the sulfuric acid prices. So here, it's a slight further improvement on real good levels that we see. Daniel Major: And then final one, you also highlight the positive contribution from the strength of products, which is predominantly wire rod. Is there any improvement in other end markets you're seeing coming through? I noticed you had a sequential year-on-year decline in flat products, but is there any signs of life in the other segments outside of wire rod? Toralf Haag: Well, as you know, automotive is still at a low level. We see no major improvement there, but we see slight increases on the construction and infrastructure industry. So we see a slight pickup here, but no major pickups yet. Operator: At the moment, there are no more questions in the queue. [Operator Instructions] All right. There is a follow-up from Bastian Synagowitz from Deutsche Bank. Bastian Synagowitz: Just on Richmond, I think your overall commentary there on the ramp-up sounded quite positive, but you said in the guidance mix, you basically marked it down a little. I guess Richmond is one area where at least on pretax level, I guess, the FX should actually work in your favor. So what's been driving the markdown? Steffen Hoffmann: Yes, Bastian. At the CMD, I think we had a chart that indicated that EBITDA would be a positive level. I think from the scale one could derive that it was, let's say, a plus EUR 20 million EBITDA figure. And as Toralf has said, we feel well with what we have on stock. We feel well also with the commercial terms. I mean what we talked about RCs improving now in Europe. We see similar things in the U.S. So the reason why we scaled it down a bit by the EUR 20 million roughly that I said is basically a few weeks slower ramp-up than we thought last fall. But I mean, here, you see we are very granular. It's just a few weeks. We are happy that we had the first revenues in Q1. We are happy that we have the depreciation, which is a sign that the system is up and running. But it's really granular, perhaps at the end of the year, we are missing very few weeks of revenues, and that would be it. Operator: So at the moment, there are no questions in the queue. So with that, I would like to close the Q&A session, and I'm handing the floor back over to the host. Elke Brinkmann: Yes. Thank you. The IR team will, of course, be happy to answer any further questions you may have. We would now like to close today's conference call, and thank you for your attention. We wish you a pleasant rest of the day. Thank you, and goodbye.
Operator: Good afternoon, and welcome to Banco de Chile's Fourth Quarter 2025 Results Conference Call. If you need a copy of the financial management review, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Institutional Relations Officer, Mr. Pablo Mejia, Head of Investor Relations, and Daniel Galarce, Head of Financial Control and Capital Management. Before we begin, I'd like to remind you that this call is being recorded, and the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed notes in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please go ahead. Rodrigo Aravena: Good afternoon. Thank you for joining our conference call. Today, we will present Banco de Chile results for the fourth quarter and the full year 2025. We are very proud of the bank's performance this year. Once again, Banco de Chile delivered market leadership and superior financial outcomes, reinforcing the strength and consistency of our business model. Starting with our financial results. Banco de Chile ranked #1 in net income and return on average assets, #1 in net fee income and #1 in net interest margin among peer banks. This result reflects the resilience of our core revenues, solid customer activity and disciplined balance sheet management. For the full year, we generated the highest net income in the local banking industry amounting to CLP 1.2 trillion, which translated into a 2.2% return on average assets, significantly above the 1.3% achieved by the industry. We also maintained the largest market value among private banks in Chile of almost $20 billion, and we are leading the market in average trade volumes with over $25 million per day, demonstrating strong investor confidence and liquidity in our stock. On capital, Banco de Chile remained the most highly capitalized bank as demonstrated by a CET 1 ratio of 14.5%, [indiscernible] regulatory requirements and peers. Also, our risk indicators continue to be among the strongest in the industry, supported by a 223% coverage ratio and CLP 661 billion in additional provisions reflecting our sound [ with ] management culture. From a cost perspective, we delivered a 3.5% real contraction in operating expenses, consistent with efficiency efforts that we have implemented over the past several years that have leveraged on a digital strategy that has benefited productivity across all business and operating processes. On the Commercial side, Banco de Chile continues to stand out in customer experience, ranking first in service quality and top of mind awareness. We also reinforced our ecosystem with the launch of Banchile Pagos our new acquiring and payment processing subsidiary, which strengthen our positioning in digital payments. In addition, Banchile mutual funds remains the largest mutual funds managed in Chile, excluding pension funds with a 22.5% market share in assets under management. Finally, our strong performance has been widely recognized as shown by the awards on the right side of this slide, including recognition for Best Customer Satisfaction, Best Corporate Governance, Best Place to Work and Best Bank in Chile. In the remainder of this presentation, we will provide a detailed analysis of our quarterly and full year results of 2025. Before moving on, I'd like to share a brief analysis of the macroeconomic and business environment. Please go to Slide #4. Chilean economy growth continues posting above trend figures with a favorable shift in the composition of GDP as shown in the chart on the left. The [indiscernible] expanded by 1.6% year-on-year in the third quarter, resulting in an average expansion of 2.5% year-to-date, although the annual growth rate accelerated, it's important to highlight the statistical effect of the higher comparison base from a year ago when the economy began to improve. However, the positive news come from the composition of growth. Domestic demand increased significantly by expanding 5.8% year-on-year in the third quarter primarily driven by a strong recovery in gross investment, which rose 10% year-on-year, led by a 22% year-on-year increase in machinery and equipment. As shown in the other right chart, the acceleration in local investment has offset the slowdown in exports, which remained unchanged in the quarter. The [ growing ] contribution from domestic demand is relevant not only because it supports positive GDP growth, but also because loan volumes are more closely linked to domestic demand than the overall economy. This could have narrowed the gap between loan growth and GDP growth that we have observed in recent years. It's reasonable to expect the trend to continue in the near term. Monthly GDP data shows that the commerce sector grew 6.7% year-on-year in the fourth quarter, while capital good import, which is a good leading indicator for investment activity increased 19.6% year-on-year in the fourth quarter after rising 30.6% in the previous quarter. Looking ahead, several factors suggest that this positive momentum will persist through the year. One of them is improvement in consumer confidence as shown in the bottom right chart apart from the upward trend in the overall continent, the sub index that measures the 12-month economic outlook for the country rose to 59 points, surpassing the neutral level of 50 and reaching its highest value since the first half of 2018. Now please go to Slide #5. Overall, we have seen a normalization of the main nominal figures prices, interest rates and the exchange rate. Regarding inflation, the 12-month CPI variation ended the year at [ 3.5% ], down from 4.4% in September and 4.5% in 2024. The [indiscernible] convergence over the Central Bank's 3% target was driven by lower inflation in the fourth quarter to just 0.1% quarter-on-quarter from 1.4% in the third quarter due to lower contribution from food, energy and core goods. Core inflation, which excludes volatile items also declined from 3.9% year-on-year in the third quarter to 3.3% in the fourth quarter. It's noteworthy that the decline occurred in an environment of economic recovery, particularly in domestic demand, suggesting improvements on the supply side, such as lower unit labor costs due to productivity gains. Depreciation of the Chilean peso against the dollar also showed to ease inflationary pressures. Given these trends, the Central Bank continues normalizing monetary policy by reducing the policy rate by 25 basis points in December to 4.5%. According to the forward guidance provided in the December monetary policy release, further rate cuts are expected this year toward the estimated neutral rate of 4.25%. Updated macro-forecast and guidance will be provided by the Central Bank in its March monetary policy report. In these more favorable environment, the Chilean peso has strengthened against the dollar, narrowing the gap relative to the global dollar index, the DXY as shown in the bottom chart. Key drivers include improved terms of trade supported by higher copper prices and better expectations for the Chilean economy. I would now like to present our baseline scenario for this year. Please move to Slide 6. We expect about Chilean economic growth of around 2.4% in 2026. This expansion should be supported by strong domestic demand, driven by both investment and consumption as confidence improved, monetary ease continuing to take effect and corporate price rise. Given better-than-expected global conditions and potential improvements in domestic factors, we are now led in our bias to beat GDP outlook. We also expect inflation to convert to the 3% target in 2026. This forecast is based on the absence of further adjustment in regulated prices comparable to those seen in electricity tariffs in previous years, the impact of peso appreciation on tradable inflation and lower unit labor costs resulting from improved productivity. In this scenario, we expect the Central Bank to reduce the policy rate to the neutral level of 4.25%. We can roll out an additional reduction to 4% if the peso appreciate further or if supply side pressures is more than expected. As we mentioned in previous webcast, this forecast are subject to risk. The evolution of the global environment is particularly relevant for Chile given our high degree of integration into world market. Developments such as U.S. and Chinese GDP performance as well as geopolitical tensions remain critical to monitor. On the domestic front, the geopolitical agenda, will also be important considering the recent government transition and the possibility of a more market-friendly quality framework. Before moving to our quarterly results, let's begin with a review of the industry landscape. Please go to Slide 7. The banking industry continued to show resilience even as inflation and interest rates move toward more normalized levels as shown on the chart on the top left. Quarterly net income for the industry was CLP 1.2 trillion with a 15% return on average EBIT, a moderate result from peak levels, but it's still in a healthy and sustainable range. Turning to asset quality. The top right chart shows that NPLs remained steady at 2.5% with a coverage ratio at 1.4x. In terms of loans to GDP, this ratio reached 75% as of December 2025, extending the below trend behavior observed in recent years. Loan demand remains subdued in 2025 despite lower interest rates and signs of improving investment, particularly over the second half of the year. The bottom right chart further reinforces this. Since December 2019, total loans for the industry have contracted 2.6% in real sense with consumer lending down around 17% and commercial lending down close to 11%, while mortgage remains the only segment showing growth, rising 19% over the same period. Looking ahead, industry projections point to a rather reactivation in 2026. According to our baseline scenario as presented in the fourth quarter 2025, financial management review report, total loans are expected to grow around 4.5% in nominal terms this year, with commercial lending returning to positive real growth helped by improving business sentiment, a big capital expenditure by companies and a more supportive interest rate environment. Consumer and mortgage loans are expected to expand between 4.5% and 5% nominal, consistent with a moderate rebound in household consumption and a demand for housing that is expected to keep on growing. In terms of profitability, it's likely to stabilize, as the industry net interest margin is expected to ramp from 3.5% and 3.7%, reflected a yield curve that remains relatively flat and normalized inflation near to the Central Bank's 3% target. Credit risk metrics should continue to improve gradually with NPLs projected to decline toward 2.2% to 2.3% and the credit loss expense ratio should read a range of 1.2% to 1.3%. Overall, this trend suggest a more balanced rate environment as the sector transitions away from market-driven revenues and back to our fundamental base growth. Now I'll turn the call over to Pablo to discuss Banco de Chile results for the quarter. Pablo Ricci: Thank you, Rodrigo. Let's turn to Slide 9. Before discussing the financials, I would like to briefly review our business strategy and our core aspirations that guide Banco de Chile's actions. At the core of our strategy is our purpose: to contribute to the development of the country, its people and companies. Everything we do across our business, our culture and our digital transformation flows from that principle. Our model is built around three strategic priorities, placing the customer at the center of our decisions, operating with efficiency and productivity and maintaining a strong commitment to sustainability and [ de ] Chile. Together, these pillars support our long-term ambition and delivering sustainable and profitable growth supported by strong governance, disciplined risk management and the collaborative culture. In line with these aspirations, we have defined clear midterm targets, as shown on the right. That reflects both our competitive position and the standards that we set ourselves. We aim to remain top one in return on average capital among our relevant peers, and maintain a cost-to-income ratio below 40%, which we have revised down from 42% based on the solid improvements we have achieved in the recent years. We also seek to strengthen our market leadership by leading market shares and demand deposits in local currency, commercial loans and consumer loans. From a customer standpoint, we are committed to delivering a Net Promoter Score of at least 73%. While on the reputational front, we aspire to rank among the top 3 institutions in Chile based on the Merco ranking. Together, these goals anchor execution of our strategic plan and reinforce our long-term vision to be the best bank for our customers, the best place to work for our people and the best investment for our shareholders. Let me now move to Slide 10, which highlights some of the most relevant business advances we achieved during 2025. This year, we launched our new acquiring and processing subsidiary, Banchile Pagos which seeks to give us a stronger position in the payment ecosystem and allowing us to broaden our value proposition for companies ranging from SMEs to corporations. As discussed in previous calls, this initiative reflects our strategy of deepening digital capabilities and strengthening fee-based income streams. We also continue to expand and enhance our FAN digital accounts, which have met a sustained demand for a fully digital on-boarding and transactional solutions from customers. Total FAN accounts reached 2.4 million in December 2025, representing a 25% year-on-year increase while balances per account rose by 32% over the last year. In parallel, we stepped up cross-selling initiatives for credit cards and micro loans within the FAN base driving higher engagement and further deepening relationships in this fast-growing segment. Likewise, we continue to advance in our leadership ambitions in lending. Originations and consumer loans increased by 7.2% year-on-year, reflecting disciplined growth and improved origination capabilities across our distribution channels as we continue to benefit from increased originations through digital channels. At the same time, our SME client base continued to expand with current accounts growing around 12% year-on-year reinforcing our role as a primary bank for a broader base of small- and medium-sized enterprises. Within this segment, non-government guaranteed installment loans for SMEs showed particularly strong momentum, growing 9.4% year-on-year, highlighting healthy underlying demand beyond support programs. In addition, our investment in AI-based virtual assistance enhance both customer and employee experiences by speeding up response times, improving service availability and boosting internal productivity. These tools have become an increasingly important part of our digital transformation journey. We also made significant progress in improving productivity across the organization, supported by the steady expansion of digital channels, higher levels of automation and continued adoption of advanced technologies in their commercial and operational processes. Additionally, we managed to deepen operational synergies with our subsidiaries by centralizing functions, standardizing processes and leveraging shared platforms to capture economies of scale and simplify our operating model. The successful integration of our collection subsidiary, SOCOFIN, represents a concrete example of this strategy and marks a major step towards a more centralized, efficient and simplified operating model without compromising service quality or collections performance. We have also continued to strengthen talent and capability development across the organization. Throughout the year, we deepened our leadership in commercial training programs, broaden internal mobility opportunities to support career growth and reinforce a positive collaborative workplace climate. These efforts were complemented by competitive employee benefits and initiatives designed to retain and develop high-performing teams, ensuring that our people remain a core differentiator for Banco de Chile. On the sustainability front, we placed U.S.-denominated ESG bonds under our MTN program to finance social projects, reinforcing our commitment to sustainable development and further diversifying our funding sources. This transaction builds on our long-standing approach to responsible finance and our strategy to support community-focused initiatives. And finally, in the second half of 2025, we presented the 4270 Project, a unique audio-visual initiative that documented Chile's 4,270 kilometers from North to South through a 90-day drone journey. Beyond this cultural value, the project reinforces our brand by linking Banco de Chile with national pride and long-term commitment to the country. Conceived as a gift to Chile and made more than 500 royalty-free images available for educational use and has received international recognition. Turning to Slide 12. Our results once again position us as the leader in the Chilean banking industry. We closed the quarter with a net income of CLP 266 billion. And for the full year, we reached CLP 1.2 trillion, maintaining our historical leadership and profitability. Our return on average capital stood at 21.9% in 2025, above most of our peers and consistent with our long-term track record on this matter, which coupled with an unparalleled capital position, the strongest among relevant peers. In terms of market share, we attained a 22% industry net income comfortably ahead of all of our peers. This performance reflects the quality of our franchise, disciplined risk management and the resilience of our core business. The chart on the bottom right shows the evolution of our return on average assets which continues to lead the system with a clear gap over peers. Even in the year marked by lower inflation, sudden yield curves, and softer loan demand, we maintained the superior result, thanks to solid funding, sound credit quality and efficient operating model. Moving to Slide 13. Our operating revenues remained resilient despite the normalization and inflation and the decline in noncustomer income. Total operating revenues reached CLP 749 billion in the quarter, with customer income increasing 4.4% year-on-year, reflecting the continued strength of our core business. Noncustomer income when compared to the fourth quarter of 2024, declined as expected, given the lower contribution from inflation index net asset position and net interest rate environment marked by flat yield curves yet overall revenue levels remained solid, well aligned with our forward-looking expectations. For the full year, operating revenues totaled CLP 3 trillion, remaining relatively stable when compared to 2024. This performance reflects the expected normalization in noncustomer income, mainly the lower contribution of our inflation index net position and decreased revenues from ALM. On a positive note, the underlying strength of our core business continued to make a difference. In fact, customer income increased by 4.2% for the full year, driven by solid retail loan related revenues, that benefited from improved lending spreads and higher fee generation across transactional services and mutual fund management. These dynamics underscore the resilience of our banking activities and the diversification of our revenue base. Even in the year marked by softer inflation and interest rate environment was marked by both lower short-term interest rates due to the ease in monetary process and a slight term spreads as yield curves remained flat for most of the year. On the right side of the slide, you can see how our margins continue to differentiate us. Our NIM remains the strongest among our peers, supported by our leadership in demand deposits, and the diversified loan mix that continues to provide a structural advantage. A similar pattern is evident in our fees margin where both the strength of our product offering and solid customer engagement allows us to maintain a stable and attractive contribution to operating income. Finally, our operating margin continues to position us ahead of peers. Even though market conditions have normalized, our focus on efficiency, digital adoption, process optimization has allowed us to protect profitability and maintain a clear gap relative to the system. Together, these drivers underscore the strength of our strategy and our consistent ability to convert commercial activity into superior financial performance. Please turn to Slide 14. Total loans rose 0.8% year-on-year, reaching CLP 39.2 trillion as of December 2025. This evolution reflects very different dynamics across mortgage, consumer and commercial portfolios. First, Residential Mortgage loans were the main source of our loan book expansion by growing 5.3% during the period. This growth was supported by higher inflation, lower interest rates, a stable housing market and recent public programs aimed at reactivating this industry. Second, Consumer Loans increased 3.9% year-on-year in line with the improvement seen in household consumption indicators during the year and the gradual recovery in demand reported in the -- by the Central Bank in the fourth quarter, 2025 credit survey. Third, in contrast to individual loans, Commercial Loans fell 3%, consistent with the slower recovery in private investment and the more conservative behavior of large corporates. This decline was further amplified by loan prepayments, a pattern observed across the banking industry among corporate customers. In terms of the composition of our loan book and our main growth drivers, Retail Banking is the most relevant in both cases, representing 67.5% of total loans, growing 4.2% year-on-year. Within Retail, individuals grew 4.4% year-on-year primarily driven by mortgage lending and the gradual pickup in installment loans during the second half of 2025. Meanwhile, SME expanded 3.3% during the same period, although an important note that excluding amortization of FOGAPE loans, SME loans grew 9.4% year-on-year, up from the 8% growth rate posted in the third quarter, reflecting a healthy and accelerating lending activity in this market, which is coupled with our continuous support for entrepreneurship. In Wholesale Banking, performance remains subdued. Total loans from this segment dropped 5.5% year-on-year with corporate banking leading the drop with 8.8%, while large companies posted a slight decrease of 0.5%. This decline was mainly due to the maturity of low spread trade finance operations, lower credit demand from corporations, prepayment and appreciation of the Chilean peso, which reduced foreign currency exposures when converted to CLP. At the same time, sectors such as real estate and construction are showing initial signs of improvement according to the Central Bank's credit surveys, although activity remains weak. In summary, our loan book is well balanced and ready to benefit from a more positive macroeconomic outlook. The economy is showing firmer domestic demand. The labor market is stabilizing. Inflation is heading back towards target and interest rates are expected to continue normalizing throughout 2026. In addition, surveys already reflect early improvements in credit demand from households, SMEs and sectors such as real estate and construction, coupled with increasing consumer confidence levels. With these positive conditions emerging, Banco de Chile is in a strong position to capture new opportunities and continue delivering industry-leading results. Turning to Slide 15. Our funding structure continues to be one of the strongest competitive advantages. As you can see on the left, demand deposits represent 26.8% of our total liabilities giving us a highly efficient funding base that remains structurally superior to the rest of the industry. This mix is further strengthened by time deposits and savings accounts, long-term debt issued and equity, supporting both solid liquidity position and cost efficiency. Looking at the chart on the top right, our demand deposit to loan ratio stands at 37%. Once again, the highest among major peers. This leadership is not only a source of lower funding costs, but also a reflection of our strong franchise, customer engagement and the trust we've built across all of our business segments. More importantly, our demand deposit base is primarily composed of retail depositors, which provide us with enough funding stability in the medium term. At the bottom of this slide, you can see the evolution of our inflation index position in the banking book. As explained in our financial management review report, our net asset exposure to the U.S. reached CLP 8.8 trillion in December 2025, increasing relative to the third quarter, mainly due to the growth in U.S. assets and the amortization of the previously issued denominated -- U.S.-denominated bonds. This position is composed of both our structural inflation index gap, which serves as a long-term hedge for our shareholders' equity against inflation and temporary directional positions managed by our treasury depending on short-term market expectations. Based on revenues obtained from inflation variations over the last quarters, we believe our strategy has more than offset the risks involved. Nevertheless, we continue to closely assess the expected inflation path and fed rate to adjust the exposures if needed. Altogether, the strength of our funding base, combined with the disciplined and effective balance sheet management allows us to sustain one of the lowest financing cost structures in the banking industry. Please turn to Slide 16 to review our capital position. As shown on the slide, Banco de Chile continues to maintain one of the strongest capital bases in the Chilean banking system, consistently operating at comfortable levels that are also well above peers. In December 2025, our CET1 ratio reached 14.5%, and our total capital ratio stood at 18.3% both reflecting a robust capital generation capacity and disciplined balance sheet management. These levels place us comfortably above the fully loaded Basel III requirements applicable in Chile. We achieved this solid position after multiple years of sustained profitability and prudent but attractive dividends, which allowed us to preserve capital even in 2025, a year marked by lower inflation and more normalized revenues. Moreover, moderate loan growth in 2025 contributed to the expansion of capital. Finally, an important regulatory update occurred earlier this month on January 16, 2026, the CMS removed the Pillar 2 charge of 0.13% previously assigned to us, bringing this requirement down to zero. This decision reflects the regulators positive assessment of our risk profile, governance and capital management practices. In summary, our strong CET1 and total capital ratios position us exceptionally well to continue growing profitably, maintaining our leadership in the industry and navigate the next stages of the economic cycle with confidence to grow our portfolio. Please turn to Slide 17 to review our asset quality. Our loan portfolio once again reflects the consistency of our risk culture. In the fourth quarter, expected credit losses were CLP 116 billion, bringing the full year figure to CLP 382 billion, which is 2.5% below the level we posted last year. In terms of cost of risk, this indicator improved to 0.97% slightly below 2024, underscoring the resilience of our loan portfolio and the effectiveness of our risk management practices. Breaking down the quarterly changes. The increase in provisions reflects both the normalization of asset quality indicators and a loan mix effect, given the stronger momentum in retail lending during the period. In the Retail banking segment, expected credit losses rose CLP 15 billion year-on-year, largely due to the low levels of 30- to 89-day past due loans recorded in the fourth quarter of 2024, which created a low comparison base. This was intensified by a pickup in lending activity during the quarter as reflected by consumer loans that increased 2% and credit card balances that grew 7.7% versus the third quarter. By contrast, the Wholesale Banking segment recorded a CLP 6 billion reduction in provisions compared with last year, also driven by a comparison base effect, but in the opposite direction. Specifically, the fourth quarter of 2024 included downgrades in certain real estate, construction and transportation clients, while the reclassifications in 2025 were more moderate. For the full year, credit loss expenses decreased CLP 9.8 billion year-on-year. This was mainly driven by the Wholesale Banking segment where better credit profiles in the real estate and construction sectors together with the reduction in exposures to specific manufacturing clients contributed to lower credit losses. The Retail segment also recorded a modest year-on-year reduction, these positive trends were partially offset by a CLP 19.6 billion loan volume and mix effect, entirely concentrated in the Retail Banking segment as well as CLP 3.4 billion increase in impairment on financial assets. In terms of delinquencies, the chart on the upper right shows that the entire industry's NPLs remain above pre-pandemic levels. Nevertheless, we continue to have a lower past-due loan ratio of 1.7%, maintaining a sizable gap versus our peers and the industry, due to a sound origination standards and monitoring practices. Looking forward, as economic activity improves, inflation moderates, we expect delinquency indicators to gradually converge towards our historical ranges. Nevertheless, as shown on the bottom left, our coverage remains one of the highest in the industry. As of December, total provisions reached CLP 1.5 trillion, including both specific allowances and additional provisions resulting in a coverage ratio of 223%. This robust buffer provides meaningful protection against potential stress scenarios and once again, differentiates our credit risk position from peers. In summary, despite the credit cycle that remains above long-term averages for the system, our asset quality metrics, strong provisioning levels and disciplined risk management practices continue to position Banco de Chile with one of the most resilient profiles in the industry. Please turn to Slide 18. Our structural cost discipline is supporting important efficiency gains, as you can see on this slide. Total operating expenses reached CLP 293 billion in the fourth quarter of '25 down from 3.5% and 6.7% in nominal and real terms, respectively, year-on-year. The decline, as shown on the chart on the top right was led by personnel expenses decreasing 7% year-on-year in nominal terms in the fourth quarter of 2025, mainly due to lower severance payments versus the 4Q '24 and slightly higher growth in salaries as headcount decreased 4% year-on-year as a result of the adoption of our sales and service model. Depreciation, amortization and other expenses dropped 12% year-on-year. This was partially offset by administration expenses that rose 5.1% year-on-year, mainly from marketing and technology-related expenses. For the full year, operating expenses were essentially flat at CLP 1.1 trillion, and in real terms, decreased 3.5% year-on-year. Specifically, personnel expenses fell 2.1% year-on-year, more than offsetting a 3.1% year-on-year increase in administrative expenses which remained below inflation while depreciation, amortization and other expenses also trended lower in 2025 versus the prior year. These positive trends in our cost base reflect a solid cost control culture we have developed over the last 5 years. The benefits we have obtained from successful optimization programs, including improved service and operating models, which have leveraged on targeted IT capital expenditures that are bearing fruit in terms of increased efficiency and productivity. As a result, our efficiency measured as total operating expenses to income reached 37.4% for 2025, comparing well to our history, peers and the industry. Looking ahead, our focus is unchanged. Maintain strict cost control while investing in capabilities that matter: digital, data and distribution so we can continue to post excellent productivity and efficiency levels. For 2026, our baseline guidance forecast efficiency around 39% under normalized revenue conditions. Please turn to Slide 19. Before taking your questions, I'd like to highlight a few key points from this presentation. Chile continues to demonstrate solid and resilient macroeconomic fundamentals, supported by credible institutions, a sound financial system and a stable policy framework. Despite a complex global environment, Chile remains well positioned relative to its peers and continues to offer a favorable environment for long-term investment. For 2026, we expect above-trend GDP growth of around 2.4% driven by stronger contribution from domestic demand, particularly investment, machinery equipment. Inflation and interest rates are also expected to converge to the long-term levels at 3% and 4.25%, respectively. Turning to Banco de Chile. I would like to reinforce our ability to combine strong earnings with robust capital levels. As shown on the left, we delivered $1.2 trillion in net income with a CET1 ratio of 14.5% and a return on average assets of 2.2%. Finally, regarding our full year 2026 guidance, we expect return on average capital in the range of 19% to 21%, efficiency around 39% and cost of risk between 1.1% and 1.2%. We remain confident in our ability to continue positioning Banco de Chile as the most profitable investment in the Chilean banking industry over the long term, supported by a solid strategy, the best customer base, superior asset quality, a sound risk culture and the strongest capital position among peers that will enable us to take advantage of a more dynamic lending environment as the Chilean economy gains momentum. Thank you. And if you have any questions, we'd be happy to answer them. Operator: [Operator Instructions] Our first question is from Ernesto Gabilondo from Bank of America. Ernesto María Gabilondo Márquez: Thank you. Rodrigo, Pablo and Daniel, and thanks for the opportunity to ask questions. My first question will be on the economic and political outlook. Just wondering what have you been hearing in terms of reducing the statutory tax rate and reducing the credit card limit on credit cards? I have seen other banks with a more cautious view on the timing of the approval of both topics. So I just want to hear your view. My second question is on your loan growth expectations. I wonder if you can break down your loan growth expectations per segment? And my last question is on your capital allocation. So shareholders approved a dividend payout ratio of 85%. But Banco de Chile continues to have a very high common equity Tier 1 ratio. So just wondering how you're seeing your capital allocation in the next years? And if you're expecting to take advantage of your strong balance sheet to take market share in the second half or next years? Rodrigo Aravena: Ernesto, thank you very much for the question. Its Rodrigo Aravena. In terms of the economic and the political outlook that we have. I think that there are a couple of things that's important to highlight here. First of all, we have for this year an official outlook for the economy for the GDP of 2.4%. However, we are aware about the potential asset risk in this estimate because we have seen very positive signs from the domestic demand. And also in terms of the business confidence, the consumer confidence, for example, we have seen a very positive trend. In fact, today, we have, for example, the highest consumer confidence, the expectation for the next 12 months from the household is the highest since 2018. Additionally, we have very good signals from the capital imports anticipated a good trend for investments. So having said that, I think that it's very important to mention that even though we will likely have a similar economic growth this year compared to the number that we have in 2025 and 2024. I think that the good news is the composition of growth because the main driver of activity this year will come from large domestic demand. In terms of the political agenda, political outlook, the new government will take office, March 11. Only at that time, we will know the main priorities, the main agenda. However, there is an important consensus in Chile, which is part of the agenda of the new government as well in terms of, for example, to propose a reform by reducing the corporate tax rate from the current 27% to -- we have to wait for the announcement of the government, but the consensus that the rate could fall towards, I don't know, 23% something like that. It could be a positive news in terms of the investment, in terms of the economic growth in the future. But again, we have to see what will be their priority for the new government, and we will have information on that only after March 11. But overall, today, we have a more positive view on the economy, especially from the domestic demand. But we have to take into consideration as well that the recent strengthening of the Chilean peso would review the inflationary pressures this year, which could have a potential impact in terms of interest rates. So we -- still we have some mixed trends that we have to pay special attention to. Pablo? Pablo Ricci: Okay. In terms of the interest rate caps and discussions, it's still very early, but obviously, similar to what happened in the past, the reduction leaves vulnerable or the mass market consumer markets unbanked and is precisely what occurred after those regulations that were implemented. This obviously could help return to the segment for the financial institutions. So this would be a positive move, but it's very early in the discussions to see if this will actually come through. In terms of loan growth by segment, what we're seeing for next year in the industry is loan growth growing around the 4.5% level for the industry. So we think that one of the most relevant areas that we should see a return to growth is in the Corporate Banking. So in Corporate Banking, which has been very weak over the last year, we believe that this -- we should start to see an improvement. And in terms of us what we're looking at growing is slightly -- well, above those levels, focusing in our key segments. We're seeing somewhere around the 7% nominal level of growth. Obviously, it will depend on the evolution of changes or improvements in terms of politics. We're seeing a recovery also in Consumer loans, which is very important for us, somewhere in the levels of around 6%. These numbers are nominal. Mortgage loans around the 5%, and Commercial Loans, we should see a pickup that's more around the 8%, which is the area that has had the highest difficulties over the last 5 years, where we've seen an important decrease with a special focus in those smaller and medium-sized businesses, SMEs. The third question was the capital. So I'll pass the call Daniel Galarce. Daniel Ignacio Galarce Toro: This is Daniel. Ernesto, as we have mentioned in the past, we have favorable gaps in terms of capital risk today, of course. And basically, we want to use them in the future as long as the economy gains some momentum. As we mentioned in our quarterly report also, we want to save and we take some market share in the future, particularly in 2026. So we want to grow above the industry in terms of loans. In the long run, and also, as we have mentioned in previous calls, we believe that we should cover, we should flow in capital ratios at least 1% above the regulatory limits. That means that probably we can float even over that margin over than 1% or something like that. But in the long run, important thing is that we want to use the capital in order to take more growth and faster growth than the rest of things. Operator: Our next question is from Andres Soto from Santander. Andres Soto: I have a couple of questions. The first one is regarding your loan growth expectations. I would like to understand two aspects. The first one is, how do you expect this loan growth to happen. Is it going to be more tilted to the second half of the year? Or you are going to see this pickup from the beginning? This considering that at the end of 2025, we actually saw a deceleration of growth for all the Chilean banks, but particularly for Banco de Chile. That will be my first question. Pablo Ricci: Yes. So for loan growth expectations, it should probably be more in the second half of the year, in line with activity and changes that can occur. You have to remember that in Chile, the government takes office on March 11. So all changes and benefits that could occur in the short term, would change after that date as well. So what we've seen in the last quarter of this year was low demand from customers from corporate customers some loan repayments from larger corporate customers and foreign trade loans that were -- that came due -- the retaken. So the fourth quarter was a little bit weaker in the commercial loans, so we should expect that in the second half of the year, we should start to see a larger pickup in terms of loans and in the medium term, we should see the possible benefits more in coming years because our expectations for the industry, remember is 4.5% nominal growth, which is under 1x the loan elasticity of Chile because we're expecting Chile to grow around 2.5% plus inflation of 3%, we're below the 1x. Andres Soto: Understood. And so thinking about 2027, can we assume that you -- there will be additional acceleration in lending based on this regulatory agenda that is being proposed by the new government? Or how do you see the medium-term expectations in terms of Chile GDP and lending activity? Pablo Ricci: If we look in the past, Chile always grew 2x. Probably that's more challenging to achieve by the medium-term goal or level of reasonable is around 1.4x, 1.5x, and they should be times there's higher levels of growth for a shorter period of time. So in 2027 and beyond, we should see better growth in the industry, taking back that level of growth that was lost during the last 4 years, especially in commercial loans and consumer loans. Rodrigo Aravena: Yes. Hi Andres, I think that it's also important to keep in mind that -- it's going to depend on the type of measure that the new government will announce. For example, there is an important consensus about the rules to reduce taxes, but the question is about the timeline of this potential reduction impacts. We have to remember that there is not an important majority in both [indiscernible]. So that's why -- there's going to be some indication between different parties, coalitions, et cetera. So that's why I think that even though we are aware about the potential average buyer now we're forecast for both for domestic demand loan growth for the GDP. I think that it's very important to analyze the specific details of the proposal of the new government especially in terms of the timeline of the potential reduction in taxes, the main area where the government will try to reduce the bureaucracy for investment, et cetera. So I think that the detail of the new proposal and the reform will be very important in terms of the potential timing of recovery of loans. Andres Soto: Perfect. My second question is on your guidance. You said 39% efficiency ratio. And I would like to understand better what drives this view considering your loan growth expectations and your NIM, I get a lower margin -- a lower efficiency ratio. So I wanted to clarify what you're seeing in terms of fee income, expense growth to see this would be the reason why you assume this level of efficiency? Pablo Ricci: Well, our 3-year project that was implemented, and we've seen significant improvements in terms of costs has been mostly implemented. We've seen improvements in efficiencies and productivities across the bank, a reduction in the branch network, optimizing the structure of Banco de Chile and that's permitted us over the last couple of years to have very low expense growth. For 2026, we should think of more in line with inflation expense growth due to last year's inflation affecting basically all of our numbers on operating expenses as well as some slightly higher depreciation levels because of technology investments, et cetera. In terms of operating income, as we mentioned, 4.5% NIM and fees, we should think, as we've said in other calls, our main driver is customers. So we should be having a good level of fee growth, thanks to a rise in customers, which is generally around the 7%, 1/3 is coming from FAN accounts of that number, cross-selling. And particularly this year, we should have more growth related to transactional revenues as well as some of our subsidiaries and will begin to have income from Banchile Pagos, our acquiring business. So it's reasonable to think of a level of around high single digits, low double digits for fee growth. So it should be similar to what we had in the prior year, but the composition of that number will be different because we expect more moderate growth in terms of AUM and mutual fund management, which we've had a very strong growth over the last few years. Andres Soto: Pablo, just to summarize, you are seeing expense growth in line with inflation and fee income above lending growth. Is that correct? Pablo Ricci: Expense growth in line, slightly above inflation and expense and fees similar to 2000 -- the prior year. We also take into consideration in operating expenses, we have in Banchile Pagos and in fees, we have Banchile Pagos as well and the rest is inflation Operator: Our next question is from [ Lindsay Shima ] from Goldman Sachs. Unknown Analyst: First, maybe just a follow-up on Banchile Pagos. Do you have any initial updates on how operations have been going? And then how do you see the overall market and the opportunity set there? And how much it can contribute to earnings in the future? And then my second question is just clarifying if the upside risks to local GDP growth are factored into your loan growth estimates and your overall estimates or if there's some upside risk there? Pablo Ricci: So for Banchile Pagos , it's been going very well. We started this, as you know, in the fourth quarter of 2025. Today, we have a level of around 4% of customers that are SMEs or equipment to the size of our SME book. We have about 4% of our Banchile Pagos customers. It's been growing well. We have a customer base that we're focusing this target of about 160,000 SMEs. And if we look at the smaller like mid-cap companies, that number goes up to 200,000. So we have an interesting level of customer base that we're cross-selling with our account managers, to Banchile Pagos. This number -- this new subsidiary will be adding important value to -- is one of the drivers for fee growth. It's also one of the drivers for a little bit more expensive, but it's coming out positive evolution of Banchile Pagos overall. So we're very happy with the level of growth that this product has had. Rodrigo Aravena: Okay. Thanks for the question. This is Rodrigo Aravena. As you mentioned, we have an up risk in terms of our GDP forecast, which is mainly based on five key drivers. First of all, we have a better [ copper ] price, which is important for the country. You know that the mining sector is important for us, represents nearly 15% of the GDP. So the improvement of the terms of trade is positive for us. Second, we have seen an important improvement in consumer confidence. Third, a similar trend for the business confidence. Fourth, we have seen an important pickup in capital goods imports, which potentially anticipate a better dynamics on total investment. And also, there are positive expectations regarding the measures that can be taken and announced by the new government, especially in terms of the reduction of [indiscernible], bureaucracy and also the potential room to reduce the corporate tax rate in the future. Of course, that when we have a better environment for the GDP, it's reasonable to expect a greater dynamics in loans. However, we have to consider that there is a delay between the GDP cycle and the loan cycle. I mean what I'm trying to say is that when you have an acceleration activity in some quarter, not necessarily, we have a fast acceleration in loans in the same period of time. So that's why I would say that we have an upward risk with GDP for the domestic demand this year that is not necessarily. We have the same asset risk for total loans this year. We can rule out that part of the recovery on loans will happen in the -- during the next year. Operator: Our next question is from [ Daniel Mora Adela ] from CrediCorp Capital. Unknown Analyst: I just have one question. You mentioned that you want to be the most profitable bank in Chile in terms of return of average capital. The new guidance of 19%, 21% since conservative, if we think about the ROE expectation of a key competitor. So I would like to understand if this will be the long-term return on average capital figure? Or do you expect -- and how do you expect to expand profitability? Pablo Ricci: Daniel, well, thank you for your question. I think it's important to consider if we look at different metrics and similar levels of capital, we have a very attractive level of returns. If we look at ROA, we're by far the leader. Today, we have -- it's true we have a CET1 ratio that's higher than our peers, and that generates a lower return on average capital. But our aspiration is to be number one. So in our guidance for this year is 19% to 21%. Maybe there's some things change within Chile. Those numbers can evolve, obviously. But in the medium term, the idea is to use this capital and organic growth, inorganic growth and we need to use effectively our capital. So this should generate better returns for us, and we should begin to see a return and return on average capital similar to what we see in return on average assets which we should return to being leaders as we deploy this additional capital and growth or how we use this to become more sustainable. Unknown Analyst: Perfect. And do you have a long-term figure already incorporating the use of the excess capital that you currently have? Pablo Ricci: No, we don't have a long-term figure, but as Daniel Galarce has mentioned that it's reasonable to see banks should have a reasonable level of capital in order to grow and use during a normal course of business, which generally is in the levels of 1%, 1.5% above the regulatory limits. Operator: Our next question is from Neha Agarwala from HSBC. Neha Agarwala: A quick one on the cost of risk and asset quality. How do you see that evolve going forward? Your cost of risk is slightly higher than what you had for 2025. It seems like it's mostly driven by the loan growth that you're expecting. But is there any other moving factors, if you could elaborate on that? And when I look at your guidance and the growth assumptions, the ROA is 19% to 21%, it seems like we could have a bit of upside risk to that number. Any thoughts that you can share on that? Pablo Ricci: Hi, Neha. Thanks for the questions. In terms of cost of risk, it's true our number of 1.1% to 1.2% is higher than what we've had over the recorded what we -- over the past few years. And that goes in line with the levels that we think are more in line with our long-term levels of cost of risk, and asset quality. We should see a year that's more -- we should see more growth this year, especially a change in mix that is more focused on SMEs, more focused in consumer loans. So the net position should be more profitability in terms of net interest margin cost of risk in the long term as this evolves to more normalized levels where we've been has been very low levels of cost of risk, which don't make sense for the cycle that we're in. We're in the cycle of GDP that's growing around above 2%, but unemployment rate quite high for this level. And coming out of a very high level of inflation that affected household income, and that's affected payment behavior. So we think it's reasonable to consider a cost of risk, which should move slowly return to the levels of our long term of 1.1% to 1.2%, but obviously, there's positive scenarios in that number if the economy improves better than expected unemployment comes down, real wage has increased more. That number could be better. So you can argue both ways. In terms of ROE, its similar to that, what's driving these numbers of ROE of 19% to 21% and part of this is cost of risk and part of this is operating expenses. So as improvements if there's surprises in the year, there can be a positive effect on the bottom line as well. And you can also have the negative effect if the surprises in the year of lower inflation, more unemployment, you can have the opposite. But considering everything that economists are looking at. We think it's reasonable the levels of cost of risk today that we should have and the levels of return on average capital. Operator: Thank you. We would like to thank everyone for the participation today. I will now hand it to the Banco de Chile team for the concluding remarks. Pablo Ricci: Thanks for taking the time to listen to our call and we look forward to speaking with you in the next quarter's results. Bye. Operator: We'll now be closing all the line. Thank you, and have a nice day.
