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Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Rexford Industrial, Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to Mikayla Lynch, Director of Investor Relations and Capital Markets. Please go ahead. Mikayla Lynch: Thank you, and welcome to Rexford Industrial's Fourth Quarter 2025 Earnings Conference Call. In addition to yesterday's earnings release, we posted a supplemental package and earnings presentation in the Investor Relations section on our website to support today's remarks. As a reminder, management's remarks and responses to your questions may contain forward-looking statements as defined by federal securities laws, which are based on certain assumptions and subject to risks and uncertainties outlined in our 10-K and other SEC filings. As such, actual results may differ, and we assume no obligation to update any forward-looking statements in the future. We'll also discuss non-GAAP financial measures on today's call. Our earnings presentation and supplemental package provide GAAP reconciliations as well as an explanation of why these measures are useful to investors. Before we begin, our outgoing co-CEOs recorded some brief remarks that they'd like to share. Howard Schwimmer: Good morning. Before the call begins, Michael and I wanted to share a brief personal note. Building Rexford from a start-up into a leading industrial real estate company has been an extraordinary journey. What we've achieved reflects the talent, discipline and commitment of a remarkable team as well as the trust and support of our partners and shareholders. Michael Frankel: Thank you, Howard. I'd like to add that it's been a pleasure to build the company together with you over the prior 20-plus years. I'm deeply grateful to everyone who contributed to Rexford's growth and success, and I'm proud of what the team has accomplished. Looking forward, I'm also excited for Rexford's opportunity to create significant shareholder value through its next phase of growth. Mikayla Lynch: I'd like to thank Michael and Howard and wish them the very best going forward. Turning now to our fourth quarter earnings call. Joining me today are Rexford's COO and incoming CEO, Laura Clark; together with our CFO, Mike Fitzmaurice. John Nahas, our Managing Director of Operations, will also be joining in the Q&A portion of today's call. I'd now like to turn the call over to COO and incoming CEO, Laura Clark. Laura? Laura Clark: Thank you, Mikayla, and thank you all for joining us today. The Rexford team delivered a solid quarter of results, including the execution of 3 million square feet of leasing and meeting our guidance expectations. Rexford's portfolio continues to outperform the broader market, and we remain confident in the long-term fundamentals of infill Southern California despite near-term pressure impacting our 2026 growth expectations. I'll provide additional detail on overall market dynamics following an update on our recent initiatives. In November, we outlined the immediate strategic priorities that position Rexford to enhance the quality of our cash flow, drive per share FFO and NAV growth and optimize return for shareholders. I'm proud of the progress that we've made in just a few short months. First, we took a rigorous approach to re-underwriting our near-term development pipeline. At this point, we have identified 6 projects representing approximately 850,000 square feet of future development that we are not moving forward with and intend to dispose of, giving us flexibility to redeploy capital into more accretive opportunities. Our decisive actions to reduce our development exposure have resulted in swift progress to date, and we currently have all 6 projects under contract or accepted offer to be sold. Importantly, as we continue to refine our strategy, maximizing risk-adjusted returns remains a critical component of driving value creation. All capital allocation decisions will be evaluated through our revamped rigorous underwriting criteria that considers our current cost of capital and market dynamics. Second, a programmatic disposition plan is a key component of our broader capital allocation strategy. We are focused on disposing of properties that allow us to realize value creation as well as properties that enhance the quality of our future cash flow growth. In 2025, we opportunistically sold 7 properties totaling $218 million. Looking forward to 2026, we are currently targeting between $400 million and $500 million of dispositions that will support our ability to continue recycling capital to accretive opportunities. Third is our commitment to driving operating efficiencies across our business. As outlined in our November release, we targeted a reduction in G&A as a percentage of revenue below the peer average. And based on 2026 guidance, our G&A as a percentage of revenue will be 6%, in line with our commitment. We also communicated the importance of better aligning executive compensation with our shareholders. Per our December filing, we recalibrated our short- and long-term incentive compensation metrics as well as the absolute level of executive compensation, underscoring our commitment to operate in direct alignment with shareholder priorities. We will continue to identify opportunities to drive further efficiencies across the business, and we are confident we can further reduce G&A as a percentage of revenue over time. Next, I'll provide an overview of the conditions we are seeing across the overall infill Southern California market, observations that are shaping our strategic actions and informing our expectations going forward. Today, tenant demand continues to be influenced by broader macroeconomic forces and elevated levels of market availability. These conditions are contributing to a more measured pace of demand. As a result, according to CBRE, market rents declined 10 basis points in the quarter and 9% year-over-year. Vacancy also increased 30 basis points during the quarter. Net absorption is another key metric we monitor closely as it typically begins to stabilize ahead of market rents. While net absorption was negative this quarter, reflecting broader market softness, we are starting to see some early signs of stabilization emerging across select submarkets and size categories. Given the current market backdrop, we are maintaining rigorous capital discipline and aggressively prioritizing occupancy, driving leasing to maintain cash flow. By way of example, subsequent to year-end, we executed a strategic early renewal of our largest tenant, Tireco, who occupies our 1.1 million square foot production Avenue property. The 3-year renewal allows us to significantly derisk cash flow and preserve occupancy. Although we are not yet able to call an inflection point in the market, we are excited about Rexford's unique upside potential and believe Rexford is a compelling investment opportunity today. Beyond the actions we are taking to position Rexford for outsized value creation, it is our unique assets, differentiated geographic focus and on-the-ground operating expertise that underpin our confidence in our business model. Southern California stands as one of the most dynamic economic engines in the country, powered by a deep, highly skilled labor pool and a robust local consumption base that consistently fuels strong diverse tenant demand over the long term. We have a superior portfolio of high-quality assets in a market where demand consistently outweighs supply. In fact, supply under construction in the market is near historic lows, supporting future rent growth potential. We are confident that as the market inflects, Rexford is well positioned to capture recovering demand to drive occupancy and NOI growth. We are entering 2026 with a clear action plan focused on maximizing risk-adjusted returns through executing on our programmatic dispositions, reducing development exposure, accretively recycling capital, driving operational efficiencies and prioritizing occupancy. We will continue to thoroughly evaluate opportunities to increase per share, FFO and NAV guided by our commitment to optimizing shareholder returns. Finally, I'd like to thank our exceptional Rexford team for their dedication that continues to drive our success today and through our next phase of growth. I also want to acknowledge and thank Howard and Michael on behalf of the entire Rexford team for their contributions in co-founding this incredible business, and we look forward to this next chapter at Rexford. I'll now turn the call over to Fitz. Michael Fitzmaurice: Thank you, Laura, and good morning. I would also like to thank Michael and Howard for their leadership over many years and wish them both much success in their next chapter. Today, I'll discuss fourth quarter results and provide additional details on our 2026 outlook. Fourth quarter core FFO per share of $0.59 was in line with expectations, driven by higher same-property NOI growth, lower G&A expense and accretive share buybacks, partially offset by higher bad debt. For the full year, after adjusting for the co-CEO transition severance charges and other nonrecurring costs, core FFO per share was $2.40, placing us at the high end of our initial expectations. Note that co-CEO transition severance charges were fully recognized in the fourth quarter and will not impact 2026 results. During the quarter, we recognized $89 million of real estate impairments related to our development sites that we have elected to sell. These projects no longer meet our investment hurdles and selling these assets allows us to redirect $285 million of capital into higher-yielding uses. This approach drives the best economic outcome and aligns with our strategic shift to derisk cash flows and reduce development exposure. Turning to full year operations. In 2025, we signed approximately 2 million square feet of repositioning and development leases, generating nearly $40 million of annualized incremental NOI. While we are encouraged by the pace of recent leasing activity, we continue to experience pressure on occupancy and market rent. Total portfolio occupancy ended the quarter at 90.2%, down 160 basis points sequentially, largely driven by near-term repositioning and development starts. These opportunities are expected to achieve an overall stabilized yield of roughly 7% -- additional move-outs were primarily driven by large tenants pursuing consolidation or expansion, the expiration of short-term renewals and in a limited number of cases, tenant financial difficulties. Regarding market rent, we continue to experience a deceleration comparing to last quarter, with market rents within our portfolio down 1%. Market rents have now fallen 20% since the peak in early '23, which has put pressure on our expected re-leasing spreads for 2026 as we address expiring leases that were signed in the height of the market. Touching on share buybacks, we continue to take advantage of market dislocation between our share price and intrinsic value. During the quarter, we repurchased $100 million of shares, bringing our 2025 full year total to $250 million. Share buybacks will remain a consideration in 2026, subject to a meaningful discount to intrinsic value, competing capital needs and preservation of balance sheet strength. Moving to our 2026 expectations. We are introducing 2026 core FFO per share guidance of $2.35 to $2.40. Our outlook reflects a mix of puts and takes, which I'll walk through using the midpoint of the range. Starting with repositioning and development, we expect to stabilize and commence rent on approximately 1.2 million square feet of value-added projects, generating $20 million of annualized NOI with the majority coming online by midyear. Conversely, approximately $12 million of annualized in-place NOI will come offline due to new construction starts, primarily related to our project at 9000 Airport Boulevard. The weighted average timing of the annualized NOI coming offline is late in the third quarter. Same-property NOI growth on a net effective basis is expected to decline approximately 2%. Key assumptions include net effective re-leasing spreads of 5% to 10%, average occupancy of approximately 95% and bad debt of 75 basis points of revenue. Of note, we expect unfavorable impact from lower termination income and the early renewal of the Tireco lease as the above-market rent was reset to current market levels. With respect to dispositions, we expect to sell roughly $450 million of assets with nearly $230 million already under contract or accepted offer. Proceeds will be redeployed toward the highest risk-adjusted returns, including future repositioning and development projects as well as opportunistic share repurchases. Before I wrap it up, I'd like to generally express my gratitude to everyone on our team for their commitment and tireless effort throughout this quarter. I'd also like to congratulate Laura on her appointment as CEO. Laura's leadership, sound judgment and vision have already made a meaningful impact, and I'm excited to partner with her as we lead Rexford into its next chapter. With that, I'll turn the call back to the operator. Operator: [Operator Instructions] Mikayla Lynch: Our first question comes from Greg McGinniss from Scotiabank. Greg McGinniss: I was just hoping just for a little more understanding on the Tireco lease resigning there. And I think the original plan was in 2024, you looked out to '27 and there's kind of the expectation that you'd be able to re-lease at a higher rent then. Has the competitive market changed much for that type of product? Or is there just like more competition for that space out there? And then why address it now versus early next year or later in this year? Laura Clark: Yes, Greg, this is Laura. Thanks for joining us today. Really, given the overall market backdrop, we made the decision here to prioritize occupancy and derisk future cash flow growth. The lease was expiring a year from now in January of 2027. It's our largest -- single largest tenant. They came to us to discuss an early renewal, and they were actually seeking a longer lease term of 5-plus years. And given the significant cash flow impacts from the downtime of that space, especially considering the capital investment that would be required to position that space for lease, we did engage in discussions around an early renewal. Although they were seeking a longer lease term, we strategically negotiated a 3-year lease here, which allows us to reset at market rents sooner. So the Tireco lease was above market. The roll down is about 30% on that space. And as I mentioned, I mean, the strategic renewal for us allows us to preserve occupancy and cash flow given the current market dynamics and derisk future growth. Michael Fitzmaurice: And Greg, the one thing I would add there is the impact of same-property NOI for 2026 and our FFO per share impact as well. So it impacts same property about 50 basis points and then an FFO per share impact is about $0.015. Mikayla Lynch: Our next question comes from Blaine Heck at Wells Fargo. Blaine Heck: As you guys talked about, market rents showed less moderation during the quarter, down 1% overall in the fourth quarter. And Laura, I know you said you're not calling an inflection today, but do you have any additional commentary on how much further you'd expect rents to decline based on what you're seeing from vacancy in the market and how aggressive some of your competitors have been on pricing. I guess, would you expect that bottoming and inflection to come at some point during 2026? Laura Clark: Blaine, thanks so much for your question. I think it may be helpful to spend a little bit more time diving into the market and kind of what we're seeing across the markets. And as I mentioned in my prepared remarks, we're certainly seeing some signs of stabilization, while there's other indicators that show some continued challenge. So Collectively, when I put all those together, I think those are indicating that we're still bouncing around the bottom here. And we're not going to be able to call an inflection point at this -- an inflection at this point, but maybe you can talk about some of the positives that we're seeing around stabilization and then also maybe some of the challenges. So on the positive side, I'd say that third and fourth quarter leasing activities levels were steady, although a portion of this activity was driven by some pent-up demand that we had seen in the first half of '25. We are seeing some tenants enter the market a bit sooner than they would historically, and we're seeing some early renewals come to us like Tireco. I think that's a sign of tenants seeing where market rents are today and wanting to lock those in for longer terms. Some submarkets and size ranges, as I mentioned, especially those in the, we'll call it, sub-50,000 square foot area, seem to have stabilized. Other lease terms like concessions and TIs are steady quarter-to-quarter. That's another good indication of some stabilization in the market. And as you mentioned, market rent declines this quarter were down 1%. That's in line with what we saw in the third quarter, which were down 1%. And that has moderated from more elevated levels of decline in the first half. So I'd say those are all positive things that we're seeing and that you need to see in a more stable market. All that being said, I think there are some market challenges that really impede our ability to say we've hit the bottom. Leasing activity levels have moderated a bit as we've started the year. We measure activity on our vacant spaces. We have activity on about 75% of our vacant spaces today. That compares to about 80% this time last quarter. I'll note, though, that we're trading paper on probably a lower percentage of that activity than we had last quarter. As I mentioned in my remarks, net absorption is a really key indicator that we pay really close attention to. And as we look at net absorption today continues to be negative in the market and to see the inflection and really to see that pricing power shift to landlords, we need to be at a point where