Operator: Good morning, and welcome to the Victory Capital Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis. Matthew Dennis: Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make several forward-looking statements. Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release, which was issued after the market closed yesterday, disclose both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slides accompanying this call, both of which are available on the Investor Relations section of our website at ir.vcm.com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO. David? David Brown: Thanks, Matt. Good morning, and welcome to Victory Capital's Fourth Quarter 2025 Earnings Call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll begin today by reviewing the fourth quarter, which capped off a transformational year for Victory Capital, one marked by significant operating and financial milestones. Most notably, we successfully closed our strategic partnership with Amundi and integrated Pioneer Investments onto our platform. From a financial perspective, 2025 was a landmark year. We surpassed $1 billion in annual revenue for the first time in our company's history, while also delivering record earnings, milestones that underscore the strength of our diversified platform and the momentum we've built as we look forward to 2026. Following my remarks, I'll turn the call over to Mike, who will provide a detailed review of our fourth quarter and full year financial results. After that, we will be available to answer your questions. The quarterly business overview begins on Slide 5. We had an excellent final quarter to end 2025. We achieved record high AUM in the quarter and ended the year with $317 billion in total client assets. Client engagement remained exceptionally strong with long-term gross flows of $17.1 billion, representing our highest level ever of quarterly gross sales. We generated very strong sales momentum in our international distribution channel, our VictoryShares ETF platform and multiple investment franchises. This momentum was supported by new products and creating vehicles for distribution outside of the U.S. as well as our recently enlarged U.S. sales force and increasing investments in our distribution partners. Long-term net flows of minus $2.1 billion were off trend and reflected several onetime items during the quarter. The one-off outflows were primarily attributable to one large platform redeeming one of our strategies, which was close to $1 billion and several larger year-end client reallocation redemptions where clients redeemed to get back in their investment policy guidelines, but still have sizable accounts and remain our clients. Profitability remained excellent to end the year with record adjusted EBITDA of $197.5 million, supported by a strong fee rate that increased quarter-over-quarter, and the achievement on a run rate basis of $97 million of the targeted $110 million in net expense synergies at year-end. The adjusted EBITDA margin of 52.8% in the quarter is up from last quarter and is a result of our continued superb execution. We continue to have one of the highest, if not the highest, EBITDA margins of any publicly traded traditional asset manager. These strong results translated to record quarterly adjusted earnings per diluted share with tax benefit of $1.78. When you look at our long-term EPS growth chart, which is in the appendix of this presentation on Slide 21, you can see our 21% compounded annual growth rate in EPS since our IPO. This steady progression demonstrates the resilience and quality of our differentiated platform in many different market environments and significant changes in the industry. As we look to the future, we see the same growth trajectory as we have experienced since our IPO in 2018 for the upcoming years. Stepping back for a moment, when we look at our full year accomplishments, we achieved record financial performance across a broad spectrum of key metrics. Today, Victory Capital offers a more comprehensive suite of investment capabilities and manages more assets for a larger and more diversified client base than at any point in our company's history. Our reach now extends across multiple U.S. distribution channels and internationally, it spans over 60 countries with 17% of our AUM currently coming from clients outside of the U.S. While we are certainly proud of our long-term success, our strategy has never been simply to grow for growth's sake alone. Rather, we are purposely focused on strategically expanding and deepening our relationships with intermediary platforms, financial advisers, institutional investors, consultants and direct investors. This approach ensures that our growth is sustainable, profitable and aligned with delivering value to both our clients and our shareholders. The acquisition of the Amundi U.S. business, Pioneer Investments, was truly transformational. It was not about only enhancing scale. It was a multifaceted transaction that brought us strong investment capabilities, a well-known brand at Pioneer, globalization of our company by significantly expanding our presence outside the U.S., and it provided us with a deeper platform to accelerate our company-wide growth strategy. It is also worth noting that under our ownership, Pioneer Investments, investment performance has remained extremely strong. If you compare Morningstar data from the end of this year versus the end of last year when they were under Amundi ownership, the overall investment performance metrics have been steady or in many cases, improved. Pioneer Investments has also continued to experience organic growth and is net flow positive in each quarter since the transaction's closing. This is a good example of our ability to enhance acquired businesses without disrupting the investment process or client experience. Our integration efforts are close to complete. We are on track to reach the full $110 million target during the 2026 calendar year. Beyond the numbers, we're continuing to integrate our sales forces in the different channels. As we fully integrate our sales forces, we anticipate our current sales momentum will increase. One of the most exciting outcomes of this transaction is how it has globalized our business. We now have 17% of our AUM coming from clients outside of the U.S. across 60 countries. This international diversification is significant strategically and represents a tremendous growth opportunity. Our business outside the United States is net flow positive since closing and in the fourth quarter and continues to ramp up in 2026. We have added resources to handle the influx of international RFPs and continue to make other investments in this area. International geographies provide us with new distribution channels and client segments that were not previously accessible to us. As we continue to expand and integrate our international sales force and launch products suitable for these markets, we expect this to be a sustainable source of growth going forward. To support our international expansion, Amundi launched 5 new UCITS products during the fourth quarter specific to Victory Capital. These registered products are designed for distribution outside the U.S. and include 3 UCITS that are managed by our RS Global and RS Value investment teams and 2 are managed by Pioneer Investments. These product launches set us up well for 2026 and beyond and as we continue to build out our international shelf space, and we are planning for more UCITS launches in 2026. Turning to Slide 6. Our ETF platform delivered another strong quarter with $1 billion in positive net flows, bringing year-end assets to nearly $19 billion. This growth shows no sign of slowing as we are off to a nice start in 2026. We are winning new shelf space at multiple U.S. intermediary platforms and Amundi's sales force began selling our U.S.-listed ETFs overseas at the start of this year. This adds a new distribution engine to the growth story. The consistency of our progress here is particularly noteworthy. Our Free Cash Flow ETF series generated positive net flows every single month in 2025, while our active fixed income ETFs also produced strong net inflows throughout the year. This is not sporadic success. It is sustained due to demand for our value-added product lineup. Our recent platform wins validate this outlook. For example, at Morgan Stanley, our VictoryShares Core Intermediate Bond ETF, ticker UITB and the VictoryShares Short-Term Bond ETF, ticker USTB, broke through as the first active fixed income ETFs on their Morgan Stanley wealth management focus list. Our VictoryShares Free Cash Flow ETF, ticker VFLO continues to be highlighted in the single factor subcategory as the top-rated quality ETF option on Merrill's platform. Meanwhile, USTB has also earned recommended list status at Wells Fargo, RBC and LPL. These are just a few of our recent wins that demonstrate broad-based recognition of our capabilities. The economics of this business remain compelling as well. With an average fee rate of 34 basis points across our 23 ETF suite, this business contributes meaningfully to both organic growth and profitability. Turning to Slide 9. I'm pleased to report improvements in investment performance across both short- and long-term periods. 54 mutual funds and ETFs, representing 65% of our rated fund AUM achieved 4- or 5-star overall ratings from Morningstar. According to Morningstar, nearly half of our fund AUM ranked in the top quartile over the trailing 3-year period. It's important to note that these figures represent only our products with Morningstar ratings. Many of our newer high-growth products, including several from our expanding VictoryShares platform, have yet to reach their 3-year anniversary and therefore, aren't eligible for Morningstar ratings. When we look at our entire AUM against benchmarks, picture is strong, well over 60% is outperforming across key time periods. This broad-based investment performance strength across our platform gives us confidence in our ability to continue winning new mandates and retaining existing client relationships over a long-term horizon. Turning to capital allocation on Slide 10. Our #1 priority is to ensure that our balance sheet can support our inorganic growth strategy. Over the last year, we have materially brought down net leverage to the lowest level for the company since we went public in 2018. Additionally, given that our earnings are at the highest levels they have ever been, we are now generating the most cash we ever have as a company. This puts us in an excellent position to execute inorganically and to execute with size and scale, which is our preference. We continue to be extremely busy from an acquisition standpoint. In fact, I would say the busiest we ever have been. Add this to a very conducive environment for acquisitions in our sector, where the issues on why the consolidation is happening are becoming more pronounced. Factoring the aforementioned, I could not be more encouraged about the acquisition opportunity set. The exact timing of an acquisition is always hard to predict and patience is an asset when sourcing and diligencing opportunities. That said, our cadence of executing quite frequently has been consistent over the last decade plus, and I see no reason for that to change as we look forward. Our second priority with our capital is the buyback of our stock. We think the sector is underappreciated and undervalued and our company is ground zero for this. We have a 21% EPS CAGR since our IPO 8 years ago, over 50% margins that have expanded materially over the years to be best-in-class, strong cash flow with a sizable cash tax benefit supported by strong diversified recurring revenue stream and an expense base that is 2/3 variable and is well tested during multiple market environments. Moreover, our firm-wide investment performance is excellent, and we are just beginning to see the benefits of the globalization of our business through the opening of the distribution channels outside the U.S. Within the U.S., we've increased the size of our sales force significantly throughout our different channels. Lastly, we recorded the highest level of gross sales we ever have had in the history of our company this past quarter. All of this makes us extremely excited to be buyers of our stock through our buyback program given the current value ascribed to our business by the market. To be even clearer, we will buy our stock back even more aggressively, we're working on executing on our next transformational acquisition. We think using our capital to purchase our stock or to execute on a transformational acquisition are great outcomes for our shareholders. With that, I will turn the call over to Mike, who will go through the financial results in more detail. Mike? Michael Policarpo: Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 13. Our financial results demonstrate the strength of our integrated platform and the operating efficiency in our business. Revenue reached $374.1 million, up 3.6% sequentially from the third quarter, driven by a 3.1% increase in average AUM to $312.9 billion. At the same time, our revenue realization rate increased slightly, reflecting the diversified mix of our product suite and client base. GAAP operating income was $153 million and GAAP net income was $1.32 per diluted share. Both metrics were up sharply from the third quarter and the same period last year. Adjusted EBITDA reached a record $197.5 million, up $7 million or 3.7% from the prior quarter. This marks continued growth as we get closer to the full realization of our projected net expense synergies. Our adjusted EBITDA margin increased to 52.8%, demonstrating our ability to maintain profitability while simultaneously investing in our platform. With 88% of our net expense synergies now realized on a run rate basis, we are on track to achieve our full $110 million target during 2026, which is ahead of our original time line. Adjusted net income with tax benefit totaled $151.7 million or $1.78 per diluted share, representing strong cash generation that supports our capital allocation strategy that Dave mentioned earlier. In the fourth quarter, we repurchased 814,000 shares under our repurchase plans, deploying $51.6 million at an average price of approximately $63 per share. At year-end, we had more than $300 million in remaining capacity under our current $500 million authorization. In total, we returned $93 million to shareholders in the fourth quarter through a combination of share repurchases and dividends. For the full year 2025, we returned $366 million to shareholders, underscoring the cash-generative nature of our business and our commitment to delivering shareholder value. The Board declared our regular quarterly cash dividend of $0.49 per share, which will be paid on March 25 to shareholders of record at the close of business on March 10. Our net leverage ratio was 1.0x as we end the quarter with $164 million in cash on the balance sheet, and our revolver remains undrawn. Total client assets reached $316.6 billion, as you can see on Slide 14. This is up from $176.1 billion at the beginning of 2025, an increase of $140.5 billion or 80% for the year. On an average AUM basis, fourth quarter average AUM rose 3.1% to $312.9 billion. For the full year 2025, average AUM was $268.8 billion, reflecting the end of the first quarter closing of the Pioneer acquisition. The composition of our AUM reflects a well-diversified platform across asset classes, distribution channels, investment vehicles and geographies. On Slide 15, we show the gross and net flows of our long-term AUM. Long-term gross sales reached an all-time high of $17.1 billion in the fourth quarter, up slightly from the third quarter. This marked the sixth consecutive quarter of higher gross sales. Year-over-year, gross sales increased by 159% from $6.6 billion in the final quarter of 2024. At an annualized run rate of approximately $68 billion or 22% of long-term AUM, we believe gross sales are sufficient to drive positive organic growth over the longer term. Long-term net outflows were $2.1 billion in the fourth quarter compared to $244 million in Q3. Q4 was an off-trend quarter from a net flow perspective, as Dave explained earlier in the presentation. We did realize strong underlying positive net flows in key growth areas in the fourth quarter, including Pioneer's multi-asset and fixed income strategies, validating the strength of the Pioneer franchise and our integration efforts. Our international channel was also net flow positive, and there is substantial runway ahead as Victory products become more widely available in new geographies and in packaging suited for sales outside of the U.S. Our VictoryShares ETFs had net inflows along with multiple other franchises in 2025. Our one but not yet funded book remains strong, spanning across numerous franchises and distribution channels. We expect this to help us in the first half of 2026 as most mandates will fund during this time frame. Looking ahead, we remain confident in achieving consistent positive net flows as we now have the product set, the distribution reach and the investment performance to support this. As illustrated on Slide 16, revenue for the fourth quarter was $374.1 million, up $12.9 million or 3.6% sequentially from $361.2 million in the third quarter. Our revenue realization rate was 47.4 basis points in the fourth quarter. This is at the high end of our guidance range of 46 to 47 basis points and reflects the favorable product mix we are seeing across our diversified platform. For the full year 2025, total revenue surpassed the $1 billion mark at $1.3 billion, a substantial increase from the previous year. The stability of our revenue realization rate is noteworthy. Despite significant changes to our AUM composition throughout the year, including the Pioneer acquisition, VictoryShares nearly doubling in size and various franchise rationalizations, we have maintained revenue realization within a tight range. This speaks to the quality and diversification of our product mix. For 2026, we expect our revenue realization rate to remain consistent within our 46 to 47 basis point guidance. On Slide 17, you can see total GAAP operating expenses of $221 million were essentially flat with $223 million in the third quarter. The decrease in operating expenses was due to lower acquisition, restructuring and integration costs, which peaked in the second quarter and should continue to decline in future periods as we complete the final stages of the Pioneer integration. This was partially offset by slightly higher compensation expenses, which are correlated to revenue and earnings. Including nonoperating expenses, total expenses of $232.5 million were in line with the prior quarter's $231.9 million. Our GAAP tax rate was 20.4% in the fourth quarter, below our long-term guidance of 24% to 25% because of onetime state tax apportionment adjustments related to the pro forma business incorporating the Pioneer Investments business. While we see no material changes to our long-term guidance for taxes, this did have a few cents positive impact on our ANI EPS in the fourth quarter. Our expense discipline is reflected in our industry-leading margins. Looking at the expense trajectory throughout 2025, we've shown consistent progress on integration and net expense synergy realization while continuing to make investments to drive future growth. Turning to our non-GAAP results on Slide 18. You can see the upward trajectory of our business over the past 4 quarters. This chart illustrates consistent profitable growth in both adjusted net income and earnings per diluted share with tax benefit, demonstrating the quality and sustainability of our earnings. The sharp year-over-year growth metrics detailed in the sidebar tell an important story. Our ability to drive earnings and cash flow expansion. This is the power of our strategic M&A model at work. We're actively building a more valuable and profitable platform. We believe our track record of consistently achieving stepwise growth through strategic acquisitions remains significantly underappreciated by the market. We have demonstrated a repeatable playbook for identifying, acquiring, integrating and creating shareholder value from transformational transactions. The Pioneer acquisition is the latest proof point. We are ahead of schedule on net expense synergies. And at the same time, we nearly doubled the size of our VictoryShares platform. Enhanced our organic profile with additional high-performing products and access to new clients, and we are generating industry-leading margins while simultaneously investing for growth. These results, just 9 months post the closing have exceeded our original accretion estimates of low double digits. This is not just about one successful deal. It's about a proven inorganic growth strategy that creates compounding value over time. Turning to capital management on Slide 19. We continue to be disciplined stewards of our shareholder capital. At the end of the third quarter, we combined our original term loans into a single credit facility of $985 million. This new consolidated Term Loan B has a 7-year term, effectively pushing out our debt maturity to 2032, eliminating any near-term refinancing risk and simplified our capital structure. This provides us with significant strategic flexibility, and we also lowered our borrowing costs. The new facility is priced at SOFR plus 200 basis points, which represents a 35 basis point reduction from our pre-refinancing rate. This improvement translates to approximately $3.5 million in annual interest savings, a meaningful reduction that flows directly to our bottom line. At the same time, we extended our $100 million revolving credit facility for an additional 5 years. The revolver, which remains undrawn, now matures in 2030 and provides us with additional liquidity and financial flexibility. At year-end, our leverage position was very strong and supportive of our inorganic growth strategy. Our Term Loan B balance stood at $982.5 million, down $2.5 million from the refinancing. Combined with $164 million in cash on the balance sheet and our undrawn $100 million revolver, we have substantial liquidity and a net leverage ratio of 1x. With that, I will turn the call back to the operator for questions. Operator: [Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Bank of America. Ivory Gao: This is Ivory on for Craig. As legacy Victory strategies begin to be registered into UCITS vehicles and distributed through Amundi's global network in 2026, what should we expect in terms of UCITS product additions and platform approvals? And how quickly could these contribute to an improvement in non-U.S. flows? David Brown: I'd first start off to say that we did highlight in the script that we had launched a few new UCITS, I think, 5 of them. 3 of them were kind of legacy Victory and 2 of them were Pioneer. And so we've already started on that journey of launching products into the system. We plan to launch more in 2026. And the impact of the new launches will probably take effect as we move through the year and more towards the end of the year. There are a lot of products today that are in the system that are selling. We did highlight that outside the U.S., we have been net flow positive since we closed the acquisition in April, and we're pretty excited about the international distribution channel. But I'd say over -- not just '26, but over the years to come, we'll be launching a lot more product into the system. Ivory Gao: And for a follow-up, as you evaluate a pipeline that stands well above and below the $50 billion to $200 billion target range, what characteristics would make a larger deal actionable for you in the near term versus one you prefer to defer? David Brown: I think when we think of acquisitions, we look at what's available, and we also look -- we start off with the concept of does it make our company better? Does it enhance our platform from a distribution perspective, from a product perspective, from a size and scale perspective. And so we look at all of those characteristics. And if it fits well, all of those, we'll execute on it. I don't think that we're in the position to want to defer an acquisition or not. I think it's kind of what's in front of us and what's available and does it fit the things that we're thinking about that betters our company. Operator: Your next question comes from the line of Benjamin Budish with Barclays. Benjamin Budish: Maybe just following up on the M&A discussion. It sounded like after the Amundi transaction, you guys were quite operationally ready to do something again. I think in the prepared comments, you talked about sort of sticking with your historical cadence, but you're also -- do you see more opportunities, you're going to be very aggressive here. Just curious how should we be thinking about the potential cadence of M&A? Could things be happening more frequently given the -- what you see as an urgency kind of building across the industry and your own sort of appetite? Or is Amundi a little bit different since it's not -- it's a different type of acquisition and a kind of traditional straightforward transaction would require more internal integration. So just curious how we should think about that cadence going forward? David Brown: I'd start off to say that we are almost complete with the integration of Amundi/Pioneer Investments. And you can see that through the progression of the net expense synergies almost getting to the complete target that we have out there. And so we're very comfortable with where we sit today that we are ready to do an acquisition. And I think from there, we highlighted that a larger sized acquisition makes a lot of sense for us for a lot of the reasons we've articulated over the last few years with what's happening in the industry. And the cadence, we have been very active. If you go back to when we did our management buyout in 2013 and even when you look at when we did our IPO in 2018, we have averaged an acquisition every 1.5 years is really what the cadence is. And I don't think there's any reason to think that, that's going to change. It could be a little bit faster, it could be a little bit slower. But when you look at it over a longer period of time, I think that's a good cadence. Of course, there are lots of external factors that impact that. But what I would leave you with is that we are ready to do an acquisition. We're very busy. I think there's a lot of great opportunities out there that would make our company a lot better and also would allow us to create a lot of shareholder value. And I would -- last thing I would say is our balance sheet is ready as well as we've brought down our leverage to the lowest it's been since we've been a public company. Benjamin Budish: Understood. Very helpful. Maybe just a follow-up. You've been talking about the build-out of Victory's sales force in addition to sort of the preparation being done with the Amundi sales force. Can you maybe talk about where you are in that process? How much more hiring needs to be done or training? Obviously, you sound like you're very confident on the near-term outlook, but just what else is required to be done internally? Or is it sort of -- in addition to those synergies, the pieces are in place and it's sort of a matter of time before your confidence in the inflow outlook starts to come to fruition? David Brown: So we're about 10 months in since we've closed the acquisition. We are done with the hiring and the integration. The teams are set and the training is happening. I would say that really in all of our distribution channels, I think our team is trained well. I think they understand the products. I think it's getting out in the field and educating clients and platforms inside the U.S. and outside the U.S. about our different products. So we're well into the journey. I think as we look out in '26, we think that a lot of the investments we've made from a training, from a marketing, from a partnership perspective are going to pay us back in 2026. So I think a lot of the hard work has been done, and now we're really ready to reap the benefits of it. Operator: [Operator Instructions] Your next question comes from the line of Michael Cho with JPMorgan. Y. Cho: I just wanted to touch on the commentary, Dave, you made about the ETFs and the various intermediary partnership. I was hoping you could flesh out some of the comments you made earlier and maybe the benefits you see these partnerships providing Victory, including any market share dynamics that you've observed, and really how that's relative or how that's evolved relative to the traditional mutual fund side? David Brown: Michael. So let me start off and say that our ETF platform, VictoryShares, I think, is quite unique. It averages about 34 basis points across the platform, and we have 23 ETFs. And we have, over the last few years, really invested into the distribution platforms through partnerships, through partnering on marketing and education and a lot of other areas where we think we're adding value to the platforms and also to the advisers. And so with those investments, we're seeing a lot of great results. And I think as time goes on, we're going to do more of them. And I think those types of partnerships are going to be super important for the future, and I think they're going to be table stakes to be able to be competitive in selling and servicing ETFs. We're seeing more opportunities. A lot more of the platforms have come up with different kinds of partnerships that are unique to their own platforms. The ones that we like are ones that have more of a selection perspective as opposed to partnering with everybody, and those are the areas that we're investing that have more of a limited set of managers they're partnering with. But I see it as a big part of the future. They are similar to mutual fund platform partnerships. They are not so different, but there are some unique characteristics from an ETF perspective. Y. Cho: Great. I appreciate all that color. I guess if I could just follow up just along the same topic with more partnerships, more selective and more nuances to come. Now how would we think about maybe an extension of these types of partnerships, maybe as it relates to private markets, right? I mean does that give Victory an edge when thinking about shelf space for any prospective private markets partners that may be out there? David Brown: I think it does. If you have a partnership or you're close with a platform, I think it makes it a lot easier to introduce new products, be it private market products or other types of products. We have seen that over the years as we've come into partnerships, as we've built relationships with the platforms and the home offices and a lot of the advisers, it's much easier to introduce new products off of an existing relationship and partnership. And so as we evolve our business and I think as the industry evolves to buying different types of products, again, private markets and other products, I think these partnerships and these relationships are super valuable to us. And I think it just gives comfort to the platforms of who they're doing business with, how we do business, how we service. And I think there's a real long-term relationship opportunity that you can maximize as you develop new products. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, everyone, and welcome to the Amtech Systems Fiscal First Quarter 2026 Earnings Call. Please note that this call is being recorded and simultaneously webcast. I would now like to turn the call over to Jordan Darrow, of Darrow Associates Investor Relations. Please go ahead. Jordan Darrow: Thank you, and good afternoon, everyone. Appreciate you joining us for the Amtech Systems Fiscal 2026 First Quarter Conference Call and Webcast. With me today on the call are Bob Daigle, Chairman and Chief Executive Officer, and Mark Weaver, Interim Chief Financial Officer. After close of market today, Amtech released its financial results for 2026. The earnings release is posted on the company's website at www.amtechsystems.com in the Investors section. Before we begin, I'd like to remind everyone that the Safe Harbor disclaimer in our public filings covers this call and the webcast. Some of the comments we make during today's call will contain forward-looking statements and assumptions that are subject to risks and uncertainties, including, but not limited to, those contained in our SEC filings, all of which are posted in the Investors section of our corporate website. The company assumes no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. These statements are not a guarantee of future performance, and actual results could differ materially from current expectations. Among the important factors which could cause actual results to differ materially from those in forward-looking statements are changes in technologies used by customers and competitors, changes in volatility and the demand for products, the effect of changing worldwide political and economic conditions including trade sanctions, and the effect of overall market conditions, including equity and credit markets and market acceptance risks, ongoing logistics, supply chain and labor matters, and capital allocation plans. Other risk factors are detailed in our SEC filings, including our Form 10-Ks and Form 10-Q. Additionally, in today's conference call, we will be referencing non-GAAP financial measures as we discuss the financial results for the first quarter. You will find a reconciliation of those non-GAAP measures to our actual GAAP results included in the press release issued today. I will now turn the call over to Amtech's Chief Executive Officer, Bob Daigle. Bob Daigle: Thank you, Jordan, and welcome to everyone joining our call today. Before I provide commentary on the quarter and recent developments, I'd like to introduce Mark Weaver, our Interim CFO. Mark joined us on December 16 to help us with our CFO transition until we appoint a permanent CFO. While we are making progress in our search, I'm confident we are in terrific hands with Mark. I had the privilege of having him as a colleague when he served as the Chief Accounting Officer and Corporate Controller of Rogers Corporation. Among other senior financial roles, he was the Chief Accounting Officer of NXP Semiconductors. We're very pleased to have someone with his experience assist us during this transition. Now on to my review of the quarter. Revenue for the quarter was $19 million, at the midpoint of our guidance, and our adjusted EBITDA was $1.4 million, also within our guidance range. The quarter benefited from strength in demand for AI-related products, which accounted for 35% of revenue for our Thermal Processing Solutions segment in the first quarter, up from about 30% in the fourth quarter. Another highlight is that our bookings were strong for the quarter. Our overall book-to-bill ratio was 1.1, driven by performance of our Thermal Processing Solutions segment due to strength in AI equipment orders. We have the ability to deliver the majority of this equipment in the second quarter due to our short lead times, but customers have requested some deliveries in the third quarter to align with their factory build-outs. As broadly reported, semiconductor OEMs and OSATs continue to increase investments to expand capacity to support strong AI infrastructure demand. We expect demand for the equipment we produce for AI applications to continue to increase in the third and fourth quarters. In addition to traditional advanced packaging bookings, I'm pleased to report that we received initial orders from multiple industry leaders for panel-level packaging equipment during the quarter. Panel-level packaging is an emerging technology that provides cost and throughput advantages that should drive broader adoption and is expected to lead to future growth. We're also continuing to invest in next-generation equipment for high-density packaging to support emerging customer requirements. We believe this next-generation equipment will provide the opportunity to significantly increase our addressable market beyond 2026. We are currently processing samples from multiple customers. For our Semiconductor Fabrication Solutions segment, I'm pleased to report our first win for a specialty chemical product that we developed for a medical device semiconductor application. We produced and delivered the initial product in the first quarter. Strong customer engagement and a robust opportunity pipeline for our specialty chemicals is validating our strategy to overserve underserved customers with technically demanding high-value applications. We also had improved bookings for our Intrifix and BTU parts and services businesses during the quarter as a result of a more proactive approach to business development and improvements we've made in service levels. Unfortunately, weak demand for our Pura Hoffman products negatively impacted overall SFS results for the quarter and offset bookings gains at Entrepix. Demand at Pura Hoffman continues to be impacted by weakness in the mature node semiconductor market and severe cost pressures at major silicon carbide semiconductor customers. 2026 will be an investment year at SFS as we execute on our strategy to overserve the underserved, but we expect double-digit growth and meaningful profits from these sticky recurring revenue streams beyond 2026. We believe the strong operating leverage and working capital efficiency that has resulted from our product line rationalization efforts and a migration to a semi-fabless manufacturing model over the past two years will result in continued strong cash flow and further increases in gross margins as revenues increase. This was our ninth consecutive quarter of positive operating cash flow. Cash generated from operations was $4.1 million for the first quarter, and we ended the quarter with a cash balance of $22.1 million without debt. Adoption of a semi-fabless model, which included the consolidation of our manufacturing footprint from seven facilities to four, should also allow us to significantly increase revenue with minimal capital expenditures. We expect capital expenditures for the year to be below $1 million. In summary, growth opportunities driven by AI infrastructure investments and our differentiated capabilities, combined with strong operating leverage as a result of our asset-light semi-fabless business model, position us very well to deliver meaningful shareholder value. Now for further details on our financial results, I'll pass the call to Mark. Mark Weaver: Great. Thank you, Bob. It really is a pleasure to be working with you again, even if it's for a short period of time. Now on to my review of the financials for the fiscal 2026 first quarter. For proper perspective, net revenues of $19 million in 2026 do not represent a meaningful comparison to the prior year period. This is due to the company's product line rationalization that began two years ago. For these periods, the only perspective worth noting is for AI-related demand, which grew year over year. You'll see in a moment the benefits of this rationalization today when I address AI revenues as part of our TPS segment, and when I talk about our consolidated gross margin as a percentage of revenues and other improvements in the company's operating performance, cash flow generation, and balance sheet. Back to the discussion on revenues. A more appropriate comparison is to the fourth quarter. Total revenues were positively influenced by growth in AI product demand within the TPS segment. AI revenues contributed approximately 35% of TPS revenue versus 30% in Q4. The increase was approximately 10% on a sequential basis. Bookings for AI applications remain strong. Other areas of TPS and SFS sales offset this growth on a consolidated basis, which is attributable to general weakness in non-AI areas of the semiconductor industry, in particular for mature node semiconductors used in the automotive electronics industry. Circling back to the benefits of the company's transformation, gross margin as a percentage of sales increased in 2026 sequentially from the fourth quarter and year over year from the first quarter of last year. Importantly, the increase in gross margin was achieved on lower sales volume. Gross margin as a percentage of sales increased to 44.8% in 2026 from 38.4% in the same period of the prior year and 44.4% in the fourth quarter. Selling, general, and administrative expenses increased $500,000 sequentially from the prior quarter but decreased by $1.2 million as compared to 2025. The increase from the prior quarter is primarily due to incentive compensation, professional fees, and insurance, and the decrease from the prior year period is primarily due to cost reduction efforts and structural changes to reduce fixed costs. Research, development, and engineering expenses increased by $300,000 sequentially from the prior quarter and were relatively flat compared to the same prior year period. The company continues to maintain a more focused approach to its innovation investments, including next-generation products targeting the AI supply chain in our specialty chemicals business. GAAP net income for 2026 was $100,000 or $0.01 per share. This compares to GAAP net income of $1.1 million or $0.07 per share for the preceding quarter and GAAP net income of $300,000 or $0.02 per share for 2025. Unrestricted cash and cash equivalents at 12/31/2025 were $22.1 million compared to $17.9 million at 09/30/2025, due primarily to the company's focus on operational cash generation, working capital optimization, strong accounts receivable collections, and accounts payable management. In the past twelve months through 12/31/2025, cash increased by 67% or $8.9 million while the company has remained without debt. As for the stock repurchase program, the company did not use any cash for this as no shares were repurchased since the plan was put in place on December 9. Now turning to our outlook, for the second fiscal quarter ending 03/31/2026, the company expects revenue in the range of $19 million to $21 million. At the midpoint of this range, our guidance is a sequential increase from our reported revenue for the first quarter. AI-related equipment sales for the Thermal Processing Solutions segment are anticipated to drive the majority of our revenue growth. With the benefit of previously implemented structural and operational cost reductions, Amtech expects to continue delivering solid operating leverage, resulting in adjusted EBITDA margins once again coming in at high single digits. The outlook provided during our call today and in our earnings press release is based on an assumed exchange rate between the United States dollar and foreign currencies. Changes in the value of foreign currencies in relation to the United States dollar could cause actual results to differ from expectations. And now I will turn the call over to the operator for questions. Operator: Ladies and gentlemen, at this time, we'll begin the question-and-answer session. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Again, that is star and then 1. And our first question today comes from George Marema from Pareto Ventures. Please go ahead with your question. George Marema: Good afternoon. Bob Daigle: Hello, George. Afternoon. George Marema: So I was curious on this, you discussed in the call about this panel-level business. Could you elaborate a little bit on what that is? A little more color on that? Bob Daigle: Yeah. Traditionally, chip packaging has been pretty discrete components, and the drive is really from a cost-effectiveness and throughput perspective to start to produce packaging really in large panel formats and then, you know, basically dice them up later like they do with semiconductor wafers. Our sense is this is really the future of advanced packaging. So it was important for us to demonstrate that, again, we were in a position of process of record with the key OEMs and OSATs. So the variety of customer orders that we received for that technology in this quarter, I think, was good validation about future demand. George Marema: And, during 2025, you were talking about perhaps in 2026 fiscal, you may have some new products. Does this have anything to do with that? Some new capabilities? Bob Daigle: The new products are more around addressing higher density packaging requirements, not panel processing uses very similar technology to what we're providing today. So and, again, what I mentioned earlier is, we've built equipment, we're processing samples for customers for these higher density packaging applications. But we're still in the relatively early stages. At this stage, I'm thinking, George, that you're looking at probably 2027 before we would see any meaningful demand from that next-generation equipment. George Marema: Okay. And, I was happy to hear you got a win in the specialty chemical business. Are there any other qualifications underway in the services and chemicals businesses? Bob Daigle: Yeah. We have a variety of active engagements right now. Again, as I mentioned in the commentary, I've been very pleased with the level of customer engagement and pull for these collaborative development efforts. So I think we're starting to get a sense that this business model that we've developed around addressing these niche applications looks very promising in terms of developing a pipeline of these recurring revenue streams. George Marema: Okay. That's great to hear. Thanks, Bob. Bob Daigle: All right. Thank you, George. Operator: Our next question comes from Gary DeStefano from Titan Partners. Please go ahead with your question. Gary DeStefano: Yes. Hey, Bob. Congrats on the very solid quarter. Bob Daigle: Thank you, Gary. Gary DeStefano: No problem. Listen, just a quick macro question level for me. Given the growing backlog, customer orders, consistent operating cash flow, continued customer engagement, what are you most encouraged about here as you move through fiscal 2026? Bob Daigle: I think the two areas that are strong bookings and as I mentioned in the commentary, right, we have short lead times on the equipment we provide for AI packaging. So we had a very solid booking quarter. Some of it stretches into Q3. But at least based on our channel checks and what we're hearing from the field, we're seeing continued strong demand, and what we're hearing is we should continue to see strength that goes into the third quarter and fourth quarter as well. Because there's always been the question of how long the demand is going to continue, and we're getting continued evidence that we've got better visibility out to a few quarters now, which gives us some comfort. As I mentioned, being process of record for panel-level packaging also gives us some comfort in terms of driving future demand because we do think that's going to be a key part of where the industry is going. And I'd say the third area, which George explored earlier, is really the evidence that both the win with the customer and the strength of the pipeline we're seeing for our specialty chemicals, I think, puts us in a position where, in terms of visibility towards growth and increasing confidence about growth, we're in a good place. And, again, the fact that we continue to see as we see this revenue flow through, the margin profile continues to strengthen, which is what we anticipated. But ultimately, we needed to see it in our results, and we are seeing it. Gary DeStefano: That makes sense. I appreciate you taking the question, Bob. Thank you. Bob Daigle: Thank you. Operator: Our next question comes from Craig Irwin from ROTH Capital Partners. Please go ahead with your question. Craig Irwin: Thank you. Good evening. So Bob, I know you've worked so hard over the last several quarters to bring down your frictional costs, right? Downsizing the footprint, adjusting your spending to your highest priority projects and customers. This quarter, we saw a $700,000 increase quarter over quarter on the SG&A and R&D lines combined. I know you're not going to be spending that much money unless you're very intentional about it. Can you maybe call out any items in there that you think are particularly interesting or projects or customers or general areas of commitment? Is this AI, or is this something for the broader semiconductor industry? Anything you could share. Bob Daigle: Yeah. No. The R&D increases are really in two categories. We are investing and have increased investments in the next-generation packaging equipment for AI applications. So being able to handle higher density, we increased investments really to move more quickly. And I thought that was important for us. It's a huge opportunity for us that we need to capitalize on. And, again, I think the commentary around the semi-fab solutions traction, now we've seen some validation, so we have increased resources a bit in that area and really trying to build that momentum behind growth in that business as well. On the more of the G&A side, there were consulting costs. There's also some variable comp costs that were in the quarter that I think will be ongoing. I'm not so sure that the consulting costs, some of that could come down a bit as well in future quarters. But those were the main drivers for the differences quarter over quarter. Craig Irwin: Understood. Thank you for that. Then the next thing is, you know, business momentum. Right? I know we're kind of in a choppy environment. You know, you've been climbing a set of stairs as far as your AI revenue mix, you know, 25%, 30%, 35%. That's awesome. Can you really, do you have confidence that that mix is likely to continue to increase over the next couple of quarters? And I know that there's not a whole lot of order visibility per se given the fast book and burn nature of a lot of your business. You know, one-to-one book-to-bill is great, but do you feel like the sort of general tempo of that base business is healthy and potentially accelerating to where we can see different growth than what we've had over the last couple of quarters? Bob Daigle: So let me start with the AI. I think our visibility has improved on the AI part of the business. Customers are more open around what they have planned for expansion these days because, obviously, with the rapid ramps, people are more concerned about making sure their supply chains, their supply base can support that. So we're feeling pretty good around, you know, it's not great visibility. It's not like the orders are placed, but in terms of forecast and what we're hearing in terms of the tempo and the build-outs. Right? Because I think if you characterized prior quarters, the equipment for the most part we were providing for AI chip packaging was, I'll call it, squeezing equipment into existing facilities. But you're now seeing new facilities being built and starting to be outfitted with equipment. And that's part of when I commented on the strong book-to-bill in the first quarter, but some of these orders in the third quarter, that's tied to that, right? They're going to finish the facilities in the second quarter, do some of the installation work in the third quarter. In terms of visibility on the balance of the semiconductor market, you know, I read the same things and pay attention probably to the same sources as you do. There's some inklings of maybe some improvement in the more traditional mature node markets. But the clarity is definitely not as good in that space as it is in AI. I do expect the momentum to continue around AI. Those other parts of the business we're less certain about, and that was reflected frankly in our guidance for the second quarter. Craig Irwin: Understood. Last question, if I may. Sometimes GAAP earnings can be important. So given the different data services out there in the market, this quarter, you had an 83% tax rate. That doesn't strike me as a natural or normal tax rate for you. Can you maybe talk us through what this was, and what you think a fair tax rate could be for this year? I realized last year actually was a tax benefit. So I wouldn't be surprised if we saw one again. But this kind of thing does sometimes create a little volatility in smaller names. Bob Daigle: Yeah. Let me ask Mark to jump in here. Mark Weaver: Yeah. So Craig, this is because our US entities are in a loss position. And so with them being in a loss position, there is no tax benefit that's recognized as a result of them being in a loss position because we have a valuation allowance against our deferred tax assets. So what you're seeing is the tax is coming through that's on our foreign entities. And although the foreign entities have income, that's probably twice as much as the loss in the US, but the loss in the US, because that benefit doesn't come through because we have a valuation allowance, it ends up being that you're showing a larger tax expense on the bottom line in relation to the overall income because that income is reduced on a book basis because of the US. Does that help? Craig Irwin: That makes complete sense to me. I've seen this many times in the past. And, you know, as we watch this US super cycle play out, hopefully, we end up having to pay a lot of tax at a low rate, but a lot of taxes in the future. Right. So congratulations on the progress this quarter. I'll hop back in the queue. Bob Daigle: All right. Thanks, Craig. Operator: And with that, we'll be ending today's question and answer session. I would like to turn the floor back over to Bob Daigle for closing remarks. Bob Daigle: All right. Well, thank you. And in closing, I want to thank everybody on the call today. We look forward to seeing some of you in March at the upcoming annual Roth Capital Conference, as well as other investor relations activities. And for everyone else, please stay tuned for updates on our continued progress and have a good evening. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Equitable Holdings Full Year and Fourth Quarter Earnings Call. [Operator Instructions] I will now hand the call over to Erik Bass, Head of Investor Relations. Please go ahead. Erik Bass: Thank you. Good morning, and welcome to Equitable Holdings Full Year and Fourth Quarter 2025 Earnings Call. Materials for today's call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may differ materially from those expressed in or indicated by such forward-looking statements. Please refer to the safe harbor language on Slide 2 of our presentation for additional information. Joining me on today's call are Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; Onur Erzan, President of AllianceBernstein; and Tom Simone, Chief Financial Officer for AllianceBernstein. During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website and in our earnings release, slide presentation and financial supplement. I will now turn the call over to Mark. Mark Pearson: Good morning, and thank you for joining today's call. Before diving into our 2025 results and 2026 outlook, I want to take a step back to reflect on the journey Equitable Holdings has been on since our IPO. We have been intentional about refining our business mix to focus on three core growth engines: U.S. retirement, asset management and wealth management. These are very attractive and growing markets, and they are integral to our mission of helping our clients secure their financial well-being and live long and fulfilling lives. Our integrated model positions us well to be one of the long-term winners in each of them. At the same time, we have been reshaping our balance sheet to become more capital-light, reduce exposure to legacy insurance risks and increase the quality of cash flows. You saw further evidence of this in 2025 with the execution of our life reinsurance transaction with RGA, and we believe these actions will create a more valuable company. Our business has solid momentum entering 2026, and we remain focused on achieving all of our 2027 financial targets. Turning to Slide 3. I will provide some brief highlights from our 2025 results. Full year non-GAAP operating earnings were $5.64 per share or $6.21 per share after adjusting for notable items. This was up 1% over 2024 as growth was held back by elevated mortality claims. The past two quarters have shown increased earnings power, and we expect EPS growth to accelerate in 2026. We produced full year organic cash generation of $1.6 billion, consistent with our $1.6 billion to $1.7 billion guidance range. In 2026, we expect this to increase to approximately $1.8 billion, and we remain on track to reach $2 billion in 2027. Assets under management and administration ended 2025 at a record $1.1 trillion, up 10% year-over-year, which will support growth in fee and spread-based earnings. Finally, we returned $1.8 billion to shareholders in 2025, which includes $500 million of additional share repurchases executed following the life reinsurance transaction. Excluding these incremental buybacks, our payout ratio was 68% at the high end of our 60% to 70% target range. Moving to organic growth. We continue to see healthy trends despite competitive market conditions. In retirement, we produced $5.9 billion of net flows in 2025, a 4% organic growth rate, helped by another year of record RILA sales. We also leaned into the funding agreement-backed note market to take advantage of attractive spreads and had $5 billion of new issuance. This is not reflected in our retirement net flows, but will help support growth in spread-based earnings. Wealth Management also continues to see strong momentum with full year net inflows of $8.4 billion, a 13% organic growth rate. The number of wealth planners who are our most productive advisers focused on holistic wealth planning increased by 12%. AllianceBernstein experienced mixed dynamics in 2025. It had overall net outflows of $11.3 billion, which includes $4 billion of low fee outflows related to the RGA transaction. On the other hand, AB continues to see strong momentum in its private markets business, which increased AUM by 18% to $82 billion and is well positioned to achieve its target of $90 billion to $100 billion in AUM by the end of 2027. AB ended 2025 with an institutional pipeline of $20 billion, and it has over $3 billion of additional insurance wins that are also expected to fund in 2026. One incremental growth opportunity is commercial real estate lending. AB is making investments to enhance its platform and will onboard more than $10 billion of Equitable's commercial mortgage loan portfolio in the second half of the year. This is a win for both companies and is another good example of the flywheel benefits between Equitable and AB. Finally, we continue to make strong progress on our strategic initiatives. I already mentioned the life reinsurance transaction with RGA, which freed $2 billion of capital and reduced our mortality exposure by 75%. We used a portion of the proceeds to help drive growth in Asset and Wealth Management by increasing our ownership stake in AB and funding an investment in the FCA Re sidecar and the acquisition of Stifel Independent Advisors. We are also on track to realize our targeted $150 million of expense savings by 2027, with $120 million currently in our run rate results. We have already achieved our $110 million target for incremental investment income from shifting to private markets and see opportunity for further upside. Moving to Slide 4. We highlight some of the key performance indicators for our growth strategy and the progress since our 2023 Investor Day. I've already mentioned several of these, so I'll just focus on a couple of areas. In Retirement, net flows and AUM growth are running ahead of Investor Day forecast. We also are making progress in growing our institutional business, which had over $600 million of net inflows in 2025 across in-plan annuities and HSAs. We expect a similar level of inflows in 2026 and forecast this to ramp further over time. In Wealth Management, we achieved our target of $200 million in annual earnings two years ahead of plan, and the business has excellent momentum given top quartile organic growth and rising adviser productivity. We expect Wealth Management to sustain double-digit annual earnings growth, assuming normal market conditions. Finally, AB has done a good job in executing on its margin initiatives, and it reported a 33.7% adjusted operating margin in 2025 at the upper end of its targeted range. At the same time, it is seeing benefits from growth investments in areas such as private markets, insurance asset management and active ETFs. Overall, we see good commercial growth momentum, which will support further growth in earnings and cash flows. Slide 5 provides an update on progress against our 2027 financial targets. Starting with cash generation, we remain on track to reach $2 billion in 2027. As I mentioned earlier, we forecast $1.8 billion of cash generation in 2026, which represents greater than 10% year-over-year growth. Over 50% of cash flow is coming from Assets and Wealth Management, and we now have a track record of paying dividends from our Arizona insurance entity, giving us good visibility into future cash flows. Through 12 quarters, our payout ratio is 67% at the high end of our targeted 60% to 70% range. Note that this does not include the $500 million of incremental share repurchases funded by the RGA transaction. The one area where we are currently below our target is earnings per share growth, which has been 8% through the first three years of our plan. We attribute this primarily to the elevated mortality claims experienced in 2025. Our exposure to mortality is significantly reduced following the life reinsurance transaction, and we expect EPS growth to improve in 2026, getting us back on track. Turning to Slide 6. I want to highlight some of the reasons we feel confident in projecting strong growth in 2026. First, we ended 2025 with a record level of assets under management across each of our business segments, which bodes well for growth in fee and spread-based earnings. Given the healthy organic growth momentum we have discussed, particularly in Retirement and Wealth Management, we expect continued growth in assets under management and advice moving forward. Importantly, we also have significantly less exposure to future fluctuations in mortality claims. The RGA transaction reduced our net mortality exposure by 75%. So even if 2025's experience were to recur, the bottom line impact would be materially reduced. Finally, we will get the full benefit from the additional share repurchases executed in the second half of 2025. We have reduced our share count by 9% over the past year, which provides a nice tailwind for EPS growth in 2026. Equitable is well positioned in attractive growing markets, and I'm confident in our ability to execute on the opportunity in front of us. I will now turn the call over to Robin to discuss our fourth quarter results and outlook in more detail. Robin Raju: Thank you, Mark. Turning to Slide 7. I'll provide some more detail on our fourth quarter results. On a consolidated basis, non-GAAP operating earnings were $513 million or $1.73 per share, and we reported net income of $215 million. The only notable item we had in the quarter was $10 million of noncash expense in corporate and other related to the write-off of a legacy software investment. Excluding this, non-GAAP operating earnings per share would have been $1.76, up 8% year-over-year. Our consolidated tax rate was approximately 18% this quarter, consistent with the guidance we provided. Total assets under management and administration increased 10% year-over-year to a record $1.1 trillion, which provides a tailwind for earnings as we enter 2026. Adjusted book value per share ex AOCI and with AB at market value was $33.84. In our view, this is a more meaningful number than reported book value per share, which significantly understates the fair value of our AB stake. On this basis, our adjusted debt-to-capital ratio ended the year at 25%. On Slide 8, I'll provide some further details on our segment level earnings drivers. In Retirement, fourth quarter earnings increased 4% year-over-year and 2% sequentially after adjusting for notable items. Given differences in tax rates across different periods, I'll focus on pretax results. Net interest margin or NIM increased 2% sequentially, driven by the growth in general account assets. As expected, our NIM spread compressed modestly versus the third quarter, reflecting the runoff of our very profitable older RILA block and some timing noise in investment income. We expect some additional spread compression in the first half of 2026, but anticipate spreads will stabilize after that. Over time, we expect quarterly NIM growth to roughly track the growth in general account assets, excluding embedded derivatives. Fee-based revenues increased 8% sequentially, driven by higher average separate account AUM as well as a favorable catch-up adjustment. Offsetting the growth in revenues was higher commission expense. While we expect commissions to trend higher over time with increased sales, the sequential growth was inflated by an allocation true-up with Wealth Management. This shifted some earnings between segments but had a neutral impact at a total company level. Putting it all together, we view this quarter's level of pretax retirement earnings as a reasonable starting point from which to project future growth. Turning to Asset Management. AB reported strong fourth quarter results with earnings up 4% sequentially. Base fees continue to benefit from growth in average AUM and performance fees of $82 million came in above our guidance. AB delivered a full year margin of 33.7%, at the upper end of our 30% to 35% guidance range provided at Investor Day. As a reminder, AB has seasonality in results given the timing of performance fees, but the business is entering 2026 with solid earnings momentum. Moving to Wealth Management. Fourth quarter earnings increased 40% year-over-year, and the business exceeded our target of $200 million in annual earnings, two years ahead of schedule. Results in this quarter benefited from a favorable commission adjustment from retirement and elevated transaction fees, and we view $60 million of quarterly earnings as a better run rate. We continue to forecast double-digit earnings growth moving forward, supported by steady increases in AUA and adviser productivity. Wealth Management attracted $2.1 billion of advisory net flows in the quarter and $8.4 billion for the full year, a 13% organic growth rate. This compares favorably versus industry peers, and we are excited about the outlook for 2026. Finally, Corporate and Other reported a loss of $123 million in the quarter. This was higher than our expectation due to $10 million of onetime expenses, approximately $25 million of elevated mortality and a lower tax rate. The adverse mortality experience was concentrated in December and resulted from a high number of small claims with less reinsurance coverage. While we still retain some exposure to fluctuations in mortality, the RGA transaction has significantly narrowed the range of potential outcomes going forward. Turning to Slide 9. I'll highlight Equitable's capital management program and cash flow outlook. In the fourth quarter, we returned $354 million to shareholders, including $277 million of share repurchases. For the full year, we reduced shares outstanding by 9%, which included $500 million of incremental share repurchases funded by proceeds from our individual life reinsurance transaction. Our full year payout ratio was 95% or 68%, excluding the additional $500 million of buybacks. We ended the year with $1.1 billion of cash at the holding company, up from $800 million at the end of the third quarter and comfortably above our $500 million minimum target. During the fourth quarter, we received approximately $600 million of subsidiary dividends, including the annual distribution from our Wealth Management business. As a reminder, our holding company cash position tends to be elevated at year-end due to timing of subsidiary distributions, and we expect it to trend lower in the first half of 2026. For the full year, we had total cash generation of $2.6 billion, which includes $1 billion of proceeds from the RGA transaction. Organic cash generation was modestly above $1.6 billion and in line with our guidance range. As Mark mentioned, we expect approximately $1.8 billion of cash generation in 2026, and we remain on track to achieve $2 billion of annual cash generation in 2027. Finally, we expect our year-end 2025 combined NAIC RBC ratio to be approximately 475%, above our target of 400% plus. This year-over-year increase reflects the benefit of the RGA transaction and provides us with ample capital flexibility moving forward. On Slide 10, we highlight the value of new business, or VNB, which is generated mainly in our retirement business. VNB represents the present value of expected future cash flows from new sales, which is above and beyond the capital deployed to fund growth. It is intended to provide investors with some visibility into the drivers of future growth and cash flow from our insurance subsidiaries. In 2025, we had record retirement sales, which helped drive an increase in VNB to $600 million. We deployed about $580 million of capital to support these sales. While our VNB margin declined modestly due to a shift in sales mix and a low spread environment, we continue to generate a 15% plus IRR on new business. We are able to achieve above-industry returns as a result of our unique distribution model, which leverages equitable advisers and results in a lower average cost of funds and a top quartile expense ratio in our retirement business. I would also note, VNB did not include the impact of distribution fees earned in our Wealth Management business or investment management fees earned by AB. These are additional benefits of our integrated business model that show up as noninsurance earnings and cash flows. Turning to Slide 11. I want to conclude by providing some additional guidance to help you forecast our results for 2026 and beyond. This assumes an 8% total return for equity markets and interest rates following the forward curve. We also forecast an 8% to 9% return for our alternative portfolio. Starting with retirement, we expect mid- to high single-digit growth in pretax earnings with spreads stabilizing in the second half of the year. Asset Management results will be highly sensitive to markets, but we have provided some baseline guidance for the compensation ratio and noncomp expenses. In addition, AB has good visibility into achieving performance fees of at least $80 million to $100 million in 2026. In Wealth Management, we forecast double-digit growth in earnings from the full year 2025 level. Turning to Corporate and Other. We project a full year loss in the $350 million to $400 million range. There will be some quarterly volatility in results based on the seasonal pattern of mortality with higher expected claims in the first and fourth quarters of the year. We have also increased our baseline GAAP assumption for mortality to incorporate recent experience. Finally, we expect a total company tax rate of approximately 20% and segment tax rate of 16% for Retirement, 26% for Wealth Management and 28% for Asset Management. We may have opportunity to execute on additional opportunistic tax planning initiatives in the first half of 2026, which could reduce our consolidated tax rate below the 20% level. Putting it all together, we expect growth in 2026 earnings per share, excluding notable items, to exceed our 12% to 15% target. I will now turn the call back over to Mark. Mark? Mark Pearson: Thanks, Robin. As I mentioned at the beginning of the call, Equitable has been on a journey since our IPO to build a more profitable and faster-growing company, and we enter 2026 with solid momentum. We have a strong balance sheet and continue to increase our organic cash generation. This has enabled us to consistently return capital to shareholders while also investing for growth. You can see this in the strong net flows we are generating across Retirement, Wealth Management and AB Private Markets, and each of our business segments ended the year with record AUM. As Robin and I have both discussed, we have tailwinds that should drive stronger earnings per share growth in 2026, and we remain focused on achieving our 2027 financial targets. We will now open the line to take your questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Suneet Kamath from Jefferies. Suneet Kamath: I just wanted to start with private credit again. It seems like your stock trades like a private equity company except on the days when those stocks go up. And I know you have some slides in the back talking about private credit, but can you just talk a little bit about how you're feeling about the quality of what you have in the portfolio? I don't know if you have a watch list, if you can talk about some of the sectors that you're particularly focused on. It just seems like this is an ongoing kind of overhang on the stock. Robin Raju: Sure, Suneet. We look forward to the multiple of those private credit companies for Equitable over time. But we added Slide 16 in the earnings presentation to give some a little bit more disclosure on our private credit portfolio. So private credit, if you take a step back, it's about 16% of our total GA. Within that, almost 50% of that is within corporate private placements, which is nothing new for insurance companies over time. There has been some recent noise about software. That's typically found in the direct lending portion of the portfolio. That's about 4% of the private credit portfolio or 1% direct lending is 1% of the total GA. Software specifically within the direct lending is a small portion of that. It's 15 basis points of the total general account. So it's really immaterial for us, and we're underweight the industry benchmarks on our software exposure within that for Equitable and the general account. Maybe I'll pass to Onur to speak about private credit at AllianceBernstein within the broader client portfolios as well. Onur? Onur Erzan: Yes. Thanks, Robin. Just to start with the broader context, if you think about our AUM, which is approaching $900 billion, private credit broadly defined makes up roughly $82 billion, both in terms of fee-paying and fee eligible assets. Within that, the corporate direct lending that Robin mentioned makes up roughly 25% of that $82 billion. So within the grand scheme of things, it's also a relatively small exposure to AB overall as a category. And within that, we have some exposure to software in line with the other corporate direct lending franchises. But our experience so far has been spectacular over the last decade plus, we have deployed $15 billion with software companies. We had zero net losses in that. When we look at our current portfolio, our elevated risk rating is only 3% of those companies that is in our portfolio. So, as a result, a, it's not a big exposure for us either. Second, we feel confident about our history of underwriting discipline. And then third, we are remaining very confident about the health of our current portfolio. So overall, it's not a big event for us so far. So we remain relatively constructive. Robin Raju: Yes. Suneet, just to wrap it up private credit, it's an important asset class for us. The liabilities within the insurance company fit well with private credit. With AB, as Onur mentioned, we get a good direct look at the underwriting that makes us comfortable with the risk in there, and it delivers good risk-adjusted returns for us. So it's an asset class that we think is important for insurance companies to invest in. They're important for the economy, and they're important for our clients at AB. And so we'll maintain our discipline and ensure we deliver good risk-adjusted returns for our clients. Suneet Kamath: Okay. Appreciate that. And then just shifting gears to wealth management. One of the things we're hearing is competition for advisers has been increasing and then there's pretty sizable packages being offered. When I look at your 12% growth in wealth planning, just curious how much of that is coming from external hires versus internal promotions? And what is your sort of target market in terms of the practices that you go after? Nicholas Lane: Yes. Thanks. This is Nick. Look, we're very encouraged by our organic growth rate that we see coming from our existing advisers. That was $8.4 billion of net flows for the year. We bring a distinct model out to the space, given our people, our planning and our platform. We're one of the few platforms that continue to bring new advisers into the industry, and that gives us a pipeline to grow wealth planners, as Mark highlighted, which were up 12% year-over-year and have more than doubled since we IPO-ed back in 2018. We're very pleased with the progress of our EXP hiring efforts. We recruited $1.4 billion in assets for the year in 2025. As it's a large addressable market. There are about 150,000 Series 7 producers, about 12,000 a year are looking for new homes. We hired a 20-year veteran to run our EXP hires, knows the market well and has built a disciplined approach here at Equitable. We are very intentional about the type of advisers we target and believe we have a distinct model for EXP hires who are looking to grow their businesses or transition their practices to other advisers. So we've got an edge. We'll remain disciplined. We're very bullish about our organic growth drivers and productivity in wealth planners, and we see EXPs as a force multiple on top of that. Operator: Your next question comes from the line of Tom Gallagher from Evercore ISI. Thomas Gallagher: First question is, when I look at the value of your AB stake now and I compare it to the value of the Equitable stock, everyone looks at that tracks it from time to time. That valuation spread is probably as big as it's been in a very long time because AB has done well, Equitable not so much. Is there anything structurally you can do to close that valuation gap when you think about potential corporate strategies? Or is that more of a theoretical gap that you're just going to have to live with and hope it closes over time? Mark Pearson: Tom, it's Mark. Thank you very much for the question. Yes, we see the gap as well, and it is perplexing from time to time. But having said that, AB has done incredibly well in the last year or so or the last years or so. And part of the benefit in AB is this integrated model that we talk about, this flywheel, this ability for Equitable to help seed strategies in AB and they've executed extremely well over there. Looking at our valuation, I think there's two or three things which we point to investors. One, attractive and growing markets, being in U.S. retirement, asset management and Wealth Management, having record AUM there, it's a good place to be. We're very pleased with the way the integrated model is working now, this flywheel we can point to really, really strong benefits on that. And we have a good track record of execution. So, I mean, putting it all together, we can see upside here, and we can see upside in the valuation for EQH. It certainly is not an expensive stock now at 6x future earnings. And what we have to do is the management team is really, really focused on the things that we can control, and that's growing the business, making sure that the flywheel works, being disciplined on the expenses and increasing that cash generation. And I'm sure that will close the gap. Thomas Gallagher: My follow-up is just on mortality exposure, I guess, Robin, one -- two-part question. One, can you just give us an idea of the embedded earnings in the corporate loss that's related to life insurance now? And secondly, is there any opportunity to further reduce your exposure to mortality? Like could you potentially get RGA to buy out the remaining 25%? Or is that -- is the expectation you're just going to keep that exposure going forward? Robin Raju: Thanks, Tom. So let me just touch on mortality a bit taking a step back. So, in the quarter, we did see a mix of some large claims, also smaller claims that we didn't have reinsurance coverage on before the RGA transaction benefits kick in. So this led to about $25 million adverse mortality in the quarter that we mentioned. And for '26, we felt that it was prudent to include in our corporate and other guide of $350 million to $400 million and increased GAAP guidance of about $50 million in terms of mortality. Now that may be conservative because it's slightly worse than our three-year average, but it's closer to recent experience. So we felt it was prudent to include that in the guidance that we've given. We're not going to disclose like subsegments within Corporate and Other because there's noise within there. But I think that's the best you can look at it is the $350 million to $400 million, that includes some prudence in it. And I think over time, in 2027, we expect that to improve as we expect the Life earnings to improve and some of the other pieces in Corporate and Other to improve as well. If you think about our remaining 25% of the exposure, it's much smaller now than it was previously. We feel as though the volatility that we have is manageable. It's small even in an adverse quarter like this, where it was $25 million. That being said, we'll always look at different solutions if we think it's permanent, and we want to continue to drive execution and shareholder value. So we'll always look to see where we can do that. Operator: Your next question comes from the line of Wes Carmichael from Wells Fargo. Wesley Carmichael: Maybe a bit more of a specific question for Robin. But in the retirement segment, realizing you had pretty strong sales this quarter, but the commission and distribution expense line picked up, I think, sequentially about $25 million. I'm just curious if you think there's a higher ratio of commission and distribution expense relative to sales going forward. Robin Raju: Sure. So, as Mark mentioned on the call, I'm sure Nick can go deeper on, but we've seen great growth in the retirement business. 4% organic growth in it. We've seen good top line growth in SCS as well. As you recall, the mix of where that sales come from, whether it's Equitable advisers or third party changes the commissions that come up upfront as we can DAC less in Equitable advisers. So that's a big portion of the drive. That being said, going forward, with less upfront DAC, that means less DAC amortization. So we expect over time, the earnings from the retirement business to exceed well and beyond the commission expense that we have, along with the NIM growth that we'll see going forward. Mark Pearson: And Wes, just remember, we had that onetime true-up as well that I mentioned between retirement and Wealth Management on the call. Wesley Carmichael: My follow-up was on the FABN program. I know you've been more active there recently, additional spread source. Could you talk about maybe how meaningfully you think you can grow that program from here and what the issuance environment looks like in 2026? I know in 2025 was kind of a record year for the industry. Robin Raju: Sure. We've been able to lean in on the FABN program in 2025. almost $5 billion in issuances. It comes with very attractive IRRs and good spread earnings, also benefiting the flywheel as AB manages those assets, so we get good risk-adjusted returns from that program overall. As a reminder, the FABN flows aren't included in the retirement 4% organic growth rate that we gave. If it was, it would be about 7% organic growth rate. So it's incremental to retirement earnings and helps us grow going forward. As long as FABN, it's a very disciplined liability that we have. If the pricing is there, we'll go and execute an issue if we can get the IRRs that we want. If it's not there, we won't. So we'll be disciplined in that market. And it really depends on where equitable spreads trade relative to broader industry spreads. And so that's what we're looking. But from where we sit here today, we still see opportunities to grow that FABN business going forward. Operator: Your next question comes from the line of Alex Scott from Barclays. Taylor Scott: I have one on cash flow and just the conversion of earnings. I guess just inherent in you guys confirming the cash flow targets that you've laid out, but not necessarily the absolute earnings levels, it sort of suggests that cash conversion is improving. So I just wanted to make sure I understand that correctly. And can you talk about some of the underlying drivers of the types of businesses you mix shifting towards? Will you actually change sort of the guidance that you've talked about in terms of conversion over time? And what kind of upside is there as you continue to mix shift? Robin Raju: Sure, Alex. I think I got it. You came in a little broken up, but it was about the cash generation, the mix and the conversion. So just taking a step back, we were able to upstream $2.6 billion of cash this past year in 2025, $1 billion of that related to the benefit from the RGA transaction. So $1.6 billion of organic cash generation, 50% of that is coming from asset and wealth businesses. So that's close to 90% conversion rate on those businesses that you'll see. Going forward, we expect to grow cash flows 10% next year to $1.8 billion. This growth is driven by higher Asset and wealth earnings and larger expected retirement dividends as well, reflecting the profitable growth in the business that we see. Now keep in mind, the one factor that we have is the capital release from the runoff legacy block that has a very high conversion rate. So that's why uniquely in our IR Day plan, you saw cash growing faster than earnings because we're getting the benefit of the capital release on the legacy block that we see. So we still feel very confident on the $2 billion target. You can see that naturally come through, and we're excited about the future. Taylor Scott: And if we go back to retirement and the spread, what are some of the dynamics that will cause that to stabilize in the mid part of the year? I mean does that have to do with the market value adjustments? Or is that more related to the 2020 runoff and what you see there? I just wanted to better understand. Robin Raju: Yes. So the question was on spread and retirement and whether it's when the market value adjustments to MVAs or some runoff. So it's a little bit of both that you saw in 2025. We saw a year-over-year decrease in MVAs. We don't assume any benefits from MVAs going forward. And then we see the runoff of that very profitable RILA block. As you recall, we were the only ones in the market. So we had very strong margins and now margins have normalized to 15% plus IRRs on that business. That business is less than 15% of our total RILA block, so that continues to run off. And we expect less spread compression going forward. If you look at this quarter versus last quarter, it was about 3 basis points of spread compression. I think that's anywhere from 2 to 4 in the first half of next -- of 2026. I think it's fair. And then going forward, you're going to see spreads move in line and grow NIM grow with the general account balance in the retirement business. So -- and then keep in mind as well, things, even if you saw spread compression quarter-over-quarter, NIM is growing. So we're actually growing nominal value in terms of earnings in that retirement business, and that will continue going forward with a strong organic growth. So, all in all, retirement business, we feel comfortable with. We expect that, as you saw in our guidance to grow on a pretax basis between mid-single to high single digits. And so we're excited about the future growth coming through. Operator: Your next question comes from Jimmy Bhullar from JPMorgan. Jamminder Bhullar: I had a question on Individual Life. But before that, I think, obviously, you guys have done a good job of derisking the business, including the RGA deal. But some of the disclosure changes you've made recently, they make it harder to analyze your results. And I don't know anybody who would want individual life pumped into like corporate where you can't see what the hell is going on with that business. I doubt you're within the company analyzing it that way. But from the outside, that's how people have to do it. But the question is on -- like maybe if you could go into a little bit more detail on what you've seen in the business that's caused the results to get worse, maybe either by policy type or issue. And is it more of an aberration? Or is there something with pricing or anything over the macro environment that's made the business perform worse and what caused you to maybe increase your -- or reduce your earnings or increase your loss assumption for that block? Robin Raju: Sure. Thanks, Jimmy. So taking a step back, I think it's most important for us, and we tell you and investors focus on cash. I mean that's the most important metric that we can give you out in the Street. Cash flow has grown from $1.6 billion to $1.8 billion next year and $2 billion by 2027. So that's the most important metric I can give you because that's what's really coming through in the businesses for some of the noise that you'll see in the GAAP reporting overall. The Life business specifically, as we've talked about historically, mortality, we have volatility because we have large face amounts, and we have older issue ages within that block. So, as a result, there's some volatility within when those policies die. The underlying economics, the economics of it are good. The cash is okay because the assumptions are more conservative on cash than they are in GAAP. From that volatility perspective, we did the RGA transaction to reduce 75% of that volatility going forward. We think the guide that we're giving is prudent. It's conservative versus the three-year average. But from what we've seen recently, we thought it was prudent to give you a guide that gave us an opportunity to ensure that we hit the numbers even if we have some volatility, but also provides upside for 2027 compared if that improves. So, all in all, we feel good about the business where it is with the reinsurance transactions that we've done. Also the lower retention rate on new business that we have minimizes that volatility going forward. So we feel okay there. Jamminder Bhullar: And then maybe just following up with Nick on the RILA market. It seems like more and more companies have entered the market in recent years, including some of the guys backed by PE insurers. Are you seeing competition disciplined? Or are some of the carriers being more aggressive beyond just offering maybe introductory specials and whatever else? Like how do you feel about the competitive environment in the RILA market? Nicholas Lane: Yes. Thanks for the question. Look, first, we continue to see growing demand for RILA given the demographics and heightened by the current period of macro uncertainty. It's a product that's right for the times. As Mark highlighted, fourth quarter RILA sales were robust across all channels, up 12% year-over-year, another record high with $1.4 billion of net flows. Look, as the market leader with a durable edge, we have a track record of benefiting from the strong demand. You've seen us more than double our RILA sales in the last 3 years, and we've delivered record sales in 9 out of the last 10 quarters. To your point on competitive intensity, we saw players enter at the tail end of 2024 so we've been operating what I would say in this new normal for over a year. We're always vigilant on competitive trends, especially on pricing. Traditionally, we see new entrants offer teaser rates and then revert to more sustainable levels, and we saw this dynamic in the fourth quarter for those who entered in the beginning of the year. We have conviction that given our Equitable flywheel, this gives us an edge. We have the differentiated distribution with Equitable advisers and privileged third-party networks, which attract lower cost of liabilities. We generate attractive yields and have line of sight for how we do that through AB. We have scale as the #1 player and decades-long relationships. And I think we have a track record of innovation to continue to meet emerging needs that we see in the marketplace. So we believe that's hard to replicate. So, looking forward, we'll continue to be vigilant on competition. We're confident in our momentum, and we have conviction that we're in a privileged position to capture a disproportionate share of the value being created in that space. Operator: Your next question comes from the line of Joel Hurwitz from Dowling & Partners. Joel Hurwitz: Rob, I wanted to get an update on the '27 targets. Last quarter, I think you said the midpoint of that 12% to 15% EPS CAGR was achievable. I guess, do you still think that's the case, especially with the mortality outlook? Robin Raju: Sure, Joel. We're very focused on delivering all of our 2027 targets. As Mark mentioned, we remain on track for the $2 billion of cash. the 60% to 70% payout ratio and where we're lagging to your point, is on the earnings per share growth. I think the guidance that we've given you in this quarter should allow you to get to that range on the 12% to 15%. I think the guidance we give you probably gets us to the lower end of the range, which would be fair. Keep in mind, though, depending on how we track during the year, we still have levers in place such as expenses to get in that range. So that's what we're focused on delivering is the 12% to 15%, but also ensuring that the business continues to grow going forward even post 2027, so we can continue to drive cash flows and earnings growth for shareholders. Joel Hurwitz: Got you. That's helpful. And then just on the payout ratio, with cash generation moving to $1.8 billion, I think what you're implying on earnings, why shouldn't the payout ratio be moving up? I know we have to take out interest expense, but I feel like if I do that, cash generation ex interest expense is more towards like the mid-70% of your operating earnings. Robin Raju: Yes. So if you look on the payout ratio since our IPO, it's been on the higher end of the range that we deliver on. And I think from -- if you look at where the stock is trading and relative to expectations, you can expect us to be probably in the higher end of the range. But keep in mind though, the opportunities to invest in growth are the best that we've seen in some time with interest rates where they are, the consumer needs for us to grow in the retirement business and asset management and wealth businesses. there are a lot of good investment opportunities that deliver very strong returns for shareholders as well. So we'll continue to buy back a good amount of stock at these levels. But more importantly, we're investing for future growth to ensure that we continue to capture the retirement opportunity in the U.S. and continue to grow in Asset and Wealth. Operator: Your next question comes from the line of Yaron Kinar from Mizuho. Yaron Kinar: You mentioned the durable edge you have in the RILA market. That being said, market share for Equitable and new sales is shrinking, albeit from an enviable market-leading position due to the increased competition. So I'm assuming you're not willing to compromise on IRRs here. And would that potentially mean that one of the company's growth engines moderates in coming years even as the RILA market continues to grow? Nicholas Lane: This is Nick. Look, obviously, the competitive landscape has changed from a decade ago since we were a pioneer in launching the RILA market and 100% share in that market. As we highlighted, look, we see the pie continuing to grow given the demographics and the nature of the product in these times. we would expect to continue to maintain our leadership position in the space. We are very intentional, and I think this speaks to the power of our distribution of being able to pivot our sales based on we see -- where we see consumer value and shareholder value. So, as you mentioned, we are extremely disciplined in IRRs. We're delivering our targeted IRRs today, and we continue to see strong momentum, as Mark highlighted, in our sales and flows. Mark Pearson: I think it's Mark here. I'll just add a couple of things, which is unique to the RILA market. Firstly, there's about $600 billion of assets coming out of 401(k)s a year going precisely into this type of market. So it's not necessarily coming out of disposable income for consumers. It's coming out of their savings vehicles. So that protects it from some of the economic issues we see consumers have. And then secondly, to Nick's point, we've had this product a long time. We don't look at market share. We look at sales growth and sales growth at a record level. So we're happy with that one. But one of the things that gives us comfort on RILA is that we know it works in low and high interest rates. There are some annuity products that work incredibly well in high interest rates and not in low interest rates. But we've seen RILA through the cycle, Nick. And we know it has a very strong customer proposition when rates are low as well as when rates are high. So it's a good part of the retirement market to be in. Yaron Kinar: That makes sense. And then my follow-up, just going back to Slide 10, the VNBs. Has the VNB payback period changed over time? Can you give us any quantification of that? Robin Raju: Sure. We haven't disclosed payback period, but our VNB over time has -- and payback period has come down over time and IRRs have gone up. If you look, the RILA product is specifically what we just spoke about is a shorter duration product compared to most of the longer duration products. that we've been selling. We're also -- we exited the individual third-party life market last year. That's longer duration. So, much shorter duration, faster payback periods, faster cash conversion on the product portfolio that we sell today versus what we sold years ago. Yaron Kinar: Okay. But you can't quantify it at this point? Robin Raju: We haven't disclosed it, but it's materially lower than it was a few years ago. Operator: Your next question comes from the line of Mike Ward from UBS. Michael Ward: I was just wondering, you mentioned the roll-off of the profitable RILA, I think, being 15% of the total. Just how long do you expect that to take to roll off? Robin Raju: Mike, it's the roll-off of the very profitable because that was a portion when we were the only ones in the market across. So we'd expect that to still drive a little bit of spread compression. You saw 3 basis points this quarter and overall through the first half of this year, probably in similar magnitude anywhere from 2 to 4 basis points a quarter. But come the second half of the year, we expect those spreads to stabilize and NIM will grow with the general account book value excluding embedded derivatives going forward. So I think at 0.5 point this year, we'd expect that to be immaterial and not drive spread compression in the business anymore. Michael Ward: Okay. And then just switching to the sort of defined contribution world. It seems like there's been kind of more of a push to open up the different asset classes and help employers plan sponsors get more comfortable with some of this stuff. You guys have obviously been involved in that for some time. Just curious how the uptake in some of those products and in-plan annuities, life paycheck kind of stuff is trending more recently? Nicholas Lane: Great. I'll start with that one. Look, we continue to remain bullish on the untapped potential in the long-term growth for secure income or in-plant annuities. It's an $8 trillion DC market. We see the potential addressable market being about $400 billion to $600 billion for in-plan solutions. We're still in the early innings, but I would say there is momentum. We have the policy or the regulatory tailwinds. This is SECURE 1.0. This is SECURE 2.0, where people want more durable retirement solutions. I think that's going to amplify as we approach social security going into 2030. We have products and partnerships with the target date funds. and record-keeping platforms exist to provide those products. So we're really in this first step now of engaging plan sponsors. This is a subject of all discussions. I think we see there are first movers and then fast followers and then laggards, but we're encouraged by the momentum. We have roughly $920 million in sales in our broader institutional business for the year and have about $1.8 billion in AUM since we launched an institutional. Looking forward, our belief we're in a very strong position as the market continues to emerge given our partnership network that you referenced, that's AB, BlackRock and JPMorgan that are building a track record as the market expands. So, going forward, we get confirmation about 60 to 90 days prior to transfer. This is going to still be lumpy. While we don't expect material inflows in the first quarter, we've got a strong pipeline for 2026. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, and thank you for joining the Stewart Information Services Corporation's Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] Please note today's call is being recorded. [Operator Instructions] It is now my pleasure to turn today's conference over to Kat Bass, Director of Investor Relations. Please go ahead. Kathryn Bass: Good morning, and thank you for joining us today for Stewart's Fourth Quarter and Full Year 2025 Earnings Conference Call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com. Let me now turn the call over to Fred. Frederick Eppinger: Thank you for joining us today for Stewart's Fourth Quarter and Full Year Earnings Conference Call. Yesterday, we released the financial results for the fourth quarter and full year, which David will review with you shortly. I'd like to open today's call with some remarks on the overall progress we made in '25 and before shifting -- and then shifting to market conditions a little bit and then our fourth quarter results and strategic outlook for each of the businesses. We are very pleased with the progress we made in '25, strengthening and growing the earnings power of all our businesses. While commercial markets saw some awakening, in '25, we remained in a multiyear slump for existing home sales with 2 years in a row of the lowest existing home sales in 30 years. Despite this market headwind, we grew revenues by 18%, net income by 48% and adjusted EPS by 46% full year '25. That growth has allowed us to gain share and improve margins. We grew the company's adjusted pretax margin to 6.8%, up from 5.8% a year prior. We have created momentum for the company through continued execution of our targeted growth plans and have strengthened our position in each business. We delivered more distinctive products and services for our customers and made good progress on becoming a destination for the best talent in the industry. At the end of '25, we also rounded out our lender services portfolio with the acquisition of Mortgage Contracting Services, also known as MCS. And in 2025, virtually all of our growth was organic, but we will continue to set our sights on additional profitable growth through targeted acquisitions, and we enhanced our financial flexibility to capitalize on potential opportunities in the near term by successfully upsizing our credit facility by $100 million to $300 million and executing an equity offering of 2.2 million shares of stock, raising $140 million to provide additional dry powder. In 2025, we also increased our dividend for the fifth year in a row, moving from $2 to $2.10 a share annually. Moving towards some highlights for our businesses. In 2025, we grew all domestic commercial revenues by 34% year-over-year. This growth can be attributed to continued success in the expansion of our national commercial services business and growth in our small commercial growth initiative in our direct operations business unit. Our national commercial services business grew 43% year-over-year with significant growth across all of our asset classes. In our real estate solutions business, we grew revenues by 22% year-over-year and continue to have a very robust pipeline of opportunities. We have made significant progress on our expansion of this business line since beginning the journey in the late 2019 and look forward to seeing how recently acquired MCS will expand our breadth and client coverage for top lenders and services. Our agency services business also made strong progress in '25, growing revenue by 21% overall. And our strategy to drive more commercial to our agents was also very successful, delivering 34% growth for the year. Now I'd like to turn to the broader housing environment and our fourth quarter results. In the fourth quarter, we were able to maintain and in most of our businesses improve on our momentum. For the fourth quarter, we grew revenue 20% and adjusted net income by 52% compared to the fourth quarter of '24. This growth is meaningful for us given the existing home sales grew in the quarter just under 1% in the same time frame. While existing home sales purchases improved very slightly in the quarter, we will see signs for cautious -- we see signs for cautious optimism for housing in '26. In the fourth quarter, 30-year mortgage rates hovered between 6.1% and 6.35% range, showing a bit more stability than more recent short-term trends. We have also seen a shift in the composition of mortgage holders with the population of mortgage holders with rates of 6% or higher, exceeding the population of those below 3%. This implies that we are seeing people continue to buy and sell for life events and that the market is beginning to accept we are unlikely to return to 3% rates in the future. In the beginning of '26, we have seen rates remain in the low 6% range, and housing inventory has continued to be a little bit better than last year. And it was up 8% for the quarter compared to fourth quarter of '24. Looking forward, we believe we have rounded the corner and are heading in the right direction to get back to a more normalized existing home sales environment in the coming years. We do not anticipate existing home sales getting all the way back to their long-term historic average of 5 million units in '26, but we believe we will begin to see modest market improvements in '26. Our direct operations business unit grew 3% -- I'm sorry, 8% in the fourth quarter compared to the same period last year, which we feel is strong given that this business is the most impacted by the effects of the challenged residential housing market. We remain focused on prioritizing share gains in target MSAs, both organically and inorganically, and we continue to make strides in our strategic initiative to grow our main street commercial business that runs through our direct office. Our main street commercial business grew 17% for the full year and 16% in the fourth quarter in direct operations. We continue to expect a portion of our future growth in this business to come from targeted acquisitions, and we maintain a growing pipeline of targets that should begin to develop as the market signals a return to normal levels. Our national commercial services business delivered another solid quarter of growth. Success for this group is largely due to increased coverage in a number of geographic markets and asset classes, expansion of our team and our ability to underwrite larger transactions over the past several years given our improved surplus. We are focused on continuing to invest in best-in-class talent to grow share as relationships are especially important in this space and will allow us to expand on our network and deepen our expertise. Because of the work we have done to continually improve this unit, in the fourth quarter, we benefited from underwriting some sizable transactions. We grew national commercial services business unit by 49% in the quarter. We are pleased with the progress here, and it really represents the improved competitive position we have built for ourselves in the commercial market. Energy continues to be a point of strength, but for the year, energy growth was less than overall growth in this sector. In '25, energy grew 34% for the year and all other classes grew 46%. We remain focused on growing all asset classes and target geographies to expand our overall footprint. Our agency services business had another strong quarter with revenues up 20% year-over-year for the quarter. This amount of growth is strong when considering that the overall housing market is near flat to last year, which affects our agency partners. We remain focused on growing this business through the expansion of wallet share with existing agents and onboarding new agents in all states with an emphasis on 15 states that are most attractive from an agency perspective. We are seeing sustained growth year-to-date agency across all our target markets and most notably, Florida, Texas and New York. Our commercial initiative with agents have also been a big part of our success as we continue to build on the momentum we have had in recent years and for our agents to differentiate our service and better our offerings to our agent partners, and we saw 34% growth in this important initiative in 2025. Our real estate solutions business grew by 29% in the fourth quarter compared to last year. We also improved our margin in the fourth quarter over last year, but our full year margin of 10.1% was a bit short of our target for the full year '25 due to some isolated pricing issues and expansion costs. For the full year '26, we fully expect to improve margins and deliver in the low teen range for this segment and expect that our recent acquisition of MCS will help us improve our historical margin outlook. As mentioned in late December, we closed our acquisition of MCS, a property preservation service provider, allowing us to expand our default services offering and cross-sell customers across our expanded product lines. We expect continued progress in this business line as the market improves. Moving to our international operations. We are focused on broadening our geographic presence and depth in Canada, increasing our commercial penetration and expanding our presence in the refi market. In the fourth quarter, we grew our noncommercial revenue by 20% for the year, and we grew total international revenue by 11%. We believe we can build on our strong position in these markets and continue to grow share. Overall, we remain dedicated to strengthening our company throughout geography, customer and channel expansion in each business to set the company up for continued long-term success. I'm proud of the work we did in '25 to further the company and look forward to seeing how we can capitalize on the potentially improving market conditions and opportunities in '26. I want to thank our customers and our agent partners for their continued trust. We are committed to doing our best to serve you with excellence. And finally, to the Stewart team, I want to thank you for the loyalty and continued dedication to excellence. We are committed to being a destination for best-in-class talent. This year, I had the opportunity to meet with thousands of employees across many different cities in the U.S. and Canada as part of my year-long roadshow. My time with you all during this series was powerful as it showed me that we have a very dedicated team that is aligned and focused on the strategic objective of becoming the premier title services company. We point to this dedication and alignment as a key component of why we received several employment awards this year, including the USA Today's Top 25 Workplaces Award, Forbes' America's Best Employers for Company Culture and ranking #1 per Forbes America's Best Employer for Women in Business Services. We are also proud that we were able to support our employees by donating $1.2 million to the Stewart Foundation to their local communities. We stood up the foundation together in '21, and we've made a significant impact on our community since the inception. I cannot be prouder of the progress we have made on our journey, which we all know that much remains to be done to accomplish our goals, but I look forward to seeing where we grow together. David, I will now turn it over to you to provide an update on our results. David Hisey: Good morning, everyone, and thank you, Fred. I appreciate our employees and customers for their steadfast support in the slow residential real estate market. Yesterday, Stewart reported strong fourth quarter results with both revenue and profitability improvements. Fourth quarter net income was $36 million or diluted earnings per share of $1.25 on revenues of $791 million. Appendix A of our press release shows adjustments to our consolidated and segment results, primarily related to net realized and unrealized gains and losses, acquired intangible asset amortization and office closure and severance expenses that we use to measure operating performance. On an adjusted basis, fourth quarter net income was 50% higher at $48 million or $1.65 diluted earnings per share compared to $32 million or $1.17 diluted earnings per share. In our Title segment, operating revenues improved $106 million or 19%, driven by strong results from both our direct and agency title operations. As a result, title pretax income increased $13 million or 28%. On an adjusted basis, title pretax income improved 35% to $68 million from $51 million. Adjusted pretax margin improved to 10% compared to approximately 9% last year. In our direct title business, total fourth quarter open and closed orders for commercial and residential transactions improved compared to last year. Domestic commercial revenues increased $32 million or 38% with growth in all asset classes led by data centers and energy. Transaction size increased as our average domestic commercial fee per file improved 39% to approximately $27,000 compared to approximately $20,000 last year. Average domestic fee per file improved 13% to $3,300 compared to $2,900 last year, primarily as a result of transaction mix. Total international revenues increased modestly. Our agency operations were robust with gross agency revenues of $334 million, 20% higher than last year. This increase was primarily driven by improved volumes in our key agency states such as Florida, New York and commercial transactions. After agent retention, net agency revenues increased $11 million or 22%. On title losses, total title losses in the fourth quarter increased slightly due to increased title revenues. The fourth quarter title loss ratio improved to 3.4% from 3.7% last year due to our continued overall favorable claims experience. We expect our title losses in 2026 to average in the 3.5% to 4% range. On our Real Estate Solutions segment, total revenues improved 29% by $25 million, primarily driven by our credit information services business. As Fred mentioned, we recently added MCS and expect it to be a major contributor to the segment's revenues and profits going forward. The segment's adjusted pretax income improved 47% to $10 million compared to $6 million last year. We are focused on the overall cost of services and strengthening customer relationships. Adjusted pretax margin was 8.5%, 1% better than last year's fourth quarter, and we expect our margins to normalize in the low teens as these relationships mature. On consolidated expenses, our employee cost ratio improved 29% compared to 31% last year, primarily due to increased revenues, while our other operating expense ratio was 25% comparable to last year. On other matters, our financial position remains solid to support our customers, employees and the real estate market. Our total cash and investments were approximately $480 million in excess of statutory premium reserve requirements. As Fred noted, our line of credit and December common share equity offering provide us financial flexibility. Total Stewart stockholders' equity at December 31, 2025, was approximately $1.6 billion with a book value of $54 per share, which is $4 better than last year. Net cash provided by operations improved by $22 million or 32%, primarily due to higher net income. Again, thank you to our customers and employees, and we remain confident in our service to the real estate markets. I'll now turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question comes from Bose George with KBW. Bose George: I just wanted to start with the commercial. Just given the strong commercial activity in 2025, can you talk about your expectations for commercial revenue growth in '26? And then just related question, usually, there's been meaningful seasonality in 1Q. But given what you see in the commercial pipeline, on the commercial side, do you think 1Q could be sort of a little better than usual? Frederick Eppinger: Yes. Great question, Bose. So I feel very confident in our kind of our pipeline activity. It's pretty broad. It's pretty good. I do think there is seasonality -- will continue to be seasonality in commercial. And the fourth quarter, in particular, this year, I think, was very robust. I think you're going to see that for a lot of people in the industry for some reasons. But -- so I do think it's -- we got -- our first quarter in general should be a little bit better than last year, but we'll still have the difficulties of the first quarter in my view. And the commercial in general, I think, is going to -- it will be a good year for us next year, looking at the activity and the breadth of the activity. Some of the comparisons, it will be interesting to see on growth. So do I think we can grow commercial next year? Yes. I just think 49% is not -- like there's going to be some comparisons here given how quickly we're going to grow into our skin that we might see some kind of moderating of growth, of course, and some comparisons that might be kind of not as robust on the growth side. But again, it's going in the right direction in every class, and we're hiring and trying to really get after it. And I feel good about the depth. The other thing that's really interesting qualitatively is we're leading more deals. Like some of these big deals, right, historically, we would participate, but we control more now, and you can just feel it and see it, which gives me comfort that we're moving in the right direction. So even if we went a little sideways this year and digested the growth in the next 2 years, I'm as confident as I've always been on being able to go forward. We're probably 14% share right now in the market. I think over the next 2, 3 years, we're going to get closer to 20%, right? So I can't time that, but the momentum and our ability to get after it is there. And I do think the market in general is going to be relatively strong this year as well. So hopefully, that's helpful... Bose George: Yes, that's great. That's very helpful. And then actually, can you remind us what percentage of your agent premiums are commercial? Frederick Eppinger: That's a great question. So we've been obviously trying to grow that business. And let me just -- I have some of the information on that. But we grew in -- of the 20% growth, we grew purchase about 16% for the quarter and 15% for the year. We grew refi with the real estate -- with the agents about 40%, but that's only about 3% -- $3 million of growth because it's such a small percentage of our business. And then we grew -- see, the commercial was about 34% for the year. And so you can look at the mix. I don't have the specific percentages of each, but it's very small refi. Again, of the growth in the purchase, it represent about $125 million of the growth. And so you can kind of back in the percentages. But it's -- but again, it's heavy purchase. It's probably somewhere around 15% to 20% commercial now. And the rest is refi. But it's -- what's nice about it to me is that when you look at the 15% -- excuse me, 16% growth for the quarter in purchase, the market is somewhere between 1% and 2%, right? So I know this year, we're going to get the data. We're going to have another share movement in most of these markets that is pretty robust. And on commercial, I would say we're playing catch up. if I was a guessing man and I looked at my competitors, their numbers of commercial and their agency would be closer to 15% to 20% of the business. And so we're still catching up of our penetration of commercial in the agency. So I wouldn't be surprised if we -- our percentage of growth in commercial doesn't continue because we're catching up, right? We're not -- I would say our competitors are probably in the 20% to 22% range, and we're probably in that 15% range. Bose George: Okay. Great. Actually, just one last one on commercial. Have you talked about commercial, the direct margins versus the residential direct margins? Is that something -- I can't remember if you discussed that? Frederick Eppinger: They're a little better. Again, it has a lot -- the costs are more variable in commercial because of the way the commission structures work and the arrangements with involved and stuff. So -- but it's a tad better. It's probably 1/3 better. And again, the other thing about it is the float is also better. So there's an investment income portion of commercial that is quite important. And there is a -- and for us, I don't know -- I can't tell you what the competitors' numbers are, but scale matters because of the nature of the work. And so as we get bigger, the margins get better, right, because of the critical mass we see in some of these asset classes and skill sets. So it's a good margin enhancer, and it's a margin grower if we can continue to grow this business. We are probably somewhere -- probably the fourth quarter, 18% of our revenue was commercial. But over the year, my guess is the average was like 14% to 15%. But if I look at my best competitors, the big guys, they're probably in the low to mid-20s, if I was guessing. It's hard to back into it because it goes through the various channels. But we are, again, short there, too. So it's not just our share in that business, but even relative to our business mix, we were short. And that's why this has been an important initiative, and this progress for us is very helpful as a company. Operator: [Operator Instructions] We'll now move on to Geoffrey Dunn with Dowling & Partners. Geoffrey Dunn: A couple of questions. First, what are the plans for the line of credit? Do you have an aggressive paydown schedule there? Or do you think it's just the plan to let that leverage come down gradually with equity growth? David Hisey: Jeff, it's David. I would say the latter. I mean we could pay it off at any point. I think we're just trying to keep flexibility, as Fred talked about. And so I think we're about $200 million drawn. We may bring it down a little, but you may see that for the year. Geoffrey Dunn: Okay. And then bigger picture, I wanted to ask you about AI and the effect you feel it's had on your business and if that's still accelerating. But also the effect it's had on the broader business. It looks like there's been some capital investment coming into the space for data collection, data mining, data organization. Curious if you view those as M&A opportunities? Or is that something we should think about in terms of a longer-term competitive consideration? Frederick Eppinger: Yes. It's a great question. It's obviously -- as I said previously, because of the way we have so much unstructured documents, there's a big benefit both on efficiency, customer satisfaction, quality because what we -- our losses are because you make a mistake, right? We're a warranty. And so the more efficient you can examine the documents and get to the right points quickly, the better you are. We have, gosh, probably 75 individual initiatives, right -- going on right now that have AI to apply in our businesses around customer service or efficiency or data consolidation and management. My view from a competitive point of view is an enormous advantage of the bigger people. It's not going to eliminate our business or anything. It's going to make us better, higher quality, better kind of throughput and consistency. It's a lot of little singles is the way I'd describe it, but important. There are tools, you are exactly right. There are innovation and tools. There's one tool in one of our businesses right now, to your point, that I'm likely to buy, so -- which is -- can get plugged in and make our service better in one of our businesses. And again, because our business is so unique and weird, this isn't a revolution. This is kind of, in my view, a way to make so many parts of your business better. And title is weird. So the opportunities tend to be smallish in these -- the market opportunity. And so there will be some of that tool thing. Just if you remember, in the P&C world after the crisis, the dot-com, same exact thing happened as all these companies failed, but some of the solutions, the models were extracted by the bigger companies to accelerate some of their innovation. And I think there will be some of that. Is it going to be massive? No. But I'm pretty excited about what's happening. And again, it's just another thing that's going to -- we have a really interesting oligopoly, right, because of the scale and size and the data and the reach. And if the big players are using this kind of tool, it's going to increase the quality of our delivery. So it's a great -- it is a really good, interesting observation. And I would also say there's characteristics in our business that are very similar between us and other kind of insurance delivery through independent channels. And so there are some of these things that are kind of repetitive. And so there'll be people that will be able to kind of accelerate your advancement because they can take something from another industry and kind of slide it over. So again, it's -- I tell our folks, what I like about it is that it's not about technology, right? It's about businesses driving improvements by using a tool that makes a more consistently -- consistent delivery of data. And it's helpful. I would also say that some of the -- what people talk about is overblown a little bit. I mean this is a world still of -- you can get to 90% of the solution, but the last 10% is the hardest, and we're still in that range. And so human intervention is going to be really -- remains really critical, particularly in our business. And again, so that's kind of how I see it developing. Geoffrey Dunn: Okay. And then, David, just an accounting question related to this. Given the digitization at the municipal level and the increased ease of collecting data, is there any implication for the title plant assets, particularly the more legacy plants because it's now cheaper to create those? David Hisey: No. I mean, as you probably know, title plants vary in access. The title data varies across the country. And the plants are needed in the markets that we're in to access data, so there shouldn't be any issues if you're talking about recoverability. Frederick Eppinger: What is happening -- right. Again, what is happening is we're able through the way we've set up the centralized processing and management, the enhancing of the value of those plants has been kind of really helpful, right, because we can supplement the data in those plants more efficiently. And it's becoming kind of more helpful in our business, particularly as we grow. Operator: We'll now move on to Oscar Nieves with Stephens. Oscar Nieves Santana: Earlier, you mentioned seeing signs of cautious optimism for housing as we look into '26. Can you talk a bit more about the specific industry [ direction ] and whether those are broad-based or concentrated in certain [ regions? ] Frederick Eppinger: Yes, it's a good question. So last year, everybody said -- this time last year or earlier, say, in the fourth quarter, when we had that little downturn in rates, and we had a nice little spurt in December orders and market ended up translating into some March close orders, people were saying, oh, by the end of the year, we're going to see 8% to 10% improvement. I didn't see any of that, right? Because your under 3% mortgage was still really high, and the inventory quality was not great. And a matter of fact, I think we got to a point where 20% of all transactions were really old, were flippers because it was old inventory. Now what I see is the under 3% has ticked down a little bit. The quality of inventory has gotten a little bit better and has increased and people say it goes up and down, and there's some seasonality in the inventory. But it's 8% up in the fourth quarter year-over-year, and we're seeing more activity. Do I think it's going to be more than 6% to 7% or 8% growth? No. It's modest. But I was -- it's hard to guess, but it feels like that this year. Whereas last year, right from the get, I think it was going to be flat, even though the estimates from some of the economists were up. This year, I could feel it. And you saw our open orders, right? You can see some of the open order data and how it's getting a little bit better. And so again, I don't think it's going to be over the top, but I believe we're going to start seeing some movement this year. Again, the first quarter is always hard for us for geography reasons. And as far as the breadth, I think there is some breadth to it. Again, some of the places that didn't go up as much, don't move as much like the Midwest kind of has less variability in it. And so the South tends to be the swing a lot of times. But I feel pretty good about modest improvement. So what we're trying to make sure we're on top of and planning for is that kind of how do you capture that... Oscar Nieves Santana: And touching on rates, looking at data from the ICE Mortgage Monitor, I can see that once rates go below, say, 6%, the number of people with in-the-money mortgages increases significantly. Could you give some color and maybe quantify the impact that would have in your revenues if that were to happen and ultimately in earnings? Frederick Eppinger: Yes. Again, there's a lot of talk about it. I don't know how scientific any of that is. But again, I look at last October, and we had a cup of coffee, a little bit under 6% and things jumped, right? So there is some optics around that 6%. What I would tell you about our economics, our big swing of our economics is really existing home sales, as we've said. And we're -- we've been sitting at $4 million for 3 years, right, with 0 growth. And the reason it's such a swing for us is because it's the fixed cost base for us with 500 locations. And particularly in the first quarter, when you're at that level, you've got so little volume going through the system, it's a real drag on your returns. And what I've said is if we got to $5 million, our margins go to 12%, right? But I don't have 12% because you're filling the excess capacity. And particularly if you want to go -- if you can't sleep one night, look at the first quarter results in '23 and '22 and '21 when things were still really strong, it's an enormous swing for us, right? Now we try to fill the bucket in direct through small commercial growth and some organic attempts around micro markets, et cetera. So you can think about a straight line almost between the $4 million and the $5 million of leverage of our business. And again, it's a little seasonal because, again, the volumes are so low in the first quarter. But that's the way we think about it. And again, it's tied -- so that's the big portion, but it's everywhere, right? Like appraisal -- you go through the businesses, there's a fixed cost portion of all those businesses. And when you're at a 30-year low, you strain kind of on the margin. That's why what I say in our lender services business, I think we're 11% to 12%. Now I think we're 12% to 13% is kind of the -- where we're going for this kind of year. But if we got back to $5 million, that thing is going to get to mid-teens because all those businesses are affected too, right? A little less, but it's part of our equation. And one of the things that are most interesting about us is if you look at '19 to '24, for example, in the volumes, all our competitors' margins went down more than ours because of the volume decrease and ours went up, but that's because we started bad. So we've made improvements, but we're still very tied to that core metric and trying to give less metrics. The other thing I would say, and I've mentioned this a number of things in public settings, because I think there's some chance that it's a journey beyond 4.5% is going to take longer. I mean, I think we're going to get some improvement, but it could get stalled for various reasons. We're working hard to make that -- try to get to double digit at 4.5%. A lot of work to do, but with geographic focus, some product portfolio stuff we're doing, some operating model because I'd like us to be able to show kind of improvement if we get stalled at that kind of 4.5% because there is some chance it's just going to take a little bit longer to get to 5%. So I'm kind of -- I'm optimistic on an improvement, but I'm cautious about how quickly it gets to that $5 million, $5.5 million and really focusing on continuing earnings growth while we get there. Oscar Nieves Santana: Yes. And maybe a last one, and I'll get back in the queue. You've highlighted efforts to grow agency in a few targeted MSAs, including Texas. With the Texas Department of Insurance finalizing the reduction in title premium rates effective March 1, if you can walk us through how that change will flow through your financials and how you're thinking about the impact on the business, both near term and longer term? Frederick Eppinger: Yes. So the rate, again, is like 6%, what that agreed to is a 6% reduction, and it's like July or something. And so that's much less of an issue than it was when it was 10%, first of all. But what we've done is we've addressed this through reviewing all our fees and services and stuff in Texas. And so it's less -- it's low single-digit impact on earnings this year. So we managed it well. Now I'm concerned for some of our agent partners in rural places in particular, because they don't make a lot of money, and that's a meaningful change. And so I do think it's going to cause some disruption in the agency -- some of the agencies, particularly small agents in parts of Texas because there is a -- in my view, right now, there's not a ton of margin for agents given the rate structure. What's weird about our world, right, is that people think about it as a cyclical world. So they take a 3-year average or a 5-year average or whatever. The problem is that '21 and '22 are once in a lifetime, never happen again kind of event. And if you weigh them too much, you overreact to the excess earnings that were made in those 2 years. And I think Texas is a perfect example where that reduction is overstated given what today's environment is, and it's going to have an impact on agents. But for us, it's not. Financially, I don't think it's going to be much, if anything -- like I don't -- we put it in our plan, everything, but it doesn't change my expectations of growth of earnings or anything in our businesses. Operator: [Operator Instructions] And we do have a follow-up from Oscar. Oscar Nieves Santana: All right. I guess this will be my last one. You highlighted efforts to grow -- you talked about prioritizing share gains in those key MSAs, both organically and through M&A. Can you give us a bit more color on how you're thinking about that strategy today, including whether that -- you have a target level of capital that you plan to deploy this year and how that might be split between the title business and the Real Estate Solutions business? Frederick Eppinger: Great question. So in direct, to me, the direct, as I said, is more of a kind of a fixed cost minimum scale way to think about direct in MSA levels. And early on, the problem we had is we were an inch deep and a mile wide. So we had a lot of offices that were chronically unprofitable unless the market was at its peak. And so we shut some stuff down, reallocated capital. We actually purchased in about 30 MSAs, some business because of the scale difference, if you get over 10% share locally is -- the margins are much better. The ability to manage the ups and down is better. Your service consistency is better, your ability to centralize things and variabilize the cost of them. So we have this -- we reviewed the 140 MSAs. We said which ones are mostly agent oriented, which ones are we strong, which ones we like the market, but we're not where we need to be. And we have 30 or so MSAs in particular that we think we can move the dial, and it'd be good for the company to get to a higher share level in those areas. We also have what I call micro markets, which is the markets, the suburbs of Nashville, the difference between Austin and San Antonio, the growth in between where we can do fill-ins and acquisitions and tie it to the bigger offices in those locations. So we have these targets that would materially both improve top line and bottom line for the company. For the last 3 years, we've got -- we kind of didn't do really any because what happened is agents weren't making any money. And so their price expectations -- they weren't going to get enough to be comfortable or happy about that. So they can kind of talk to us and communicate with us, but there was a price point even with an earn-out. What has happened is as people have reengineered their operations through -- getting through the tough times, they're making a little bit more money. They're seeing the improvement that I'm seeing. All of a sudden in these target markets, those conversations are becoming more constructive, right, for those that are deciding this is one of the alternatives they want to consider. And so for me, I've said over the next 3 years -- I said a bunch of times, over the next 3 years, I see $300 million roughly of acquisitions in the direct channel against these kind of markets that would structurally improve our margin regardless of cycle in that business. And so what I'm saying and what I said in my script, I am much more optimistic that this year, some of that can start to happen. And I don't know when. And again, I only want people that want to be here. I only want it to work for both of us. So it's getting to that right trading price, so there's no risk for us and no risk for them. And I think we're getting closer. And so that $300 million in my mind over the next 3 years is kind of the way I've thought about it. As you know, most of the transactions in that space are small, $10 million to $30 million. It's what -- because you're geared to a market or a market opportunity. And that, by far, if you look at our overall capital plan, I would say the other businesses I'm in -- are in, we don't need to do acquisitions. What I have said out loud recently is that in lender services, there's a couple of spots where we've got really good traction that it might make sense to consolidate some of the competitors. Again, those won't be -- they wouldn't be big transactions. But what's emerging is we've got so much momentum with some of the big lenders that filling in our network or buying some of those customer relationships could make some sense. So again, that's a little bit more opportunistic. And again, it's not -- I don't think you're going to see a $300 million opportunity. Those again are -- will there be a $20 million or $30 million opportunity. The other thing I would say is what Jeff just said, there are a handful of really teeny like $3 million, $4 million of tool sets that I do think will be available in some of these businesses that accelerate some of the development we want to do to make our service better and our delivery better because of what's happening with not just AI, there's a bunch of things happening with certain development. So that's where our capital is. I don't think it's going to be a huge number. I think what happens quickly as the market comes back and we improve margins, we generate a lot of cash. So I believe the majority of what we're going to be doing is self-funded. I still believe that. And it was just a timing thing here that I wanted to give ourselves some flexibility because of what I saw happening over the next 6, 9 months. But I think in general, we should be able to self-fund what I'm talking about over the next 3 years. Oscar Nieves Santana: I'm going to stick to my word. You answered the follow-up that I would have but... Frederick Eppinger: Thanks a lot. Appreciate it. Operator: We'll go next to Geoffrey Dunn with Dowling & Partners. Geoffrey Dunn: Just a couple of number questions. David, could you update us on what you saw January trend-wise for orders and also share your thoughts for investment income in the coming year relative to '25? David Hisey: Yes, Jeff, I mean with respect to orders, I think Jeff -- or Fred just covered it a little bit. Things have been opening up a little, particularly relative to last year's quarter, they're up a bit. We just have to see how things play out here because rates have been a little volatile as you've seen. But right now, things seem to a little bit better than last year. With respect to interest income, and this also goes to Fred's comment on the flow benefit of getting commercial. So as it stands now, if you plan on maybe 1 or 2 rate cuts and assume most escrow earnings are tied to short-term rates, we may come down a little bit, but most -- we don't expect it to come down that much. And the main reason is because the escrow balances will grow and offset it. Geoffrey Dunn: Okay. So largely a volume offset to rate cut impact? David Hisey: Yes. I mean I would say it could come down a bit, like several million or so, but it's really a function of how quickly -- like if they don't drop rates until the fall, right, and volume continues to pick up, then you're sort of holding, maybe increasing a little, right? If volume doesn't pick up as quickly and they drop rates like at the next meeting or 2, right, then you could go down a little bit. Operator: We'll now move to Bose George with KBW. Bose George: One more for me as well. The -- actually, can you give us an idea about the revenue contribution from MCS? And is there much seasonality there as that comes in? Frederick Eppinger: Yes, both good questions. So there is a little seasonality, particularly in the first quarter, okay, for that business. It's -- and we -- I think when we bought the company, we talked [indiscernible]. David Hisey: Yes. Bose, I think we had covered this a little bit in different forms, but it's about $165 million a year revenue company sort of in the $40 million EBITDA or so range. And we'll just have to see where it goes from there because foreclosures have been increasing as you've seen, FHA delinquencies have been increasing, but that's about how they're running now. Frederick Eppinger: Yes. So a little lower in the first quarter... Operator: At this time, there are no further questions in queue. I will now turn the meeting back to management for closing remarks. Frederick Eppinger: I just want to thank everybody for their interest in Stewart. As I said earlier, I'm very pleased with '25. We've made good progress, and we have good momentum. And I believe that momentum will continue into '26 if we stay focused. So thanks for -- thank you for all your attention and interest in the company. Thanks. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Vincent Clerc: Welcome, everyone, and thank you for joining us on this earnings call today, where we present our fourth quarter and full year results for 2025. My name is Vincent Clerc, I'm the CEO of A.P. M�ller - Maersk. And with me in the room today for the last time is our CFO, Patrick Jany. Before we start, I'd like to thank Patrick for all of his hard work and support over the past 6 years here at A.P. M�ller - Maersk, and wish him the very, very best in the next steps of his career. As we announced back in December, Robert Erni will succeed Patrick in the coming days. We look forward to introducing you to Robert on our upcoming road shows and conferences. If we start with the highlights from 2025 notwithstanding a challenging external environment, especially in Ocean, we are pleased with the strong year overall, in which we made good operational progress across all of our business segments. We closed 2025 with a full year EBITDA and EBIT of $9.5 billion and $3.5 billion, respectively. This places us towards the upper end of the most recent financial guidance we had communicated to you back in November. Specifically in Logistics & Services, we strengthened the performance of our portfolio on the back of improved operation, stronger cost and yield management measures, delivering 4.8% in EBIT margin for the year. This represents an improvement of 1.2 percentage points on 2024. We are, of course, proud of the progress we have made, but are either complacent or satisfied with where we are. And improving both our results and growth rates in Logistics will remain a priority in 2026. In Ocean, Gemini successfully implemented, delivering unprecedented reliability for our customers and significant cost benefits, which we have revised upwards on an annual basis, and I will look at this further in a short while. Gemini has also allowed us to deliver strong volume growth of nearly 5% through increasing asset turns while limiting the fleet size expansion. This was against the backdrop of sequentially receding rates because of increasing overcapacity and volatility created by trade tensions, especially towards the middle of the year. The agility of the new network helped us manage this volatility by ensuring that we could react to the volume swings on the U.S.-China trade lanes. Finally, it has been a record year for Terminals, both in terms of top line and earnings. In the year, we delivered a strong revenue growth of 20% and EBIT growth of 31%. The top line was driven by strong volumes, mainly from additional Gemini services, higher pricing and continued growth investments in critical infrastructure. Utilization remains high, but with our multiyear investment program, we are confident in our ability to take advantage of the market growth in the upcoming years. As we look ahead to 2026, we see a continuation of strong global container demand translating into a volume growth that we expect to land between 2% and 4%. Based on various scenarios we currently see, especially on industry overcapacity in Ocean, we guide for a full year EBIT of between negative $1.5 billion to positive $1 billion free cash flow above negative $3 billion and a CapEx for full year '26 and '27 combined of between $10 billion and $11 billion. As usual, more detail on the guidance will follow later in the call. With the numbers now out of the -- for the full year, we can also announce a dividend proposal for the year that just passed. For 2025, the dividend proposal will be set forward by the A.P. M�ller Board at the AGM on March 25 and is a dividend per share of DKK 480. This is equivalent to 40% payout of our underlying net results in line with our dividend policy and the same payout ratio of the 2024 dividend. Looking back at the year just past, we generated thus a total shareholder return of 35% in 2025 through capital gains and dividends. With a strong balance sheet, we are also in a position to announce a continuation of the share buyback program. The new tranche will be approximately $1 billion with a duration of 12 months and will begin immediately. The lower level reflects the higher level of uncertainty and the lower rate environment that we are headed into in 2026. This implies a total cash return to shareholders for 2026 of approximately $2.1 billion, of which $1.1 billion is the proposed 2025 dividend subject to the AGM approval, and the remaining $1 billion is the new tranche of the share buyback program. Now taking a closer look at the fourth quarter performance for each of our business segments. First, Logistics & Services continue to track positively this quarter. We achieved an EBITDA margin of 4.9% up from 4.1% last year, but down from the 5.5% we had in the last quarter. The year-on-year margin improvement comes from the -- on the back of operational progress made in warehousing and distribution primarily. This quarter marks the seventh consecutive quarter year-on-year margin improvement. And meanwhile, the margin contracted sequentially. On the top line, revenue grew 1.9% year-on-year, driven mainly by warehousing and distribution, but fell 0.5% sequentially against the third quarter of this year of '25. Our focus remains on stringent cost control, portfolio discipline and capital efficiency to live the performance upwards towards an EBIT margin target of 6%. We are happy about the general trend throughout the past 7 quarters, but we also clearly have more work to do. In Ocean, we had our second full and clean quarter after the Gemini implementation. We delivered above-market volume growth with volumes up 8% year-on-year and a stable -- and stable on the prior quarter following the peak season. The network continued to deliver high schedule reliability of 90% for our customers despite significant weather disruptions and substantial cost savings to Maersk. We continue to use our fleet efficiently with utilization of 94% on par with the third quarter. The cost benefit and agility of the new network have bolstered our operation against the backdrop of the ongoing freight rate decline. In Terminals, we delivered a solid quarter in a record year with a strong top line growth, mainly driven by volumes. Volumes grew 8.4%, driven by Europe, North America and Latin America and mainly through the Gemini network. As we mentioned last quarter, much of the volume uplift has come from Gemini, which has put more boxes through our gateway terminals. Utilization remains high at 88%, but we are confident that with ongoing investments, we will continue to be able to capture good volume growth in the coming years. Finally, return on invested capital for Terminals remained strong at 16.1%, well above the target of 9%. Turning to the main achievement of the year. We have updated the Gemini cost benefit we showed you previously and now expect the benefits to be higher than our initial guidance last quarter. Starting with bunker. We can see that the continued advantage of Gemini stemming from a more efficient use of our ships, for example, through lower speed, shorter distances and shorter dwell time is allowing us to reduce bunker consumption. This translated to an approximately 9% bunker consumption improvement adjusted for capacity for the quarter. Then on the asset turn side, from the more efficient use of our vessels, Gemini allows us to transport more volumes on the same capacity. This quarter, we saw capacity growth of about 4% year-on-year against a volume growth of about 8%. The delta was about 4 percentage points, representing the improvement in asset turn. We can quantify the bunker consumption improvement of about 9% at fixed bunker prices into a cost benefit of about $150 million for the quarter. Likewise, we can quantify the asset turn improvement of about 4 percentage points, which against our total network where cost translates into about $120 million of cost benefit for the quarter. An added advantage of Gemini has been to increase volumes in some of our gateway terminal, allowing us to significantly increase throughput. As with the prior quarter, the additional uplift has generated about $4 million in benefit this quarter, which annualizes to about $120 million to $200 million based on full year implementation and seasonality. Overall, across Ocean and Terminal, therefore, we have generated over $300 million in benefits here in the fourth quarter, and we are now targeting $820 million to $1.1 billion in annual benefits. Turning to our midterm targets. As you might recall, we introduced these targets back in May 2021 to cover the midterm period of '21 to '25. Even though the reporting period technically ends, we will continue to use those indicators for 2026 and report on our progress in the same terms. Later in the year or early in 2027, we will revise our achievements and formulate new midterm targets. Nevertheless, we are finishing those 5 years -- as we're finishing those 5 years, it is time to have a closer look at the progress made, and you can see to the right of the table how we have performed over the 19 quarters since the introduction of the targets. Overall, we have delivered exceptional performance at the group level with almost all quarters delivering last 12 months ROIC above target, which translates into an average ROIC of above target for all 19 quarters. Similarly, Ocean has performed well with EBIT above the 6% target for all but the first 2 quarters in 2024 and this most recent quarter with downward pressure on rates from increasing overcapacity. Terminal has truly transformed with a ROIC starting shy of the target back in 2021, but has been consistently above its target of 9% since the first quarter of 2023. At the same time, we know where we have fallen short, namely in Logistics & Services, with an EBIT margin still below the 6% target that we laid out and modest revenue growth because of challenged products, primarily in middle mile and warehousing. Our priority in 2026 is to continue to improve where we have fallen short in Logistics & Services. And that is a good segue into the next slide. Looking ahead to 2026, we have laid out our key strategic priorities. In Logistics, our priority is to accelerate margin improvement and push harder on growth wherever it makes sense, which we define as the many part of the portfolio delivering high margin and where higher volumes will increase network utilization and thus, translate also in better margin. Focus areas are, for example, a further reduction in white space and contract logistics or adding density to our e-commerce network. As part of our efforts to accelerate improvement in Logistics, we will simplify the organization as well. I will get back to this shortly on the following slide. Within Ocean, we seek to protect the high asset turns we have achieved with Gemini, which will allow us to carry more containers with our existing fleet and so we can grow with minimal fleet expansion. Further, we continue to grow with the market as we did in 2025. Given market headwinds we are facing in -- for 2026, we will focus on profitability by sticking to our core principle of cost leadership, which will prove to be even more important in the coming quarters. Finally, in Terminals, we continue to grow through existing and new location, maintain long-term profitability and ultimately deliver on our ROIC target. Our aim here is growth, concession excellence and operational excellence. Across all our business segments and in corporate, we continue to focus on driving further efficiency and simplification of our organization. Cost leadership remains core to being the best operator. We are transforming our organization within the Logistics & Services as well. This is to drive more value for our customers and reflecting the feedback from all of you. It will increase comparability and transparency to allow you to better benchmark our performance with peers. We will report 3 new product segments, which reflect how we will simplify also the way that we run the business. These segments will be landside, forwarding and solutions with each of these product segments comprising its own set of products. Landside will comprise local and regional products linked to inland transportation, drayage in and out of terminals, ground freights in North America which offer largely expedited LCL road transport between centers. Depots, which are often located close to ports and terminals as well as custom services to assist customers with declarations, tariffs and other regulatory matters. Forwarding will comprise global forwarding and ancillary products, namely air freight, less than container load for ocean forwarding and project logistics of large cargo as well as insurance. Finally, solution will complain supply chain management, e-commerce and warehousing and distribution. This organizational change will take effect on April 1 and will be reported externally for the first time in the second quarter reporting later this year in August. We will provide at that time, a year-to-date and year-on-year figures according to the new segmentation to help you for comparability purpose. Finally, on the guidance for the upcoming year. First, we expect global container volumes to continue to grow in 2026, with growth expected to be between 2% and 4% and for Maersk to grow in line with the market. In that context, we expect an underlying EBITDA of $4.7 billion to $7 billion, and underlying EBIT between negative $1.5 billion to positive $1 billion and a free cash flow of negative $3 billion or higher. While we plan on operational progress and growth across segment, we expect container shipping rates to develop adversely, such that our guidance for 2026 is lower than for 2025. The guidance range reflect industry overcapacity that already exists today from the new vessel deliveries and different scenarios with respect to a full Red Sea opening in 2026. Our CapEx guidance for '25 and '26 is unchanged compared to the previous levels and around $10 billion to $11 billion, and we expect the current funding -- the corresponding figure for '26 and '27 to be the same. I'll now hand over to Patrick, who will walk you through the detailed financial and segment level performance. Patrick Jany: Thank you, Vincent, and good morning, everyone. We closed the book on 2025 with a good operational delivery in the fourth quarter, delivering an EBITDA of $1.8 billion and an EBIT of $118 million, implying margins of 13.8% and 0.9%, respectively, placing us very much where we expected to be. On a full year basis, we delivered an EBITDA of $9.5 billion and an EBIT of $3.5 billion, equating to a 17.7% EBITDA margin and a 6.5% EBIT margin for 2025. While both Logistics & Services and Terminals delivered improving year-on-year performance, excluding one-offs, the first benefiting from improved operational efficiency and the latter from higher throughput from Gemini, the quarter saw overall decreased earnings resulting from receding freight rates in Ocean. Return on invested capital was 5.7%. This is lower both year-on-year and sequentially and reflects the additional investments made this year in Ocean and Terminals together with a very strong earnings in the latter half of 2024, no longer being included in the last 12-month measure. We continued returning cash to shareholders in Q4, distributing $620 million through the ongoing share buyback program for a total of $2 billion for the full year. Finally, we maintained our strong liquidity positions with total cash and deposits at $21.4 billion at quarter end and with net cash decreasing year-on-year to $2.9 billion primarily due to the cash returned to shareholders through dividend and share buybacks. Going into 2026, our balance sheet remains strong and allows us to continue pursuing our strategic growth objectives while simultaneously returning cash to shareholders and weathering the expected downturn in Ocean. Let's take a closer look at the cash flow breakdown on Slide 15. The fourth quarter operating cash flow was $2.5 billion, driven by an EBITDA of $1.8 billion, together with a positive impact from a substantial unwind of net working capital. This resulted in strong cash conversion of 137%, up on last year's 123% in the quarter, leading to 102% conversion for the full year. Gross CapEx decreased to $919 million, down both year-on-year and sequentially, primarily due to a lower level of investments in Ocean which, together with capitalized lease installments of $819 million resulted in free cash flow of around $1 billion. For the full year, CapEx landed at $4.8 billion at the lower end of our guidance. Free cash flow also included a positive contribution of $349 million, mainly from dividends received from our minority investments. We repurchased roughly $620 million of shares during the quarter, which is reflected in the dividend and share buyback column. Finally, a large portion of our term deposits matured in the quarter, implying an increase of the readily available cash. Starting our segment review with Ocean on Slide 16. Strong demand prevailed in the fourth quarter and our Ocean business managed to successfully capitalize on this momentum, delivering substantially increased volumes while reaping the cost benefits of Gemini in an otherwise deteriorating market environment. Volumes increased by 8% year-on-year across more trade lanes, driven by sustained strong Asian import. Sequentially, volumes remained roughly stable at a negative 0.4%. Fit rates continue to decline in response to the ongoing market pressure in industry supply demand imbalance, declining by 23% year-on-year and 8.8% since the previous quarter. As a result of the significant rate decline, profitability turned negative in the fourth quarter as Ocean incurred a loss of $153 million. Ocean continued to benefit from the Gemini network. The scale reliability of the network remains in line with our target. And we have seen the immediate financial and operational year-on-year impact of better asset turns and bunker savings cushioning the full impact of declining rates. While continuing to invest in our Ocean business in line with the overall strategy, CapEx was comparatively low at $603 million compared to $1.2 billion last year, mainly due to significant vessel installments in Q4 2024. Sequentially, CapEx also decreased by around $300 million due to lower equipment investment. On the next slide, you can see a breakdown of the individual elements, which contributed to the EBITDA development in Ocean. The year-on-year rate decline was the