we're experiencing some continued quarters of positive absorption. A few other notes about the market. I'd say that given the availability in the market, I'd say leasing is taking a bit longer. Tenants are certainly out shopping. And we're seeing tenants focused on wanting to capture more functional space in the market to operate their businesses. So some consolidations are happening as well, but Rexford is positioned well to capture that demand. So -- all that being said, challenging to call the inflection point or when that will occur. But I do feel like that we are seeing that we're bouncing around the bottom here. We are prioritizing occupancy to drive cash flow, making capital allocation decisions that take into account these market dynamics. Mikayla Lynch: Our next question comes from Craig Mailman at Citigroup. Craig Mailman: Laura and Fitz, you both kind of gave some good color here on the leasing environment. I guess my question to dig a little deeper is, Laura, you just mentioned you guys are prioritizing occupancy over rate. And I understand that maybe showing activity is down a little bit. But could you just give us a sense of what you guys are specifically seeing that's underpinning the occupancy decline versus what is just kind of a feel at this point? Like are there big known move-outs that we should be modeling in outside of the spaces coming off for redevelopment or repositioning? And maybe talk a little bit about the 75 basis points of bad debt. I think you guys are running closer to 0.25 point through the first 3 quarters. What happened in the fourth quarter? And kind of what does the watch list look like? Michael Fitzmaurice: Sure, Craig. I'll start. This is Fitz. First, we're assuming a longer downtime in our occupancy assumption for 2026, both on a same-property perspective and repositioning and redevelopment. From a same-property perspective, we took about 1 million square feet back in the fourth quarter, and it's taken a bit of time for that to lease up. Also repositioning and redevelopment, given the mix in terms of a change relative to last year, it's a bit longer. Last year it was around 9 months. It's approaching 10 to 11 months this year. So that's what's driving the occupancy decline, both in same property and at least expectations in same property and total portfolio. John Nahas: Yes, I'm happy to add a little bit more color. Craig, this is John. So for a couple of specific examples, if you're looking at our same property ending occupancy, we did have a sequential decline of about 50 basis points. There's a couple of bigger drivers in that bucket. We had 2 properties in the L.A. market that had some move-outs that were expected. One was at our Rancho Pacifica Park. It's 144,000 square foot space that was leased to a temp tenant, and they moved out in the quarter. We've since re-leased that space and the new tenant moved in as of 1/1. So it's not showing in that quarterly number. The other big driver in the same property bucket was an asset that we own at 3880 Valley, and that was an expected move-out as well that is on the market for re-lease. With respect to the bucket of properties that moved out and going into repositioning and development, the bigger drivers there are 3 properties that are on our development pipeline. Those are Gale, Balboa and 190th. These are assets that we are really excited to move forward with. They are great pieces of real estate and the development returns are meeting our expectations. So we're very excited to move forward with those. Michael Fitzmaurice: And Craig, in regard to bad debt, first on the watch list, if I compare year-over-year in terms of the size of our watch list in terms of tenants and rent, it's about the same. In 2025, we experienced about 50 basis points of bad debt. That was tied to 3 tenants. We experienced 1 tenant that vacated in the first quarter. We had 0 bad debt in the second and third quarter. And in the fourth quarter, we had 2 tenants, 2 large tenants vacate. As we look into 2026, same story. We have a handful of tenants that are larger tenants that we're keeping an eye on. And therefore, we're going to take the same expectation that we set in 2025 in terms of being pretty judicious and having the appropriate bad debt reserve of about 75 basis points on revenues. Mikayla Lynch: Our next question comes from Andrew Berger from Bank of America. Andrew Berger: Great. Maybe just following up on the last question. Fitz, were there any particular industries for the 2026 reserves watch list? John Nahas: Andrew, this is John. Yes, this quarter, we had the same number of tenants on our watch list. The difference from Q3 is that there's some larger spaces that are showing up, and there is some concentration in logistics. When we dive into each situation, they're a little different. There's specific business issues with the businesses that are operating in these properties. Many of the tenants in this space really are contending with changing rates from their customers. And so any time there's some misalignment between their contract revenue and their occupancy cost, it can create some disruption. So it's something that we're very focused on and working with these tenants to resolve, but that is representing a higher concentration this time around. Mikayla Lynch: Our next question comes from Michael Griffin from Evercore ISI. Michael Griffin: Maybe just circling back to sort of expectations for leasing and rents on the year. If I look at the expiration schedule, you've got about $16.50 rents expiring versus you were signing in the past quarter, call it, $14.50, $15. Maybe this is better for Fitz just on the guidance side. But if you're anticipating 5% to 10% re-leasing spreads this year, I guess, does that imply you're going to be signing leases in the $17 range? Like I'm just kind of curious how to marry the expectation for where rents could be versus what you've currently been signing. And I realize that you can have a mix issue quarter-to-quarter, but any context there would be great. Michael Fitzmaurice: Yes. It always comes down to a mix issue, Griff, for sure. But yes, I think you're roughly around the right rent per square foot in terms of your 17, it's between $16.75 and 17, what we expect to sign. And like you said, on the net effective perspective in re-leasing spreads expectation, it is between 5% and 10%. Some of that obviously is impacted by Tireco. As Laura mentioned earlier, we do have a 30% negative spread on that lease. And then from a cash perspective, we'll give you the other side of that as well. We do expect those to be flat to negative 5%. And that is one of the more significant drivers or lack of drivers in both our same-property net effective and cash NOI expectations. Mikayla Lynch: Our next question comes from Michael Mueller from JPMorgan. Michael Mueller: Your year-end same-store occupancy was 96.5%, and it looks like the guidance is for about 95% average for the year. So can you give us a little color on where you expect occupancy to end '26? Michael Fitzmaurice: So the 96.5% that we ended last year was based on a different same-property pool. Our pool did change from '25 to '26. That was primarily driven by the acquisition activity that we experienced in 2024 that entered the same property pool in 2026. So the appropriate starting point is actually 95.6%. And we -- our expectation is that it will decelerate into 2026 and our midpoint of our guide is about 95%. And generally, it's a deceleration from this point throughout the year and with a little bit of acceleration in the fourth quarter. Mikayla Lynch: Our next question comes from Vince Tibone from Green Street. Vince Tibone: I'd like to drill down further into the cash same-store guide. Based on the components you gave, I'm having trouble getting to the range of spreads are only going to be slightly negative, 60 basis points occupancy decline and it seems like a modest headwind from bad debt, lease term fees, free rent and contractual bumps are still 3.5%. So I just want to understand what I'm missing. And I just want to confirm, the Tireco lease extension does not have an impact on cash same-store in '26, right? So just if you can help me kind of stitch together how cash guidance is negative 1% to 2% given all those factors. Michael Fitzmaurice: Yes. Vince, this is Fitz. I appreciate the question. But yes, to quickly answer your Tireco question on the cash side, we do have concessions in '26 versus '25. So that is impacting. But to pull back and give you the components of the buildup. So our 60 basis point decline in average occupancy translates into about 100 basis points of unfavorability. If you add on the NOI margin, which is correlated to occupancy, it's another 50 basis points. The lower term fees and the Tireco impact is about negative 75 basis points. And then bad debt, which includes some straight line -- I'm sorry, not straight line, but about 50 basis points. And that gets you to like a negative 2.75%. And then concessions brings you down even further. It's about 200 basis points and then bumps brings you back up at about 3.25%. And that gets you to the 1.5% at the midpoint on cash. Mikayla Lynch: Our next question comes from Rich Anderson from Cantor Fitzgerald. Richard Anderson: So I guess a bigger picture question here. I'm wondering what the measurement of success will be from everything you're doing. The things that are under your control, you're doing, higher dispositions, lower development, lower G&A, but so much is out of your control when you think of the macro and politics in a blue state and tenant behaviors. So come a year from now or 2 years from now, if we're still talking about the same growth profile, does that incite the Board to like think to do something even more substantive with the company? Or do you think you have a few years to see this through? I understand, Laura, you're just fresh in the seat. So I don't mean to be overly aggressive with this question. But I am curious as to what the time line is to sort of see some fruits of your labor. Laura Clark: Yes, Rich, great question, and thanks so much for joining us today. In 2026, as we've outlined, I mean, we're focused on executing our strategic priorities. And we believe that this will position us to create long-term value. And you asked about what's the measurement of success. It's about driving outsized shareholder returns for you all. So that's the guidepost and that's the measurement stick. And our priority there is to drive those returns, and we are going to be the best stewards of your capital. So that's our commitment is to continue to assess opportunities within the portfolio to drive value and position Rexford for future success. We're going to do that through a variety of ways. We've talked about how we're going to exercise a renewed capital allocation discipline. We're focused on driving to the highest risk-adjusted returns, taking into account our cost of capital and market dynamics. We've embedded a more rigorous underwriting criteria into how we're making decisions. We're limiting our development exposure. We've adjusted the spreads at which we need to achieve to move forward with those projects. We're focused on executing on value creation. I mean it's a key component of our business model, and that's really going to drive our cash flow and position us into the future. And we're committed to operating this company also as effectively and efficiently as possible. That allows us to maximize shareholder value, and we will continue to identify other ways to drive efficiencies across the business. So all that said, we're going to continue to assess those opportunities to drive value, and that is our focus today. Mikayla Lynch: Our next question comes from Vikram Malhotra from Mizuho. Vikram Malhotra: I just want to clarify 2 things. So one, I guess, just real quick, the mark-to-market kind of was only down 1%, and it seemed like no impact from either move-outs or re-leasing. So if you could just clarify kind of how you expect that mark-to-market to trend in the year? And then just clarifying on that last answer. I guess, given what you've said, still very tepid leasing, et cetera, your rent spreads are probably a headwind next year and then you have a lot of dispositions. So sort of Laura, as you rightsize the ship, so to say, there will be a lot of dilution. Is that like a multiyear effort? In other words, do you think it takes a while before we see earnings to drop? Michael Fitzmaurice: Vikram, this is Fitz. I'll take the first question. We had offsetting items for the impact on both our net effective and cash mark-to-market for our portfolio. In the fourth quarter, we -- leasing, we had a positive impact of about 50 basis points as we converted below-market leases to positive spreads. That was offset one for one by spaces that vacated during the quarter that had an above-market rate. Laura Clark: Yes. And in terms of how we're thinking about dispositions, I mean, we've got $230 million identified between the near-term development pipeline and other operating properties. But as we think about additional properties and what's the strategy, it's comprised of future opportunistic sales where we can realize value creation, opportunities that we can sell that derisk future cash flow growth and then the potential for future repositioning and development properties as we assess the strategic plan for each asset and evaluate what the right appropriate risk-adjusted return is to move forward with those assets. All that being said, the goal is to execute on a programmatic disposition strategy that's neutral to accretive to FFO and NAV growth over time. Michael Fitzmaurice: Yes. And then the one piece I would add there is just the continued cash flow generation for our for repositioning and development. We had about $15 million or so that stabilized during the quarter, which was about 750,000 square feet. And then we have another $53 million that's in lease-up or under construction. $20 million of that $53 million, as I mentioned in my prepared remarks, is going to commence in 2026 and then the remaining $33 million will be in 2027 and beyond. So there are some offsetting impacts to the re-leasing spread. Mikayla Lynch: Our next question comes from Nick Thillman from Baird. Nicholas Thillman: Maybe touching a little bit on the disposition side. Maybe some color on what you guys are seeing from the bidder pool, the type of bidders you're seeing in the market and what you're seeing on the pricing front. And then it seems as though most of the dispositions are targeted towards redevelopment and repositioning properties that have some vacancy. But as you are evaluating this portfolio, is there anything you're seeing from a submarket level that has us changing thesis or targeting different submarkets or looking to exit as well as we just evaluate the portfolio construction today? Laura Clark: Yes, Nick, I'll start on this one. In terms of the buyer pool, the buyer pool is really different depending on kind of what we're in the market selling. In terms of the 6 development sites, near-term development sites that we have under contract, that buyer pool is made up of mostly developers that have local Southern California development expertise. The pool was pretty deep on -- for the total sales value of those is about $135 million or $80 per land square foot on those 6 properties. I'll also note that those were projected to yield those properties a 4% yield upon stabilization, which is why we didn't move forward with those projects. In terms of other buyers in the market, I would say that we continue to see user sales have increased across the market, and it was a significant portion of the assets that we sold in 2025. User sales -- users typically pay a premium pricing, and we were able to take advantage of those opportunities, selling that $218 million at an average cap rate of 4.2%. As I look into the pool of what we have under contract, $135 million is under in the near-term development and then another $95 million is under contract, and those are operating properties mostly to user sales at about a 4% cap rate. Mikayla Lynch: Thank you, Nick. Our next question comes from Brendan Lynch from Barclays. Brendan Lynch: I think in the past, you've highlighted that your port exposure is somewhat limited, and that was kind of limiting some of the tariff risks over the past year. Has your view evolved at all on that consideration? And do you see it as a potential catalyst if some of these tariffs are removed in the relatively near future? Laura Clark: Yes. I think overall, I mean, as we've talked about in the past, our tenant base is very much focused on the local consumption, and there hasn't been a direct -- we haven't seen as much of a direct impact from changes in port volumes. Port volumes year-over-year roughly flat in this market. All that being said, what I would say in terms of impacts of tariffs with our tenants is they have a very keen focus on their expense structures and driving operating efficiency. And I think tariffs are certainly playing a role in how they're making decisions. They're taking a more conservative approach to decision-making, and we're seeing this come through in some of their decision-making, either if it's around consolidation or space rationalization needs. And so yes, I do think tariffs are playing a role as our tenants are looking to drive operating margins and efficiencies. Mikayla Lynch: Our next question comes from John Kim from BMO. John Kim: I wanted to ask on the roll down at Tireco of 30%, how that compares to the 12% roughly change in ABR. I'm wondering if this number is more of a net effective number that includes concessions? And if not or just generally, like how this transaction work in terms of concessions and maybe lower annual escalators? Michael Fitzmaurice: Sure, John. This is Fitz. So the new lease shifted to a gross lease from a triple net lease. So on an apples-to-apples basis, the re-leases probably was an unfavorable 30%, including the rent and the triple net charges. Mikayla Lynch: Our last question comes from Vince Tibone from Green Street. Vince Tibone: Can you just walk through the expected sources and uses of cash for '26? So if you sell the $400 million to $500 million of properties this year with the guide, I'm just trying to get a sense of how much free cash flow after all development spend could be available to potentially buy back shares or redeploy in some fashion this year? Michael Fitzmaurice: Yes. Good question, Vince. So at the end of the year, we had $166 million of cash, including disposed at the midpoint of $450 million, that puts us at $616 million of sources. The redevelopment -- I'm sorry, development and repositioning spend is expected to be about $203 million in 2026. So that leaves about $413 million of available cash to deploy to the highest risk-adjusted returns, and that can include share repurchases or future repositioning or development. Mikayla Lynch: Thank you, Vince. That concludes the Q&A portion of our fourth quarter 2025 earnings call. I'd now like to turn the call back over to Laura for some brief closing remarks. Laura? Laura Clark: Thank you all for joining us today, and we look forward to connecting with you all over the quarter. Operator: This will conclude today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to the Dorian LPG Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Additionally, a live audio webcast of today's conference call is available on Dorian LPG's website, which is www.dorianlpg.com. I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young. Please go ahead. Theodore Young: Thank you, Raisa. Good morning, everyone, and thank you all for joining us for our third quarter 2026 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; John Lycouris, Head of Energy Transition; and Tim Hansen, Commercial Officer -- Chief Commercial Officer. As a reminder, this conference call webcast and a replay of this call will be available through February 12, 2026. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our unaudited results for the period ended December 31, 2025, that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Form 10-K, where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. Finally, I would encourage you to refer to the investor highlight slides posted this morning on our website during our remarks. With that, I'll turn over the call to John Hadjipateras. John Hadjipateras: Thanks, Ted. Good morning, and thank you for joining us. Before my colleagues provide you with detailed comments on our financial results, our market outlook and our operational progress, I'd like to highlight the following: our dividend declared last week of $0.70 per share totaling $29.9 million will be our 18th dividend payment, bringing total dividends distributed to over $725 million and total capital of $961 million returned to shareholders since our IPO. The VLGC market remained strong in the fourth calendar quarter with spot earnings well above long-term mid-cycle despite some volatility. Indeed, as we speak, demand and freight rates continue to be strong. Last quarter, global liftings were up 3% year-over-year, measuring 36.8 million tons. The new record level of LPG exports highlights the attractiveness of LPG as an energy source for domestic, commercial and industrial uses. Tim will elaborate on the VLGC market and our outlook. On the operational side, we completed 12 dry dockings this past year and have one more scheduled for this month, which will bring to completion the docking cycle for our fleet. After this last docking cycle, most of our ships will have been fitted with energy-saving devices and silicone paint, resulting in meaningful cost savings and emission reductions. We have a 93,000-cubic meter VLAC new-building delivering in March from Hanwha in South Korea. John L. will give you more information on the progress made in our docking program, ammonia retrofits and new-building delivery as well as the regulatory environment. Ted will now present our quarterly financial overview. Ted? Theodore Young: Thanks, John. My comments today will focus on our unaudited third quarter results, capital allocation and our financial position and liquidity. For the discussion of our third quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. I'd also remind you that my remarks will include a number of terms such as TCE, available days and adjusted EBITDA. Please refer to our filings for the definitions of these terms. Turning to our third quarter chartering results. We achieved a TCE per available day of $50,333. Chartering results were strongest in October, followed by a small dip in November and into the first part of December. Tim will elaborate more on the current rate environment, which has substantially improved. As our entire spot trading program is conducted through the Helios Pool, its spot results are the best measure of our spot chartering performance. For the December 31 quarter, the Helios Pool earned a TCE of $50,500 per day for its spot and COA voyages. On Page 4 of our investor highlights material, you can see that we have three vessels on time charter within the pool, indicating spot exposure of about 90% for the 29 vessels in the Helios Pool. We will provide forward booking information later in the quarter in order to make it more useful for the investment community as the impact of rate volatility is best managed by providing information when more of the quarter is booked. Daily OpEx for the quarter was $9,558, excluding dry docking-related expenses, which was more or less flat with the prior quarter. We are encouraged by the lower OpEx, excluding dry docking over the last 2 quarters. Our time chartered-in expense for the TCN vessels came in at $18.2 million, consistent with our guidance and equivalent to an average charter hire of about $33,000 per day, reflecting full quarter contributions from both the Crystal Asteria and the BW Tokyo. The Tokyo is jointly chartered in with MOL Energia and deployed into the Helios Pool, and thus, we account for 100% of the revenues and time charter expense on our P&L. The new line item, profit sharing expense on our income statement reflects the 50% of the net chartering result that is due to our partner. For the March quarter, we estimate TCI expense continue to be in the $18 million to $19 million range again for the quarter. Total G&A for the quarter was $10.8 million and cash G&A, that's G&A excluding noncash comp expense, was about $8.7 million. Included in that $8.7 million was about $2 million of quarterly expense under our cash incentive plan. Thus, our core G&A remained steady at roughly $6.7 million. Our reported adjusted EBITDA for the quarter was $74.2 million. Total cash interest expense for the quarter was $6.8 million. Our current debt cost is about 5%, which reflects the heavily hedged and fixed nature of our various pieces of debt. We closed the quarter on December 31, 2025, with $294.5 million of free cash, which was up about $25 million from the prior quarter, which is a particularly good result as we paid the dividend and an installment on our new-building during the quarter. As announced last week, we will pay $0.70 per share as an irregular dividend or roughly $30 million in total on or about February 24, '26 to shareholders of record as of February 9, 2026. With a debt balance at quarter end of $516 million, our debt-to-total book capitalization stood at 32.2% and net debt-to-total cap at 13.8%. With an undrawn $50 million revolver and a $100 million accordion feature in our existing loan agreement, our strong free cash balance and one debt-free vessel, we feel well capitalized for fleet growth and renewal or for whatever challenges might arise. We expect our cash cost per day for the coming year to be approximately $27,000 per day, excluding capital expenditures for dry docking and scrubbers. During the quarter, we completed three dry dockings and anticipate one dry docking for this quarter currently ending March 31. That will complete the dry-docking program for our 2014 to 2016-built vessels. As John mentioned, we expect to take delivery of our new-building ammonia-capable VLGC at the end of March 2026, and we expect to pay about $62 million in cash at closing. We expect to enter into a loan facility to finance that payment. The irregular dividend declared last week of $0.70 per share brings to $17.65 per share in irregular dividends that we have paid since September 2021. While many investors and analysts like to suggest that these dividends are no longer irregular, we underscore that they are indeed irregular and subject to the discretion of our Board. VLGC's rates are not regular, and thus, we don't think our dividend policy should be either. Looking at our dividends in a more traditional context, our net income since June 30, 2021, that's the quarter immediately prior to our first irregular dividend, has been approximately $754 million, while including the dividend to be paid this -- later this month, we will have returned approximately $725 million of dividends in total -- sorry, $725 million in dividends. In total, we have returned over $960 million in cash to our investors since our IPO. We will continue to maintain a steady balance between dividends, deleveraging and fleet investment. With that, I'll pass it over to Tim Hansen. Tim Hansen: Thank you, Ted, and good day, everyone. For the quarter ending December 31, 2025, the global seaborne LPG trade increased again to a new quarterly record. It was reported to be more than 37 million tons for the first time. North American export contributed significantly, hitting a new quarterly export record of more than 18.5 million tons. The Middle East exports were the second-highest quarter -- quarterly export volume on record. The expanded seaborne trade witnessed over the quarter speaks to the attractiveness of LPG as a commodity, but the whole freight markets were challenged by external factors. The key external factors impacting the freight markets were lower-than-anticipated Saudi contract prices or Saudi CP for October and the retaliatory port service fees implemented in China. Starting with the lower-than-anticipated Saudi contract prices, it should be remembered that the Saudi CP influences the pricing of the Far East Index, or FEI, and therefore, impacts product price economics. The Saudi CP for October was lowered to be price competitive against U.S. exports for a tender into India and to demonstrate some commercial flexibility on the parts of Saudi Aramco. The price decrease was unexpected because the Saudi CP is historically in a contango throughout the fourth calendar quarter of any year and Far East imports increase in anticipation of winter heating demand. The drop in the Saudi CP and Far East Index created an uncertain trading environment for a few weeks and narrowed the arbitrage, slowing and weakening the freight markets. Amidst the slower freight market activity, the port service fees were announced in China to impact the U.S.-related vessels on the 10th of October. The timing was key as the announcement felt on a Friday before 3-day weekend with the implementation happening on the 14th of October to match the USTR Section 301 port service fees. The immediate impact was for vessels with cargo on board and en route to China, setting in motions the discussions and rerouting of some vessels as additional costs would be incurred and there were ambiguities as to the scope of the impacted vessels. The shock of sudden cost negativity impacted the market and had a knock-on effect on the wider Far East cargo market by -- prompting owners with vessels scheduled to load in the Arabian Gulf and U.S. target cargoes not bound for China and price those aggressively. Normalcy returned to the market at the end of October when the U.S.-China Summit in Busan found an agreement to suspend the port service fees for both countries until the 9th of November 2026 and the market corrected upwards again. The third calendar quarter demonstrated VLGC players to respond with agility when the USTR Section 301 port services was announced, and the fourth calendar quarter reaffirmed this. Once the backlog of unfixed vessels was cleared through November, the freight market improved through December to capture value from the West to East arbitrage that returns to normal levels. The quarter ending December 31, 2025, ultimately traded amid a lower average Baltic Index than the quarter prior, but found upwards momentum heading into 2026. For 2026, a total of roughly 36 VLGCs, including one of our own, will require absorption in the market. Geopolitical impact on world market seems -- in world market seems likely, but the agility of the VLGC market and the fundamental attractiveness of LPG as a commodity support the belief that the risk can be mitigated and upside successfully captured. With that, I will pass it over to Mr. John Lycouris. John Lycouris: Thank you, Tim. At Dorian LPG, we are committed to continually enhancing energy efficiency and promoting the sustainability of both our operations and our vessels. We operate 16 scrubber-fitted vessels and 5 dual-fuel LPG vessels. Scrubbers neutralize sulfur oxides from fuel oil while reducing significantly particulate matter and black carbon emissions. For the third fiscal quarter of 2026, vessel savings amounted to $1,116,000 or about $933 per calendar day, net of all scrubber operating expenses. Lower oil prices and a lack of geopolitical events led to lower bunker prices, which resulted in our lower savings for the scrubbers. Fuel differentials between high-sulfur fuel oil and very-low-sulfur fuel oil averaged $57 per metric ton, while the differential of LPG as fuel versus very-low-sulfur fuel oil stood at about $104 per metric ton, making LPG economically attractive for our dual-fuel vessels. During the last quarter, three vessels completed special survey and dry docking, including one upgraded for the carriage of ammonia cargoes. With the completion of the special survey and dry dock of the last of our C-type vessels this month, we will have completed the entire dry docking cycle for our 2014 built -- 2016 built vessels. Next month, we take delivery of the Hanwha Ocean 93,000-cubic meter new-building, which is a VLGC and VLAC combined, and which will join the Dorian LPG fleet. This LPG dual-fuel vessel is fitted with a hybrid scrubber and with Alternative Marine Power. Annual efficiency ratio, or AER, is the metric which calculates the carbon intensity of our vessels' operations. The average Dorian LPG fleet AER for the full year 2025 was 6.24%, which is 10.4% better than the IMO required target for 2025 of 6.96%. In late 2025, the IMO's Marine Environmental Protection Committee met for a second extraordinary session. Member states decided to delay approving changes to the MARPOL Annex VI by 1 year. Despite this delay, Dorian remains fully committed to investing in fuel efficiency, improved performances and decreased greenhouse gas emissions. We view the delayed IMO changes as a very positive step, allowing more time for input and review on many outstanding technical issues, capabilities, procedures and implementation details. This also gives our industry time to prepare and adjust expectations for realistic targets for the net zero framework guidelines and towards gradual development of alternative fuel. The MEPC 84 session is scheduled to take place in the spring of 2026. We expect this session to focus on finalizing critical implementation guidelines that will give more clarity on the net zero framework and to consider additional proposals. We are confident that our company and fleet are well equipped and fully prepared to meet regulatory changes ahead. And now I would like to pass it over to John Hadjipateras for his final comments. John Hadjipateras: Thanks, John. And we'd love to open up for questions if anyone has joined us and like to -- who has joined us, would like to ask any questions. Operator, please. Operator: [Operator Instructions] We'll take our first question from Omar Nokta with Clarksons Securities. Omar Nokta: I do have a couple of questions, maybe one on the market, and I just wanted to get into Dorian specifically. But maybe broadly on the market. I know, Ted, you mentioned you'll wait a bit to give us guidance on how the quarter's bookings are looking. But just in general, what we've seen here in the spot market, rates seem to be quite strong. They're at 2-plus year highs. And it's interesting in terms of how this is happening and somewhat defying the typical seasonal norms. And so I just wanted to ask from your perspective, what's been driving this kind of counter-seasonal strength? And then from that sense, what do you think that then means for how the year is going to look in general? John Hadjipateras: Thanks for that question. Is this Omar? I didn't catch the introduction. Omar Nokta: Yes, it's Omar. John Hadjipateras: Omar, congratulations on your new position. I'm happy to have you back in the industry. Tim, can you take that question, please? Tim Hansen: Yes. Omar, it's unusual that the first quarter actually goes stronger as we get into the quarter. But as I mentioned, the last quarter of 2025, there was a lot of uncertainties and people held back on the activity. So there was a little bit less cargoes lifted. There was some fog as well in the U.S. and so on. And once all these -- the USTR was cleared, once the fog have lifted and people have gotten used to the Saudi pricing, the market came back. So I think it was a spur from that kind of lack of activity in November that has gone into first quarter also. And then the production levels have kept on increasing and surprising to the upside. So we have seen more cargoes and the U.S. terminals have been able also to get these cargoes out of the terminals and on to the water. So we see that production continuing on the upside and hopefully continue to surprise on the upside compared to the levels [ advised ] from the U.S. But -- so we do see the rest of the year should be strong and continue in this kind of activity. So we're pretty positive for 2026. Omar Nokta: Okay. And then just maybe a follow-up just in terms of how you've been deploying