dominant headwind, contributing a large negative impact of $2.1 billion, only partially offset by stronger volumes. The price of bunker decreased 11% year-on-year to $512 per tonne, which had a positive impact together with 5.4% lower bunker consumption from primarily Gemini-related efficiency gains. Container handling costs were up from increased terminals and empty repositioning costs. And then there is a negative comparative impact from the timing of revenue recognition in the final bucket, offsetting the impact of lower SG&A costs. Overall, Ocean EBITDA for the fourth quarter landed at $1.2 billion, down 59% from the previous year and 35% sequentially. Now let's have a look at the KPIs of the Ocean business on Slide 17. Loaded volumes increased by 8% year-on-year to 3.4 million FFEs across most trade lanes from continuing strong Asian exports, leading us to almost 30 million FFEs for the full year. At the same time, average freight rates decreased 23% from last year and 8% sequentially, while remaining flat throughout the quarter itself. Unit cost at fixed bunker decreased 4% year-on-year and 1% sequentially, benefiting from the stronger volumes offsetting the higher cost base. Bunker costs decreased 12% year-on-year, primarily from 11% lower bunker prices and further supported by the already mentioned 5.4% lower bunker consumption driven by high efficiency of the Gemini network. This was all partially offset by the EU ETS payments. The size of our fleet was stable sequentially at 4.6 million TEUs, implying a 4.3% increase year-on-year. This is the result of the capacity injection in early 2025, initially for Gemini, which has allowed for higher volumes and to satisfy the strong demand, which is also reflected in our sustained high utilization, which was sequentially unchanged at 94% in the fourth quarter. In terms of product mix like in the last couple of quarters, a majority of the volumes came from strong term contracts with 55% of volumes in Q4 compared to 45% of volumes for our long-term contracts. Looking forward for 2026, we expect a slightly higher share of volumes to come from long-term contracts with about half the volumes to come from long and half from short-term products, respectively. I would also like to briefly comment on the change in how we account for our vessels in -- on the balance sheet starting in January 1st of this year. Over the last years, we have observed an increase in the average time frame in which our vessels remain economically viable. And as a result, we have increased the estimated useful life from 20 to 25 years. The impact of this will be approximately $700 million of reduced depreciation in 2026, which is reflected in the financial guidance, as you might have already read in the footnote. We continue to our Logistics & Services business on the next slide. The year-on-year development in Logistics & Services highlights the operational improvements to the segment that we have made throughout 2025. While there was top line growth, the biggest difference came through improved profitability resulting from our efforts at turning around the more challenged products like warehousing and middle mile. Revenue in Logistics & Services grew to almost $4 billion in the quarter, up 1.9% compared to last year, driven by improved volumes across most products. Sequentially, revenue declined modestly at negative 0.5% following a strong third quarter. EBIT increased to $194 million, mainly driven by solid performance in warehousing, last mile and lead logistics. This implies a 4.9% margins, up 0.8 percentage points compared year-on-year and marking the seventh consecutive quarter of year-on-year EBIT margin increase. Sequentially, the margin decreased by 0.6 percentage. CapEx was $129 million in the fourth quarter, declining another quarter year-on-year to reflect the slightly lower investment level in 2025, where focus has been on improving operational performance. Now let's have a look at the segment breakdown by service model. Overall, we recorded a positive business development in a generally supportive business environment with one of the biggest weak point being the U.S. import-linked activities. This can be seen in particular, in freight management, where revenue declined to $532 million, down 8.9% year-on-year as lead logistics volumes were significantly down on the China-U.S. corridors, given the tariff environment, while customs held broadly stable. EBITDA margin improved to 19% from better execution. Fulfillment services increased revenue by 1.5% to $1.5 billion, while increasing the EBITDA margin to around breakeven. Warehousing was here the largest contributor to the higher margin with middle and last mile also trending better after the rebasing actions we executed during the year. In Transport Services, revenue grew by 5.6% to $1.9 billion. EBITDA margin eased to 7.1%, and strong air and landside transportation volumes growth was offset by softened prices against a still relatively fixed cost base in own control capacity. Additionally, margin was impacted by a $22 million impairment of aircraft, representing about 1.2 percentage points of the year-on-year margin decline. Stepping back to margin journey we set out at the start of the year remains on track. We have lifted the operational flow in our fulfilled by Maersk products and prioritize profitable wins while keeping CapEx insured. While the business is by far not where we want it to be in terms of growth and profitability, 2025 has moved us closer. Let us now turn to our Terminal segment. This business rounded off an excellent year with another strong quarter. Revenue grew 13% to $1.4 billion, driven by strong volumes, which increased 8.4% year-on-year, supported by increased throughput from Gemini and geographically driven by Europe, North and Latin America. Additionally, the top line was supported by a higher rate level. With another quarter of strong volumes, utilization for Terminals remained high at 88%. Revenue per move increased 4% year-on-year to $363 per move driven by improved rates and favorable FX development, somewhat offset by lower revenue from storage. On the other hand, cost per move increased by 5.9% from labor inflation coming through together with adverse FX, overall increasing despite higher utilization. Terminals delivered fourth quarter EBIT of $321 million, down 5% from $338 million the previous year, impacted by an $86 million expense related to the impairment of a terminal in Europe and a write-down in Asia. Adjusting for this one-off, EBIT would have increased to $407 million, equivalent to an EBIT margin of 30.1%. Sequentially, EBIT decreased as expected given the significant positive one-off reported in the third quarter. On the back of strong performance throughout the year, return on invested capital increased to 16.1%, CapEx remained stable at $152 million, roughly in line with previous quarters. Now let's have a look at the breakdown of Terminals EBITDA development on the last slide. EBITDA for the fourth quarter increased to $440 million from $421 million the previous year. The year-on-year increase came mainly from the higher volumes contributing a positive impact of $52 million, which was further supported by a $16 million impact from higher revenue per move. This more than offset the negative impact from labor inflation and higher costs of $48 million. This finishes our business segment review. Let us now proceed to the Q&A. Operator, please go ahead. Operator: [Operator Instructions] And we have the first question coming from Muneeba Kayani from Bank of America. Muneeba Kayani: So Vincent, you talked about the range of the guidance. I just wanted to get back on that, like how have you thought the low and the top end of that guide in terms of a freight rate scenario or Red Sea timing? I know you said gradual reopening is kind of what you've assumed, but if you can help us think about that scenarios and kind of the cadence of that guide for this year, please? Vincent Clerc: Muneeba, thank you for your question. I think the way to think about this is whether it is through the new ships that are coming in or through the return to Suez, we're going to free about -- we're going to have an overcapacity of anywhere from 4% to 7%, 8%. And for that to resorb itself, you will need to see some scrapping. There is a lot of pent-up capacity that needs to get scrapped and didn't get scrapped since COVID basically for 6 years. And there is also a tonnage that needs to be returned. So that will create a few quarters that are going to be a bit bumpy. If we return fast and full to Suez, we will see probably more pressure on the freight rate because there is a bigger gap that we need to close at once. If we have an orderly slow gradual return, we might be able to manage it better, but it all starts to get to the upper end of the guidance that we start to see some scrapping starting to occur because it means that we're starting to eat into some of that overcapacity. And so it really depends how quickly the industry reacts to the current start over the capacity, how quickly we move through -- we get back to Suez and how much of the tonnage gets pushed back to provider. I think that's really the underlying thing that you need to get into towards the upper or the lower end of the guidance. Operator: The next question comes from Cristian Nedelcu from UBS. Cristian Nedelcu: It's a two-part question, if you allow me. The first part of CMHC has recently announced that it's selling a 25% stake in their terminal business. Would you consider spinning off or selling a stake in terminals to crystallize value or accelerate the growth in Terminals? And in relation to this -- in relation to the capital allocation, there are some opportunities out there, Panama ports. You talked about Logistics M&A. The way you've reduced the share buyback, so just a more prudent approach on capital deployment. Is this prudent approach valid also for acquisitions in Terminals and Logistics.? Vincent Clerc: Cristian, we've seen the deal from CMA. I think they are trying to monetize some of the portfolio. I think with the balance sheet that we have today, we have no need to monetize and can perfectly as we do this year, even on a reduced guidance, maintain a strong return to shareholder and conduct the investment that we need to do. You mentioned Panama, there would other -- I think, in general, the world has underinvested in terminal capacity for a while, and there is over the coming decade, need for significant investment in greenfield projects to add terminal capacity to match the flows of containers that there is globally. That's also what we plan on doing, and you've seen some of those facilities start to come online during 2025. There will be more in the coming months and quarter. But here also, we have the wherewithal to do it. We have the wherewithal to continue to renew our fleet and be able to sustain a strong position in shipping. And then on Logistics, it's always a question of finding the right candidate, the right opportunity and being ready to do that integration. Certainly, that remains one of the financial axis of the strategy. But at this stage, I would say we are, of course, prudent towards capital deployment and keeping as much of our powder dry as possible given some of the unknowns in the outlook. But it is exactly to preserve the ability to countercyclically go and do some moves when the time comes. Operator: The next question comes from James Hollins from BNP Paribas. James Hollins: Best of luck to you Patrick. Thanks for everything. Just on the Red Sea, I'm just wondering if, if you can run us through kind of the rationale you saw with your desire seeming desire to be a first mover back in the Red Sea amongst your main competitors and kind of linked to that, the expected time lines as you would see them for Maersk to be fully back through the Red Sea, assuming everything else geopolitically stays the same and kind of what you'd expect to see from your competitors from here? Vincent Clerc: Yes. Thank you, James. So a couple of points to start with. If you look at the Suez transit in January, they're up 50% versus what they were a year ago. So -- and that's not with a lot of Maersk ships there was only one of them that crossed during that period. So we're not the first movers. There has been a significant uptick across tankers and bulk segments, for sure, but also with CMA having a much more aggressive, they have multiple services already that have been transiting throughout the period and more aggressively also over the past month and even quarter. So we are a second mover, if you will, on that. For us, the security assessment has been on different levels. First of all, obviously, we follow the situation in Gaza, where we seem to be moving slowly along a peace process with where we are going to go with the reopening of the border with Egypt and so on, where there's a lot more talk about now reconstruction rather than a new round of hostilities. There has not been any attack since October from the Houthis on any ship. There has been declaration also from the Houthis that they do not intend to attack anybody. So for us, the -- and again, a lot of ships are crossing every week. And we monitor the situation and how we're doing. We're talking to others and see what intelligence do they have. The conclusion that we have is today, it is safe for us to move into a Phase 1, which is having some services specifically the ones for whom going around the Cape of Good Hope is the longest deviation where it is safe to move under escort and go through the Bab el-Mandeb. There is limited escort capacity. There are a lot of shipowners today that already moved through Bab el-Mandeb without escort. I feel that it's a bit premature for at least for how we assess the security situation. And therefore, there is a certain limit to what we can do. At some point, we need to get into a situation where the temperature comes further down, where we feel it is also safe for us to move into -- to reopen services even if we don't have escort. And that would be probably what triggered the difference between what we have announced so far and a more full return would be the ability that we have to see that we can move without the military escort that the service that we do it today have. Operator: The next question comes from Lars Heindorff from Nordea. Lars Heindorff: Yes. On the share buyback, I don't know if you can indicate your thoughts behind the $1 billion, down from the $2 billion last year? And also, what kind of balance sheet ratios, I don't know if net interest bearing debt to EBITDA is the only ratio you look at? Or if there are other ones that you sort of steer after in order to determine the size of the share buybacks? Patrick Jany: Yes, I think probably two parts to your question, Lars. So first on the share buyback, I think we decided to continue with the share buyback. I think, which is the main message here because we have a strong balance sheet. And as we have said before and Vincent mentioned as well on the call, we will continue to obviously invest in growth in Terminals to renew our fleet and also to expand our logistics business while knowing that you were downturn in Ocean. This is now coming, I would say, closer with a return to the Red Sea, which you see different scenarios reflected in our guidance. I think it's a word of caution to continue the confidence, which we show by continuing, but also reduce a bit the dimensioning, which at $1 billion is still pretty significant when you look in terms of absolute returns. So we feel it's a good balance. But by keeping a prudent approach to the balance sheet obviously recognizing and keeping a commitment to return cash to shareholders. If you look at the ratios, which we use for that, I think when you are on a net debt positive, so a net cash position, the ratio is a little bit out of scope in terms of net debt-to-EBITDA, clearly. So we look more at free cash flow, right ratios, but we are well above those elements. So it's really when you look forward on -- as we talked around the last few years, when you model a potential overcapacity having an impact on Ocean profitability and the Red Sea returns compared to the progress in Terminals and Logistics. You come into different scenarios, and we feel with this strength of balance sheet, return on shareholder via SBB, but also our guidance. We have a good cushion looking ahead, and we will not be threatening any ratios. Typically, as you know, we aim to be solid BBB. That is quite far off the position where we are today. We can only repeat the 1.5x net debt-to-EBITDA as an order of magnitude on the over-the-cycle EBITDA, obviously, not the crisis year EBITDA as being the reference in terms of balance sheet modeling. Operator: The next question comes from Jacob Lacks from Wolfe Research. Jacob Lacks: So it feels like there's a pretty clear focus on the cost structure between the corporate restructuring and further increases in Gemini savings. To the extent the market remains oversupplied beyond just this year, do you think there's further cost opportunity to help offset inflation rightsize the cost base? Patrick Jany: Jacob, yes, I think -- so obviously, as we head towards leaner times, focus on cost and very hard focus on cost is absolutely paramount. So I think the work that we have done with Gemini has yielded quite a significant amount of efficiencies for us. We think that there is more that can be done there. And certainly, we're going to do this. A return to Suez is going to reduce costs going to enable more slow steaming as well. So -- and we can expand some of the Gemini philosophy to other services. Something can be done on organization as well. We've made some announcements on this. I think there are -- there are 3 more levers to reduce cost further. The first one is we still have a time charter market that is at extremely elevated level. which usually follows freight rates after -- with a bit of lag. And I think when the trend on freight rates confirms itself, which, I mean, unless there is another shock, this is what we're going to continue to see in the months to come, we're going to see the time charter market come down as well, and this will generate significant savings as well because a significant amount of our fleet also is on time charter and will gradually be renewed at those lower levels. That's the first -- that's the first one. The second one is procurement. I mean the times have been good. And of course, some of our suppliers might have been benefiting a bit from that. And that's certainly time for us to just make sure, and I think this is going to happen across the industry that we get back to pretty hard core negotiation on everything and in some cases, roll back some of the inflation we have seen in the past few years. And then finally, I think on the front of productivity, the scaling of some of the AI tools that we are having, they have some opportunities to go further on the organizational costs in the couple of years to come. And so those are the areas where we feel there is more to go get and that will help continue to cushion further I think the results, if the supply and demand environment stays weak for a few quarters. And then, of course, the other thing is to continue to diversify the portfolio. The more -- the better margins we get in logistics, the more we get out of our Terminal business also to more, it kind of reinforces the whole thing. Operator: The next question comes from Alex Irving from Bernstein. Alexander Irving: I'm going to come back on your Gemini cost savings, please, on your slide 7. So you talk about $820 million -- $1.1 billion of annual cost savings, $960 million at the midpoint, of which there was $310 million in Q4, about 1/3 of it so our cost savings going to be lower in the coming quarters? Or how should we think about the cadence of those cost savings as we go through 2026, please? Patrick Jany: Yes. So I think, Alex, you can expect it's hard to estimate there is some seasonality always. I think the savings are going to be a bit less in the first quarter because you have Chinese New Year with a month of subdued demand and a lot of canceled sailings and so on. And then I think we look a bit at the average of what we have achieved in the third quarter and the fourth quarter, adjust also for maybe seasonality demand first quarter and then we get to a midpoint. What I think is truly important here is that we can see the consistency with which this is being delivered. You see this on a quarterly basis. I have the benefit of getting weekly reports on that. I think this is very, very solid. We've really made a parallel shift on our production cost with Gemini. And we can see that with some of the reports or some of the financial data we're getting on some of our competitors that we can actually notice that we stand with a competitive advantage today. And especially given some of the tougher times, we might have ahead, I mean that is going to stand -- they're going to be very -- are hitting a dry spot, if you will. I think for us, the key now is to say, how can we grow that? Of course, we need to realize the $1 billion for the full year. But then how can we grow that further because Gemini today is about half of the network, and there is still some potential for us to do that elsewhere. But it does require, for instance, that we have a permanent hub in Panama, so we can stabilize our Latin American coverage over there. It does require a few things that we're working on now to continue to grow that competitive advantage. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Could you let us know if you're interested in engaging in any shipping M&A? Patrick Jany: Is it because you're aware of candidates or are you selling? I think it's really hard to comment on that. I think the strategy that we have is pretty clear. Our focus is we have an infrastructure business in Terminals and a Logistics business that have a lot of growth potential and a lot of very stable and solid earning potential. At the same time, we have a shipping business that we continue to invest in from a renewal perspective and where we keep an eye on the competitive landscape and how we can stay, how -- what is the best way for us to remain competitive and not just bleed this to a place where certainly it's not good. So it is not the focus for us to do that in the shipping. Our focus is elsewhere. Our strategy is unchanged. But it's something that might require a review at some point. But I think for now, that's the strategy that we have. Operator: The next question comes from Arthur Truslove from Citi. Arthur Truslove: So just quite a simple question for me. Based on freight rates that we've seen thus far, is there any reason why the loss in notion in Q1 should be significantly different to what you saw in Q4? Obviously, at the EBIT level and obviously stripping out the adjustment you've made the depreciation rates. Vincent Clerc: So I think there's 2 things you should expect in Q1. First of all, I think quite a lot of the contracts are basically resetting either the 1st of January or the 1st of February. And then you have some seasonal fluctuations around Chinese New Year, which means that in general, the volumes and therefore, the yields that you carry on your network are a bit lower than what you have in a normalized quarter, which the last 2 would be from a volume perspective. Operator: The next question comes from Parash Jain from HSBC. Parash Jain: I have one follow-up question. if you can shed some color on how has the start of 2026 been? And we have seen some pullback in the rates leading up to the Chinese New Year. But when you look at the CCFI trend sequentially or when you look at the guidance from one of your Asian competitors, it seems like all else being equal, first quarter will be sequentially better than fourth quarter. Do you concur with that impression? And secondly, what are you hearing from your customers, particularly in the U.S. with consumption remains solid potential restocking post Chinese New Year? Patrick Jany: Parash, Yes. So as Vincent was saying, I think we obviously don't guide on the quarter. But I think if you look at directionally, we would expect rates to continue to come down. And as Vincent was saying Q1 is not the strongest quarter, right? You have Chinese New Year and so on. So the rhythm will be determined on how the business is doing after Chinese New Year, right? What is the level that is set afterwards. I think if you look at our yearly guidance, it implies certainly that Ocean will have results lower than it has in 2025 or even the last quarter of 2025. As you can assume that Terminals will continue to be good. Rather stable, I guess, from 1 year to the other logistics will continue to progress, and therefore, the difference in EBIT is clearly to be looked at from the Ocean point of view. So I think clearly, we see demand still strong. We had just guided for 2% to 4%. So there might be here and there some quarterly impact. As I said, for Q1, it is Chinese New Year and the rebound. But overall, for the year of '25, we see on a continuation of a quite solid demand. So between 2% and 4%, so roughly 3%. And the EBIT of Ocean being obviously significantly worsening as the rates have come down and continue to come down. Vincent Clerc: And then on the U.S. consumer, I think the sentiment from the customers I've been talking to is that actually 2026 in the U.S. is going to be strong. There's a midterm coming, and there is a huge fiscal stimulus that continue to be put into -- pumped into the U.S. economy. And therefore, the American consumer keeps on doing what it does best, which is actually consuming. And so we expect demand to stay quite stable in the U.S. and to continue to grow also elsewhere. After that,' '27, we'll have to see, but that is for '26, that's -- we see no sign of weakening anywhere. Operator: The next question comes from Ulrik Bak from Danske Bank. Ulrik Bak: Just a question on your Ocean volume growth for 2026. You obviously assume the volume growth to be in line with the market, 2% to 4%. However, over the past couple of quarters, you've actually outgrown the market. So would it be fair to expect some tailwind in Q1 and Q2, where you may grow faster than the market as Gemini was only ramping up in H1 last year before aligning with the market in H2. Some comments on that, please? Vincent Clerc: Yes. Ulrik, I think look at it over the years, you will always have a couple of quarters where you are a bit faster. It's always super hard to just hit it right down to the month or the other quarter basis. I think if you look at 2025, clearly, the Q1 was a bit weaker on the volumes and then the following 3 quarters were very strong and it contributed to us growing in line with the market for the year. I think probably just a year-on-year comparison would assume that then because we had a first -- a bit of a weak first quarter, growth will be higher than market in Q1. But since we have very strong quarters after that, then more subdued and distributed after -- in the subsequent quarter. But overall, we're going to be able to tag along with the market. Ulrik Bak: That's very clear. And if I may just follow up, just in terms of your capacity in Ocean, if your prediction that we will see a return to the Red Sea. How should we think about your capacity in Ocean, which has gone up quite significantly over the past couple of years? Vincent Clerc: I think you should think about -- you should think about it in a way that we're going to manage it with a keen eye on the bottom line. There is some tonnage that we will keep and reinvest into slow steaming. There is some tonnage that we will return to the tonnage provider. As I mentioned before, I think the market is going to come down. We're going to do also a lot of yield management. The fact that the deliveries that we have from our order book is maybe not as high as some of the others, and we still want to keep growing with the market may mean that some of it we will keep and invest it into ensuring that we do grow with the market. But we have basically -- I think we come into this down cycle with a lot of flexibility. We don't have a lot of capital commitments in investments that are coming online. We have a fairly flexible portfolio. So I think as this situation normalizes, we are left with the optionality to do what's right for the bottom line. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: So you were discussing before about '26 and potentially at least a few quarters of very weak spot rates once and when the Red Sea opens. But then if we look beyond '26, in '27, '28 we have according some external data, we have got 9% capacity addition in '27, 14% '28. I mean, what do you expect for profitability? I mean do you think that profitability will further slowdown in '27 versus '26 and even more '28 versus '27 given the very big influx of new capacity? And therefore, what can you say at this point in time about share buyback beyond '26, so share buyback in '27 and '28? Patrick Jany: Look, when you look at the development, we have obviously alluded it in our previous encounter. I think we have a strong balance sheet towards the downturn. The unknown is how deep and how long will it last, which is your question. I think you have 2 different models. One is to have it on a multiyear smaller impact or to have it on a deeper impact in 1 year and then it rebounds because ultimately, as we have listed and also Vincent alluding to it, -- you do have a lot of capacity, which has not been replaced. So you do have a lot of old vessels on the water, which are economically not viable, which with the current level of rates -- and if you project that this continues, are just not economically viable to be in the water. So there will be, at one point in time, return to the capacity providers or scrapped or idled. And those tools will be deployed as soon as the rates are starting to take effect and be painful from the cash point of view. And therefore, I would expect this to happen this year, particularly in the scenarios where the Red Sea reopens fully and fast. That will trigger a reaction. So our view is not that we will have 3 years of pain, but more that you will have 1 or 2 years of pain and then the capacity will be taken out and that will readjust a little bit because ultimately, demand is actually quite solid and has been quite solid, and we see it for '26 as well, quite stable. So those elements will adequate over time. It is hard to say whether it's in 12 months, 24 months or 36 months. But it will adequate. And therefore, we don't feel that the balance sheet is stretched on the one hand, but on the other hand, it is conservative and good to keep a solid balance. And share buybacks are every year, right? So we will look at it every year. And if the world is totally different from what we expect, we'll have to come to new conclusions. But for now, we see that it's actually pretty much in the line of the scenarios that we have discussed in the past. Marco Limite: And is there a sort of minimum level of rates you have got in mind for the medium term? Patrick Jany: Sorry, can you repeat the question? We didn't get it here. Marco Limite: Sure. Is there, let's say, a minimum level of rates on which the industry can leave in your view on the medium term? Where things will normalize despite the big influx of capacity? Patrick Jany: Yes. So I think the important thing to consider is that -- for me, the overhang of capacity that is coming in the next 4 years, when I put it side by side with the amount of ships that are over 26, 27 years, and that would be candidates for scrapping because they are just at level of either fuel efficiency or cost or whatever that are no longer or size or models that are no longer competitive. I think this -- we have all the tools across the industry to get this back in whack. The question for how long it takes is how long does it get for the industry to get back to what was normal before like hygiene before every year, but that has not been necessary for the past 6 years because of the abnormal cycle we've been into. If it takes long for the discipline to come, then you will see rates that can be at a difficult level for a while. If you -- if there is good discipline and people do what needs to be done because it's not a lot, it's not abnormal. Then this could resorb itself quite fast. But I think what -- to your point, I think you will go down to incremental cost. So that, I think, is a bit of the -- what is your -- what is the incremental cost that there is for the capacity. And then so you get to this cash neutral pricing. And then on the up as well, if the profit gets above a certain margin, where some of these old ships make sense to sell, then you might want to keep them. So I think the need that there is now to do that homework will put both a floor under how bad it can be, but also probably a ceiling about how high it can be for a while before people stop doing what they need to do, and it pressures things again. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Vincent Clerc for any closing remarks. Vincent Clerc: Well, thank you for joining us today. And to summarize, I think that we have finished 2025 with a really solid fourth quarter, translating into a strong full year results with our 2025 guidance delivered. We demonstrated operational products across all of our business segments, most notably with the successful implementation of Gemini in Ocean, the operational initiatives that we undertook in Logistics & Services, which have improved our margin there and a record year in our Terminal business helped by the volume uplift from additional Gemini services. Further, we continue to deliver significant capital returns to our shareholders with the continuation of a share buyback program and dividend in 2025. As we navigate the potential headwinds of the external market environment, our focus remains the same as in prior quarter, and that is to stay the course on being the best operator and for the upcoming period, this means focused on cost discipline and reduction, improving productivity and simplifying the organization. We will look forward to seeing many of you on our upcoming road shows and conferences. Thank you for your attention, and see you all soon. Thank you. Bye-bye.
Vincent Clerc: Welcome, everyone, and thank you for joining us on this earnings call today, where we present our fourth quarter and full year results for 2025. My name is Vincent Clerc, I'm the CEO of A.P. M�ller - Maersk. And with me in the room today for the last time is our CFO, Patrick Jany. Before we start, I'd like to thank Patrick for all of his hard work and support over the past 6 years here at A.P. M�ller - Maersk, and wish him the very, very best in the next steps of his career. As we announced back in December, Robert Erni will succeed Patrick in the coming days. We look forward to introducing you to Robert on our upcoming road shows and conferences. If we start with the highlights from 2025 notwithstanding a challenging external environment, especially in Ocean, we are pleased with the strong year overall, in which we made good operational progress across all of our business segments. We closed 2025 with a full year EBITDA and EBIT of $9.5 billion and $3.5 billion, respectively. This places us towards the upper end of the most recent financial guidance we had communicated to you back in November. Specifically in Logistics & Services, we strengthened the performance of our portfolio on the back of improved operation, stronger cost and yield management measures, delivering 4.8% in EBIT margin for the year. This represents an improvement of 1.2 percentage points on 2024. We are, of course, proud of the progress we have made, but are either complacent or satisfied with where we are. And improving both our results and growth rates in Logistics will remain a priority in 2026. In Ocean, Gemini successfully implemented, delivering unprecedented reliability for our customers and significant cost benefits, which we have revised upwards on an annual basis, and I will look at this further in a short while. Gemini has also allowed us to deliver strong volume growth of nearly 5% through increasing asset turns while limiting the fleet size expansion. This was against the backdrop of sequentially receding rates because of increasing overcapacity and volatility created by trade tensions, especially towards the middle of the year. The agility of the new network helped us manage this volatility by ensuring that we could react to the volume swings on the U.S.-China trade lanes. Finally, it has been a record year for Terminals, both in terms of top line and earnings. In the year, we delivered a strong revenue growth of 20% and EBIT growth of 31%. The top line was driven by strong volumes, mainly from additional Gemini services, higher pricing and continued growth investments in critical infrastructure. Utilization remains high, but with our multiyear investment program, we are confident in our ability to take advantage of the market growth in the upcoming years. As we look ahead to 2026, we see a continuation of strong global container demand translating into a volume growth that we expect to land between 2% and 4%. Based on various scenarios we currently see, especially on industry overcapacity in Ocean, we guide for a full year EBIT of between negative $1.5 billion to positive $1 billion free cash flow above negative $3 billion and a CapEx for full year '26 and '27 combined of between $10 billion and $11 billion. As usual, more detail on the guidance will follow later in the call. With the numbers now out of the -- for the full year, we can also announce a dividend proposal for the year that just passed. For 2025, the dividend proposal will be set forward by the A.P. M�ller Board at the AGM on March 25 and is a dividend per share of DKK 480. This is equivalent to 40% payout of our underlying net results in line with our dividend policy and the same payout ratio of the 2024 dividend. Looking back at the year just past, we generated thus a total shareholder return of 35% in 2025 through capital gains and dividends. With a strong balance sheet, we are also in a position to announce a continuation of the share buyback program. The new tranche will be approximately $1 billion with a duration of 12 months and will begin immediately. The lower level reflects the higher level of uncertainty and the lower rate environment that we are headed into in 2026. This implies a total cash return to shareholders for 2026 of approximately $2.1 billion, of which $1.1 billion is the proposed 2025 dividend subject to the AGM approval, and the remaining $1 billion is the new tranche of the share buyback program. Now taking a closer look at the fourth quarter performance for each of our business segments. First, Logistics & Services continue to track positively this quarter. We achieved an EBITDA margin of 4.9% up from 4.1% last year, but down from the 5.5% we had in the last quarter. The year-on-year margin improvement comes from the -- on the back of operational progress made in warehousing and distribution primarily. This quarter marks the seventh consecutive quarter year-on-year margin improvement. And meanwhile, the margin contracted sequentially. On the top line, revenue grew 1.9% year-on-year, driven mainly by warehousing and distribution, but fell 0.5% sequentially against the third quarter of this year of '25. Our focus remains on stringent cost control, portfolio discipline and capital efficiency to live the performance upwards towards an EBIT margin target of 6%. We are happy about the general trend throughout the past 7 quarters, but we also clearly have more work to do. In Ocean, we had our second full and clean quarter after the Gemini implementation. We delivered above-market volume growth with volumes up 8% year-on-year and a stable -- and stable on the prior quarter following the peak season. The network continued to deliver high schedule reliability of 90% for our customers despite significant weather disruptions and substantial cost savings to Maersk. We continue to use our fleet efficiently with utilization of 94% on par with the third quarter. The cost benefit and agility of the new network have bolstered our operation against the backdrop of the ongoing freight rate decline. In Terminals, we delivered a solid quarter in a record year with a strong top line growth, mainly driven by volumes. Volumes grew 8.4%, driven by Europe, North America and Latin America and mainly through the Gemini network. As we mentioned last quarter, much of the volume uplift has come from Gemini, which has put more boxes through our gateway terminals. Utilization remains high at 88%, but we are confident that with ongoing investments, we will continue to be able to capture good volume growth in the coming years. Finally, return on invested capital for Terminals remained strong at 16.1%, well above the target of 9%. Turning to the main achievement of the year. We have updated the Gemini cost benefit we showed you previously and now expect the benefits to be higher than our initial guidance last quarter. Starting with bunker. We can see that the continued advantage of Gemini stemming from a more efficient use of our ships, for example, through lower speed, shorter distances and shorter dwell time is allowing us to reduce bunker consumption. This translated to an approximately 9% bunker consumption improvement adjusted for capacity for the quarter. Then on the asset turn side, from the more efficient use of our vessels, Gemini allows us to transport more volumes on the same capacity. This quarter, we saw capacity growth of about 4% year-on-year against a volume growth of about 8%. The delta was about 4 percentage points, representing the improvement in asset turn. We can quantify the bunker consumption improvement of about 9% at fixed bunker prices into a cost benefit of about $150 million for the quarter. Likewise, we can quantify the asset turn improvement of about 4 percentage points, which against our total network where cost translates into about $120 million of cost benefit for the quarter. An added advantage of Gemini has been to increase volumes in some of our gateway terminal, allowing us to significantly increase throughput. As with the prior quarter, the additional uplift has generated about $4 million in benefit this quarter, which annualizes to about $120 million to $200 million based on full year implementation and seasonality. Overall, across Ocean and Terminal, therefore, we have generated over $300 million in benefits here in the fourth quarter, and we are now targeting $820 million to $1.1 billion in annual benefits. Turning to our midterm targets. As you might recall, we introduced these targets back in May 2021 to cover the midterm period of '21 to '25. Even though the reporting period technically ends, we will continue to use those indicators for 2026 and report on our progress in the same terms. Later in the year or early in 2027, we will revise our achievements and formulate new midterm targets. Nevertheless, we are finishing those 5 years -- as we're finishing those 5 years, it is time to have a closer look at the progress made, and you can see to the right of the table how we have performed over the 19 quarters since the introduction of the targets. Overall, we have delivered exceptional performance at the group level with almost all quarters delivering last 12 months ROIC above target, which translates into an average ROIC of above target for all 19 quarters. Similarly, Ocean has performed well with EBIT above the 6% target for all but the first 2 quarters in 2024 and this most recent quarter with downward pressure on rates from increasing overcapacity. Terminal has truly transformed with a ROIC starting shy of the target back in 2021, but has been consistently above its target of 9% since the first quarter of 2023. At the same time, we know where we have fallen short, namely in Logistics & Services, with an EBIT margin still below the 6% target that we laid out and modest revenue growth because of challenged products, primarily in middle mile and warehousing. Our priority in 2026 is to continue to improve where we have fallen short in Logistics & Services. And that is a good segue into the next slide. Looking ahead to 2026, we have laid out our key strategic priorities. In Logistics, our priority is to accelerate margin improvement and push harder on growth wherever it makes sense, which we define as the many part of the portfolio delivering high margin and where higher volumes will increase network utilization and thus, translate also in better margin. Focus areas are, for example, a further reduction in white space and contract logistics or adding density to our e-commerce network. As part of our efforts to accelerate improvement in Logistics, we will simplify the organization as well. I will get back to this shortly on the following slide. Within Ocean, we seek to protect the high asset turns we have achieved with Gemini, which will allow us to carry more containers with our existing fleet and so we can grow with minimal fleet expansion. Further, we continue to grow with the market as we did in 2025. Given market headwinds we are facing in -- for 2026, we will focus on profitability by sticking to our core principle of cost leadership, which will prove to be even more important in the coming quarters. Finally, in Terminals, we continue to grow through existing and new location, maintain long-term profitability and ultimately deliver on our ROIC target. Our aim here is growth, concession excellence and operational excellence. Across all our business segments and in corporate, we continue to focus on driving further efficiency and simplification of our organization. Cost leadership remains core to being the best operator. We are transforming our organization within the Logistics & Services as well. This is to drive more value for our customers and reflecting the feedback from all of you. It will increase comparability and transparency to allow you to better benchmark our performance with peers. We will report 3 new product segments, which reflect how we will simplify also the way that we run the business. These segments will be landside, forwarding and solutions with each of these product segments comprising its own set of products. Landside will comprise local and regional products linked to inland transportation, drayage in and out of terminals, ground freights in North America which offer largely expedited LCL road transport between centers. Depots, which are often located close to ports and terminals as well as custom services to assist customers with declarations, tariffs and other regulatory matters. Forwarding will comprise global forwarding and ancillary products, namely air freight, less than container load for ocean forwarding and project logistics of large cargo as well as insurance. Finally, solution will complain supply chain management, e-commerce and warehousing and distribution. This organizational change will take effect on April 1 and will be reported externally for the first time in the second quarter reporting later this year in August. We will provide at that time, a year-to-date and year-on-year figures according to the new segmentation to help you for comparability purpose. Finally, on the guidance for the upcoming year. First, we expect global container volumes to continue to grow in 2026, with growth expected to be between 2% and 4% and for Maersk to grow in line with the market. In that context, we expect an underlying EBITDA of $4.7 billion to $7 billion, and underlying EBIT between negative $1.5 billion to positive $1 billion and a free cash flow of negative $3 billion or higher. While we plan on operational progress and growth across segment, we expect container shipping rates to develop adversely, such that our guidance for 2026 is lower than for 2025. The guidance range reflect industry overcapacity that already exists today from the new vessel deliveries and different scenarios with respect to a full Red Sea opening in 2026. Our CapEx guidance for '25 and '26 is unchanged compared to the previous levels and around $10 billion to $11 billion, and we expect the current funding -- the corresponding figure for '26 and '27 to be the same. I'll now hand over to Patrick, who will walk you through the detailed financial and segment level performance. Patrick Jany: Thank you, Vincent, and good morning, everyone. We closed the book on 2025 with a good operational delivery in the fourth quarter, delivering an EBITDA of $1.8 billion and an EBIT of $118 million, implying margins of 13.8% and 0.9%, respectively, placing us very much where we expected to be. On a full year basis, we delivered an EBITDA of $9.5 billion and an EBIT of $3.5 billion, equating to a 17.7% EBITDA margin and a 6.5% EBIT margin for 2025. While both Logistics & Services and Terminals delivered improving year-on-year performance, excluding one-offs, the first benefiting from improved operational efficiency and the latter from higher throughput from Gemini, the quarter saw overall decreased earnings resulting from receding freight rates in Ocean. Return on invested capital was 5.7%. This is lower both year-on-year and sequentially and reflects the additional investments made this year in Ocean and Terminals together with a very strong earnings in the latter half of 2024, no longer being included in the last 12-month measure. We continued returning cash to shareholders in Q4, distributing $620 million through the ongoing share buyback program for a total of $2 billion for the full year. Finally, we maintained our strong liquidity positions with total cash and deposits at $21.4 billion at quarter end and with net cash decreasing year-on-year to $2.9 billion primarily due to the cash returned to shareholders through dividend and share buybacks. Going into 2026, our balance sheet remains strong and allows us to continue pursuing our strategic growth objectives while simultaneously returning cash to shareholders and weathering the expected downturn in Ocean. Let's take a closer look at the cash flow breakdown on Slide 15. The fourth quarter operating cash flow was $2.5 billion, driven by an EBITDA of $1.8 billion, together with a positive impact from a substantial unwind of net working capital. This resulted in strong cash conversion of 137%, up on last year's 123% in the quarter, leading to 102% conversion for the full year. Gross CapEx decreased to $919 million, down both year-on-year and sequentially, primarily due to a lower level of investments in Ocean which, together with capitalized lease installments of $819 million resulted in free cash flow of around $1 billion. For the full year, CapEx landed at $4.8 billion at the lower end of our guidance. Free cash flow also included a positive contribution of $349 million, mainly from dividends received from our minority investments. We repurchased roughly $620 million of shares during the quarter, which is reflected in the dividend and share buyback column. Finally, a large portion of our term deposits matured in the quarter, implying an increase of the readily available cash. Starting our segment review with Ocean on Slide 16. Strong demand prevailed in the fourth quarter and our Ocean business managed to successfully capitalize on this momentum, delivering substantially increased volumes while reaping the cost benefits of Gemini in an otherwise deteriorating market environment. Volumes increased by 8% year-on-year across more trade lanes, driven by sustained strong Asian import. Sequentially, volumes remained roughly stable at a negative 0.4%. Fit rates continue to decline in response to the ongoing market pressure in industry supply demand imbalance, declining by 23% year-on-year and 8.8% since the previous quarter. As a result of the significant rate decline, profitability turned negative in the fourth quarter as Ocean incurred a loss of $153 million. Ocean continued to benefit from the Gemini network. The scale reliability of the network remains in line with our target. And we have seen the immediate financial and operational year-on-year impact of better asset turns and bunker savings cushioning the full impact of declining rates. While continuing to invest in our Ocean business in line with the overall strategy, CapEx was comparatively low at $603 million compared to $1.2 billion last year, mainly due to significant vessel installments in Q4 2024. Sequentially, CapEx also decreased by around $300 million due to lower equipment investment. On the next slide, you can see a breakdown of the individual elements, which contributed to the EBITDA development in Ocean. The year-on-year rate decline was the dominant headwind, contributing a large negative impact of $2.1 billion, only partially offset by stronger volumes. The price of bunker decreased 11% year-on-year to $512 per tonne, which had a positive impact together with 5.4% lower bunker consumption from primarily Gemini-related efficiency gains. Container handling costs were up from increased terminals and empty repositioning costs. And then there is a negative comparative impact from the timing of revenue recognition in the final bucket, offsetting the impact of lower SG&A costs. Overall, Ocean EBITDA for the fourth quarter landed at $1.2 billion, down 59% from the previous year and 35% sequentially. Now let's have a look at the KPIs of the Ocean business on Slide 17. Loaded volumes increased by 8% year-on-year to 3.4 million FFEs across most trade lanes from continuing strong Asian exports, leading us to almost 30 million FFEs for the full year. At the same time, average freight rates decreased 23% from last year and 8% sequentially, while remaining flat throughout the quarter itself. Unit cost at fixed bunker decreased 4% year-on-year and 1% sequentially, benefiting from the stronger volumes offsetting the higher cost base. Bunker costs decreased 12% year-on-year, primarily from 11% lower bunker prices and further supported by the already mentioned 5.4% lower bunker consumption driven by high efficiency of the Gemini network. This was all partially offset by the EU ETS payments. The size of our fleet was stable sequentially at 4.6 million TEUs, implying a 4.3% increase year-on-year. This is the result of the capacity injection in early 2025, initially for Gemini, which has allowed for higher volumes and to satisfy the strong demand, which is also reflected in our sustained high utilization, which was sequentially unchanged at 94% in the fourth quarter. In terms of product mix like in the last couple of quarters, a majority of the volumes came from strong term contracts with 55% of volumes in Q4 compared to 45% of volumes for our long-term contracts. Looking forward for 2026, we expect a slightly higher share of volumes to come from long-term contracts with about half the volumes to come from long and half from short-term products, respectively. I would also like to briefly comment on the change in how we account for our vessels in -- on the balance sheet starting in January 1st of this year. Over the last years, we have observed an increase in the average time frame in which our vessels remain economically viable. And as a result, we have increased the estimated useful life from 20 to 25 years. The impact of this will be approximately $700 million of reduced depreciation in 2026, which is reflected in the financial guidance, as you might have already read in the footnote. We continue to our Logistics & Services business on the next slide. The year-on-year development in Logistics & Services highlights the operational improvements to the segment that we have made throughout 2025. While there was top line growth, the biggest difference came through improved profitability resulting from our efforts at turning around the more challenged products like warehousing and middle mile. Revenue in Logistics & Services grew to almost $4 billion in the quarter, up 1.9% compared to last year, driven by improved volumes across most products. Sequentially, revenue declined modestly at negative 0.5% following a strong third quarter. EBIT increased to $194 million, mainly driven by solid performance in warehousing, last mile and lead logistics. This implies a 4.9% margins, up 0.8 percentage points compared year-on-year and marking the seventh consecutive quarter of year-on-year EBIT margin increase. Sequentially, the margin decreased by 0.6 percentage. CapEx was $129 million in the fourth quarter, declining another quarter year-on-year to reflect the slightly lower investment level in 2025, where focus has been on improving operational performance. Now let's have a look at the segment breakdown by service model. Overall, we recorded a positive business development in a generally supportive business environment with one of the biggest weak point being the U.S. import-linked activities. This can be seen in particular, in freight management, where revenue declined to $532 million, down 8.9% year-on-year as lead logistics volumes were significantly down on the China-U.S. corridors, given the tariff environment, while customs held broadly stable. EBITDA margin improved to 19% from better execution. Fulfillment services increased revenue by 1.5% to $1.5 billion, while increasing the EBITDA margin to around breakeven. Warehousing was here the largest contributor to the higher margin with middle and last mile also trending better after the rebasing actions we executed during the year. In Transport Services, revenue grew by 5.6% to $1.9 billion. EBITDA margin eased to 7.1%, and strong air and landside transportation volumes growth was offset by softened prices against a still relatively fixed cost base in own control capacity. Additionally, margin was impacted by a $22 million impairment of aircraft, representing about 1.2 percentage points of the year-on-year margin decline. Stepping back to margin journey we set out at the start of the year remains on track. We have lifted the operational flow in our fulfilled by Maersk products and prioritize profitable wins while keeping CapEx insured. While the business is by far not where we want it to be in terms of growth and profitability, 2025 has moved us closer. Let us now turn to our Terminal segment. This business rounded off an excellent year with another strong quarter. Revenue grew 13% to $1.4 billion, driven by strong volumes, which increased 8.4% year-on-year, supported by increased throughput from Gemini and geographically driven by Europe, North and Latin America. Additionally, the top line was supported by a higher rate level. With another quarter of strong volumes, utilization for Terminals remained high at 88%. Revenue per move increased 4% year-on-year to $363 per move driven by improved rates and favorable FX development, somewhat offset by lower revenue from storage. On the other hand, cost per move increased by 5.9% from labor inflation coming through together with adverse FX, overall increasing despite higher utilization. Terminals delivered fourth quarter EBIT of $321 million, down 5% from $338 million the previous year, impacted by an $86 million expense related to the impairment of a terminal in Europe and a write-down in Asia. Adjusting for this one-off, EBIT would have increased to $407 million, equivalent to an EBIT margin of 30.1%. Sequentially, EBIT decreased as expected given the significant positive one-off reported in the third quarter. On the back of strong performance throughout the year, return on invested capital increased to 16.1%, CapEx remained stable at $152 million, roughly in line with previous quarters. Now let's have a look at the breakdown of Terminals EBITDA development on the last slide. EBITDA for the fourth quarter increased to $440 million from $421 million the previous year. The year-on-year increase came mainly from the higher volumes contributing a positive impact of $52 million, which was further supported by a $16 million impact from higher revenue per move. This more than offset the negative impact from labor inflation and higher costs of $48 million. This finishes our business segment review. Let us now proceed to the Q&A. Operator, please go ahead. Operator: [Operator Instructions] And we have the first question coming from Muneeba Kayani from Bank of America. Muneeba Kayani: So Vincent, you talked about the range of the guidance. I just wanted to get back on that, like how have you thought the low and the top end of that guide in terms of a freight rate scenario or Red Sea timing? I know you said gradual reopening is kind of what you've assumed, but if you can help us think about that scenarios and kind of the cadence of that guide for this year, please? Vincent Clerc: Muneeba, thank you for your question. I think the way to think about this is whether it is through the new ships that are coming in or through the return to Suez, we're going to free about -- we're going to have an overcapacity of anywhere from 4% to 7%, 8%. And for that to resorb itself, you will need to see some scrapping. There is a lot of pent-up capacity that needs to get scrapped and didn't get scrapped since COVID basically for 6 years. And there is also a tonnage that needs to be returned. So that will create a few quarters that are going to be a bit bumpy. If we return fast and full to Suez, we will see probably more pressure on the freight rate because there is a bigger gap that we need to close at once. If we have an orderly slow gradual return, we might be able to manage it better, but it all starts to get to the upper end of the guidance that we start to see some scrapping starting to occur because it means that we're starting to eat into some of that overcapacity. And so it really depends how quickly the industry reacts to the current start over the capacity, how quickly we move through -- we get back to Suez and how much of the tonnage gets pushed back to provider. I think that's really the underlying thing that you need to get into towards the upper or the lower end of the guidance. Operator: The next question comes from Cristian Nedelcu from UBS. Cristian Nedelcu: It's a two-part question, if you allow me. The first part of CMHC has recently announced that it's selling a 25% stake in their terminal business. Would you consider spinning off or selling a stake in terminals to crystallize value or accelerate the growth in Terminals? And in relation to this -- in relation to the capital allocation, there are some opportunities out there, Panama ports. You talked about Logistics M&A. The way you've reduced the share buyback, so just a more prudent approach on capital deployment. Is this prudent approach valid also for acquisitions in Terminals and Logistics.? Vincent Clerc: Cristian, we've seen the deal from CMA. I think they are trying to monetize some of the portfolio. I think with the balance sheet that we have today, we have no need to monetize and can perfectly as we do this year, even on a reduced guidance, maintain a strong return to shareholder and conduct the investment that we need to do. You mentioned Panama, there would other -- I think, in general, the world has underinvested in terminal capacity for a while, and there is over the coming decade, need for significant investment in greenfield projects to add terminal capacity to match the flows of containers that there is globally. That's also what we plan on doing, and you've seen some of those facilities start to come online during 2025. There will be more in the coming months and quarter. But here also, we have the wherewithal to do it. We have the wherewithal to continue to renew our fleet and be able to sustain a strong position in shipping. And then on Logistics, it's always a question of finding the right candidate, the right opportunity and being ready to do that integration. Certainly, that remains one of the financial axis of the strategy. But at this stage, I would say we are, of course, prudent towards capital deployment and keeping as much of our powder dry as possible given some of the unknowns in the outlook. But it is exactly to preserve the ability to countercyclically go and do some moves when the time comes. Operator: The next question comes from James Hollins from BNP Paribas. James Hollins: Best of luck to you Patrick. Thanks for everything. Just on the Red Sea, I'm just wondering if, if you can run us through kind of the rationale you saw with your desire seeming desire to be a first mover back in the Red Sea amongst your main competitors and kind of linked to that, the expected time lines as you would see them for Maersk to be fully back through the Red Sea, assuming everything else geopolitically stays the same and kind of what you'd expect to see from your competitors from here? Vincent Clerc: Yes. Thank you, James. So a couple of points to start with. If you look at the Suez transit in January, they're up 50% versus what they were a year ago. So -- and that's not with a lot of Maersk ships there was only one of them that crossed during that period. So we're not the first movers. There has been a significant uptick across tankers and bulk segments, for sure, but also with CMA having a much more aggressive, they have multiple services already that have been transiting throughout the period and more aggressively also over the past month and even quarter. So we are a second mover, if you will, on that. For us, the security assessment has been on different levels. First of all, obviously, we follow the situation in Gaza, where we seem to be moving slowly along a peace process with where we are going to go with the reopening of the border with Egypt and so on, where there's a lot more talk about now reconstruction rather than a new round of hostilities. There has not been any attack since October from the Houthis on any ship. There has been declaration also from the Houthis that they do not intend to attack anybody. So for us, the -- and again, a lot of ships are crossing every week. And we monitor the situation and how we're doing. We're talking to others and see what intelligence do they have. The conclusion that we have is today, it is safe for us to move into a Phase 1, which is having some services specifically the ones for whom going around the Cape of Good Hope is the longest deviation where it is safe to move under escort and go through the Bab el-Mandeb. There is limited escort capacity. There are a lot of shipowners today that already moved through Bab el-Mandeb without escort. I feel that it's a bit premature for at least for how we assess the security situation. And therefore, there is a certain limit to what we can do. At some point, we need to get into a situation where the temperature comes further down, where we feel it is also safe for us to move into -- to reopen services even if we don't have escort. And that would be probably what triggered the difference between what we have announced so far and a more full return would be the ability that we have to see that we can move without the military escort that the service that we do it today have. Operator: The next question comes from Lars Heindorff from Nordea. Lars Heindorff: Yes. On the share buyback, I don't know if you can indicate your thoughts behind the $1 billion, down from the $2 billion last year? And also, what kind of balance sheet ratios, I don't know if net interest bearing debt to EBITDA is the only ratio you look at? Or if there are other ones that you sort of steer after in order to determine the size of the share buybacks? Patrick Jany: Yes, I think probably two parts to your question, Lars. So first on the share buyback, I think we decided to continue with the share buyback. I think, which is the main message here because we have a strong balance sheet. And as we have said before and Vincent mentioned as well on the call, we will continue to obviously invest in growth in Terminals to renew our fleet and also to expand our logistics business while knowing that you were downturn in Ocean. This is now coming, I would say, closer with a return to the Red Sea, which you see different scenarios reflected in our guidance. I think it's a word of caution to continue the confidence, which we show by continuing, but also reduce a bit the dimensioning, which at $1 billion is still pretty significant when you look in terms of absolute returns. So we feel it's a good balance. But by keeping a prudent approach to the balance sheet obviously recognizing and keeping a commitment to return cash to shareholders. If you look at the ratios, which we use for that, I think when you are on a net debt positive, so a net cash position, the ratio is a little bit out of scope in terms of net debt-to-EBITDA, clearly. So we look more at free cash flow, right ratios, but we are well above those elements. So it's really when you look forward on -- as we talked around the last few years, when you model a potential overcapacity having an impact on Ocean profitability and the Red Sea returns compared to the progress in Terminals and Logistics. You come into different scenarios, and we feel with this strength of balance sheet, return on shareholder via SBB, but also our guidance. We have a good cushion looking ahead, and we will not be threatening any ratios. Typically, as you know, we aim to be solid BBB. That is quite far off the position where we are today. We can only repeat the 1.5x net debt-to-EBITDA as an order of magnitude on the over-the-cycle EBITDA, obviously, not the crisis year EBITDA as being the reference in terms of balance sheet modeling. Operator: The next question comes from Jacob Lacks from Wolfe Research. Jacob Lacks: So it feels like there's a pretty clear focus on the cost structure between the corporate restructuring and further increases in Gemini savings. To the extent the market remains oversupplied beyond just this year, do you think there's further cost opportunity to help offset inflation rightsize the cost base? Patrick Jany: Jacob, yes, I think -- so obviously, as we head towards leaner times, focus on cost and very hard focus on cost is absolutely paramount. So I think the work that we have done with Gemini has yielded quite a significant amount of efficiencies for us. We think that there is more that can be done there. And certainly, we're going to do this. A return to Suez is going to reduce costs going to enable more slow steaming as well. So -- and we can expand some of the Gemini philosophy to other services. Something can be done on organization as well. We've made some announcements on this. I think there are -- there are 3 more levers to reduce cost further. The first one is we still have a time charter market that is at extremely elevated level. which usually follows freight rates after -- with a bit of lag. And I think when the trend on freight rates confirms itself, which, I mean, unless there is another shock, this is what we're going to continue to see in the months to come, we're going to see the time charter market come down as well, and this will generate significant savings as well because a significant amount of our fleet also is on time charter and will gradually be renewed at those lower levels. That's the first -- that's the first one. The second one is procurement. I mean the times have been good. And of course, some of our suppliers might have been benefiting a bit from that. And that's certainly time for us to just make sure, and I think this is going to happen across the industry that we get back to pretty hard core negotiation on everything and in some cases, roll back some of the inflation we have seen in the past few years. And then finally, I think on the front of productivity, the scaling of some of the AI tools that we are having, they have some opportunities to go further on the organizational costs in the couple of years to come. And so those are the areas where we feel there is more to go get and that will help continue to cushion further I think the results, if the supply and demand environment stays weak for a few quarters. And then, of course, the other thing is to continue to diversify the portfolio. The more -- the better margins we get in logistics, the more we get out of our Terminal business also to more, it kind of reinforces the whole thing. Operator: The next question comes from Alex Irving from Bernstein. Alexander Irving: I'm going to come back on your Gemini cost savings, please, on your slide 7. So you talk about $820 million -- $1.1 billion of annual cost savings, $960 million at the midpoint, of which there was $310 million in Q4, about 1/3 of it so our cost savings going to be lower in the coming quarters? Or how should we think about the cadence of those cost savings as we go through 2026, please? Patrick Jany: Yes. So I think, Alex, you can expect it's hard to estimate there is some seasonality always. I think the savings are going to be a bit less in the first quarter because you have Chinese New Year with a month of subdued demand and a lot of canceled sailings and so on. And then I think we look a bit at the average of what we have achieved in the third quarter and the fourth quarter, adjust also for maybe seasonality demand first quarter and then we get to a midpoint. What I think is truly important here is that we can see the consistency with which this is being delivered. You see this on a quarterly basis. I have the benefit of getting weekly reports on that. I think this is very, very solid. We've really made a parallel shift on our production cost with Gemini. And we can see that with some of the reports or some of the financial data we're getting on some of our competitors that we can actually notice that we stand with a competitive advantage today. And especially given some of the tougher times, we might have ahead, I mean that is going to stand -- they're going to be very -- are hitting a dry spot, if you will. I think for us, the key now is to say, how can we grow that? Of course, we need to realize the $1 billion for the full year. But then how can we grow that further because Gemini today is about half of the network, and there is still some potential for us to do that elsewhere. But it does require, for instance, that we have a permanent hub in Panama, so we can stabilize our Latin American coverage over there. It does require a few things that we're working on now to continue to grow that competitive advantage. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Could you let us know if you're interested in engaging in any shipping M&A? Patrick Jany: Is it because you're aware of candidates or are you selling? I think it's really hard to comment on that. I think the strategy that we have is pretty clear. Our focus is we have an infrastructure business in Terminals and a Logistics business that have a lot of growth potential and a lot of very stable and solid earning potential. At the same time, we have a shipping business that we continue to invest in from a renewal perspective and where we keep an eye on the competitive landscape and how we can stay, how -- what is the best way for us to remain competitive and not just bleed this to a place where certainly it's not good. So it is not the focus for us to do that in the shipping. Our focus is elsewhere. Our strategy is unchanged. But it's something that might require a review at some point. But I think for now, that's the strategy that we have. Operator: The next question comes from Arthur Truslove from Citi. Arthur Truslove: So just quite a simple question for me. Based on freight rates that we've seen thus far, is there any reason why the loss in notion in Q1 should be significantly different to what you saw in Q4? Obviously, at the EBIT level and obviously stripping out the adjustment you've made the depreciation rates. Vincent Clerc: So I think there's 2 things you should expect in Q1. First of all, I think quite a lot of the contracts are basically resetting either the 1st of January or the 1st of February. And then you have some seasonal fluctuations around Chinese New Year, which means that in general, the volumes and therefore, the yields that you carry on your network are a bit lower than what you have in a normalized quarter, which the last 2 would be from a volume perspective. Operator: The next question comes from Parash Jain from HSBC. Parash Jain: I have one follow-up question. if you can shed some color on how has the start of 2026 been? And we have seen some pullback in the rates leading up to the Chinese New Year. But when you look at the CCFI trend sequentially or when you look at the guidance from one of your Asian competitors, it seems like all else being equal, first quarter will be sequentially better than fourth quarter. Do you concur with that impression? And secondly, what are you hearing from your customers, particularly in the U.S. with consumption remains solid potential restocking post Chinese New Year? Patrick Jany: Parash, Yes. So as Vincent was saying, I think we obviously don't guide on the quarter. But I think if you look at directionally, we would expect rates to continue to come down. And as Vincent was saying Q1 is not the strongest quarter, right? You have Chinese New Year and so on. So the rhythm will be determined on how the business is doing after Chinese New Year, right? What is the level that is set afterwards. I think if you look at our yearly guidance, it implies certainly that Ocean will have results lower than it has in 2025 or even the last quarter of 2025. As you can assume that Terminals will continue to be good. Rather stable, I guess, from 1 year to the other logistics will continue to progress, and therefore, the difference in EBIT is clearly to be looked at from the Ocean point of view. So I think clearly, we see demand still strong. We had just guided for 2% to 4%. So there might be here and there some quarterly impact. As I said, for Q1, it is Chinese New Year and the rebound. But overall, for the year of '25, we see on a continuation of a quite solid demand. So between 2% and 4%, so roughly 3%. And the EBIT of Ocean being obviously significantly worsening as the rates have come down and continue to come down. Vincent Clerc: And then on the U.S. consumer, I think the sentiment from the customers I've been talking to is that actually 2026 in the U.S. is going to be strong. There's a midterm coming, and there is a huge fiscal stimulus that continue to be put into -- pumped into the U.S. economy. And therefore, the American consumer keeps on doing what it does best, which is actually consuming. And so we expect demand to stay quite stable in the U.S. and to continue to grow also elsewhere. After that,' '27, we'll have to see, but that is for '26, that's -- we see no sign of weakening anywhere. Operator: The next question comes from Ulrik Bak from Danske Bank. Ulrik Bak: Just a question on your Ocean volume growth for 2026. You obviously assume the volume growth to be in line with the market, 2% to 4%. However, over the past couple of quarters, you've actually outgrown the market. So would it be fair to expect some tailwind in Q1 and Q2, where you may grow faster than the market as Gemini was only ramping up in H1 last year before aligning with the market in H2. Some comments on that, please? Vincent Clerc: Yes. Ulrik, I think look at it over the years, you will always have a couple of quarters where you are a bit faster. It's always super hard to just hit it right down to the month or the other quarter basis. I think if you look at 2025, clearly, the Q1 was a bit weaker on the volumes and then the following 3 quarters were very strong and it contributed to us growing in line with the market for the year. I think probably just a year-on-year comparison would assume that then because we had a first -- a bit of a weak first quarter, growth will be higher than market in Q1. But since we have very strong quarters after that, then more subdued and distributed after -- in the subsequent quarter. But overall, we're going to be able to tag along with the market. Ulrik Bak: That's very clear. And if I may just follow up, just in terms of your capacity in Ocean, if your prediction that we will see a return to the Red Sea. How should we think about your capacity in Ocean, which has gone up quite significantly over the past couple of years? Vincent Clerc: I think you should think about -- you should think about it in a way that we're going to manage it with a keen eye on the bottom line. There is some tonnage that we will keep and reinvest into slow steaming. There is some tonnage that we will return to the tonnage provider. As I mentioned before, I think the market is going to come down. We're going to do also a lot of yield management. The fact that the deliveries that we have from our order book is maybe not as high as some of the others, and we still want to keep growing with the market may mean that some of it we will keep and invest it into ensuring that we do grow with the market. But we have basically -- I think we come into this down cycle with a lot of flexibility. We don't have a lot of capital commitments in investments that are coming online. We have a fairly flexible portfolio. So I think as this situation normalizes, we are left with the optionality to do what's right for the bottom line. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: So you were discussing before about '26 and potentially at least a few quarters of very weak spot rates once and when the Red Sea opens. But then if we look beyond '26, in '27, '28 we have according some external data, we have got 9% capacity addition in '27, 14% '28. I mean, what do you expect for profitability? I mean do you think that profitability will further slowdown in '27 versus '26 and even more '28 versus '27 given the very big influx of new capacity? And therefore, what can you say at this point in time about share buyback beyond '26, so share buyback in '27 and '28? Patrick Jany: Look, when you look at the development, we have obviously alluded it in our previous encounter. I think we have a strong balance sheet towards the downturn. The unknown is how deep and how long will it last, which is your question. I think you have 2 different models. One is to have it on a multiyear smaller impact or to have it on a deeper impact in 1 year and then it rebounds because ultimately, as we have listed and also Vincent alluding to it, -- you do have a lot of capacity, which has not been replaced. So you do have a lot of old vessels on the water, which are economically not viable, which with the current level of rates -- and if you project that this continues, are just not economically viable to be in the water. So there will be, at one point in time, return to the capacity providers or scrapped or idled. And those tools will be deployed as soon as the rates are starting to take effect and be painful from the cash point of view. And therefore, I would expect this to happen this year, particularly in the scenarios where the Red Sea reopens fully and fast. That will trigger a reaction. So our view is not that we will have 3 years of pain, but more that you will have 1 or 2 years of pain and then the capacity will be taken out and that will readjust a little bit because ultimately, demand is actually quite solid and has been quite solid, and we see it for '26 as well, quite stable. So those elements will adequate over time. It is hard to say whether it's in 12 months, 24 months or 36 months. But it will adequate. And therefore, we don't feel that the balance sheet is stretched on the one hand, but on the other hand, it is conservative and good to keep a solid balance. And share buybacks are every year, right? So we will look at it every year. And if the world is totally different from what we expect, we'll have to come to new conclusions. But for now, we see that it's actually pretty much in the line of the scenarios that we have discussed in the past. Marco Limite: And is there a sort of minimum level of rates you have got in mind for the medium term? Patrick Jany: Sorry, can you repeat the question? We didn't get it here. Marco Limite: Sure. Is there, let's say, a minimum level of rates on which the industry can leave in your view on the medium term? Where things will normalize despite the big influx of capacity? Patrick Jany: Yes. So I think the important thing to consider is that -- for me, the overhang of capacity that is coming in the next 4 years, when I put it side by side with the amount of ships that are over 26, 27 years, and that would be candidates for scrapping because they are just at level of either fuel efficiency or cost or whatever that are no longer or size or models that are no longer competitive. I think this -- we have all the tools across the industry to get this back in whack. The question for how long it takes is how long does it get for the industry to get back to what was normal before like hygiene before every year, but that has not been necessary for the past 6 years because of the abnormal cycle we've been into. If it takes long for the discipline to come, then you will see rates that can be at a difficult level for a while. If you -- if there is good discipline and people do what needs to be done because it's not a lot, it's not abnormal. Then this could resorb itself quite fast. But I think what -- to your point, I think you will go down to incremental cost. So that, I think, is a bit of the -- what is your -- what is the incremental cost that there is for the capacity. And then so you get to this cash neutral pricing. And then on the up as well, if the profit gets above a certain margin, where some of these old ships make sense to sell, then you might want to keep them. So I think the need that there is now to do that homework will put both a floor under how bad it can be, but also probably a ceiling about how high it can be for a while before people stop doing what they need to do, and it pressures things again. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Vincent Clerc for any closing remarks. Vincent Clerc: Well, thank you for joining us today. And to summarize, I think that we have finished 2025 with a really solid fourth quarter, translating into a strong full year results with our 2025 guidance delivered. We demonstrated operational products across all of our business segments, most notably with the successful implementation of Gemini in Ocean, the operational initiatives that we undertook in Logistics & Services, which have improved our margin there and a record year in our Terminal business helped by the volume uplift from additional Gemini services. Further, we continue to deliver significant capital returns to our shareholders with the continuation of a share buyback program and dividend in 2025. As we navigate the potential headwinds of the external market environment, our focus remains the same as in prior quarter, and that is to stay the course on being the best operator and for the upcoming period, this means focused on cost discipline and reduction, improving productivity and simplifying the organization. We will look forward to seeing many of you on our upcoming road shows and conferences. Thank you for your attention, and see you all soon. Thank you. Bye-bye.
Operator: Good day, everyone. Welcome to VeriSign's Fourth Quarter and Full Year 2025 Earnings Call. Today's conference is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I would like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir. David Atchley: Thank you, operator. Welcome to VeriSign's fourth quarter and full year 2025 earnings call. Joining me are Jim Bidzos, Executive Chairman, President and CEO, and John Callis, Executive Vice President and CFO. This call and presentation are being webcast from the Investor Relations site, which is available under About VeriSign on verisign.com. There you will also find our earnings release. At the end of this call, the presentation will be available on that site and within a few hours, the replay of the call will be posted. Financial results in our earnings release are unaudited, and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-Ks and 10-Q. VeriSign does not update financial performance or guidance during the quarter unless it is done through a public disclosure. The financial results in today's call and the matters we will be discussing today include GAAP results and two non-GAAP measures used by VeriSign: Adjusted EBITDA and free cash flow. GAAP to non-GAAP reconciliation information is appended to the slide presentation which can be found on the Investor Relations section of our website available after this call. Jim and John will provide some prepared remarks, and afterward, we will open the call for your questions. With that, I would like to turn the call over to Jim. Jim Bidzos: Thank you, David. Afternoon to everyone, and thank you for joining us. 2025 marked another solid year for VeriSign as we continue to deliver on our mission by extending our 100% service delivery for the .com and NetDNS to an unparalleled twenty-eight years even as utilization of our services increased significantly. New registrations during 2025 totaled 41,700,000 names, the largest we have seen since 2021. During the year, the domain name base grew by 4,500,000 names or 2.6%, leading to a 2025 ending .com.net domain name base of 173,500,000 names. Our revenue grew 6.4% year over year while EPS grew by 10.1%. In 2025, we returned $1,100,000,000 to shareholders through share repurchases and quarterly dividends which were initiated in 2025. The positive domain name-based trends we saw developing in late 2024 gained strength and continued throughout 2025. During the year, we saw sustained strength in new registrations, renewal rates, and domain name-based growth across our three main regions: The US, EMEA, and APAC. It is clear to us that end users are seeing value in domain names and the domain name system as evidenced by our strong domain name metrics and the increasing utilization of our infrastructure. Net registrations added during the fourth quarter were 1,580,000 names driven by the strength of new registrations of 10,700,000, which is up from 9,500,000 in Q4 2024 and a preliminary Q4 renewal rate of 75%, compared to 74% a year ago. We continued to see solid demand for our domain names during the fourth quarter and ongoing registrar engagement with our programs. As we look to 2026, we're encouraged by the continued strength as we exited 2025 and register our feedback on our 2026 marketing efforts. For 2026, we expect a domain name-based growth rate of between 1.5-3.5%. As a reminder, you can monitor the progression of the domain name base, which is updated daily on our website. Our financial and liquidity position remains stable with $581,000,000 in cash, cash equivalents, and marketable securities at the end of the quarter. There was $1,080,000,000 remaining available at the end of the quarter under the current share repurchase program, which has no expiration. As announced in today's earnings release, VeriSign's Board of Directors declared a cash dividend of $0.81 per share of VeriSign's outstanding common stock to stockholders of record as of the close of business on 02/19/2026, payable on 02/27/2026. This quarterly amount is an increase of 5.2%, which is consistent with the increase in net income we saw during 2025. VeriSign intends to continue to pay a cash dividend on a quarterly basis subject to market conditions and approval by VeriSign's board of directors. Now I'd like to turn the call over to John. I'll return when John has completed his financial report with closing remarks. John Callis: Thank you, Jim, and good afternoon, everyone. For the year ended 12/31/2025, the company generated revenues of $1,660,000,000, up 6.4% year over year. Operating income totaled $1,120,000,000 in 2025, up 5.9% from the previous year. Full year EPS was $8.81, and 2025 free cash flow was $1,070,000,000. For the quarter ended December 31, 2025, the company generated revenue of $425,000,000, up 7.5% from the same quarter a year ago. Operating expense in Q4 2025 totaled $140,000,000, which compares to $135,000,000 last quarter and $132,000,000 for 2024. During the fourth quarter, we recorded an impairment charge on real estate we intend to sell, which accounted for a majority of the sequential quarter increase in operating expenses. Net income in the fourth quarter totaled $206,000,000 compared to $213,000,000 last quarter and $191,000,000 in 2024. Fourth quarter diluted earnings per share was $2.23 compared to $2.27 last quarter and $2 for the same quarter of 2024. Net income reflects a higher income tax expense booked during the fourth quarter, primarily due to foreign-based income taxes. Operating cash flow for 2025 was $290,000,000 and free cash flow was $285,000,000 compared with $232,000,000 and $222,000,000 respectively in the year-ago quarter. The increase in our free cash flow is partly due to higher quarterly earnings, increased cash from working capital, and lower cash tax payments. I will now discuss our full year 2026 guidance. Revenue is expected to be between $1,715,000,000 and $1,735,000,000. Operating income is expected to be between $1,160,000,000 and $1,180,000,000. The midpoint of our revenue range and operating income range reflect an expected operating margin more consistent with our long-term trend as compared with the level we saw during 2025. Interest expense and non-operating income net, which includes interest income estimates, is expected to be an expense of between $57,000,000 and $67,000,000 as our expectations for interest income are lower due to lower short-term rates and lower cash balances. Capital expenditures are expected to be between $55,000,000 and $65,000,000, which is higher than our typical range primarily for two reasons. First, we have a larger amount of end-of-life equipment that we are replacing in 2026 along with planned capacity expansion, both of which are facing significantly higher costs largely attributable to intense AI industry-driven demand and supply constraints. Additionally, we are planning a few capital improvement projects to our corporate headquarters. The GAAP effective tax rate is expected to be between 22-25% as we are seeing a slight increase in foreign taxes. In summary, VeriSign continues to demonstrate sound financial discipline during the fourth quarter and throughout 2025. And as you can see from our guidance, we expect continued solid financial performance during 2026. I will now turn the call back to Jim for his closing remarks. Jim Bidzos: Thank you, John. We're pleased with the progress we made during 2025 and look to delivering on our mission during 2026. I've said over the years that while we divested what we considered non-core businesses, we would continue seeking and evaluating ways to offer enhanced functionality or security services that are consistent with our mission. We've continued this evaluation, and we now believe we have strong candidates for new services that can help reduce known and unknown vulnerabilities and contribute significantly to information trust. These potential new services are strongly aligned with our core mission, leverage our long history of pioneering DNS and security technology, and can be offered to new or existing customers throughout our channel. We'll share more in the coming months. Thanks for your attention today. This concludes our prepared remarks, and now we'll open the call for your questions. David Atchley: Operator, we're ready for the first question. Operator: Thank you. If you are using a speakerphone, please make sure your mute function is off to allow your signal to reach our equipment. Once your question has been stated, please mute your line. We will take our first question from Rob Oliver with Baird. Rob Oliver: Great. Good afternoon. Jim, on the last quarterly call, you talked at some length about your view on AI and its impact on the domain base and that it actually was driving some benefit. Clearly, there's a lot of concern in the market around the open web and AI's impact on the web structure. So can you talk a little bit about, you know, give us an update on what you're seeing there, how much you think an uptick in activity on AI is contributing to some of this domain resurgence, and what you're seeing among the domain base? And then I had a couple of follow-ups. Jim Bidzos: Okay. So the impact of AI on our business is certainly having some impact, but it's one of several components that we've talked about before. We've talked about the utility of a domain name and its value. We've talked about the domain name as a digital trust anchor. We've talked about the reliability of our services, twenty-eight years of uninterrupted service and uptime availability. All significant contributors. Internet use is growing. Traffic is expanding. We believe with confidence that a good portion of that is due to AI. And AI is benefiting us, as we've said, in several different ways. I mean, one interesting way is that the registrars are putting AI to work and developing tools that users find easier to build a website and also to select a good domain name. But we're also seeing that AIs building LLMs are, we've all read about how they're basically scraping the Internet and collecting data. We see that in the increase in our queries. That's an indication that there's increased activity in traffic, no doubt. A portion that we difficult to measure with precision, but no doubt that a portion of that is AI. And that just means a greater dependence on the DNS. AIs are going to have to, especially agentic AIs, obviously, conducting multiple tasks for people are going to have to navigate. They're gonna have to refresh data, collect current data. They're going to be using the DNS to do that. So increased dependence on it, increased value and utility of domain names, the established governance structure that exists for the DNS, a secure trusted anchor that's supported across most of the world's countries, in a well-governed system by ICANN, I think, is just proving its value as the load on this infrastructure grows. And AI is undoubtedly a huge part of that, and I think it's probably safe to say that it's gonna continue to grow well into the foreseeable future. Rob Oliver: Great. Really helpful. And then I wanted to pivot to the marketing programs. You know, you called out, you know, going back to '24 when you guys made the call that you were going to pursue some new strategic marketing programs. Those have definitely had an impact and are playing out really nicely. I was wondering if you could just address where in particular you're seeing that impact? Is it across the board? Is it more nontraditional channels? And then are there any tweaks you guys are making to the marketing programs coming into '26? Jim Bidzos: Sure. Let me first say this. I think we can sort of break this into two pieces. One is the registrar channel, of course, who engage with these programs and actually make the sales. First, I'll say that over the years, that channel has evolved. Their business models have evolved. There have been some that have gone public, some that have gone private, some that have changed management, some that have changed business strategies. And so, it took us a little while, but in 2024, we began to adjust and develop programs that met their needs far better. We're kind of a slow, careful, deliberate company. Our priority is our infrastructure and its secure operation, but give us credit. We did catch up. And I think one of the most significant changes that we made was simply giving this evolving changing channel the flexibility to choose from a basket of programs that we began to provide. That allowed them to engage in the ones that are most effective for them. We also included some aspects of the program that sort of incentivized, shall we say, registrations in the categories that tend to have stronger renewal rates. And so, I think all of that is paying off. Rob Oliver: Great. Really helpful. And then last quick one for me. I couldn't resist since you threw out the teaser at the end there, Jim. You know, you mentioned how you think AI is going to drive, you know, sort of increased dependence on that sort of trusted secure, anchored DNS system that you guys play a critical role in. You mentioned some new services. I know we're going to get more information in the future. But just in the interest of, you know, trying to mitigate any surprises on any conference calls nowadays, any color around that would be helpful. You know, there are many folks like, a bit around long enough to remember when you guys sold VeriSign Security Solutions. Thank you. I'm just curious for any more color you can provide around what those additional services might be. Jim Bidzos: Okay. Well, thanks for all those questions. I guess what I can say is this. Yes. We did divest kind of ending in 2015 a number of services that proved to be maybe even more distraction for us than real benefit, and sort of complicated matters in our core mission. We focused exclusively on our core missions starting in 2015. However, I've said consistently, maybe not every earnings call, not every year, but sporadically throughout the last ten years that we don't stop looking for ways to enhance things. Let me start by saying that we are constantly doing R&D. We are constantly improving our own infrastructure. We are supporting IETF standards. We're working to bring innovations and new technologies. A lot of them are made available at no cost if they in our sort of stewardship role as stewards of .com and .net. The two of the 13 roots that we run managing the root zone, in all of these areas, we see ourselves as having stewardship responsibilities. And so, we're always looking to enhance security and stability. That's literally what we're about. If we find things that may be of interest to a broader community, either in a stewardship role or as a commercial product, they'd have to meet a number of different tests. We're not gonna become a sales organization. We're staying in our wheelhouse. And I think, given the increased load on the Internet, given the increased usage, given further dependence on the Internet itself and all of the infrastructure that it sits on, including ours, if there are small enhancements that we've made that we think could add value and benefit folks, either in functionality or particularly in security and stability, at some level, some of those look as if they may have value to folks through our channel, and that's what I was alluding to. So we'll have more to say about that in a few months. Rob Oliver: Great. Very helpful. Thank you, Jim. Appreciate it. Jim Bidzos: Thank you. Operator: We will take our next question from James Michael, Sherman Lewis with Citi. James Michael: Hi there. Good afternoon. Thank you for taking my questions. Two, if I may. First, on the 2026 domain guidance, can you unpack your assumptions on a macro or operational, that could drive domain growth to the low or the high end of the guide? And the high end implies, you know, continued acceleration in domain growth. Jim Bidzos: Yeah. So our guidance really reflects what we've seen trend-wise over the last year. We've been encouraged by the trends. I think each of our major regions showed growth during the year. And we monitor those trends. We also meet and talk regularly with our channel to see what trends they're seeing and to hear what their plans are. So, you know, we think our range encompasses the most likely outcome and our best estimate at the time. And as the year progresses, we'll continue to update on that. James Michael: Helpful. Thank you. Any expectations, then for, maybe the ICANN auction? You know, in contact with a .com domain growth acceleration we've seen, but also some emerging TLDs that have begun to scale faster. Just any insights into your approach here would be helpful. Jim Bidzos: Okay. I'm sorry. I missed quite catch the last part of that. The first part was about the upcoming ICANN auction you said? James Michael: Yes. Jim Bidzos: Ah, okay. You mean their next round of new generic top-level domains? There may be auctions where they may have for domain names, but it isn't an open auction. It's an application process. I think that's what you're referring to. Right? The one that opens in April. James Michael: Yes. Absolutely. Jim Bidzos: Oh, okay. Yes. So they're opening a round of new GTLDs like they did roughly fifteen years ago. And are you asking us what our participation will be, or did you want some general comments on how we view ICANN's new round? I apologize. Some of your question broke up just a little bit. James Michael: Yes. Apologies for breaking up. I'm curious how you're thinking about new TLDs and your portfolio here. Jim Bidzos: Well, we're studying. ICANN hasn't opened the round yet, but we are studying it. We're looking for any opportunities that may present themselves. I think we would be an interested party if there were something specific that would contribute to our strategic role as a critical infrastructure provider. Think of it that way. We do, of course, have .com and .net, and there is .web as well from the last round that we have an interest in. But nothing more really to say about that now other than the round opens up in April. There is a process that could include auctions depending on contention. And then there's a lot of process behind that to launch a new GTLD. But yes, we're familiar with it. We're studying it, and we don't have anything to say with respect to how we may view our own applications at this point. Perfect. And all of them will be visible shortly after the round opens. There will be a period in time in which everyone's applications will be public and visible. James Michael: Great. Thank you. Jim Bidzos: Sure. Operator: Thank you. And we will take our last question from Alexey Gagalev with JPMorgan. Alexey Gagalev: Hello, everyone. Maybe first question, either Jim or John, could you double click a bit more on the guidance? Obviously, I appreciate the range that you provided. Would it be possible to give a bit more granularity in your assumptions? How much domain growth I assume for .com and what sort of direction or trend are you assuming for .net? Jim Bidzos: Yeah. Typically, don't guide the .com and .net specifically. We guide to the DMV base of the combination of those two. You know, I think, you know, over the recent years, you know, that .net has had a little bit of a decrease in its size. You know, we've obviously implemented programs, some of which target .net, and hopefully, we'll have a positive impact. Our other programs, as Jim mentioned, are some of them focused on specific use cases that we believe will drive better retention rates. You know? So we're pleased with what we saw last year. We've made some adjustments this year to those. So we do think we have good momentum coming out of 2025 and starting the year right now. You know, I think we've talked in the past that, you know, while our renewal rates have improved here during 2025, we have mentioned that, you know, we will have a higher mix of first-time renewal rates during 2026, so that'll potentially pull down our overall renewal rate. But while I say that, you know, during 2025, both our first-time renewal rates and previous renewal rates have improved. So several positive trends throughout 2025 that seemed to gain steam as the year progressed. And obviously, we're doing the types of things that we think are important to continue that momentum and continue to build on it. Jim Bidzos: Yeah. And, Alexey, I would say, we do treat the zone as a combination of .com and .net, but the daily report that we get, I'm sure you're aware, does show you what has happened in each of those, and you can track that as it progresses. Alexey Gagalev: That's helpful. Thank you, Jim and John. And maybe just to follow-up on that, so it just seems like the midpoint of the guidance being a little bit conservative considering the trend that we're seeing for .com at the moment. And I was just wondering if your assumptions, at least at the midpoint of the guide, are implying that the growth will taper off in the second half of the year. Is that the logic? John Callis: You know, we exited what, at 2.6% growth for 2025 over '24 midpoint of 2.5. I feel like I'd be splitting hairs to explain that one-tenth of a percent. But, you know, certainly, you know, if you look at the trend of our new registrations during 2025, they might be a little bit more back second half loaded, which, like I said, will impact our first-time renewal rates. But we tend not to guide to quarterly numbers. Jim Bidzos: The other factor, Alexey, obviously, I know you're aware of this. I just want to point it out to some who may be new and just remind everyone as well that we don't sell directly. We sell through a channel, and it's a very, very diverse channel. There are many, many registrars with different business models. They're engaged in different programs. There's been quite a bit of change in the channel. There's been some M&A activity. So I kind of feel as if, you know, we're being given those factors, I think we're being pretty precise, given all the things that we don't control in that particular channel. So we try to tighten that range up as much as we can. And John, as John said, you know, a tenth of a percent, if we could be that close, I'm gonna feel like we pretty much hit the bull's eye. Alexey Gagalev: I hear you, Jim. Thank you. And final question maybe if you could comment on your intention to raise prices for .com. Have you made the decision to move to raise prices this year? And when do you think you may announce that? Jim Bidzos: So we don't guide to pricing, but for those who may be new or unfamiliar, we do have the ability to raise prices in every six-year period in the back four years, 7% each of those back four years. It requires six months' notice. The first available price increase will come to execute in October 2026. And, therefore, if we choose to some level of a price increase, the first opportunity to take advantage of that would be an announcement made in April. But we don't guide to it, but April isn't that far away. So you won't have to wait long to see what we're doing, but I can't answer your question directly because it's our policy not to guide price increases. Alexey Gagalev: Thank you. I appreciate the answers. John Callis: You're welcome. Operator: Thank you. This does conclude today's question and answer session. I would now like to turn the call back to David Atchley for final comments. David Atchley: Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening. Operator: This does conclude today's call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the NOV Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host for today, Amie D'Ambrosio, Director of Investor Relations. Amie, please go ahead. Amie D'Ambrosio: Welcome, everyone, to NOV's Fourth Quarter and Full Year 2025 Earnings Conference Call. With me today are Jose Bayardo, our Chairman, President and CEO; and Rodney Reed, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the fourth quarter of 2025, NOV reported revenues of $2.28 billion and a net loss of $78 million or $0.21 per fully diluted share. For the full year 2025, revenues were $8.74 billion and net income was $145 million or $0.39 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Jose. Jose Bayardo: Thank you, Amie, and thank you, everyone, for joining us this morning. I want to start by recognizing and thanking Clay Williams for his leadership and his lasting impact on NOV. Clay served as NOV's CEO for over 10 years, but he helped build and shape this great organization and its incredible culture over nearly 30 years. As CEO, he led this company through some of the most challenging industry cycles while setting a high standard for integrity, perseverance and commitment to all of NOV's stakeholders. NOV is the great company it is today due to his exceptional leadership and all of us wish him the very best in retirement. Turning to our results. NOV delivered an outstanding fourth quarter to cap off a solid year, executing well in what continued to be a turbulent market environment. Fourth quarter revenue improved 5% sequentially but decreased 1% year-over-year against a global drilling activity decline of 6%. EBITDA was $267 million, up $9 million sequentially. For the full year, revenue decreased 1% to $8.74 billion and EBITDA exceeded $1 billion for the third straight year despite the challenging market environment. I'm proud of the way our team performed and pleased by the demonstrated resilience of our diverse portfolio of market-leading technologies. We achieved a full year book-to-bill of approximately 91% on a 15% increase in revenue out of backlog, and we ended the year with a total backlog of $4.34 billion. 