the fleet. You've obviously got a good amount of spot exposure via the pool. I did notice that one of the ships, I think the Chaparral maybe has been put on a TCE into 2027. Anything you're able to share on what that rate looks like? I know you tend to not give specifics, but anything you can give or perhaps maybe in relation to what that would be earning relative to the other ships on charter? John Hadjipateras: I'll let Tim again answer because I think probably, we have a P&C clause. But Tim and Ted can also give -- tell you what we can tell you, put it that way. Tim, do you want to start and then Ted can take over. Tim Hansen: Yes. As you mentioned, we don't give out the rates. It is reported in the market. It was a deal that was done back in October, November and just going on charter this quarter for a little more than a year's charter. So on -- we do our [ charter ] like more opportunistic when we see possibilities. Of course, the market has since then surprised us on the upside in the spot market, but we think it's at levels compared to the earnings we do in the spot market over the last quarter. John Hadjipateras: But Ted, maybe this is a good time to say something about guidance. Theodore Young: Well, yes, I think picking up on the topic of guidance, like we said, Omar, we think it's probably more useful to give the overall forward bookings information later in the quarter just because there's so much volatility in the business in the sector, just as Tim alluded to. And so the information coming out later is going to be better. And so I think that -- so we'll leave it there. But I think Tim did a good job of giving you the overview. I also think it's probably -- was reported, which I think is interesting, it's business for Brazil, which I think is pretty exciting because of what it says about Brazil as a potential growth market. Omar Nokta: Got it. That's quite helpful. And then just a final one, maybe for you, Ted, just on the new-building that you're taking delivery of here in the next few weeks. It looks like I think from the filing, there's $62 million left to spend. You have $294 million of cash, so quite a bit of flexibility to do what you want. But do you have any specifics on how you plan to fund that vessel? Will you borrow or just pay cash? Theodore Young: Yes. I alluded to it briefly in our remarks. We do plan to finance the rest of the payment, and more detail will be forthcoming when we get there. Operator: Our next question comes from Climent Molins with Value Investor's Edge. Climent Molins: Just kind of a follow-up on Omar's first question. Despite rates being very solid, so far, we haven't seen a significant increase in the average speed of the overall VLGC fleet. To what extent do you believe the fleet can speed up if rates remain solid? Older vessels are, let's say, capped by the environmental regulations. But to what extent could the ECO portion of the fleet speed up? John Hadjipateras: That's another one for Tim. A very good question. Tim Hansen: Yes, there's a bit of leeway in speeding up still. But most of the, you can say, non-LPG fuel ships, so the ECO type from -- you have the majority of the 2015, they are still capped by the environmental regulations and the reductions of power done years back. So there's maybe like 1 Knot or 2 more in it, 1.5 Knots. And for the older ship, there's really nothing. So it's not a significant additional speed that we can do. You'll probably see when we come into the summer months, if the market is strong, we can go a bit faster. But at the moment, also, we have seen quite a lot of bad weather here over the winter. So even in there, we could go faster. It's hard to actually do it. Climent Molins: That's helpful. And as a follow-up, in your prepared remarks, you talked about the energy saving devices you've installed on your vessels, resulting in meaningful savings. Could you talk a bit further on what kind of improvements that has resulted relative to previous consumption levels? And what kind of IRR are these investments generating? I know like giving an exact figure may not be easy, but any color would be helpful. John Hadjipateras: Yes. John will answer that. I think we've mentioned something specific, and he could give you as an illustration, perhaps, the payback on scrubbers. That should give you a bit of a color on the whole picture. John? John Lycouris: Yes. The energy-saving devices that we use and we mentioned, usually provide an improvement of around 5%. And that's the ballpark figure for most of the energy-saving devices in most of the ships. And silicone paints also provide a similar kind of number, about 5% improvement in the energy savings. So the payback is generally pretty fast. It is generally within a year. So I think that answers your question. Climent Molins: It does. John Hadjipateras: That, of course, does not apply to scrubbers specifically. The payback on scrubbers is a bit longer than that. But most of the other devices are low cost, those producing the 5%, low cost. So that's why we have a quick payback. Operator: It appears we have no further questions at this time. I'll turn the program back to the speakers for any additional or closing remarks. John Hadjipateras: Thank you all for joining us, and have a good summer. Operator: This concludes today's program. Thank you for your participation, and you may disconnect at any time.
Daniel Fairclough: Good afternoon, everyone. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you for joining this call to discuss ArcelorMittal's performance and progress in 2025. Present on today's call, we have our CEO, Aditya Mittal; and our CFO, Genuino Christino. Before we begin, I'd like to mention a few housekeeping items. As usual, we will not be going through the results presentation that we published this morning on our website However, I do want to draw your attention to the disclaimers on Slide 26 of that presentation. Following opening remarks from Aditya and Genuino, we will move directly to the Q&A session. [Operator Instructions] And with that, I will hand over the call to Aditya. Aditya Mittal: Thanks, Daniel. Welcome, everyone, and thank you for joining today's call. Before I ask Genuino to walk through our financial performance, I want to start by reflecting on the progress we have made against our 2025 priorities. When I look back at the year, the achievements are clear and everyone at ArcelorMittal should be very proud of what we have delivered. I will focus on 3 key topics. First, on safety. Across the organization, our people are galvanized and fully engaged in improving safety performance. A year ago, we outlined a 3-year safety transformation plan. And in 2025, we have seen real measurable progress. All key safety KPIs have improved, most notably fatality prevention. Custom safety road maps are at the heart of ArcelorMittal's transformation program, designed to strengthen our safety culture, enhance risk management and drive progress towards our goal of zero fatalities and serious injuries. Secondly, on trade policy. ArcelorMittal has been a vocal advocate for the need to address the market distortions created by excess capacity and unfair trade dynamics. It is encouraging to see the European Commission recognize and address this over the past 12 months. With the new carbon border adjustment mechanism in place, we are now competing on a more level playing field. And the new tariff-rate quota trade measure will significantly limit the amount of steel that can be dumped into the European market. Together, this fundamentally resets the outlook for the European steel industry and creates the conditions for a balanced market structure that will restore profitability and returns on capital to healthy levels. I want to take this opportunity to reassure our customers that ArcelorMittal is ready and able to meet all their needs for high-quality steel delivered with the best-in-class service they expect from us. And while Europe has perhaps seen the most significant changes in trade policy, we are seeing real efforts in Canada and Brazil to also protect their domestic markets. This should add incremental support to our results in those regions as we move through this year. Moving to my third topic, growth. ArcelorMittal's growth strategy is clearly differentiated and sets us apart from our peers. In 2025, we began to reap the benefits of several strategic investments made in recent years. Our projects and portfolio optimization helped support our results in 2025, and this growth momentum will continue. Our strategic projects will add an additional $1.6 billion of EBITDA in the near future. A core pillar of our growth strategy is energy transition. We are expanding our renewables portfolio. We are building electrical steel capacities to support electrification and mobility, and we are expanding our EAF footprint where the economics make sense. We remain laser-focused on competitiveness and allocating capital to where we can achieve the strongest returns. We are consistently generating solid investable cash flow, $1.9 billion in 2025 and $2 billion the year before. This enables us to continue strengthening the business through investment in these high-return opportunities while consistently returning cash to shareholders. As I conclude, my message is simple. A more supportive trade policy has reshaped the outlook of our business. This is set to amplify the transformational progress we have delivered at ArcelorMittal in recent cycles. We benefit from best-in-class operations and an industry-leading R&D program. Our reputation for quality, innovation and operational excellence sets us apart from our competition, and this is all down to our people. So I would like to sincerely thank our employees and also our key stakeholders for their continued trust, commitment and support. I will now hand it over to Genuino to talk more about our financial performance. Genuino Christino: Thank you, Aditya, and good afternoon, everyone. Let me start by saying that 2025 was another year in which the resilience of our business was clearly demonstrated. We delivered EBITDA of $6.5 billion, which is equivalent to $121 EBITDA per tonne shipped. This is almost double the margin that we achieved at previous cyclical low points and reflect how the earnings power of ArcelorMittal has structurally improved. The benefits of our optimized asset base and our diversified footprint are now being complemented by the additional EBITDA being generated by our strategic projects. In 2025, these projects contributed $0.7 billion of new EBITDA, driven by a record performance in Liberia, the continued build-out of our renewables capacity in India and the significant strengthening of our U.S. footprint following the full consolidation of Calvert. Turning to cash flows. In 2025, we generated $1.9 billion of investable cash. This brings the total investable cash flow generated since 2021 to $23.5 billion. Last year, we allocated $1.1 billion towards high-return strategic growth projects, returned $0.7 billion to shareholders and deployed $0.2 billion cash to M&A alongside $1.7 billion of net debt assumed through these transactions. Our results continue to show that ArcelorMittal can deliver value through all phases of the steel cycle. Today, we have proposed a base dividend of $0.60 per share. This marks the doubling of our dividend over the past 5 years and reflects our increasing confidence in the company's outlook. In addition to dividends, our share buyback program has been a major driver of value creation. Our share count has been reduced by 38% over the past 5 years, a pace unmatched by any of our peers, significantly enhancing value per share. Finally, regarding the positive outlook for 2026, we expect higher steel production and shipments across all our regions this year, supported by operational improvements and strengthened trade protections. We are confident in our ability to continue generating positive free cash flows in 2026 and beyond, and we will remain disciplined in allocating this through our established capital return policy. With that, Daniel, I believe we can go to our Q&As. Daniel Fairclough: Excellent. Thanks, Genuino. [Operator Instructions] We have a good queue already, and we'll take the first question from Alain at Morgan Stanley. Alain Gabriel: I've got a couple. I'll take them one at a time. First one is on Europe. So the industry structure is changing, and you have quite a flexibility across your European assets to bring in more tonnes to the market, should they be needed. How quickly can you bring these tonnes online? And what signposts would you look for before making that decision? That's the first question. Aditya Mittal: Thank you, Alain. Can you say the last bit? What -- I missed it. What would we have to look for before we bring the capacity online? What was the question? Alain Gabriel: Indeed. What signposts are you looking for before bringing the new capacity online? And how quickly can you bring this capacity as well? Aditya Mittal: Fantastic. Thank you, Alain. So yes, look, I think clearly, the biggest change since I last spoke to you guys has been Europe. I won't go through the details of the TRQ and the CBAM program. In terms of your question, we are well positioned at ArcelorMittal because we do have certain idle capacity. We can bring that online quite quickly. It is not subject to reline. It is not subject to bringing back people who have been permanently laid off. So we could meet the deadline that is projected. I think the best -- the latest estimate remains 1st of July for the TRQ to be put in place. Hopefully earlier, but today, the latest estimate is 1st of July, and we'd be able to bring the capacity online in that time frame. What is the capacity? You may ask as a follow-up. We do have the ramp-up of our Sestao mini mill, which is underway. We have a new electric furnace in Gijon and we do have some spare blast furnace capacity. So it's a combination of the above in terms of idle capacity or available capacity. In terms of signposts, I think signposts are very clear, right? The signpost has to be customer demand, i.e., requirement in the market. We don't want to bring in capacity just for the sake of bringing back capacity. And related to that and underpinning all of that is earnings a healthy and sustainable return on the capital employed in Europe. So clearly, we remain focused on meeting customer demand, but at the same time, ensuring that these tonnes are profitable and achieve our return thresholds. Alain Gabriel: And my second question is on the usual profit bridges Q4 into Q1, including the impact of the restart costs in Europe, if you decide to bring in some capacity in Q1? And then more importantly into Q2, where the lagged prices really kick in. So any color on that bridge would be very much appreciated. Aditya Mittal: I missed the first bit of your question, but perhaps Genuino caught it all. So Genuino... Genuino Christino: Yes, I got it. Aditya Mittal: Okay. Genuino Christino: Thanks. I got it, Aditya. Thank you. So let us start with the bridge then as we typically do. And I will start with North America because that's really where we're going to see a big delta quarter-on-quarter. So as you know, we were -- experienced our operational problems in Mexico that has been now largely resolved. So we will see a recovery in volumes in North America in Q1. As we know, prices have been moved up. So we will also see prices increasing in North America, right? So those are really the big 2 changes that we see in North America. We will be shipping more and prices will be higher. We're not going to have the repetition the operational costs from Mexican operations. Moving to Europe. In Europe, we will, of course, also see higher shipments, which is, as you know, also to some extent, seasonal. We will also see prices improving to some extent. But I would say that this is really more a second quarter phenomenon for us. Costs will also be moving up as we are seeing what is happening on the marketplace with the raw material basket and CO2 costs, right, following also the implementation of CBAM. Then Brazil should be relatively stable and also our mining division should also be relatively stable. We'll continue to ramp up the Liberia. So -- but we will -- in terms of shipment, it should be relatively stable quarter-on-quarter. So your -- second part of your question was on costs just to bring back this capacity. As Aditya said, it does not really involve. We're bringing more fixed costs. So the cost to restart this capacity will not be something meaningful to your bridge, Alain. Alain Gabriel: And any hints you can give us on Q2 given that there's a lag effect in both North America and in Europe? Genuino Christino: Well, I think that the key point there really is in Q2, as we know, I mean, that's always the strongest quarter from a volume point of view in Europe. So I would expect to continue to see that trend, right? And as we know, we'll see the full impact of the prices that we are seeing in the marketplace right now impacting our Q2 results in Europe and North America. We started to see prices also responding also in Brazil. So that should also improve our realized prices in quarter 2 as well. Operator: So we'll move to the next person in the queue, which is Tristan at BNP Paribas. Tristan Gresser: I have 2. The first is on Europe decarbonization. As you have now more visibility on the returns you can make in Europe, what are the next steps and the time line around all the decarbonization project you previously announced in each country? And if the structural margin level is now higher in Europe, does that mean also that your previous CapEx maximum of $5 billion could potentially be increased? Aditya Mittal: Thank you, Tristan. Yes, a really good question. As all of you know, in Europe from 1st of Jan, the carbon border adjustment mechanism was put in place, which creates a level playing field in terms of carbon costs. In terms of decarb, we call it economic decarbonization in ArcelorMittal. We call it economic decarbonization because it has to make economic sense. What is our plan? We have long talked about we need certain preconditions to economically decarbonize our footprint in Europe or in other parts of the world. So the conditions that we've talked about publicly have been energy. As you saw in France, we signed a new energy contract with EDF. And at the same time, we wanted a level playing field in terms of carbon costs. Those conditions have been premet or those preconditions have been met. There is an economic case to decarbonize our operations. And so at this point in time, we're evaluating to decarbonize our French operations, specifically our Dunkirk facility by setting up an electric arc furnace. It's also in our presentation as future projects. In terms of what will come next, our idea is to be sequential. Taking on multiple projects at the same time is onerous, both from a people perspective, but also from a capital perspective. And therefore, you should be comfortable with our CapEx guidance of $4.5 billion to $5 billion on a going-forward basis because, yes, we're starting Dunkirk. The intent is to do it sequentially, not overburden the organization, both from a people resource or a capital perspective. And at the same time, as I underlined and highlighted, these are economically attractive decarbonization projects. Tristan Gresser: That's very clear. And the second question is still on Europe and more on the ETS reform and review. What is your view on the potential extension of the phaseout period for free allowances in Europe, if you are in favor, and what it could change for your business? And how likely do you think as well that the commission will move forward and extend the deadline past 2034? Aditya Mittal: Yes. Thank you, Tristan. Look, I talked about this in my quote, in the earnings release, that the biggest change that has happened is -- in 2025 is a realization that countries around the world need the steel industry. It's about supply resilience, it's about national security. And we see increasing action to support the domestic steel industry, whether it's through trade or other actions. I see the same dynamic in Europe, right? That's the fundamental shift that has occurred in 2025. So there is support that's coming through the TRQ, there's support that's coming through the CBAM, but I also see a fundamental rethink that Europe cannot deindustrialize, but needs to retain and support its strategic industries. So I would take the ETS review in that context because that is the new dynamic and the ETS review should reflect that new dynamic. What is ArcelorMittal's focus area in that new dynamic or in the ETS review, is to highlight that today, energy costs in Europe remain very high relative to the global averages. Gas prices remain very high relative to what is available globally. And at the same time, when you look at what other steel companies around the world or other countries are doing in terms of decarbonizing their steel business, the pace is much slower, right? The steel industry is not able to adapt at the rate or slash pace that the ETS system is currently designed to do that. And so I do believe that we need to -- that the ETS system needs to adapt to reflect these realities. To the extent that it does not adapt to reflect these realities, at the end of the day, the CBAM is in place, right? We have a carbon border adjustment mechanism. So to the extent that we incur a carbon cost, the same as incurred by imported tonnes, and so there is a level playing field. And so I hope that provides a perspective on our thinking. Tristan Gresser: That is very clear. Daniel Fairclough: So we'll move to take the next question, which we'll take from Ephrem at Citigroup. Ephrem Ravi: Just 3 non-European questions, for a change. Firstly, on the Page 12 of the presentation, when you say further expansion at Hazira under study. Just to clarify, is that to the 15 million to 24 million tonnes that you've already planned and guided to by end of the decade? Or is it to beyond 24 million tonnes? Aditya Mittal: Thank you, Ephrem, for the questions. I'm not exactly sure what you're referring to, but let me talk about what's happening in Hazira. So this will provide a broader context and I hope it answers the question. So just starting with the macro, India remains a growth market, right? Demand continues to grow at 6% to 8%. We have an excellent facility with excellent products, excellent quality, excellent people, and we have a very strong platform to grow that. Today, our current capacity is about 9 million tonnes in Hazira and we are finishing our expansion, which will start up towards the end of the year, but will really be completed in 2027, where we will achieve a targeted capacity or design capacity of 15 million tonnes in the Hazira facility. We're actively working on an additional greenfield facility. We have not announced what the capacity level would be, but safe to assume it will be about 8 million tonnes on the Eastern Coast of India in Rajayyapeta. So that remains an option. And as we make progress on finalizing environmental clearance, land acquisition, virtual integration in terms of iron ore, we will be updating the market. Fundamentally, the vision is to grow the business and to achieve a design capacity in excess of 40 million tonnes in the long term. Ephrem Ravi: So very quickly, switching to Brazil. There are news reports that CSN is considering selling its steelmaking. I don't want you to comment on M&A specifically, but do you think you're capped out in Brazil from an acquisition perspective, given your high market share already? Aditya Mittal: So in Brazil, we have an excellent business. As you know, we have 2 facilities, Tubarão and Pecem. Two big picture points on Brazil. We're working with the government to further support the steel industry in terms of trade measures, so there is progress on that front. But simultaneously, we're growing our franchise, right? We just completed the Vega facility, which is automotive galvanizing capacity. In the presentation, you can see that we're evaluating further downstream capability in Tubarão. We have certain mining projects, which have come on stream in Brazil, namely Serra Azul. We have investments in the long business. So we are very comfortable with the business that we have. We have, like in other parts of the world, an excellent set of assets with excellent people and really are the market leader in terms of product quality, product capability as well as what we offer the market in terms of innovation, design, service, et cetera. Ephrem Ravi: And then finally on Calvert. You're ramping up your furnace #1, and it will be done pretty much in 6 months, I think. Given kind of the challenges of mobilizing another team for the next phase of expansion there, when do you think is a realistic time frame for approving the second EAF? Aditya Mittal: Yes. Ephrem, it's a great question. I don't expect it to be a medium-term phenomenon. I can't give you a specific time line. I expect this to be in the short term. We have put it in our presentation. We have further organic growth plans, Calvert, Dunkirk as well as what I just spoke about in terms of Brazil. We're also building up our electrical steel facility in Calvert, as you are aware. So we have completed the EAF, but we have another facility ongoing and we have plans to double our EAF capacity. So that is an update that I can provide. I don't know if Genuino can provide more of an update. Genuino Christino: No, I think that's a fair summary, Aditya, and we will have to wait and see when we announce the next steps. Daniel Fairclough: So we'll move now to take a question from Cole at Jefferies. Cole Hathorn: Just a follow-up on Europe and the impact of the import quotas and how you're thinking about ramping up your capacity. It's very difficult from the outside in to kind of put some shipment numbers to that. If we think that 10 million tonnes of imports are going to be displaced and ramped up in Europe, how do you think about how much Mittal can ramp up to meet those needs? Should we think about it as kind of 3 million to 4 million tonnes kind of keeping your market share? And when you talked about being able to ramp up initially some idle capacity, do you have an idea in mind, we can ramp up 2 million of that 3 million tonnes and then we'll need to put some more CapEx into that? Aditya Mittal: Yes, thank you for the question. I'll get Genuino to answer it. But just to maintain our market share, which is our intent, there's not that much significant CapEx that's required, right? We spoke about that earlier. So we do have idle capacity. We can bring it online to achieve the market growth. It's not a market share fight, right? It's to achieve market share growth based on customer demand. Genuino? Genuino Christino: Yes. I think you got the numbers right, right? So we are talking about 10 million tonnes of reduction of imports, about 8 million is for flat products, right? We talked about in the previous quarter, our market share against the domestic supply of about 30%. So I think you got the numbers right. And as you know, this is going to happen, we're going to see really the full impact of that in 2027 because as Aditya mentioned, our best guess today is to have the new TRQ from 1st of July. So we are already working on some of these tools, furnaces, be it France or Poland. So I think we're going to be in a good position to meet the demand. And I think that's really important for us to be able to service the customers when they need us, and that is our focus. So I would not expect to add more CapEx. You have our guidance. So we have provided the guidance of $4.5 billion to $5 billion, right? And it's all included in that. So I would not, at this point, conclude that there is more CapEx to come to be able to bring this extra capacity that we are talking about. Cole Hathorn: And then maybe just as a follow-up on that, to Alain's question. What's the trigger to start kind of ramping some of your idle capacity or improving operating rate? Do you really need to start seeing the demand and pricing as the trigger to start building some inventories? And Europe for a long time has benefited from having, I would say, quite short supply chains. Do customers need to adapt to longer order books or longer supply chains, which I imagine would be good for Mittal? Genuino Christino: Yes. Well, I think, look, this is not really a fight for market share, right? So I think we are -- we want to be ready when we see that demand, right? And so we're not going to be increasing capacity or just for the sake of doing it. I think Aditya mentioned it at the beginning of the call, our focus is on make sure that as we bring back this capacity, that it makes sense also from an economic point of view, that we earn our cost of capital. And I think that is our focus. Aditya, do you want to add to that? Aditya Mittal: Yes. I feel that you answered the question very well, Genuino, but there's also an answer in the question, the order book. I think the order book determines when we bring on this capacity. We don't have that much of long lead time in bringing on some of this capacity. Also recognize that we have a lot of slab capacity in Brazil. So we can augment our facilities with slabs from Brazil. So there is flexibility in-built in our operations, and we will examine the order book. And based on that, we will plan our production cycles. Daniel Fairclough: So we will move to take the next question from Reinhardt at Bank of America. Reinhardt van der Walt: First one, I just want to check on the dividend increase. Quite a substantial increase, I guess, this year-end and over the last 5. It does seem like the buyback pace has slowed very slightly. Should we read this as maybe a mix shift in how you're returning capital to shareholders? Or should we read this as an increase in the absolute level of payback in the dividend? Aditya Mittal: Yes. Thank you, Reinhardt. I'll get Genuino to answer it specifically or provide more details. But just at a high level, there is no change to our capital allocation framework, right? We think it has really served the company and its stakeholders really well. The framework remains 50% of free cash flow return to shareholders and 50% in terms of growth. We talked a lot about our growth portfolio in our opening remarks. You can see how well that is doing. We have not really used up much of the balance sheet, and yet we're delivering significant earnings enhancement, both in 2025, but also going forward. In terms of returns to shareholders, if you see, the share buyback program has been very successful. And because of the confidence that we have in the underlying operating business and what we're seeing from a macro perspective, we're very comfortable in increasing the dividend this quarter to $0.60. With that, Genuino, please go ahead. Genuino Christino: Yes, I think you touched on the key aspects of it. I think we did well in 2025. So we did more than the minimum according to our policy. And I think that's really the key message for everybody is the policy has been working extremely well. I think we're very pleased with the outcome of the policy based on our interaction with shareholders as well. We have a very good positive feedback. So the intention is to keep that. 2026, we believe will be a better year in terms of profitability. We are very confident that the company will continue to generate good levels of free cash. And as you know, the policy is such that 50% of that as a minimum should flow to shareholders. And we continue to see good value in our stock. So I would think that as we generate free cash, the buyback will continue to be our preferred tool to return cash to shareholders. Reinhardt van der Walt: Understood. That's very clear. And maybe if I could just ask one more question on your demand forecasts. So 2% next -- this year ex China, but Europe specifically, I mean, we're seeing sort of PMIs turning and construction indicators moving, especially since you last reported. Can you give us a more specific number for the European market by any chance? Aditya Mittal: Yes. Reinhardt, thank you for the question. We -- this quarter, we provided global guidance. The reason is because bare steel consumption is changing. I guess what am I trying to suggest to you, historically, when we published our ASC numbers, that became a proxy for the change in our shipments in terms of markets. That is no longer the case because trade has become such a big driver that the change in our shipments is much more driven by trade policy. So what we did want to do was provide you with the global outlook, a positive macro outlook. That's what we're seeing. You spoke about some other factors in Europe. The other factors in Europe that we're seeing on a more medium-term basis is the German infrastructure spend. That's quite significant, as you are aware. You also see a resurgence in defense-based spending, right? Now European countries are moving towards 5% of NATO spend, so that's a positive medium-term dynamic. Globally, in other markets, there are other positive dynamics. So we just wanted to provide with a -- with you with a global perspective and then you can model what you expect how our shipments will do based on the changes in trade policy. So I hope that answers the question. Daniel Fairclough: So we'll move now to take the next question from Bastian at Deutsche Bank. Bastian Synagowitz: Just the first one on Europe as well. And I guess, you turned more positive on the market as we all do. Just looking at the market structure, though, Europe is obviously still a much more fragmented market than many other markets you're operating in. And I guess you did your job to a very large extent, but do you still see more scope and need for consolidation in Europe? And would you aim to continue to play a role in this? Or is this something you would leave to the other players? That's my first question. Aditya Mittal: Yes. Thank you, Bastian. We are very comfortable with our footprint in Europe. As we talked about, we have latent capacity to grow it at minimal capital costs or CapEx. And as you do it, you get economies of scale, you get fixed cost dilution, i.e., fixed cost absorption. The assets that we have are well invested. They're producing high-quality products. We don't really see significant benefits from consolidating at this point in time. If anything changes, obviously, from further consolidation for us in Europe, if anything changes, obviously, we will update you guys. Bastian Synagowitz: Got you. Okay. Very clear. Then one more question actually on just the back and forth we've seen on the European stance with regards to Russian material and how it may be treated in the context of the planned TDI. And I guess that also particularly depends on how far semifinished products are in scope or not. So do you have a view on this? And how far Russian semis may or should be tackled by the new tool? Aditya Mittal: So I can just provide you with information versus a perspective. In terms of slabs, you're right. They are not part of the tariff-rate quota, the TRQ. There has been a position paper that has been published by the European Parliament, I believe, where they are demanding they are demanding that there is no Russian slabs that are brought into the European marketplace. But it is not a position that has yet been adopted by either the council or the commission. Clearly, there is a move in that direction, but time will tell whether that actually gets enacted into policy or not. Daniel Fairclough: So we'll move now to take a question from Matt at Goldman Sachs. Matthew Greene: I have a couple of questions just on CapEx and then a follow-on, on Liberia. Just on CapEx, perhaps you can just clarify a couple of things. Just the strategic CapEx spend was a bit of a -- it fell short, I guess, of what you guided for the year by about $300 million, $400 million. So you spent about, I guess, 75% of the CapEx, yet still delivered the full $400 million of strategic EBITDA uplift that you guided through last year. So I guess, can you just sort of talk about what the moving bits are? Has that