2025 orders were led by demand for offshore production technologies, resulting in our offshore-related backlog growing more than 10% during the year, supported by demand for subsea flexible pipe offshore construction equipment and processing modules. Strong demand for offshore equipment and solid execution on our backlog more than offset lower demand for aftermarket parts and services from our offshore drilling contractor customers, leading our Energy Equipment segment to post its fourth straight year of revenue growth and margin improvement. Energy Equipment's strong performance mostly offset a 4% decrease in revenue from our shorter-cycle, more North America land-weighted Energy Products and Services segment. Rodney will provide more color on operating unit performance, but both segments performed well in a challenging market due to continued efforts to drive additional efficiencies and process improvements. Those efforts enabled us to reach our second consecutive year of converting over 85% of our EBITDA to cash, resulting in $876 million in free cash flow in 2025 and $1.8 billion in free cash flow over the last 2 years. Today, NOV is entering 2026 in a position of strength. We have strong market positions in almost everything we do, a fortress balance sheet, and we have what I believe is the best team of people in the industry. They believe in our mission to lower the marginal cost of energy production and help deliver reliable, affordable energy to the world. They also take great pride in providing exceptional service for our customers and come to work every day with a continuous improvement mindset. While NOV is in a strong position, we see additional opportunities to drive value for our shareholders over the coming years. As we look forward, there are 2 simple overarching areas of emphasis on which we are focused. One, continue to drive operational efficiencies; and two, lean into the many growth avenues we have in front of us. NOV has done a significant amount of heavy lifting over the last 10 years, actions that were needed to navigate through the repercussions of the November 2014 oil price war, the global pandemic and the dramatic shift from investments in offshore activity to U.S. shale. Our work included consolidating, repositioning and simplifying our business and improving operational and back-office efficiencies. This work continues today with our ongoing $100 million cost-out program, multiple facility consolidations and exiting underperforming product lines and geographic markets. While we are well beyond the low-hanging fruit, we still have opportunities to drive efficiencies, grow margins and increase return on capital, and we are accelerating the pace and increasing the scope of our efforts. As we drive efficiency and productivity gains, they are being offset by lower activity levels, tariffs and inflation. Still, we are driving more change to make the organization better every day, and our work is positioning NOV to outperform over the long run. There are many indications of the progress we are making with a number of our operations achieving record performance, some of which Rodney will highlight. We also see progress in numerous KPIs we measure and benchmark in our businesses, including cost of quality, which measures warranty, scrap and rework rates. We've seen significant improvement in this area over the last few years. And today, most of our operations are well within the top quartile of performance. Benchmark not only against oilfield equipment companies, but also leading industrial manufacturing peers. This also shows up in recognition from our customers, such as our subsea flexible pipe business receiving their top customers Best Supplier of the Year award for the third consecutive year. We've also driven improvements in health and safety KPIs such as total recordable incident rate and lost time incident rate over the last few years. Better HSE performance means our employees return home from work safely and in good health. Additionally, we are convinced that strong HSE performance reflects a culture that has pride, accountability and ownership in its operations, which translates into higher quality, reduced downtime and better service for our customers. Another sign of operational and process efficiency is our cash conversion cycle, which has benefited from the work we've done to improve all facets of our operational processes. We exited 2025 with a cash conversion cycle of 119 days and a working capital to revenue run rate of less than 22%, down from 143 days and 28.8%, respectively, in 2023, freeing up around $630 million of cash. While we will continue to focus on optimizing our portfolio, lowering costs, improving margins and driving efficiencies to increase return on capital, the actions we are taking also enhance our ability to lean more aggressively into both organic and M&A growth opportunities. We've always been disciplined in our allocation of capital. But over the past few years, we significantly raised the hurdle related to our criteria for acquisitions. In 2025, we did not complete a single acquisition. It's not that we're no longer interested in pursuing acquisitions. We've just set a much higher standard for them. For us to pursue an acquisition, it should fit within 1 of 3 categories: one, core business technology bolt-on, meaning a business or a technology that replaces or supplements a current core offering: two, direct consolidation opportunities; and three, larger acquisitions that already have scale, competitive advantage and compelling growth prospects. Any acquisition must also be accretive to our margins, earnings, cash flow and return on capital. Also, the more efficient our internal processes are, the better we are able to leverage NOV's global manufacturing, supply chain, marketing and other functions to improve profitability and grow the acquired business, making our case for investment more compelling. We expect all of our businesses to be leaders in what they do. We must either be a top 3 player in the market or have a compelling strategy and path for how we get there. If we do not have an achievable path, we will plan to exit the line of business. Today, we are a top 3 player in most everything we do. The combination of technology leadership, exceptional service and scale can be self-perpetuating, driving market leadership and additional growth opportunities. Complacency kills, and we will not lose sight of the continuous need to invest in product development and innovation. The success we are having with our new products and technologies is driving increases in market share and additional growth opportunities become even more compelling with the type of market we see emerging in late '26 and into 2027. Our objective is not growth for growth's sake, it is about value creation. We will invest in areas where we have clear competitive advantages, high barriers to entry, technology differentiation and a high likelihood of outsized market growth, all of which would be expected to result in investments that are accretive to margins and return on capital and drive value for our shareholders. Our market outlook naturally informs how we think about deploying capital, and 2026 will likely continue to provide a challenging market environment. However, our mid- to longer-term outlook is compelling. The current consensus view is that the oil market is currently oversupplied by between 2 million to 3 million barrels a day. This is due to an oil supply wave coming from OPEC's unwinding of production cuts and from pandemic era non-OPEC FIDs that are now coming online. Despite the excess supply, oil prices are holding up reasonably well due to geopolitical risk and increased storage capacity in Asia. However, with OECD inventories at the high end of their 5-year range and total global inventories that appear to be at their highest levels since 2021, there's downside risk to commodity prices. As a result, we are seeing customers take a cautious approach to the start of 2026, but we expect oil markets will start coming back into balance in the second half of the year, driving higher levels of customer spend and setting up a much healthier market in 2027 and beyond. Overall, we expect global industry spend and drilling activity to decline slightly year-over-year. In the U.S., we expect activity to be down mid-single digits year-over-year due primarily to the low activity exit rate from 2025 and further declines in oil-directed activity that will be offset by higher activity in gas basins. Slightly longer term, we expect U.S. short-cycle activity to remain sensitive to price signals, resulting in a modest recovery in activity by late 2026 and early 2027. We believe fiscal discipline among operators due in part to concerns related to depth and quality of drilling inventories and the state of the service complex's asset base will constrain activity growth. Capacity has moved overseas and attrition from the wear and tear of equipment operating 24/7 has taken its toll. Any increase in activity levels will likely require a disproportionate amount of demand for capital equipment, creating a compelling market opportunity for NOV. Longer term, we expect U.S. activity to realize modest but consistent growth to maintain a long production plateau as unconventional basins continue to mature. In international markets, we expect activity will be flat to up slightly in 2026, driven by rigs going back to work in Saudi Arabia and by the expansion of unconventional activity in international markets. This increase in unconventional activity throughout the Middle East, Latin America and Australia will continue to drive investments in the high-spec drilling, completion and production equipment needed to efficiently develop these resources, almost all of which NOV provides. Additionally, we see meaningful potential in Venezuela for us to help get the industry back on its feet over the longer term. This will require significant investments in capital equipment. NOV has a long and proud history in the country that began back in 1949. We employed over 450 people there before we had to shut down our operations. Since then, we have continued to sell equipment and spare parts to support major IOCs Venezuelan operations. And just over the past several weeks, we've received new orders with a value that exceeds the total amount of revenue we've generated during the past several years while supporting this operator's activity in the country. Given our history operating in the country, we will quickly ramp up support for our customers when it becomes appropriate to do so. Moving to the offshore markets. First, I'll talk briefly about what we see in the construction space, then cover production and drilling markets. NOV is a leading provider of critical cranes and deck machinery for drilling rigs, offshore support vessels, or OSVs, cable and pipe lay vessels and wind turbine installation vessels or WTIVs. Demand for new WTIVs has been soft, impacted by cost inflation, supply chain pressures and higher borrowing costs for developers. While we booked 1 order in 2025, the outlook for offshore wind has deteriorated with the latest forecast for turbine capacity additions through 2030 down over 35% since this time last year. As a result, offshore wind contractors are cautious and there is poor visibility into future orders. However, demand for cable lay vessels needed to connect power from the still growing number of offshore turbines to shore has remained solid with 2 orders in 2025, including 1 in the fourth quarter. We expect this level of demand to continue through 2026 with longer-term demand contingent on the ultimate pace of offshore wind development. We're seeing strong demand for our offshore cranes with our operation reaching its highest level of revenue in over 10 years. This demand has been led by operators of OSVs, where the average age of the global fleet is now almost 20 years, approaching a typical 25-year life and giving us confidence that demand will remain solid over the coming years. Turning to offshore production and drilling equipment. Industry forecasts suggest 2026 will be another year of lower spending, down low to mid-single digits. While we do not disagree with this view, the market is nuanced, and we believe the offshore market is rapidly nearing the beginning of a strong extended up cycle. Over the past decade, the offshore industry has fundamentally changed. Improved project execution, greater standardization, industrialization of infrastructure and better technology have materially lowered breakeven costs. NOV's drilling and production technologies have contributed to this emerging renaissance. Our automation packages, digital solutions and other equipment have improved drilling efficiencies. And the industrialization we've applied to building gas and fluid processing modules for FPSOs has helped lower costs. Additionally, operators are now benefiting from artificial intelligence using the latest processor chips that enable quicker iterations and better subsurface interpretations to reduce time, risk and costs associated with deepwater exploration. All of this has meaningfully improved offshore economics with breakevens in many areas now falling below $40 per barrel. Lower costs, along with a growing need to offset structural production declines are increasingly positioning long-cycle offshore barrels to supplant short-cycle North America shale as a source of incremental supply, supply that is needed to feed the world's growing demand for energy and which will reinvigorate offshore exploration. We're already seeing many IOCs planning to significantly increase their deepwater exploration budgets in the coming years, some by as much as 50%. In the offshore production space, we are leaders in providing most of the critical components outside of power and compression for FPSOs and mobile offshore production units. We also provide mooring and fluid transfer systems and other equipment for FLNG projects. 2025 was a massive year for deliveries of FPSOs with 15 vessels starting operations, many for projects sanctioned before the pandemic. Only 5 new FPSO FIDs advanced during the year, while others were postponed due to higher costs, supply constraints and macroeconomic uncertainties. Over the last year, operators and suppliers have been working together to lower upfront capital costs by evolving designs of large FPSOs to smaller to midsized units optimized for average anticipated field production rather than maximum throughput. The projects are now starting to move forward. In 2026, we see the potential for up to 10 FPSO FIDs and expect demand to remain strong with an average of 8 FIDs per year through 2030. Notably, while we expect the average size of FPSOs to decrease, we see a higher proportion of FPSOs destined for gassier markets in harsher environments, which plays into NOV's strength in gas and condensate processing and in quick disconnect turret mooring systems. Lastly, in offshore drilling markets, we are seeing green shoots with growing indications that the white space for our offshore drilling contractors is beginning to shrink. Our customers are seeing an increase in the pace of contracting and the average duration of new contracts is increasing significantly, which we believe reflects building momentum for long-term offshore developments. From September 2025 through January 2026, there have been 59 floater contracts awarded in comparison to only 33 during the same period last year. Additionally, as of year-end 2025, public open tenders for all offshore rigs reflected approximately 30% more minimum rig days relative to open tenders at year-end 2024. That number increases to over 100% if you consider only open tenders for floating rigs. While most new contracts are scheduled to begin in 2027, our offshore contract drilling customers typically call us as soon as contracts are signed to begin preparing rigs to go back to work. This drives demand for service and repairs, spare parts, recertifications and capital equipment upgrades. We've now realized 2 straight quarters of increased spare part bookings and expect orders to improve further in the second half of the year. We also believe the stage is set for an extended recovery as the call on production from deepwater increases, driving the industry to get back to work. We're extremely excited about NOV's future and the market environment we see unfolding over the next several years. We performed well in 2025, reflecting the strength of the diversity in our portfolio and the great work our team is doing to execute well in a tough environment. Rodney? Rodney Reed: Thank you, Jose. Consolidated revenue for the quarter was $2.28 billion, an increase of 5% sequentially and down 1% year-over-year. Net loss was $78 million or $0.21 per fully diluted share, impacted by a higher effective tax rate from valuation allowances on deferred tax assets and a higher mix of foreign earnings. The company also recorded $86 million within other items, primarily related to the impairment of goodwill and long-lived assets. Adjusted operating profit was $177 million, or 7.8% of sales and adjusted EBITDA totaled $267 million, representing 11.7% of sales. Sequentially, margins benefited from strong operational execution, offset by a less favorable mix of business and higher tariff expense. Our team delivered another strong quarter of free cash flow generation, totaling $472 million in the quarter. As Jose mentioned, free cash flow was $876 million for the full year, our second consecutive year with an EBITDA to free cash flow conversion rate of over 85%, representing our best 2-year free cash flow in 10 years. Working capital as a percentage of revenue run rate decreased to 22%, our lowest level in 10 years. We continue to execute on our return of capital program. During the quarter, we repurchased 5.7 million shares for $85 million and paid dividends of $27 million, bringing total capital return to shareholders to $505 million year-to-date. This includes a supplemental dividend of approximately $78 million paid in the second quarter. In the past 2 years, we've returned $842 million to our shareholders while increasing our cash balance by $736 million. Through our disciplined share repurchase program, our current shares outstanding are at their lowest level in 18 years. Our balance sheet remains strong with net debt-to-EBITDA at 0.2x, and we remain committed to our return of capital framework. For the quarter, tariff expense was $25 million, increasing around $8 million sequentially. In the current regulatory environment, we expect our tariff expense to slightly increase in the first quarter, leveling off at a similar amount for the remainder of 2026. We're seeing an increased cost in our supply chains from secondary impacts from tariffs, including sizable increases for items like Tungsten carbide. We continue to focus on our supply chain and execute strategic sourcing initiatives to reduce tariff impacts. Our efforts to reduce structural costs, standardize and simplify processes and upgrade systems to improve productivity are progressing as planned. These programs are on track to deliver over $100 million in annualized cost savings by the end of 2026, although tariffs and other inflationary impacts remain headwinds. As Jose mentioned, we expect overall upstream spending to contract slightly from 2025 levels with reductions in North America being greater than international and offshore markets. We expect this will lead to slightly lower revenue in 2026 with results being more weighted to the second half of the year and full year EBITDA in line to slightly lower than 2025. Given the strong fourth quarter collections and anticipated timing of progress billings on projects, we expect EBITDA to free cash flow conversion to decrease to between 40% to 50% for 2026. Capital expenditures for the year should be between $315 million and $345 million. Higher expected foreign earnings will likely lead to a higher effective tax rate of around 34% to 36%. Turning to segment results. Our Energy Equipment segment fourth quarter revenue was $1.33 billion, up 7% sequentially and 4% year-over-year. Adjusted EBITDA for the fourth quarter was $180 million or 13.5% of sales, driven by solid execution on a higher quality backlog and further strength in our offshore and production-oriented businesses. As Jose mentioned, this represents 4 years of consecutive revenue and margin growth with annual revenue increasing almost 60% over that time. Capital equipment sales accounted for 63% of the segment's revenues in the fourth quarter of 2025, increasing 8% sequentially and 15% year-over-year, led by growth in our subsea flexible pipe, Process Systems and Marine Construction business units. Aftermarket sales and services accounted for the remaining 37% of revenue, growing 6% sequentially, but declining 12% year-over-year, which I will discuss momentarily. Capital equipment orders for the quarter were $532 million and $2.34 billion for the full year, resulting in a book-to-bill of 91% for 2025 and backlog at the end of the year of $4.34 billion. Orders during the quarter were led by a newbuild offshore jack-up rig equipment package, additional scope on offshore production projects, subsea flexible pipe, subsea cranes and a cable lay vessel. These bookings reflect the diversity of end-use markets where NOV has leading positions and technologies critical to our customers. We continue to have a constructive outlook on bookings and expect the full year 2026 book-to-bill to be near 100%. Our Subsea flexible pipe business delivered another exceptional quarter, achieving its highest quarterly revenue and EBITDA on record for the second consecutive quarter. Backlog since the end of 2023 has doubled, while annual shipments have increased around 50%. Margins remained robust, driven by better quality backlog and operational execution. Production levels set new records as the team continues to produce high-quality, on-time deliveries, earning further recognition from customers for reliability, quality and consistent execution. Another sizable project was booked in the fourth quarter, and we expect strong bookings in the first quarter of 2026. Given the expectations for growth in greenfield projects, tiebacks and an increased need to replace aging pipes, the outlook for this business remains bright. Our Marine and Construction business achieved an upper single-digit increase in revenue sequentially and a sizable increase compared to the fourth quarter of 2024, driven by higher revenue from cranes as well as pipe and cable A systems. During the year, this business has booked orders for critical equipment supporting cable A, FLNG, FPSO, offshore supply and wind turbine installation vessels. As Jose mentioned, we expect an increase in FPSO and FLNG-related awards, which should drive incremental demand for our gas and liquids processing systems and our mooring and fluid transfer systems over the next several years. Our Process Systems business delivered solid performance during the fourth quarter with revenue slightly outpacing last quarter's record revenue. Compared to the fourth quarter of 2024, revenue was up more than 40%, supported by continued strong activity across offshore production and onshore gas markets, particularly in the Middle East. For the full year, the business delivered more than 30% growth, reaching its highest ever revenue and EBITDA. Bookings for the year doubled compared to 2024. During the quarter, the business secured key awards for a gas dehydration unit in Saudi Arabia and an expansion of scope in existing North Sea project. Representing over 40% of 2025 business unit bookings, demand for MEG systems remains strong, driven by offshore projects and large onshore gas field expansions. Also, the business is seeing increased opportunities for brownfield applications in our produced water technologies. Our book-to-bill over the past 3 years in subsea flexible pipe, process systems and marine construction has exceeded 120% with backlog growing nearly 40%. These businesses represented over 70% of total energy equipment bookings for 2025, and we anticipate continued strong demand as momentum builds and FIDs increase in offshore markets. Revenue from our drilling capital equipment business during the fourth quarter experienced a year-over-year decline in the low teens percentage range, but notably increased nearly 10% sequentially. We are encouraged by recent contracting activity among our offshore drilling customers, which helped capital equipment orders improve sequentially. We delivered our 14th high-specification land drilling rig manufactured in Saudi Arabia and expect a solid cadence of rig deliveries in 2026 and beyond. And as previously mentioned, we secured a drilling equipment package for a newbuild jack-up rig being constructed in Saudi Arabia. Continued engagement with customers as offshore tendering remains active is leading to an increase in demand for select upgrade opportunities, including BOP-related equipment, managed pressure drilling and automation and robotic systems. We're having more constructive dialogue around future opportunities, positioning the business to benefit as offshore drilling activity should improve later this year and into 2027. Revenue for intervention and stimulation capital equipment declined 10% year-over-year, but increased substantially compared to the prior quarter, driven by solid demand for coiled tubing equipment and wireline equipment. During the quarter, we shipped new coiled tubing equipment to the North Slope and the U.K. and wireline equipment throughout the Middle East. New orders included 2 dual trailer large-diameter CTU units with 50,000-foot reels and injectors. Even with constrained budgets for our North America customer base, book-to-bill for the year was 94%, primarily supporting international markets, which more recently represents about 50% of the business' total revenue. Turning to aftermarket portion of the Energy Equipment segment. In our drilling equipment business, fourth quarter revenue for aftermarket parts and services was down in the mid-teens percentage range year-over-year, but increased nearly 10% sequentially. Spare parts bookings for the fourth quarter were above their trailing 8-quarter average, reaching their second highest level in the past 6 quarters. Aftermarket revenue for our Intervention and Stimulation Equipment business was down mid-single-digit percentage sequentially and low double-digit percentage year-over-year. The year-over-year change was due to lower sales of spare parts and a decrease in rentals resulting from reduced completion activities in North America, partially offset by higher coiled tubing, repair and service activity. For the first quarter, we expect Energy Equipment segment revenue to increase 3% to 5% year-over-year with EBITDA in the range of $145 million to $165 million. Moving to the Energy Products and Services segment. Our Energy Products and Services segment generated revenue of $989 million during the quarter, representing a sequential increase of 2%, driven by higher sales of the segment's composite solutions, seasonal bulk sales of downhole products and stabilizing activity in the U.S. and the Middle East. Compared to the fourth quarter of 2024, segment revenue declined 7% and adjusted EBITDA decreased to $140 million or 14.2% of sales. The year-over-year decline was driven by lower drilling activity in the U.S., Saudi Arabia and Argentina. Lower volumes, increased tariff expense and other inflationary pressures more than offset cost control efforts and efficiency improvements, resulting in larger-than-normal EBITDA decrementals year-over-year. In North America, the segment continued to outperform underlying activity levels. Market share gains and increased adoption of new technologies contributed to a modest increase in revenue year-over-year despite a 6% decline in rig count. Our strong market positions in Saudi Arabia and Argentina hurt our performance in 2025 as drilling activity declined. However, we expect meaningful activity improvements in those markets progressing through 2026. For the fourth quarter, the sales mix within Energy Products and Services was 49% service and rental, 33% capital equipment and 18% product sales. Revenue from services and rentals declined 7% year-over-year, driven primarily by softer global activity levels. This decline was partially offset by increased adoption of NOV's wired pipe enabled downhole broadband services, DBS, and continued market share gains across several offerings. Revenue from NOV's DBS services more than doubled compared to the prior year, driven by increased activity in the North Sea, where technology is enabling enhanced geosteering and faster drilling in complex long lateral wells. During the quarter, a North Sea operator highlighted the value of high-frequency downhole data and enabling faster and more confident decision-making, crediting the technology with enabling the drilling of a reservoir section that likely would not have been achievable without real-time data transmission. NOV's drill bit rental business also finished the year strong, capturing additional market share across U.S. land markets and driving a revenue increase of about 20% in the region for the full year compared to 6% decline in U.S. rig count. Across the broader services portfolio, softer activity in Saudi Arabia, North America and Latin America reduced demand for rentals of downhole tools, solids control services and tubular inspection operations. These declines were partially offset by growing adoption of our advanced technologies into new markets and higher activity levels in the UAE. Sales of capital equipment declined in the low single-digit percentage range year-over-year, but increased at a high single-digit rate sequentially, driven by a recovery in shipments of composite solutions. The year-over-year decline reflected strong shipments of composite pipe for the Middle East and FPSO vessels in the prior year that did not repeat, partially offset by continued strength in demand for fuel handling tanks and large diameter composite pipe supporting produced water takeaway capacities in North America. Our composite business experienced its highest annual revenue in history during 2025 with fourth quarter bookings reaching their highest level in 3 years, with strong demand from multiple end markets, including fuel handling, where orders doubled from 2024. While we expect to see typical first quarter seasonality, demand remains supported by ongoing investments in infrastructure and offshore developments. Our Tubular Products business, which includes drill pipe and large diameter conductor pipe, saw orders for drill pipe in the second half of 2025 significantly outpaced the first half, leading to a high single-digit revenue increase year-over-year. However, timing of orders for our large diameter conductor pipe led to a year-over-year decline in revenue for this product line, which will also have a negative effect for the first quarter of 2026. Revenue from product sales increased modestly sequentially during the quarter but declined in the mid-teens percentage range year-over-year. The year-over-year decline reflected lower industry activity levels, particularly impacting typical year-end bulk purchasing in the Eastern Hemisphere of our downhole drilling tools and drill bits. Sequentially, strong shipments of completion tools to customers in the Middle East, Argentina and Europe were offset by lower shipments of fishing tools and drilling tools to Asia. For the first quarter of 2026, we expect our Energy Products and Services segment to experience a seasonal decline consistent with prior years, translating into revenue that is down 6% to 8% year-over-year with EBITDA between $105 million and $125 million. That sums up our financial results for the quarter and for the full year. If we take a step back, our adjusted EBITDA for 2023 was $1 billion, with 2025 improving about 3% to $1.03 billion despite significant market headwinds. Over that time, North America rig count declined 15%, Saudi Arabia rig count declined over 10% and the offshore floater count declined 4%. Additionally, changes in trade policies resulted in tariff expense of over $50 million in 2025. Nevertheless, NOV generated $1.8 billion in free cash flow during that 2-year period, demonstrating the diversity and resilience of our portfolio. With that, I'll turn the call back over to Jose. Jose Bayardo: Thanks, Rodney. As we go forward, NOV is in a very strong position. The near-term market environment may become more difficult, but we will further improve our operational efficiencies. We also intend to lean harder into growth opportunities that will generate value for our shareholders and that will be supported by a much more favorable market setup that we expect to emerge later in the year. I'd like to end by saying thank you to all our employees for delivering another solid year and for the dedication you have to our customers and to our fellow employees. I appreciate your focus on making NOV better every day. Our outlook is bright, thanks to everything that you do. With that, we'll open the call to questions. Operator: [Operator Instructions] The first question will come from the line of Jim Rollyson with Raymond James. James Rollyson: Maybe on the offshore rig kind of expected ramp late this year going into '27. You guys have done an interesting job of kind of laying out like the FPSO opportunity set for you, which is a pretty wide range from a revenue standpoint. Maybe if you could just kind of give us order of magnitude how you're thinking about the order opportunity set for spares and upgrades and all the different components that you're in discussions with on folks as they look to ramp back up hopefully into the next couple of years. Jose Bayardo: Yes. Thanks for the question, Jim. So yes, as you can tell, we're pretty optimistic about the lay of the land in terms of what we expect to happen in the offshore space, both from an offshore production equipment standpoint as well as in the drilling environment. And so the last few years, as Rodney really laid out, we've seen a tremendous increase in terms of demand for offshore production-related equipment, and we have really positioned the business well to capitalize on that opportunity set. And as I mentioned, it was just a huge year in terms of FPSO deliveries in 2025, really a wave that kind of came about from FIDs that are around the time of the pandemic. Some of those were pushed out later than anticipated because of all the dysfunction that occurred in the marketplace during the pandemic era. And they're finally coming online. And recall that part of the reason or really a big driver for the reason of the white space in the offshore drilling market was because the production equipment wasn't yet in place to put those rigs back to work. And so we've been saying for a while now that, hey, do you really think the world is going to build all this production equipment and not drill a bunch of wells to feed into those assets? And that's what we continue to expect to happen. A lot of those vessels just recently set sales and are connecting. And we're also now starting to see unsurprisingly, really significant impact or improvement in terms of offshore rig tendering, and we provided those stats with comparable period contracts increasing from 33 contracts a year ago to 59 over the most recent period. And really importantly, the average duration of these contracts that are being tendered is significantly longer than they were before, indicating that, hey, we're moving from an era here recently where rig contracts have basically been very short term in nature for single well or double well projects, and now we're shifting to crew development mode from some of these offshore opportunities or field development projects. And so we feel really good about all facets of our offshore business. As we mentioned, we still continue to see a lot of demand for offshore production-related equipment with potentially 10 FIDs this year and averaging 8 or so going forward for the next several years. Additionally, we see a little bit of a different mix in terms of the types of vessels that will be needed. And those -- that mix kind of plays, we think, into our strength -- with having higher gas and condensate content, which is where we really shine as well as more of those vessels that will be operating in harsh environments, which create larger opportunities for our quick disconnect through our boring system. So excited about that. But here, as we've talked about over the last year with the white space, there's been a lot of pressure on our rig aftermarket business, which, as Rodney mentioned, was down mid-teens percent year-over-year. And Jim, as you know, that's a really good business where the -- where we really have a really good position as the original OEM of a lot of this equipment that's out there. And so we're going to benefit from just a higher pace of activity offshore that's going to command a higher level of aftermarket parts, but also as these rigs go back to work, -- there's service and repair work that needs to be done. There's recertifications, there's upgrades, et cetera. And so we feel like the outlook here is really bright. James Rollyson: Appreciate all that color. And then just one quick follow-up. Rodney talked about the tariff impact, and you guys have talked about this over the last couple of quarters or so really since it all started. And I seem to recall maybe a couple of quarter conferences ago -- conference calls ago that one of the plans was the $100 million cost-out program to help kind of offset that. But longer term, I think the hope was you pass some of this tariff costs through higher pricing. And I'm just curious like where we are in the status of maybe that actually happening. Is the market still soft enough that you can't quite get there and you need that to change or maybe where we are in that process? Jose Bayardo: Yes, Jim, we're certainly having some success passing on those costs. But as you can imagine, it is a difficult market environment to pass along those costs, right? We've been -- we've seen a steady decline in industry activity over the last couple of years at a time -- during a time period when not only are we seeing heightened costs from tariffs, but also inflationary costs hitting in other areas. And so while in general, the number of areas that are experiencing large increases related to inflation, the number of areas has decreased a little bit. We're still seeing certain areas where there are really significant increases. Rodney highlighted the tungsten carbide, that's going to be a bit of a shock to the system, really important in the manufacturing of matrix body bits as well as for art-facing steel body bits. And we've gone up a couple of hundred percent in a couple -- in a 1-month time period due to all the supply constraints there coming out of China, and that's just really volatile. Also costs associated with electronics and memory and then not to mention continued pressure on labor and medical has been a real challenge. But look, this is just a fact of life in our business. Sometimes these things are more volatile than others, and we're managing through it. We've got some good efforts underway in terms of making sure that we get paid an appropriate value for the technologies that we bring to bear for our customers. Also have good efforts underway to continue to improve the efficiencies across the organization and offset some of those costs. And when we talked -- initially talked about that cost-out program, which we're making really good progress on, we mentioned that it would not fully offset what we expected to happen over the next few quarters related to inflation, tariff expense, et cetera. So you haven't really been able to see it just looking from the outside in on the P&L, but we're certainly seeing the benefits of what we're doing internally in some of the KPIs that I referenced earlier. And then as we progress through 2026, when tariffs will stabilize, assuming no other changes to the regime and a larger amount of those cost savings come through, I think you'll really start to see more of that in the second half of the year. Operator: Our next question comes from the line of Marc Bianchi with TD Securities. Marc Bianchi: Jose, you had some comments in your prepared remarks about M&A. And it sounded to me like the company, given the stuff that you guys have put in place over the last several years to sort of respond to the new world is maybe in a better position to pursue M&A going forward. And I don't know, maybe that wasn't the intended takeaway, but just maybe frame for us how we should be -- how investors should be thinking about your intentions around M&A now? Jose Bayardo: Yes. Thanks for the question, Marc. And I think you picked up on the general message, but let me clarify a little bit. Yes, certainly, our focus has been a little bit more internal recently, really focused on cost out, driving internal efficiencies and really preparing to get ourselves ready to really capitalize on growth opportunities. And so it's really a mindset shift to a large degree in terms of having played defense in a very challenging market to really moving into the -- in the role of playing offense. And having really incredibly efficient processes, whether it's manufacturing, whether it's supply chain, whether it's back-office processes, certainly helps in terms of being able to justify and validate M&A type transactions. So we're very confident. And look, one of the benefits that we get when we do acquisitions is being able to buy businesses that are within our core expertise areas, leveraging our core competencies to make those businesses better and accelerate their growth through leveraging our manufacturing base, our global supply chain, our marketing resources around the world, et cetera. And so the more efficient those are, the better we can integrate these acquisitions and drive more value. But the other part of what we were really trying to get at is that while we will lean into M&A a little bit more and try to be a little bit more aggressive, we're still going to be incredibly disciplined. We're still going to be focused on making sure that that's the best use of our capital, certainly in comparison to buying back our own shares and things of that nature. So we will continue to be very, very disciplined. And what we're really excited about is the organic growth opportunity that is in front of us. Our businesses have developed some fantastic technologies that have recently been commercialized or that are soon to be commercialized. And that, combined with the market outlook that we see evolving over the next couple of years has us extremely excited and presents additional growth avenues in areas where we can invest our capital to lean into those growth opportunities. And look, those -- the need for capital in those opportunities is not -- we're not talking about huge amounts because it's organic, but there are opportunities where we look into the future and we see, hey, we're going to be manufacturing constrained in this area, and we need to build these areas out. There are other areas where we're seeing really rapid adoption of what we're doing, and we need to build out more capacity from a rental equipment standpoint to be able to effectively deliver for our customers. So that's -- hopefully, that helps provide a little bit more clarity in terms of what I was getting at there. Marc Bianchi: Yes. Yes, sure does. The other one I had was on the order outlook. I think, Rodney, you mentioned a near 1 book-to-bill. And within that context, you also talked about FPSO FIDs doubling in '26. So maybe help us think about the range of scenarios if you were to get your fair share and there are 10 FIDs for FPSOs, should we be comfortably above 1? And then along those lines, how are you seeing 1Q shape up? Jose Bayardo: Yes. Thanks for that question as well. And look, it's never over until it's over, but we feel really good about our prospects to win our fair share related to the opportunities that are out there. As I touched on earlier with Jim's question, there are some of those opportunities that really are areas in which we should do very well related to leveraging our expertise in high condensate gas processing and environments. So we're excited about that. And look, if you look -- if you think about kind of what we've done over the last several years, yes, this year was a 91% book-to-bill, but each of the preceding 4 years was greater than 100% book-to-bill. We've got a very healthy backlog today that has been driven by those offshore production awards, backlog of $4.34 billion. So while it's 91% for the year, we're only down $93 million year-over-year, and the outlook for this coming year is really good. Always tough to give precise guidance related to future awards. As you know, these are big and chunky typically, and they can push and pull from quarter-to-quarter. As we suggested here, we anticipate a relatively slow and cautious start to the year. So I think we'll be below 1x book-to-bill in Q1. But for the year, we think things will even out, and we expect to be around 1x. Operator: Our next question coming from the line of Stephen Gengaro with Stifel. Stephen Gengaro: Jose, I think you got Clay words for minute down pretty pat. Jose Bayardo: I had a lot to say this morning, Stephen. Stephen Gengaro: No, the commentary is great, and there's a lot of detail. The -- I may be overthinking this, but when we think about the aftermarket business that you have and given your large installed base, the amount -- do you know -- do you have a sense for the amount that you serve of your installed base? And maybe more importantly, over the last couple of years, has the third-party ability to service existing assets dwindled at all from a competitive perspective? Jose Bayardo: Yes. A good question, Stephen. Look, it always ebbs and flows. And inevitably, people want to look for ways to do things more efficiently and more cost effectively. And at times, that leads them to go to the sort of proverbial [indiscernible] mechanic. But more often than not, those efforts are short-lived because they realize the complexity of what it is that we provide and what we do and the critical importance of making sure that you operate incredibly efficiently and reliably and that tends to drive people quickly back to the OEM. So I can't precisely tell you exactly where we are, but we feel great about our position and that we're getting our fair share. And look, every day, we're focused on providing better and better service and delivering better value for our customers. So certainly, intent is to bring that down more and more every single day, but there are always little ebbs and flows here. Stephen Gengaro: Okay. And then just the quick follow-up was when you look at sort of the basket of sort of stacked idle deepwater assets, it's -- I think it's fairly small, but do you have a sense for what the market opportunity is there for reactivations? Jose Bayardo: Yes. I think, look, it's -- when you talk about deepwater drillships, it's pretty limited. And I'm not going to give specific numbers. I'll let our contractor customers talk about it. But look, it is limited. I think it's -- you can sort of see exactly what's been operated here in the recent past and what those levels are that we could probably more easily get back to. But then I think your question is really around the stuff that's been stacked for a really long time or rigs that were never fully completed that were ordered during the last boom cycle. And I think that opportunity set, lucky to call it kind of a handful. So it's a limited opportunity and those opportunities that do exist. They're going to be large opportunities, right? They've been stacked for a very, very long time. And when I say handful, that's the number that are higher spec and that we think will be in line with what the market currently demands. And like I said, they've been stacked or uncompleted for a very long time. There's going to be a big ticket associated with bringing those back. So TBD exactly how that will play out. But it's a good opportunity for us. And then we see the market obviously tightening up very quickly, which means it will be a very good market for our drilling contractor customers, and that's a good thing for the space. Operator: Our next question coming from the line of Dan Kutz with Morgan Stanley. Daniel Kutz: So just going back to Venezuela. I was wondering if you guys could kind of quantify at all maybe what the level of revenue you were doing back pre-sanctions when you had the -- I think you said 400 employees in country or kind of what the equipment and spares revenue streams have been the last couple of years, which you said like the inbound you've gotten is kind of a multiple of the annual revenue stream. So basically just driving that, anything you could help us with as we're trying to kind of quantify the potential opportunity in Venezuela would be really helpful. Jose Bayardo: Yes, Dan, fair question. But I think what I would point to is that I don't think kind of the history is the precise dollar amount isn't particularly relevant, right? There's been a lot of change in pricing. And more importantly, I think the market environment going forward is going to be very, very different. But look, you can do the quick math. I said 450 employees. Today, we have a little over 30,000 employees. And so you can sort of figure out what the revenue per employee should be, and that's kind of in line with where we were. But the reason why I say it's not entirely relevant is because if and when the right fundamentals get put in place to really get back to work in the country. And what I mean by that is the right governance, the right laws and rules that allow us and more importantly, our customers to go to work there, along with alleviating security concerns and all those sorts of things. It's a country that's been -- it's a country whose oilfield assets have been neglected for an incredibly long period of time. And so that's going to create -- should create massive opportunities for new capital equipment. So when you go back in the day when we were active there, virtually all lines of business were active there. So we have -- certainly have the capability to do that and scale up very quickly. But we think the opportunity there, if and when the right guardrails are put in place will be meaningfully larger than what they were in the past. Daniel Kutz: Awesome. That's really helpful. And then I just wanted to check in on kind of your through-cycle CapEx and free cash flow framework. So not asking about 2026 because I know you guys gave the explicit guide for both of those items. But just wanted to check in on -- I guess you guys have kind of said like a 50% plus free cash flow conversion framework through cycle. I wanted to see if that's still a good assumption or that's the latest. And then maybe if you could kind of unpack CapEx a little bit, how you think about that through cycle, whether it's in terms of revenue or some type of maintenance level plus some growth investments. So yes, anything you could help us on the through-cycle CapEx and free cash flow framework would be great. Rodney Reed: Yes. Thanks, Dan. This is Rodney. So just stepping back and giving some credit to the team with respect to free cash flow conversion for the last couple of years, 85% free cash flow conversion, really excellent performance by the team. A lot of that was really system structural improvements. So if you look at the improvements that we've had on DSOs during that time, you look at the improvements that we've had, in particular, for some of our project-based businesses with some of the progress billings and timing of collections during that time, really strong and also on our inventory turn improvement. So 2023 inventory turns at 3.1 improving to 3.9, almost 4 turns in 2025. So just across the board, I know Jose gave some commentary on cash conversion through the cycle, but just some components there. And then we kind of mentioned, as we think about '26, a little bit more directed to your question, about 40% to 50% free cash flow conversion for '26. And if you look at the components of that, CapEx in that sort of $315 million to $345 million range. You look at working capital as a percentage of revenue, probably about flat to maybe slightly up. So that kind of gets you to that cash conversion rate there for '26. And I think going forward, as Jose mentioned, we've got some organic opportunities that we always evaluate. I think our CapEx in '24 and '25, if you look, was a touch higher than '22 and '23. '26 at that sort of midpoint gets back to a little bit more sort of average level. But the positive thing is with the strength that we have on the balance sheet and where we're at right now, we've got the flexibility to look at those opportunities going forward. But overall, I'd say kind of through cycle, that sort of 50% -- 40% to 50% number from a conversion perspective is a good marker for us. Operator: Our last question will come from the line of Jeffrey LeBlanc with TPH & Company. Jeffrey LeBlanc: I wanted to see if you could provide an earnings potential of your ATOM RTX robotics platform over a multiyear period and how we should think about the gating events for it to become the next drive? Jose Bayardo: Yes. Thanks, Jeff. Look, we are super excited about kind of what we're doing on the automation front and really more broadly speaking, on all things that we're doing digital-wise. First of all, just a quick answer on the robotics piece. This is something that we put our first effectively pilot system out a couple of years ago. It's been operating consistently with a couple of upgrades and getting better and better every day over the last couple of years, operating in a very harsh environment. We've been working very closely with the drilling contractor customer and an IOC. This is a great stage that's set to where we're doing a lot of cooperation with industry partners to ensure that this is successful. And we're working with 2 different IOCs and 2 different drilling contractors. And all 4 of those customers are really excited about what we're delivering with them out in the field. We currently have 3 rigs operating on land, 3 operating offshore, and we've sold around 27 to 30 robot arms, and we're having super constructive conversations with our customers about doing a whole lot more. So that's really about all I can give you on that front right now. But look, the other thing that I'm extremely excited about is the capabilities that we have under one roof related to data control systems and automation. Look, we've been in the data business for over 100 years when we started an instrumentation business. Obviously, we've migrated from analog to digital on a lot of fronts, including data capture aggregation and now more and more high-speed downhole data transmission, combine that with our world-class capabilities for control systems, then layer on top of that automation and robotics and now the use of AI, and we're super excited about where we can take all this over the coming years. So really excited about our prospects there. Operator: And I'll now turn the call back over to Mr. Jose Bayardo for any closing remarks. Jose Bayardo: Great. Olivia, thank you very much, everyone, for joining us here this morning. We look forward to talking to everybody again here in late April. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. .