CapEx been deferred into 2026? Has it been canceled? Because I see '26 as that -- is that EBITDA uplift or that target uplift has been trimmed slightly as well? So yes, if you could just help marry up what's going on there with some of the strategic CapEx spend, please? Genuino Christino: Yes, Matt, let me take that one. So you're right. So we came at the end a little bit lower than the low end of our range for CapEx. And really the biggest delta there, Matt, is you may have seen that we have just recently finalized the MDA extension for Liberia, right? And we are providing you with the number there. So this will -- we will have to pay the government $200 million in Q1, and that number will be part of our CapEx because it gets capitalized and amortized throughout the life of the new MDA, which now extends until 2050, right? So that's about $200 million. So if you add that to our CapEx of 2025, then we are there. So no change to the projects or delays. So we continue to move forward, right? And then when we think about what we're going to be doing in 2026, I think a lot of the CapEx will go into electrical steels in the U.S., in Europe, the renewables, the projects that we announced for renewables in India, right? And then, of course, we will have this $200 million for Liberia that should be paid in quarter 1. So that's how I would describe the moving parts, pieces of our strategic growth CapEx. Matthew Greene: Got it. That's clear. Okay. So just a delay in that spend and, obviously, no EBITDA uplift given it's an extension of the mining agreement. Okay. That's clear. Well, look, moving on to Liberia then, just you touched on this agreement allowing you to push the rail up to 30 million tonnes. How should we think about the criteria here that would trigger the decision for you to move beyond 20 million tonnes? And perhaps you could just touch on what are the limitations? Is rail the limitation at 20 million tonnes or is it the mine? Are you oversizing any part of the mine to, I guess, allow you to expand at a lower capital intensity in the future? Could you just touch on kind of how you're thinking about that pathway to 30 million tonnes? Aditya Mittal: Yes. Thank you, Matt. It's a great question. In terms of capacity, there's minimal infrastructure required for rail. The rail is quite well designed. They can accommodate up to 30 million tonnes. You probably have to buy some rolling stock, but you don't have to set up a whole new rail infrastructure. In terms of the mine, we want to further explore and develop the mining licenses that we have and examine how we can bring production up to 30 million tonnes at low capital costs that achieve our return on capital. That's fundamentally it, right? We want to make sure after we had made this investment, which is doing really well, and we can see the increase in production in Liberia and more expected in 2026, how we can continue to outperform and deliver these projects, which create higher returns for the company. So that study is underway and as soon as that is complete, we'll update you. It's not in our document in terms of what you can expect in the short term. So you can expect that this will take a little bit of time before it's finalized. Daniel Fairclough: So we'll move now to take a question from Timna at Wells Fargo. Timna Tanners: I wanted to follow up with Aditya's comments on the opening remarks about the additional measures in Canada and Brazil. I'm curious about your thoughts. There's also, of course, threats to India and Mexico of your coverage. And given the sharp measures to prohibit trade or restrict trade, I suppose, to the U.S. and EU, is there not even more risk on those regions? And are they doing enough to combat the excess supply that you've alluded to? Aditya Mittal: Yes, Timna, look, excellent question. The short answer is yes. There is heightened risk in these markets. So I talked about Canada already, so I won't go through it. I addressed Mexico, I believe that they're moving forward, but the pace can be accelerated. In terms of Brazil, it's a similar conversation. The government is very engaged on ensuring that the steel industry in Brazil continues to thrive. They understand that the steel industry is domestically important, both long and flat. There have been some new measures that have been put in place recently. We expect this to further develop. Let us see the impact of the European trade measure that will be put in place latest by 1st of July and what it does to some of these markets. But I would expect that governments will react. I mean if there is a direct impact, I think everyone is recognizing that, that is very important to support the domestic steel industry for supplier resilience, for national security, for various other reasons. And so I am not overly concerned by that development or by that scenario, I should say. In terms of India, in India, I think you are solving for 2 things at the same time. It's unique from other markets in the sense that there is significant growth. And when you have growth that clearly supports the development, it supports profitability, as you continue to drive scale advantage, you can do productivity improvement and the 6% to 8% growth level is quite healthy for our market. And so I think the growth vector offsets some of the trade actions in that market because the government remains very focused on inflation. Nevertheless, even with the existing trade policy in place, we can see that the steel industry in India remains profitable. Growth is profitable, and that's where we continue to expand our operations. So Timna, I hope that provided you with a quick perspective. Timna Tanners: Yes, I appreciate it. It's not a quick topic, but we'll stay tuned. The other question we had, I just wanted to get your perspective on the substitution risk and opportunity in Europe, in particular. So we have heard that maybe Audi is switching more to steel from aluminum on the margin, but then also perhaps the move up in prices could risk some demand destruction. So I just wanted your thoughts on substitution both ways, if possible, please. Aditya Mittal: Sure. So we have gone through markets in which there have been significant tariff or trade measures put in place. I mean, I believe we live in one, the United States. And we have not seen that level of demand disruption or significant demand disruption in the downstream industries, right? So I think overall, this is not a phenomena that we are concerned about. However, we do want our customer base to be competitive. I think we always want to grow with our customer base. So that really is the thing that we want to solve towards, how can our customer base continue to grow and flourish. In that, I think there is a lot of activity in the European Union, a recognition that is also very important for European industrialization. And so if you see in the TRQ, there is a conversation on what has to be done on downstream industries as well, similar to what the U.S. has done. And so I would expect that once this is in place, there will be a conversation on TRQ measures for downstream industries. The downstream industries are not as well organized as steel, so it will take some time, but I do expect that to occur. There's a similar conversation on CBAM for downstream industries. What can be done in terms of CBAM for downstream industries? So I do expect that as these measures are put in place for the steel business, they're also put in place for some of the downstream industries. And there's also support. For example, we're growing our electrical steel franchise. And we do want to see electric vehicles being manufactured in Europe, not just the assembly of the vehicles, but everything, right, the whole gamut of activities. So that is the direction of travel and that is what we remain focused on. In terms of automotive steels, look, we have a leading franchise. We continue to do very well in demonstrating that steel is a premier product. It has excellent lightweighting capability and is available at a very competitive cost. Through our R&D efforts, through our process capabilities, that journey continues in all the markets in which we operate. Daniel Fairclough: So we'll move now to take a question from Phil at KeyBanc. Philip Gibbs: Regarding Calvert, just curious where the current operating rates are on the EAF. And then in Mexico, how much incremental volume should we think is coming back after the outages? Genuino Christino: Yes, Phil. Look, we are progressing, Phil, with the ramp-up of the EAF. So our expectation is to see a meaningful improvement in quarter 1. And as we discussed, we are hoping to be up and running at capacity towards the end of the second half, right? So it's progressing well. We are in dialogue with our customers for the homologation of the product. So it's progressing well. In Mexico, really the volumes that we're going to see coming in quarter 1. So as you know, we have 2 business in Mexico, longs and flats. The long business was basically the furnace was not operating in quarter 4 and started end of Jan. So you're going to have 2 months there, and it's a furnace that produces about 1 million tonnes. So you're going to have 2 months of the production and shipments. So that's what you're going to see. On the flat side, so we were -- we had maintenance for about 1 month in Q4. So you're going to have the full quarter, quarter 1 in operation. So that should add another. So we are talking about 2.8 million tonnes for our flat business at the moment. So then it's going to be 1 month more of capacity, Phil. Philip Gibbs: And then just as a follow-up, I saw D&A pop pretty good in Q4. I think largely, it was in North America. What should we be modeling just overall for D&A for '26? Genuino Christino: For '26 overall or you're asking for overall or for North America? Philip Gibbs: Overall. I just noticed the change in North America a lot quarter-over-quarter, but... Genuino Christino: Yes, yes, yes. So if you read our MDA, you're going to see we are providing a guidance on that, Phil. It should be in the range of $2.9 billion to $3 billion. So some of the new projects, of course, coming online. So there is a depreciation for that, right? And what you see, the data that you see in North America in quarter 4, it's just as we typically do at the end of the year. So -- and as we know, this is all based on estimates and to the extent that we have assets that ended -- get to end of life, we have this correction. So that should not be the run rate for the full year. Daniel Fairclough: So we have time I think, for one more question, which we will take from Max at ODDO. Maxime Kogge: So the first one is on Ilva. There has been some developments recently, which have forced you to issue a press release. Can you perhaps give us some sense of the next milestones there? And when we will get more clarity on the financial impact? I assume you haven't provisioned any amount at this stage, right? Genuino Christino: Max, yes. So look, I mean, you have our response there, right? And you referred to the press release and that's the right place to go. And you're absolutely right. So we have no provisions for that. We don't believe that is the case it has any merit. So there are no provisions in our books. And in terms of timing, I mean, we will see, but when we speak with our lawyers, it's likely that it may last for a couple of years. So we will, of course, update you as and when there are new developments. But it should be -- it should take some time. Maxime Kogge: Okay. Second question is on CBAM. Can you perhaps give us a bit of your initial feedback on the first months of implementation? Do you still see some circumvention going through the system? It seems also there was some import front-loading ahead of CBAM at the end of last year. So does it mean that most of the impact from CBAM in terms of pricing is yet to come? Aditya Mittal: Yes. That's a great question. So I'll address parts of your question. In terms of the front-loading of the CBAM, the CBAM came into effect 1st Jan 2026. However, as per the legislation, it's for a product which is produced before 1st Jan 2026 does not have any CO2 cost, right? So the product may arrive in Jan or Feb, but as long as it was produced in December 2025, there is no CBAM effect. So you don't see it in the January numbers. However, we are seeing it now because import offers are including CBAM costs. And as you can see, in Europe, there has been a change in the spot pricing of steel and that is reflecting -- some of it is reflecting the CBAM effect. In terms of your question on circumvention that as you know, there is also an activity to further tighten the CBAM. And there are a few topics to address. I spoke about, I think Timna asked a question on downstream. I spoke about the downstream. There is a review on what to do for CBAM for downstream. There is also a fund that is being created to support exports from Europe, right? And how we can support steel companies in Europe so that they can continue to export product globally. And then the third aspect is circumvention. So there is circumvention legislation, and we need to make sure that there is no resource shuffling and circumvention that occurs. At this point in time, we have not seen that. Clearly, the default values are in place. Certain companies will work through actual values. But fundamentally, so far, we have not seen that. Maxime Kogge: Okay. Very clear. And just the last one is on the India greenfield. So as the construction is getting nearer, how should we think about this financing? Will it be self-funded or through bank lines as previous phases of the development were done? Or will it be partly funded by equity injections from the shareholders, in which case, are you going to include them in your CapEx guidance? Aditya Mittal: Yes. Look, a great question. We are focused at ArcelorMittal on minimizing funding costs both at ArcelorMittal and our joint ventures. So we will make sure the capital structure that we put in place, both in India and ArcelorMittal supports that. To the extent that we have further news on that to share with you in terms of CapEx guidance or others, we will obviously update you. At this point in time, we are focused on achieving groundbreaking, achieving the key milestones and then we will come back and report to you on how we are minimizing overall funding costs. Daniel Fairclough: So that, Aditya, was our last question, so I'll hand back to you for any closing remarks. Aditya Mittal: Okay. Great. Thank you, Daniel. Thank you, everyone, for taking the time to join us. I hope the discussions gave you a clear sense of the progress we are making and the confidence we have in the road ahead. As you all heard, the outlook is positive. Policy developments are creating the foundations for a fairer and more balanced market. Our investments, particularly those supporting the energy transition, are delivering tangible returns and positioning us for long-term value creation. As I said, right at the opening, what underpins all of this and what is the foundation of all of this is our people. Across the company, I see a deep commitment to operational excellence, to innovation, to building a safer and more competitive ArcelorMittal. This gives me great confidence that we can continue executing our differentiated strategy to safely grow ArcelorMittal and create value for all our stakeholders. Thank you once again. With that, I will close today's call, and I look forward to speaking with you again soon.
Operator: Hello, and welcome to the Magnera Q1 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce EVP, Investor Relations, Robert Weilminster. Robert Weilminster: Thank you, operator, and thank you, everyone, for joining Magnera's First Quarter 2026 Earnings Call. Joining me, I have Magnera's Chief Executive Officer, Curt Begle; and Chief Financial Officer, Jim Till. Following our prepared remarks, we will have a question-and-answer session. To allow everyone the opportunity to participate, we ask that you limit yourself to one question with a brief follow-up, then fall back into the queue for any additional questions. A few things to note before handing over the call. On our website at magnera.com, you can find today's press release and earnings call presentation under Investor Relations. You can also go directly to ir.magnera.com to review the investor presentations from our recent conference attendance. Lastly, we filed our annual report and proxy statements with the SEC, which can be found on our website under Investor Relations and Financials. As referenced on Slide 2, during the call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures in our earnings press release and in the appendix of the presentation available on our website. Additionally, a reminder that we will make certain forward-looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore, are subject to risks and uncertainties. Actual results or outcomes may differ materially from those expressed or implied in our forward-looking statements. Some factors that could cause the results or outcomes to differ are in the company's latest SEC filings and our news releases. These statements speak only as of today, and we undertake no obligation to update them. I will now turn the call over to Magnera's CEO, Curtis Begle. Curtis Begle: Thank you, Robert. Good morning, and thank you for joining our call. I'm pleased to present our first quarter results and highlight the momentum that we've carried into 2026. For today's update, I'll focus on our financial performance, highlight key innovation efforts to improve our differentiated portfolio mix and update you on how our business excellence journey is aligned with emerging macro trends. First, our sequential earnings improvement over Q4 was in line with our expectations and reinforces our 2026 adjusted EBITDA guidance of 9% growth with our synergy realization and Project CORE transformation programs tracking as planned. It is noteworthy to mention that despite consumer spending concerns related to inflation, our customers are indicating resiliency and demand for the essential products we provide. Magnera's improved earnings for our Rest of World segment is a result of the intense focus on addressing our cost structure in competitive end markets while increasing our consumer solution mix in our portfolio. Our organic volume growth in North America helped offset the expected year-over-year volume decline in South America due to competitive import pressure from Asia. There are open inquiries in several countries connected to antidumping concerns and potential countermeasures. We expect earnings stability in South America in the coming quarters as we lap the prior year comparison in the third quarter. The improved mix in our personal care businesses is a result of addressing the demands of the largest consumer products companies and expanding our premium product lines in private label applications. The continued strength in our consumer solutions is a result of ongoing sustainability infrastructure investments in Europe and Asia. The benefit of our global scale anchors our ability to better manage energy efficiency through increased productivity. I've tasked our Americas team to increase operational progress in North America through targeted investments and operational excellence to enable growth opportunities in oversold platforms. As predicted, the South American markets are stabilizing, reflected by the supply chain alignment we have with our customers. Pivoting now to innovation on Slide 7. I will highlight the positive impact our efforts will have on our business mix in 2026 and beyond. Shortly after we launched Magnera, our resources were intentionally deployed to programs that were part of our broader strategy to be a cost-competitive product leader in our chosen markets. We thrive on being the trusted solutions partner to meet the most challenging consumer needs. The presentation materials provided highlight a small sample of our key leading innovations in 2 categories, with the first being transformational by design. Although these innovations take longer to realize full potential, they address key end market needs. We identified a second category as incremental improvements to current products or introducing an existing innovation to a new market. Last quarter, we launched a transformational breakthrough in barrier protection for health care applications. This proprietary innovation delivers fluent repellency requirements for health care professionals while ending the need for PFAS chemicals. This innovation not only solves end-of-life material concerns, it provides the mission-critical performance demanded by the end user. Another exciting development is the progress that we have made with an advanced materials solution that extends battery life and accelerates charging times. As lithium-ion batteries grow with vehicle electrification and growing defense needs, we developed a product that is a candidate for a government grant supporting regional supply chain priorities in critical national security programs. Next, I'll speak to innovations enabled by Magnera's existing intellectual property and platform capabilities to improve existing products. Our Kamisoft platform is a step improvement in softness while maintaining barrier and tensile strength. We launched this product in North America and have taken that platform to the remaining regions. Last year, we had $15 million in sales, and we're seeing growth in mid-single digits as we go into 2026. The benefits to consumers are common in branded and private label personal care products. Before completing my opening comments, I want to clarify how we are winning in the market. In the first quarter, our premium hard surface disinfectant wipes technology proved its value in the face of an elevated flu season. Our ability to meet our customers' dynamic supply requirements demonstrated our flexibility and localized supply chain value, resulting in strong growth in our Americas region. In addition, we were able to support the growing needs for premium private label baby, consumer and dispersible wipes. A second bright spot was growth in European infrastructure enabled by our strong position in essential utility investments and maintenance projects. As Europe has prioritized infrastructure to provide continuity for critical utilities and data cables, we have made operational improvements to increase efficiencies and meet the growing demand. Lastly, our branded Geca Tape, which provided required protection against corrosive environmental elements found above ground and undersea for high-voltage cable applications and wind and solar energy expansions, also provided nice gains in the quarter. Turning to Slide 10. Our strategic priorities are clear, disciplined and intentionally designed to position the company for sustained long-term success. At the foundation of our strategy is a commitment to strengthening our global cost structure, ensuring we operate with efficiency, scale and competitiveness required to earn the right to win in the markets we serve. Equally important, we are focused on delivering product leadership by fostering thoughtful, collaborative innovation across the organization and with our customers. By aligning deep market insight with technical excellence, we aim to develop differentiated solutions that create enduring value and reinforce our leadership positions. Finally, we are advancing a comprehensive set of commercial excellence initiatives to ensure we fully realize the advantages of our portfolio, capabilities and market positions. Through disciplined execution, sharper focus on priority segments and stronger customer engagement, we will maximize our impact in the spaces where we choose to compete and grow. Our strategic direction was constructed to capitalize on established positions in key markets, as noted on Slide 11. By design, we continue to balance our product portfolio to ensure financial stability in all economic cycles. We remain confident in our ability to deliver on our full year financial guidance. Our optimization efforts are well underway, and we continue to cultivate an innovative culture aligned with our commitments to our customers while providing the stable financial results our investors expect. At this point, I will conclude my opening remarks and invite Jim to provide a detailed overview of our financial performance. James Till: Thank you, Curt, and good morning, everyone. Turning to the financial highlights on Slide 12. As Curt referenced earlier, our quarterly earnings performance was in line with expectations. This performance reflects the continued discipline and execution of our global teams who delivered meaningful cost reductions, advanced productivity initiatives and further optimize our product mix across the organization. Importantly, during the quarter, we made substantial progress on Project CORE, positioning us to realize earnings benefits as we continue to optimize our global footprint and align our cost structure with long-term demand trends. For the quarter, sales were $792 million as strength across our consumer solutions categories was offset by weaker performance in Latin America as well as continued broad-based market softness in Europe. Despite these headwinds, our team remained focused on disciplined pricing, portfolio management and cost containment. Adjusted EBITDA for the quarter was $93 million, flat year-over-year on a constant currency basis as contributions from synergies and cost reduction initiatives offset the impact of softer demand in Europe and South America. Turning to our segment performance, beginning on Americas on Slide 13. The Americas division delivered 2% organic volume growth during the quarter, driven primarily by strong demand in our wipes and adult end markets. These gains reflect both resilience in our core categories and the effectiveness of our commercial execution. As we've discussed in previous calls, the performance in South America baby business was challenged by heightened competitive intensity, which began in the second quarter of fiscal 2025. In addition, reported revenues were impacted by contractual pass-through of lower raw material costs, which reduced revenues but did not have a material effect on profitability. Adjusted EBITDA in the Americas declined by $3 million compared to the prior year. This decline was largely attributed to volume and product mix pressures in South America. While we are not satisfied with this performance, we remain confident in our ability to improve results through the balance of the year. Our teams are actively executing on a range of targeted initiatives under Project CORE, which are focused on enhancing efficiency and optimizing the regional footprint. As we expect these initiatives, combined with continued synergy realization and strong emphasis on operational excellence will support margin recovery in the coming quarters. Turning now to the Rest of World division on Slide 14. We experienced year-over-year decline in revenues during the quarter as strength in our Asia healthcare business was more than offset by ongoing general market softness in Europe and the pass-through of lower raw material costs. While the top line conditions in Europe remains challenging, we are encouraged by the resilience in the earnings of the region. Adjusted EBITDA for the Rest of World division increased by an impressive 9% to $35 million. This improvement reflects the continued progress on our disciplined cost management and synergy realization as we focus on delivering differentiated products into end markets with attractive profitability. This performance of this division highlights the benefits of our strategic focus on operational efficiency and portfolio optimization. Turning now to our capital allocation priorities, which are outlined on Slide 15. Free cash flow over the last 4 quarters totaled $97 million, representing a free cash flow yield of approximately 18% based on market capitalizations at the end of the quarter. Our strong cash generation underscores the quality and resilience of our earnings and demonstrates our disciplined approach to capital deployment. At the end of the quarter, we had approximately $550 million of available liquidity. In the near term, our capital allocation priority remains strengthening our balance sheet as we've committed to deleveraging in line with our stated capital allocation framework as we work towards our targeted leverage ratio of 3x. This disciplined approach ensures that we maintain financial flexibility while positioning the company for long-term value creation. In support of this commitment, we repaid $27 million of outstanding debt during the quarter and expect to repay approximately $100 million over the course of the fiscal year as we deliver sustained and attractive returns to shareholders over time. This concludes my financial overview, and I'll turn it back over to Curt. Curtis Begle: Thank you, Jim. Now that Magnera has officially entered our second year of existence, I would like to thank our valued employees for their willingness to embrace challenges and execute on our demanding playbook. Despite a dynamic macroeconomic environment, we expanded margins through disciplined operational focus and delivered a strong financial quarter. We are committed to increasing value for our stakeholders through earnings growth and robust free cash flow generation. Our priorities are clear: operational excellence, balance sheet strength, disciplined capital allocation and strategic investment and growth opportunities. These actions position us to secure long-term shareholder value while maintaining flexibility in a competitive global environment. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Gabe Hajde with Wells Fargo. Gabe Hajde: I wanted to start with, Curt, you kind of laid out some potential intervention antidumping and countermeasures that are being explored. Can you just talk about maybe timing of those? And I'm assuming most of that sits in South America. And again, like if you've seen any change in behavior on the competitive landscape front? And then sort of correlated to that, we've seen some of your customers merging or pursue some partnerships in the market. Has this changed conversations at all at this juncture? Curtis Begle: Gabe, thanks for joining the call this morning and for the question. So just to start with the antidumping situation, there's some legislation and some proposals in Brazil, and we would expect the May time frame for those to be kind of coming to a conclusion. We're encouraged by some of the dialogue. There's recently been some antidumping measures as it related to polyolefin materials going into the region, and that's now been proposed and expanded to the nonwoven materials, again, that we manufacture and ship inside of the country. In terms of the customer dialogue, we talked about the stabilization of just the discussions we've had with our customers and the alignment that we have with supply chain. And so as we've pivoted some of the portfolio to what we've been encouraged by is some of the more premium applications in the region that are ramping up. But also the other thing as it relates to South America, we're seeing a ramp-up of adult incontinence adoption rates. And part of that's been driven by some government subsidies. And so those adoption rates are picking up. And now with the quality of the products that are being provided down in that region, it's having a similar effect that it's had in some of the countries like the U.S. and Europe, various countries throughout Europe. So we're encouraged by that, and we're already seeing a pivot in terms of the portfolio where we've primarily been baby in South America, as we've highlighted historically. That's now at 20% of the total portfolio just in South America. So we'll continue to see that mix change and mix improvement as it relates to our product lines. And I think your other question, Gabe, was -- I think it was related to some of the customer -- or some of our customer partnerships. Is that what you referred to? Can you clarify the question? Gabe Hajde: Yes. There's just been some merger activity or kind of cross-border partnerships that have been entered by some of your customers. And I'm just curious if that's enhanced, changed the dialogue with those customers and perhaps... Curtis Begle: Yes. Look, I always view that as a pretty positive thing as it relates to our situation because of our global scale and because of the relationships we have with pretty much every customer that's in the spaces that we serve. And so if anything, we see that as an enhanced opportunity for further innovation and driving some supply chain efficiencies on their end. And so again, we stay very close to those customers. Obviously, there's dialogue that takes place. You're limited in terms of how much can be done prior to the actual conclusion of the 2 organizations. But we've had a couple of those customers more recently announced the intent to either combine, merge or acquire, and so we stay very close to them and also where they're growing, right, where they're putting some of their own investments as it relates to capacity additions or just recapitalization of their existing assets. So we stay pretty close to that as well. So we view it as a very positive thing historically. And now with the bandwidth that we have inside the organization and the diversity of the portfolio, it gives us a greater opportunity to have the seat at the table and really find ways to solve their needs. Look, they're all looking for cost innovation opportunities, but also the innovation portion of differentiation on the shelf. And that's really where we put a majority of our efforts as it relates to our innovation team and commercial excellence team to stay in front of them. Gabe Hajde: Understood. So more of an opportunity. Just a point of clarification, you said adult incontinence approaching 20% of the portfolio down specifically in South America? Curtis Begle: Correct. If you recall in some of the historical information that we provided, it's roughly in our Personal Care segment, which is 47% of our total enterprise, Personal Care is made up of adult, fem, baby and then healthcare. And it's been pretty much a 50-50 split globally for us between adult and baby, which has ticked up significantly over the past 5 years from an adult position standpoint. The lagger has been -- for us has been South America, where it's been primarily baby and there's been less adoption rates as it relates to adult inco. And so now having that portfolio in South America creep up to 20%, I would expect over the course of the next 3 years to 5 years to see a very similar 50-50 split. And then with the Rest of the World in some of our more mature markets, whether it be North America, Europe, I would expect that split to go from 50-50 more to 60-40. It takes 3 to 4 baby diapers to make up the amount of material it takes to make an adult incontinence product. And so we continue to leverage our platforms because of the same platforms, same materials, same demands as it relates to discretion, form fit and function. And not to mention, again, heavy efforts on ensuring we can continue to provide our customers with the right fem care application products to grow that segment as well. So encouraged by what we're seeing, again, in South America and really maybe more accelerated than I would have anticipated a couple of years ago. Gabe Hajde: Got it. I wanted to ask a couple of our companies thus far have mentioned weather I know a decent amount of your plants kind of sit in the corridor where some of these storms came through. So any impact, this is more of a near-term question, but just any impact from that and how we should think about it? Curtis Begle: Yes. It's been an interesting winter to say the least. I think this is the first time we had the number of sites that were really impacted by the storm. And coupled with that, our customers were impacted as well. So in terms of long-term demand dynamics, there's no change to what we would expect through to the balance of the year. But fortunately, for us, our teams did a nice job