Operator: Greetings, and welcome to the Griffon Corporation Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Harris, CFO. Please go ahead, sir. Brian Harris: Thank you. Good morning, and welcome to Griffon Corporation's first quarter fiscal 2026 earnings call. Joining me for this morning's call is Ron Kramer, Griffon's Chairman and Chief Executive Officer. Our press release was issued earlier this morning and is available on our website at www.griffon.com. Today's call is being recorded, and the replay instructions are included in our earnings release. Our comments will include forward-looking statements about Griffon's performance. These statements are subject to risks and uncertainties that can change as the world changes. Please see the cautionary statements in today's press release and in our SEC filings. Finally, some of today's remarks will adjust for items that affect comparability between periods. These items are explained in our non-GAAP reconciliations included in our press release. With that, I'll turn the call over to Ron. Ronald Kramer: Thanks, Brian. Good morning, everyone, and thanks for joining us today. Earlier this morning, we announced exciting news regarding the creation of a joint venture, including AMES North America and Venanpri Tools, along with other strategic actions related to Griffon. Allow me first to summarize our results for the quarter, then I'll comment further about the strategic actions that are underway. We are pleased with our first quarter results, highlighted by free cash flow of $99 million, continued solid operating performance at Home and Building Products and improved profitability at Consumer and Professional Products. We're off to a good start and are on track to meet our updated financial targets for the year. For the quarter, Home and Building Products, HBP, revenue increased 3% compared to the prior year, and EBITDA margin was 30.1%. Revenue benefited 7% from strong price and mix across both residential and commercial products, which was partially offset by reduced residential volumes. Consumer and Professional Products, or CPP, first quarter revenue increased 2%, driven by price and mix with increased volume in Australia and Canada, offset by reduced volume in the U.S. as consumer demand remains soft. CPP EBITDA in the quarter increased by 19% to $22 million, driven by the increase in revenue. We're pleased to continue to see year-over-year improvement in CPP EBITDA despite persistently weak demand in the U.S. Turning to capital allocation. During the first quarter, we repurchased $18 million of our stock or 247,000 shares at an average of $73.21 per share. At December 31, $280 million remained under the repurchase authorization. Since April 2023 and through December, we've repurchased $578 million of stock or 11.1 million shares at an average price of $52.27 per share. These repurchases have reduced Griffon's outstanding shares by 19.3% relative to total shares outstanding at the end of the second quarter of fiscal 2023. Also yesterday, the Griffon Board authorized a regular quarterly dividend of $0.22 per share payable on March 18 to shareholders of record on February 27th, which marks the 58th consecutive quarterly dividend to shareholders. Our dividend has grown at an annualized compounded rate of 19% since we initiated dividends in 2012. These actions reflect the strength and resiliency of our businesses as well as our continued confidence in our strategic plan and outlook. Let me comment on our strategic actions. Earlier this morning, we announced the formation of a joint venture with ONCAP, the middle market private equity platform of ONEX Corporation, which will create a leading global provider of hand tools, home organizational solutions and lawn and garden products for professionals and consumers. The joint venture will combine Griffon's AMES businesses in the United States and Canada with ONCAP's global portfolio of hand tool businesses, including Corona in the United States, Burgon & Ball in the United Kingdom and Bellota hand tools operating in Europe and Central and South America. Through this transaction, we are creating a global leader in professional and consumer hand tools, home organizational solutions and lawn and garden products with sufficient scale and scope to compete in the global marketplace. The joint venture is comprised of leading professional and consumer brands, including AMES, Bellota, Burgon & Ball, ClosetMaid, Corona, Garant, Razor-Back and True Temper. ONCAP and Griffon both recognize the benefits created by merging leading diversified professional tool brands with global reach. We are very excited about this business combination and the prospects for the joint venture. We see significant opportunities to streamline operations across the businesses and capture the benefits of economies of scale. For Griffon, the formation of the joint venture will generate immediate shareholder value and additional liquidity as well as provide a path for realizing more value in the longer term through the second lien debt from the joint venture and our significant equity interest. We're looking forward to working with ONCAP to make this joint venture a success. In addition to the joint venture, we also announced three other strategic actions that, once completed, will transform Griffon into a pure-play building products company, positioning us as the leading provider in North America of residential and commercial garage doors, rolling steel doors and grill products as well as a leading brand of residential and commercial ceiling fans. So our actions, a comprehensive review of strategic alternatives for AMES Australia, a review of strategic alternatives for the AMES United Kingdom and the combination of Hunter Fan with our Home and Building Products segment. To offer a bit more detail, our AMES Australia business has grown from a small operation that was part of our original AMES acquisition into a category leader in Australia. This business is led by an exceptional team with a demonstrated track record of growing both organically and through acquisition, while consistently generating solid operating performance. We're confident there are a number of strategic alternatives available for AMES Australia that will position the business for continued growth, while providing value to Griffon shareholders. We'll report back regarding our progress. Finally, we're combining Hunter Fan with our Home and Building Products segment. Both Clopay and Hunter maintain exceptional positions with industry-leading brands and best-in-class technology and innovation. We see many opportunities for the two businesses to leverage their complementary sales channels across residential and commercial building products. The two teams already know each other well, have collaborated over the past three years and are excited about bringing them together. I'll turn it over to Brian for a bit more detail on the financials, and he'll provide additional detail regarding the strategic actions. Brian Harris: Thank you, Ron. First quarter revenue of $649 million increased 3% in comparison to the prior year quarter and adjusted EBITDA before unallocated amount of $145 million was in line with the prior year. EBITDA margin before unallocated amounts was 22.3%. Gross profit on a GAAP basis for the quarter was $267 million compared to $264 million in the prior year quarter. Gross margin was 41.1%. First quarter GAAP selling, general and administrative expenses were $153 million compared to the prior year of $152 million. Excluding adjusting items from the prior period, SG&A expenses were $153 million or 23.6% of revenue compared to the prior year of $151 million or 23.8% of revenue. First quarter GAAP net income was $64 million or $1.41 per share compared to $71 million in the prior year quarter or $1.49 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $66 million or $1.45 per share compared to the prior year of $66 million or $1.39 per share. Corporate and unallocated expenses, excluding depreciation in the quarter were $15 million compared with $14 million in the prior year. During the quarter, we had capital expenditures of $8 million compared with the prior year gross capital expenditures of $17 million and de minimis prior year net capital expenditures as proceeds from asset sales offset the capital investment made in that quarter. Regarding our segment performance, as Ron mentioned earlier, revenue for Home and Building Products increased 3% from the prior year quarter, reflecting strong price and mix of 7% for both residential and commercial, which was partially offset by reduced volume of 4% driven by residential. Home and Building Products adjusted EBITDA decreased 3% compared to the prior year quarter, resulting in an EBITDA margin of 30.1%. The positive effect of increased revenue in the quarter was more than offset by unfavorable material costs, labor costs and operating expenses, along with the adverse impact of reduced volume on absorption. Consumer and Professional Products revenue increased 2% from the prior year quarter to $241 million. Favorable price and mix during the quarter, along with increased volume in Australia and Canada was partially offset by the impact of reduced volume in the U.S. CPP adjusted EBITDA increased 19% from the prior year quarter to $22 million, primarily due to the increase in revenue. Regarding our balance sheet and liquidity, as of December 31, 2025, we had net debt of $1.26 billion and net debt-to-EBITDA leverage of 2.3x as calculated based on our debt covenants compared to 2.4x leverage at the end of last year's first quarter and the end of fiscal year 2025. We paid down $60 million of term loan B during the quarter. Our net debt and leverage decreased from our year ended September 25 and the prior year quarter, even with returning $29 million of capital to shareholders via stock repurchases and dividends during the quarter. Regarding our strategic actions, under the terms of our master transaction agreement, ONCAP will own 57% of the joint venture, and the joint venture will be operated as an ONCAP portfolio company. Griffon will receive $100 million of cash proceeds at closing, along with $160 million of second lien debt from the joint venture. Griffon will have a 43% ownership stake. As a result of our strategic actions, starting in our second quarter 2026, we will report AMES U.S., Canada, Australia and U.K. as discontinued operations. Hunter Fan's financial results, which historically have been included in CPP segment will be reported as part of the Home and Building Products segment. The expected fiscal year 2026 EBITDA for discontinued businesses is $60 million, comprised of $25 million for AMES North America, $40 million for Australia and with U.K. operating with negative EBITDA. In terms of our updated outlook for our continuing operations, we now expect full year fiscal 2026 revenue from continuing operations to be $1.8 billion and adjusted EBITDA to be $520 million, excluding unallocated costs of $62 million. Free cash flow from continuing operations, including capital expenditures of $50 million, is expected to exceed net income. Depreciation will be $27 million and amortization will be $15 million. Fiscal year 2026 interest expense is expected to be $93 million, and Griffon's normalized tax rate is expected to be 28%. This guidance, as stated, is consistent with our expectations for legacy Home and Building Products and Hunter Fan as we originally outlined in November. Now I'll turn the call back over to Ron. Ronald Kramer: Thanks, Brian. From a financial and operational perspective, 2026 is off to a good start with strong free cash flow and continued solid operating performance. Our results continue to reinforce our confidence in our outlook for the year and beyond, especially given our resiliency to what continues to be a mixed and uncertain market backdrop. We remain optimistic about a turnaround in the residential and commercial markets and believe that we will realize substantial leverage as activity improves. Our capital allocation priorities remain unchanged. We'll continue to use the strong operating performance and free cash flow of our businesses to drive a capital allocation strategy that delivers long-term value for our shareholders. This strategy includes continuing to focus our resources on growing organically, while opportunistically repurchasing shares, paying dividends and reducing debt. This is an exciting time for Griffon. Our strategic actions taken together will streamline the company's portfolio and enhance shareholder value. When completed, Griffon will be a premier pure-play North American residential and commercial building products company with a very exciting future. In closing, I'd like to express my sincere gratitude to our Griffon employees around the world whose dedication and effort have driven our financial success. Our strategic activities have created additional challenges for our global teams. And as usual, they've stepped up to make it happen. Operator, we're now ready for questions. Operator: [Operator Instructions] And our first question will come from Tim Wojs with Baird. Timothy Wojs: Congrats on all the announcements. Maybe just to start, bigger picture, Ron, I'm just kind of curious in terms of kind of the timing and the thought process and kind of why now? Maybe some of the alternatives that you were kind of considering in this and kind of how this JV kind of came together? Ronald Kramer: Well, we have always said that we thought there was a disconnect between the market value of our stock and the intrinsic value of our businesses. We've been looking at two very different segments. Our Home and Building Products business is a 30% EBITDA margin business, and our consumer businesses have been operating at a 9% margin. We see the performance of our businesses as being differentiated and the ability for us to take our consumer businesses and strengthen them by combining it with a leading global provider of tools, brands, giving us the leverage to be able to take the AMES companies and its footprint in North America and Canada and fit it in with the partner who's able to scale that business. So we continue to be a significant investor in the consumer business at 43%. We have a very strong belief that ONCAP and the Venanpri businesses fit hand in glove with the AMES business, and that, we'll be able to continue to create value in that business as a separate investment for Griffon. Now what that does is this is an ability for us to unlock value. And the consumer side of our business, we believe, has been mispriced in our sum of the parts. By doing this, we are putting a spotlight on the value in the AMES, U.S. and Canada. The value of the $40 million EBITDA business that we have in Australia. And Hunter is a synergistic combination with our Home and Building Products business, and we have high expectations that the development of the industrial fan business can grow faster under the Home and Building Products Clopay umbrella. So for us, this is a set of moves that we believe significantly improves our valuation. And that's, again, without any growth coming out of the HBP side of the business as we believe we're getting closer to a recovery in the housing market in the U.S. So we've got a very strong HBP business with growth, and we believe that these actions strengthen the consumer businesses that we own and positions us to unlock meaningful value to our shareholders. Timothy Wojs: Okay, okay. Great. Yes. No, that's very helpful. And then, Brian, just maybe on like some of the details. So the go-forward financials of this go away, what would you guys kind of expect minority interest contribution to be from an earnings perspective? And then any sense on the rate on the second lien debt because I would assume that's effectively income for you. Brian Harris: Correct. So that second lien debt is at a 10% PIK rate. And as far as our portion, our minority interest of the net income of the JV, I do not expect a significant impact from that as it's a private company with debt on it and amortization. So net income will not be material. Operator: Our next question will come from Bob Labick with CJS Securities. Lee Jagoda: It's actually Lee Jagoda for Bob. So I guess starting with the JV, can you give us a sense for the EBITDA that's being contributed from ONCAP or maybe the expected fiscal '26 EBITDA for the combined entity? Brian Harris: Yes, the combined entity results are not something we're disclosing at this time, but they are slightly smaller than we are. Lee Jagoda: Okay. And then on -- as it relates to Hunter, can you kind of give us a sense for the revenue that Hunter was contributing? And then once it gets combined into the HBP segment, how should we think about your margins in that segment relative to the 30% or above that you've been running for the last several years? Brian Harris: Sure. So in fiscal '25, Hunter Fan had $211 million of EBITDA -- sorry, of revenue rather. And as far as margin, you just heard the guidance, which is roughly 29%. But ultimately, this is still a 30% plus business going forward. Operator: And our next question will come from Collin Verron with Deutsche Bank. Collin Verron: Congratulations on all the announcements. I guess just following up on that, any sense of just like maybe the EV to EBITDA multiple that the proceeds and the second lien debt imply for the business? And then any sense on sort of the time line to sort of establish the JV and for the sale or other strategic action for Australia and U.K. Brian Harris: Sure. So as far as a multiple, it's on the cash, just the cash, $100 million of cash, it's roughly a 4x multiple. And of course, larger if you include the second lien debt. As far as timing, we expect the JV to close by the end of June. And timing for the rest of the actions for Australia and U.K., we'll have to keep you posted, and we'll update you as they progress. Collin Verron: Okay. Understood. And then I guess just with proceeds, any sense -- any comments around capital allocation going forward? Ronald Kramer: Well, I've said it, and I'll continue to underline, we believe that our stock is the best acquisition we can make. Our balance sheet has never been stronger. We finished the quarter at 2.3x. We've got a significant amount of liquidity, and we will have more as a result of these transactions, and you should expect us to continue to be an active buyer of our stock, deleveraging from free cash flow and being an increased dividend payer in the future. Operator: Moving next to Trey Grooms with Stephens Incorporated. Trey Grooms: Congrats on the announcements, pretty exciting stuff. So we've talked a lot about the portfolio actions. But shifting gears here just a little bit on to the kind of the HBP business, the remaining business. You mentioned, Ron, I think, twice that '26 is off to a good start. But if you could maybe talk about, volume was down a little bit, which you mentioned lower res, no surprise there. But maybe you could update us on kind of the demand outlook here for the HBP business, kind of the remaining business here as we go into calendar '26, maybe looking across both the res with remodel and then also commercial. Ronald Kramer: Yes. I'll start by saying that the macro environment for housing, the political support for housing is clearly better than we went into this fiscal year. So our performance in the fourth -- in the first quarter with a decline in residential improvements in the commercial. But on price and mix is -- shows you the story that there is still a very good part of the repair and remodel in the premium side of the market, which is where we are positioned. And Clopay and our management team has done an extraordinary job of both bringing in new products, using technology with our dealer network. And that was before we went into '26 and the winds of an improving housing market started. So we're very optimistic about that the recovery in housing is still ahead of us. Our performance is as good as it's been, is going to get better in terms of both units and in volume as the housing markets recover in the United States. Interest rates will come down. Mortgage markets are going to have to get repaired for new home construction and for volume of activity. But all of those things are going to help -- what's already a very efficient, highly profitable Clopay to become bigger. And the commercial side of our business, which is the result of an acquisition of CornellCookson that we made 7 years ago is proving to be the balance to that business. We're hoping over the next few years that our commercial business is as big as our residential business. And with the infrastructure spending that's going on, we continue to believe that Clopay is an excellent business that has growth in front of it. Trey Grooms: Okay. That's all super helpful. And then you mentioned you mentioned price mix, very good in the quarter. I know you guys implemented a price increase in '25. Maybe if you could kind of -- is that, I guess, still kind of the flow-through there of the price increase plus some benefits from mix? Is that the right way to think about that? Brian Harris: Yes, that is correct. Operator: And we'll go next to Sam Darkatsh with Raymond James. Sam Darkatsh: So most of my questions have been asked and answered. I just got two or three quickies. So why a JV and not an outright sale would be the first question. Second question, I know you're mentioning that Hunter has some connectivity with HBP, but I don't know if it's immediately intuitive externally for us. So if you could be more specific in terms of why you did not include Hunter in the JV contribution. And then finally, you mentioned, Ron, that you're putting a spotlight on the HBP under evaluation. Why not do a strategic review then on the whole shoot and match as opposed to just looking at the European and Aussie businesses at this point? Brian Harris: Sure. So I'll start off. The structure of a joint venture for Griffon, it enables us to unlock substantial value now and additional value in the future as we still have a minority interest in it. The current market for consumer companies is not a very good one. And this allows us to accomplish bringing two companies together, increase the economies of scale and get future benefit, still get future benefit for our shareholders as the JV progresses. As far as Hunter, we see stronger strategic alignment and upside potential with HBP, and we believe the combination of that business is the best way to maximize shareholder value. It has -- this is an iconic consumer brand, has a great management team. It's highly recognized, has an asset-light model. And even though the past few years have seen weak consumer, it still has double-digit EBITDA. But there's a lot of upside to that business. And again, in a weak consumer environment to sell it now would seem poor timing. Ronald Kramer: And as far as your comment about the whole shooting match, we like our company, and we believe that we're going to stay and run this and build it for the foreseeable future. Operator: Moving on to Julio Romero with Sidoti & Company. Julio Romero: Congratulations on the exciting announcements. I wanted to also ask about the RemainCo going forward. And I know you talked a little bit about Hunter and HBP combined. But I believe in the prepared, you mentioned that they've worked together in the past. Can you maybe cite an example or two of Hunter and HBP working together? And then also speak to any potential cross-selling opportunities or any opportunities as a combined go-to-market entity? Brian Harris: Sure. So I'll start on the commercial side of the business. Of course, with our rolling steel and commercial sectional products, we are often dealing with large warehouses and entities and industrial type facilities that have large commercial fans that Hunter sells and so -- and vice versa. So Hunter knows about other projects, it shared with the Clopay legacy HBP side of the business and vice versa. And on the residential side, actually, Hunter came out with a pretty clever product that allows fans to be installed in the garage and deals with where outlets may be in the garage. So those are just two early examples. Julio Romero: Okay. Perfect. And then as we think about the RemainCo, you've always historically been a very strong free cash flow generator. How should we think about the cash conversion cycle of RemainCo relative to the historical portfolio? And should we expect your business to flow cash at a faster or slower rate going forward? Brian Harris: Yes. So overall, we'll still be a very highly cash flow generative company. The cash flow, if you're looking at it over the course of the year, the first half will be more positive than in the past under the new construct, but still a little weaker than the second half. Operator: And we'll take a follow-up from Collin Verron with Deutsche Bank. Collin Verron: I just wanted to touch on the HBP business a little bit more. I know you called out mix being a good guide. I was just curious how sustainable you think that is going forward, just given the trend in commercial and residential. And then maybe just talk about the margin pressure a little bit, like the order of magnitude of inflation in material costs versus labor costs just so we can get a sense of how that's tracking? And then my last question is just on the legacy HBP guidance. Was there any change to that, or was the guidance change only related to the announced strategic actions? Brian Harris: Sure. The guidance change is only related to -- yes, the legacy guidance we gave is still the guidance included in what we said today for HBP. There's a lot of questions there. So as far as outlook for HBP, really, our guidance stays the same. We continue to see pressure on residential volume, mostly driven by the lower end of the market, where the high end of the residential market continues to be buoyant and strong. For commercial, it's -- we said we would have flat volume this year. We still expect that to be the case already -- that is what we saw in the first quarter already. What was the last question? I'm sorry, Collin, repeat it. I seem to have lost him. If there are more questions. Operator? Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Ron Kramer for closing comments. Ronald Kramer: We're very proud of the track record that this management team has created over a long period of time. And with the actions that we've taken today, we look forward to continuing to deliver superior shareholder value in the future. So thank you, all, and we'll be speaking to you soon. Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to Compass Minerals' First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Brent Collins, VP, Treasurer & Investor Relations. Please go ahead. Brent Collins: Thank you, operator. Good morning, and welcome to the Compass Minerals' Fiscal First Quarter 2026 Earnings Conference Call. Today, we will discuss our most recent quarterly results. We will begin with prepared remarks from our President and CEO, Edward Dowling; and our CFO, Peter Fjellman. Joining in for the question-and-answer portion of the call will be Ben Nichols, our Chief Commercial Officer; and our Chief Operations Officer, Pat Merrin. Before we get started, I'll remind everyone that the remarks we make today reflect financial and operational outlooks as of today's date, February 5, 2026. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are available online. I'll now turn the call over to Ed. Edward Dowling: Thank you, Brent. Compass Minerals had a strong start to the year. For the first time since 2023, we're reporting positive quarterly net income. For the first quarter of 2026, reported net income of $0.43 compared with a net loss of $0.57 a year ago. Adjusted EBITDA doubled to $65 million. We took leverage down year-on-year by nearly 2 turns to 3.6x, and we raised the midpoint of our full year adjusted EBITDA guidance range to $224 million based on solid results in the Salt business and positive momentum in the Plant Nutrition, partly offset by the planned sale of our Wynyard SOP operation. Absent the Wynyard sale, the midpoint of our revised guidance would have been up about 4%. Let me begin today where we are in the Salt business. There's been steady winter weather this year across many of our North American markets we serve, excluding the Western part of the U.S. Year-over-year, Compass Minerals saw sizable increases in sales volumes. We also benefited from price increases in both highway deicing and C&I parts of the business. With a strong start to the winter, short-term market for the entire salt industry is really tight. Compass Minerals continues to focus on efficient and safe delivery of every ton of salt possible, understanding the critical role that we and others in the industry play in the communities we serve. In any given season, our ability to service excess market demand in season can be limited by the compressed timing of regional winter weather and any associated demand surge. We forward deploy salt throughout the year across our depot network as there is meaningful lead time across our production and supply chain to reach many of the regions we serve, particularly mid-season. For reasons I'll discuss more in a moment, our ability to meet excessive demand if it materialize in this specific season was always going to be limited. We do not plan our business assuming that we will have above-average winters, and we've been very clear about our commitment to managing inventories, maintaining financial discipline and focusing on value over volume. I'll make a few comments on the changes to our outlook in the Salt segment as we recognize that they may not be intuitive to the midst of a strong winter. What I want to make clear upfront is that our guidance does not represent "a new normal for this kind of winter." Our plans for the business are expected to allow for more flexible operations in the future, and we have more work to do to get there. I'd first reiterate why we put our back-to-basic strategy in place beginning in '24. The company's prior approach was to operate so that never missed the big winner. I won't bore you this morning with the details of how that ended, but suffice to say that it directly led to excess inventory over multiple years, a stressed balance sheet with all the adverse impacts on market value we expect it to bring. We're committed not to repeat the mistakes of the past. We made the right decision to align the business more closely with anticipated market demand and have managed inventories accordingly. Over time as the balance sheet continues to improve and market dynamics adjust to historical norms, the optionality within our inventory management strategy will evolve. We've been very open that our inventory management plan could preclude our ability to meet excessive demand in fiscal 2026. Our inventory production planning are informed by 3 factors: the first 2 I just discussed. First, the customer level commitments and our desire to keep inventory levels closely aligned to market demand; and second, effective placement of salt inventories via our salt supply chain. Third factor is production reach and capabilities at the mines, which I'll now comment to. Goderich mine is in a period of high development. The mine is currently developing a number of new mining panels, which require the construction of new underground infrastructure and ground support. New development panels inherently have higher costs and lower production rates than panels that are in full production. This is not a new issue and was incorporated in our initial guidance for the year. The development sequence is important as it governs our ability to produce at the higher end of historic production levels. Advancing these development panels will improve the optionality and flexibility within the production plan at Goderich mine. But in the near term, the mine's ability to produce at the higher end of the historical rates will be limited. Within this context, the production ramp-up at Goderich mine in mid-fiscal 2025 later than anticipated due to uncertainties around the applicability of the USMCA and subsequent hiring and qualifying our miners. Currently, Goderich is producing significantly higher rates year-on-year, and we're generally pleased with the direction of travel regarding our production level. That being said, we have some more work to mitigate greater than anticipated unplanned downtime as well as to further improve operating efficiencies. These factors are somewhat limiting in our ability to service incremental in-season demand, creating headwinds for production cost per ton, working our way through these issues, including improvements to preventive maintenance and overhaul programs to name a few. Despite these challenges, we still have a solid quarter in salt. Moving over to Plant Nutrition business. We continue to see momentum in our story. Over the last year or so, we've talked a lot about improving the performance of the business, which is largely premised on restoring the health of the pond complex at Ogden. This is succeeding. As the pond complex continues to improve, the quality of the feedstock that goes into Ogden also improves, provides benefits on how the plant operates, drive cost down. We continue to make progress on this initiative, and we've seen product costs trend down. On the pricing front, our team has done a good job for maintaining market value of our SOP portfolio. We're seeing a $20 improvement in price compared to our expectation. The decrease in anticipated sales volume relates to us prioritizing having SOP available to pursue additional domestic business over lower-margin export opportunities. We announced in our press release yesterday that we have entered into an agreement to sell our Wynyard SOP operation in Canada for $30.8 million, subject to customary closing conditions. Considering the improvements we're seeing in our Ogden operation, coupled with our read on future market conditions, we believe now is an opportune time to pursue this transaction, allowing us to further focus our efforts on North American leading producer of SOP. Improvements that we're seeing at Ogden are allowing us to increase our adjusted EBITDA guidance for the Plant Nutrition business by 8% in a midpoint of $37 million, despite the sale of the Wynyard operation. We've talked before about the importance of returning this business to a level where it consistently carries a $40 million EBITDA handle. Absence of Wynyard sale, we would have grinded to this value in this quarter. We think that we have line of sight to getting there in the coming quarters without Wynyard. Next phase of improvement involves capital project to upgrade the dryer compaction plant at Ogden, which we expect to boost operational efficiency and financial performance. As we look to the remainder of the year, we are focused on people, processes and systems and focused on executing our back-to-basics framework. This approach is anchored in 5 core priorities: improving operational efficiencies and capabilities to enhance performance and reliability across the organization; reducing capital intensive by deploying resources in a disciplined manner; simplifying processes and eliminating unnecessary complexity to accelerate decision-making and improve accountability; maximize cash flow generation to support long-term value creation; and reducing leverage to reinforce financial resiliency and provide capital allocation flexibility. The balance sheet and financial health of the company continue to improve. So I mentioned at the beginning of my remarks, our leverage ratio has improved significantly over the last year. We've grown confidence in continuing improvement in our leverage profile. We plan to begin conversations with the Board about approaches around capital allocation. This is all consistent with the progression of our back-to-basics framework. As the first quarter results demonstrate, we are clearly making positive strides in improving our operational, commercial and financial performance. Some of these improvements are visible now, such as the strong results we're seeing in Plant Nutrition business, and the continuing improvement in our leverage profile. Some, as fully optimized production in our Salt mines, will take more time to fully manifest themselves. We're committed to becoming a top-tier operator, grounded in financial strength and operational excellence. As a leadership team, we're focused on building a company with resiliency and flexibility to thrive over the long term. Our responsibility is to deliver consistency against our back-to-basics framework. Journey isn't finished, but progress is unmistakable. We're moving confidently towards the organization we know we can be. With that, I'll turn the call over to Peter for a review of our first quarter results. Peter Fjellman: Thanks, Ed. I'll begin by discussing our quarterly financial performance. As Ed noted earlier, this quarter marked the first time in several years that the company has reported quarterly net income and adjusted EBITDA more than doubled from the year before. In the Salt segment, operating earnings improved year-over-year to $14.33 per ton, up $2.54 or 22% and adjusted EBITDA per ton increased 2% to $19.61. Total salt volumes were up 37% compared to the prior year period. Highway deicing volumes increased 43% year-over-year, while C&I volumes increased 14% over the same period. A higher proportion of highway deicing sales volume in the current period resulted in overall Salt segment pricing being relatively flat year-over-year, despite realizing higher highway deicing and C&I sales prices of 6% and 2%, respectively, year-over-year. Salt segment revenue in the first quarter was $332 million compared to $242 million a year ago. Product cost per ton declined 7% to $50.20, while distribution cost per ton increased 6%. SG&A attributable to the Salt segment improved by $1 million. Moving on to the Plant Nutrition segment, where we had a very positive business performance that is resulting in strong financial results. Year-over-year, operating earnings increased approximately $9 million, while adjusted EBITDA improved by $8 million. This was driven by improvements in both pricing and cost structure, despite the anticipated decrease in sales tons we saw year-over-year. In addition, the average SOP sales price was up 13% to $687 per ton. Product cost per ton declined 2% to $520, while distribution cost per ton increased 2% to $93. Corporate overhead year-over-year was down 24% to $19 million for the quarter and is a reflection of the momentum in our multiyear cost control and continuous improvement initiatives focusing on back-to-basic process optimization and system utilization. Moving on to the balance sheet. The previously announced settlement related to Ontario mining tax dispute resulted in some meaningful changes on the balance sheet at the end of December. The increase in other current assets and the decrease in other noncurrent assets and other noncurrent liabilities are a result of that settlement. Those movements also impacted changes in working capital in the statement of cash flows. With respect to the company's financial position, at quarter end, we had liquidity of $342 million, comprised of $47 million of cash and revolver capacity of around $295 million. Ed mentioned our focus of delevering, and we continue to make good progress there. The ratio of total net debt to trailing 12-month adjusted EBITDA at the end of the quarter was 3.6x. It's Down from 5.3x from the comparable prior period. Looking ahead, I'll now make a few comments on the updated guidance for 2026. The range for Salt segment adjusted EBITDA in 2026 is now $230 million to $252 million. Ed previously commented on the operational dynamics within the Salt segment. Our guidance reflects an increase in expected sales tons, the benefit of which is being muted by headwinds and production costs mentioned earlier. Additionally, severe winters tend to put pressure on distribution costs as surges in network demand create suboptimal logistical conditions. It's important to note that notwithstanding these factors, adjusted EBITDA margin is expected to increase by approximately 200 basis points year-over-year. For the Plant Nutrition segment, the range for adjusted EBITDA in 2026 is now up to $34 million to $39 million on stronger margins and an improved cost structure, partially offset by lower expected sales volume and the impact of the Wynyard sale. At the midpoint of the guidance, we expect a more than 300 basis point improvement in adjusted EBITDA margin year-over-year. The guidance range for adjusted EBITDA related to corporate overhead is unchanged as is the range for our capital expenditures. As a result of these changes, the range for guidance for total company adjusted EBITDA for 2026 is up to $208 million to $240 million or a 2% increase at the midpoint. I'll now turn the call over for questions. Operator: [Operator Instructions] Your first question comes from the line of Evan McCall with BMO Capital Markets. Evan McCall: It's Evan on for Joel Jackson. Just wondering about the salt market and if the market is well supplied for the strong winter? Or are we seeing a rush for any imports? And is there a larger spot market than normal? And does Compass have any excess tons to sell into it? Edward Dowling: This is Ed. As we said in our release and our just completed call that the market is very tight as a result of winter so far. When we do our planning, there's a variety of things that we consider in terms of our -- how we manage that, which could include some imports from time to time. Ben, do you want to pick that up? Ben Nichols: Yes. Evan, I think the market is exactly what Ed said. It's become tight. Winter has certainly trended ahead in terms of a straight calendarization. So that's something that the market hasn't seen in quite a few seasons. The ability for imports and opportunistic supply to play a role mid-season is difficult just given the lead time of supply in transit. And so I think our anticipation is if the winter continues as it has up to date, the market will remain tight. Evan McCall: If I could sneak one more in. How are the plans progressing for the new mill at Goderich? And also, when would you make a decision on this? And has the strong winter emboldened your decision to make the investment? Edward Dowling: Well, there's really 3 projects associated with the new mill at Goderich mine. The first that we've been working on for some years is the -- what we call the East Mine Drive, where we connect the current mining areas directly driving access directly to the East to tie into existing infrastructure. The second -- and that's been going on for some period of time, some years. Second is what we call the [ 3B108 ] project, which is really connecting the shafts and the infrastructure itself to the East Maine Drive. That project is really just getting underway and it will take a little while to complete that, but that's moving ahead. In terms of the new mill itself, it's in engineering. We've got a project team coming together on that. We're currently in the value engineering stage of that, and we should have things that we can talk about here over the next quarters. Operator: [Operator Instructions] Your next question comes from the line of David Silver with Freedom Capital Markets. David Silver: I wanted to maybe start with a question about the Salt segment economics during the quarter and in particular, on the cost side. So if I was to kind of lay things out on a per ton basis, I guess, production costs and also shipping and handling or logistics were higher, I guess, than a year earlier despite the higher volume. And I think you did in your prepared remarks, Ed, I think you talked about the development panels and whatnot. But I was curious, I mean, what would be driving up the logistics costs, the shipping and handling such that it seemed to have kind of a meaningful impact on your per ton margins this quarter? Was there anything going unusual there? Or is that something that will improve, I guess, as we move through the balance of the winter? Edward Dowling: Thanks, David. Appreciate that. Let me just say, as long as we're in the development sequence, which you measure in quarters, not years and start improving the production to development ratio in the mine, this is normal course things for mining. And the costs are always going to be a little bit higher just because of what we do to set up infrastructure, et cetera. But for the quarter itself, to answer your question directly, unit costs that were down about 6% in terms of production and distribution costs were up about 6%. I'll pass this over to Peter and Ben to see if they've got anything else they'd like to add. Ben Nichols: David, I think as you look at the distribution cost, there's 2 factors in play. One are just some basic inflationary pressures on rates, which was clearly identified in our guidance. The other big thing that's occurring is because Q1 of this year was so robust compared to prior year, we're shipping salt across a much wider network to service the business. And so essentially, we're pushing salt and shipping it to further away destinations to meet the demand, which results in a little higher rates. So that's what you're seeing come together. David Silver: And just to follow up on that briefly, but you don't have to scan news sources very long before you read about salt shortages in particular metropolitan areas, in December and January in particular. And I'm just wondering if that had an unusual kind of impact. In other words, were you forced -- did you find yourself without enough salt in the right locations? Or were you supporting maybe another supplier who was tapped out and maybe tapped into your supply or whatever in a pinch? Just anything unusual in the field that you would call out that might have impacted the margin profile this -- the per ton margin profile this quarter, but especially on the logistics side. Edward Dowling: Ben just spoke a little bit to the logistics side and really the delivery from further places away. We take a lot of pride in meeting our obligations as a company in terms of serving our customer base. And we operate to meet the commitments that we've made, shortages, et cetera, and we have a lot of people who would be approaching us for more salt. I think the net result of that is we'll see how the rest of the winter shakes out. But looking forward, then kind of, let's just say, industry-wide, deicing inventories, which are low, is very constructive as we look forward and start planning for '26, '27 winter. David Silver: Okay. If I could just ask a question, I guess, about tax rates, and I guess that would be both nominal and also cash tax as well. So during the quarter, you did have the unusual situation where your tax rate was, I guess, negative in the first quarter. And I know you've got kind of an evolving tax situation from the point of view of you should be solidly profitable this year. On a reported basis, a little bit different than the last couple of years. But can you just speak to kind of how you see your tax positioning evolving this year? I'm thinking about the valuation allowances, will you be able to claim some offsets, some profit with losses that maybe in the last couple of years you weren't able to do? And if you had an idea of what your cash tax situation looks like for full year 2026, that would be great. Edward Dowling: David, I think in part, you're asking about the impact of the Ontario mining tax settlement that we met earlier this year. Recall, that's been something hanging around the company for decades. We're very pleased to get that behind us. And that, of course, had impact on some of the footnotes you'll see in the release. Let me pass it over to Peter to give you a bit more detail on that. Peter Fjellman: Sure. And on that Ontario mining, you'll see it in both the balance sheet and cash flow and cash tax, which is where a lot of what you're referring to. As to the full year, obviously, we're still early in the year. We know that the swings in the effective tax rate, it's a function of income in Canada, losses in the U.S. and it's relatively a small number for tax purposes, right? And that's causing, obviously, lots of swing. We have to look at that post valuation allowance as well and then let that thing roll through. Still early in the season as to utilization and also looking at that valuation as well. So it's yet to be determined. Operator: I will turn the call back over to Edward Dowling, CEO, for closing remarks. Edward Dowling: Thank you, Kate. Thank you again for your interest in Compass Minerals. We're excited to see the advances that we're making under our back-to-basics framework. As I mentioned earlier, the company has had a solid quarter. We have positive momentum in a number of areas. We reported positive net income for the quarter, the first time in a long time. Quarterly adjusted EBITDA more than doubled. Total net trailing 12-month debt decreased by almost 2 turns. And lastly, we increased our guidance for the full year. The journey isn't finished, but we're making unmistakable progress of being the company we know we can be. Please don't hesitate to reach out to Brent if you have any follow-up questions. We look forward to speaking to you next quarter, if not before. Make it a safe day. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.