of preplanning, do the appropriate shutdowns, all of our safety being our #1 priority and in terms of our employee base and what our core values are, it was simply call-offs as it related to our employees. So pretty much every one of our facilities in North America were impacted in the first wave of storm. The best way we've calculated that is it impacts roughly 10% of our shipping days in North America. We would expect over the course of the balance of this quarter and into the next quarter that there will be some catch-up, but we would expect a little bit of impact as it relates to just shipments and timing, but we would get the overhead absorption back as we have ramped back up. And then the most recent storm hitting North Carolina, as you know, as you look at the map and look at our sites, we have quite a bit of concentration in North America. Also, we have quite a few customers in that area as well. But fortunately, I'm proud of what the team has been able to accomplish of getting the lines fired back up and getting product out the door. I think -- and we've not heard from our -- any major disruptions as it relates to supply chain logistics. But I would imagine as store shelves continue to get replenished and some of our customers ramp back up some of their inventory, we'll continue to monitor and manage just overall freight availability and logistics. Fortunately, for us, many of our customers are pickup. So we're working with them on identifying the best routes and getting those products to them. But again, this is a case where we were not in a position where we were disappointing customers because we couldn't supply product to them. It's going to be a matter of just managing their inventory, store shelves, et cetera, and continue to take care of them the way we always have. Operator: And our next question comes from the line of Kevin McCarthy with Vertical Research. Kevin McCarthy: Curt, on Wall Street, I think some investors have gotten excited about the uptick in PMI in January. And I'm curious, as you look across your portfolio, are you seeing much evidence of either improved underlying demand and/or some restocking activity as the calendar page flipped from December into January? Curtis Begle: Kevin, thanks for joining the call. Good to hear from you. I think you and I have had some dialogue about destocking, restocking, and I try to avoid those topics because from our standpoint, we try to be on a short cycle with our customers. But in general, we've experienced some of the same demand trends that you would expect in North America in particular. So as we mentioned on the call, we have experienced a growth in North America. We would expect that to continue on. And we forecasted that for the guide. Europe continues to be a little bit of a concern just as it relates to overall demand dynamics, but we had also put our guide toward minus 3% in the region. I think it was minus 5% out of the first quarter. We'll continue to monitor that and take the appropriate actions. But I'm not ready to wave the flag and say, hey, demand is just going to be tremendously robust. However, we're seeing or experiencing the same signals that maybe some of the consumer products companies are sharing as well, which would be a positive thing. But for us, it's just to remain disciplined close to our customers and be ready to take them on when they need the additional product. So we'll continue to monitor it. But optimistic for sure, but we're not putting that anywhere in our outlook at this point. Kevin McCarthy: Understood. And then secondly, I was wondering if you could provide an update on Project CORE, maybe review what you've done so far and talk through the next steps or mileposts we should be thinking about there? Curtis Begle: No, thanks for that question. Yes, so Project CORE, we mentioned a little bit on the call, I've been very pleased with the execution from our teams globally. As we mentioned before, it was impacting all regions, and we really targeted those areas where it was the longer supply-demand dynamics related to the platforms that we are serving. So just as a reminder, some of the spun bond technologies that we have inside of the system, we focused on prioritizing investments on those lines to more premium applications, but also taking the appropriate measures to remove some of the capacity from our system that, again, will help inorganically kind of shape up what we would expect to have better utilization rates globally. We had a slight benefit in the first quarter as we expected, and we'll see that continue to ramp up throughout the balance of the year, quite a few actions in this quarter that will start to reap some of those benefits and then blended in over the course of the next 2 quarters. So still very much in line with what we had anticipated in the range of $15 million to $20 million of benefit. We had certain executions that have already taken place on time, on schedule, slight delay on a couple of others, but nothing materially different than what we've already put a guide toward. But again, for us, there are certain areas and certain platforms inside of our network where I'm pushing our teams to be able to drive more productivity because we're getting much tighter utilization rates than historically we've experienced. And so we'll continue to monitor that. But just in terms of the overall Project CORE-related programs, well on schedule and well within what we provided in our guide. Kevin McCarthy: Very good. And then last one for me, if I may. If I look at your Slide 11, you have a nice snapshot of the portfolio. And you have 6 categories there essentially. I was wondering if you could speak to the outliers, maybe help us understand where you're seeing the strongest positive growth and on the other end of the spectrum, if there are any pieces that you think are running subpar at the moment or opportunity for improvement as the year progresses? I'm guessing adult might be in the positive category based on your prior comments. But any additional color along that framework would be helpful. Curtis Begle: Yes. Look, and I think it's important to look at it by segment or region as well. So particularly in North America, we are seeing some positive implications as it relates to the innovation that we've had on the baby front. And if you look at store sales data in the U.S. markets, baby has ticked up slightly. So it's very low single-digit growth, but adult continues to gain momentum. Wipes, as we've talked about, is an excellent enterprise or franchise for us inside of the portfolio, particularly as you look at some of the proprietary technology, and Kevin, you had a chance to see it in our [ Mooresville ] site during one of your visits that Spinlace technology and that proprietary technology has really certainly gained up momentum, and we've been able to grow with the market and support our customers as they've grown in those areas. From an infrastructure standpoint, we highlighted Europe on this call. That's an area where it's a nice mix of business. It's a nice niche application for us. But when we look at North America, we also have a strong TYPAR brand, and we continue to find ways to evolve that portfolio by having some additive products within that space. What I would say is on the home food and bev side, this is a very strong position that the historical Glatfelter business had had. And so a big focus we've had there, as we've talked about before, the qualification of other materials, finding ways for compostable solutions for our customers and the benefits we can provide them as well. And so that business, I would consider stable. The team has done a nice job of securing the right contracts, the right mix of business that we want to run. And we all root for cold season, so people drink more tea and coffee. But in general, that business is very stable, I would say, because a big concentration in Europe, it's not necessarily down negatively in a big way, but it's more tempered than what we'd see in other parts of the world. And then lastly, healthcare being relatively small in terms of the total portfolio is where we've had a recent launch for our gowns and drapes and elimination of PFAS materials. We think that there's not only an ability to protect the business that we currently have in that market, but potentially expand through whether it be market share gains or further demands from end users on better solutions for PFAS-free materials. And then again, there's some outliers within each of the regions that I would say are a little bit more tempered in general. We talked about baby in South America and the competitive pressures that we've had from Asia and other imports. Regardless of what happens with the antidumping measures, I think for us, we've certainly found stability in the region and the conversations with customers and our ability to have that local supply and the responsive rate has helped at least shore up some of the dialogue that we've had with them. But more importantly, it's the discussion on how we pivot more towards some innovative products that historically haven't been as prevalent in that region than we've experienced in other places. And our team in Asia continues to do a nice job of securing the right businesses for those lines, albeit relatively small in terms of our total business, profitable business, and the team does a really nice job of also supporting other regions, not only with innovative products, but best practices across the system. So again, without getting too deep into some of the outliers within the product mix, in general, we feel good about the majority of where we sit from the portfolio. I can get into certain applications that are relatively small and immaterial that we continue to evaluate from a portfolio standpoint. But in general, hopefully, that provides you a little bit of flavor. But Europe still continues to be soft, as you heard from other major players. U.S. showing nice green sprouts, South America stabilizing and Asia Pacific continue to be stable. Operator: And our next question comes from the line of Roger Spitz with Bank of America. Roger Spitz: For fiscal 2026, is your volume growth assumption still flat? And how do you think about 2027 volumes if you have some thoughts there? Curtis Begle: Roger, thanks for joining the call. Good to hear your voice. We're not going to comment on '27. I think we can look at longer-term growth dynamics. And as we get to our guide throughout the year, we'll maybe provide some more color there. But I don't know, Jim, if you want to -- we have come into the year with flattish volumes, and we expected Europe to be slightly down, as I mentioned, roughly 3%, North America being slightly positive to help offset that. And then what we would experience toward the back half or the second -- last 2 quarters of our fiscal year will enter into a little bit more normalized comps for South America. So we still are anticipating flattish volumes overall. And keep in mind, we've made some intentional efforts, Roger, on where we want to play, where we're leaning in, in terms of our commercial excellence programs. And there's businesses that may not fit within our portfolio long term that whether it be not a path to having us be the right competitive set, but more importantly, have the right growth dynamics for us long term. So again, we're being selective in making sure that, again, we're getting the value for the products that we supply and that we serve our customers with, but that will have an impact as some of the actions that we've taken on CORE. Roger Spitz: And then for the fiscal 2026 EBITDA guide up from pro forma fiscal 2025, including Glatfelter, is therefore the main drivers of the growth cost savings and merger synergies? Or are there other items that might be driving that improvement? Curtis Begle: Yes. I'll touch on just from a mix standpoint, obviously, that's been a focus of ours. And I'll let -- I've been talking so much here. Jim, I'm going to let you jump in here as it relates to synergies. James Till: Yes. Thanks, Roger. Yes, yes, the primary driver for growth, as we highlighted, we're sort of assuming flat volumes for your last question. So the main driver of growth in 2026 is going to be both the synergy realization as well as the Project CORE initiatives as we sort of highlighted on the last call. Roger Spitz: Got it. And then lastly, I don't know if you want to give further detail on the other items in fiscal 2026 free cash flow, for instance, working capital inflow/outflow, I think you were kind of neutral last time, cash taxes or any other items? James Till: Yes, yes. The -- we target -- we always target flat working capital. So if you're thinking about your free cash flow walk, we're at the $395 million midpoint, $135 million for cash taxes -- I'm sorry, for interest, $80 million for integration costs and taxes, and then you have CapEx of $80 million as well. We will get you to the midpoint of roughly $100 million. Operator: And our next question comes from the line of Edward Brucker with Barclays. Edward Brucker: To build on some of the innovation points you made, are you able to provide maybe directionally the margin profile for these innovative products and if they are proprietary products more commoditized? And then would these innovative products cannibalize any other products in the portfolio? Curtis Begle: Yes, that's a very good question. So there's 2 different types of things that we do with our customers. First of all, it's protecting some of the existing business through the innovation and finding ways to not only benefit our customer from potentially cost savings opportunity, but a margin up opportunity from our side. The other thing that we look at is, is this a new feature or benefit within a particular product. And so we've been able to launch some of those as well. And historically, Edward, we would -- we expect obviously a higher than our average margin. So that can range anywhere between the mid-teens to 20-plus depending on how unique the application is, what materials are available and used in the product itself, but more importantly, the collaboration that we have with our customers. So again, we'll continue to find ways to help our customers drive efficiencies through cost competitive applications and sharing in those savings. But for us, we expect innovation to be well above our average of 11%. Edward Brucker: Got it. Second one on the debt reduction goal for the year of $100 million. First, is that gross debt reduction? And then second, if it is, where are you targeting that debt reduction? Is it through the term loan or maybe taking some discount within the bonds? Curtis Begle: Yes. No, as you saw -- thank you for the question, by the way. Yes. So as you saw in the quarter, we did take advantage of both buying back bonds and term loan in the open market. So we will go after the yield, which is sort of the best use of money in terms of -- and we do buy in the open market. So that's how we would approach it. It will just be on which has the best return at the given point in time as we pay down throughout the year. Operator: And our next question comes from the line of Gabe Hajde with Wells Fargo. Gabe Hajde: Two hopefully quick follow-ups here. Curt, you mentioned in your prepared remarks, improved operations and oversold platforms. I'm just curious what specifically your referenced there, if it's somewhere you're capacity constrained or something like that in North America? Curtis Begle: Yes. As we mentioned -- as I mentioned earlier on the call, so anytime there's an elevated -- for instance, elevated flu season, you may be smacked with a great deal of orders in a short period of time where you're going to be maxing out certain levels of capacity if you're close to that 90% utilization. And so we're really focused on some of those platforms within our system where the market isn't quite as long in terms of supply-demand dynamics, and that can vary by region, Gabe. But ideally, it's finding ways to produce more product off the existing assets that we have. And that comes through both just operational excellence productivity measures, supply chain is tied into that as well. So it's working with our customers, identifying the best running SKUs, how we can maximize that. But also the work that the team has done on material science and material innovation that's actually been an enabler as we've looked to qualify other raw materials and finding more efficient material streams to run through our lines. And it could be as simple -- when we think about some of our production lines Gabe, it could be as simple as an upgrade to an existing winder to be able to have the extrusion and the overall makeup of running our lines faster with the same level of quality and service that their customers expect to be able to get more throughput on those lines by having the right technology at the end of the line to improve the overall throughput of the machines. Gabe Hajde: Got it. Okay. So relatively capital light, it sounds like. Two last unrelated questions. One is just seasonality. We don't have a whole lot of history here, obviously, with the combined entity. But at the midpoint of kind of the guidance range, I think you've talked about before maybe low 40%-ish in the first half and the remainder in the second half. Can you help maybe Jim or Curt parse that out for us? And then putting a little bit finer point on the synergy realization. I think the ultimate target was $55 million. Last year, you were somewhere in the mid-teens in terms of absolute realization. What's the target for '26? And then kind of what does that leave in the '27 for us to get after? Curtis Begle: Thanks, Gabe. So I think just maybe on the second question, we have put $25 million of realized synergies for 2026 with the balance then working through in '27. And we can follow up on that or Jim, you can highlight that. And then the initial question, just as it relates to demand by quarter, again, every region is a little bit different in terms of summer months and holidays, et cetera. But in general, Q3, Q2, Q4, Q1 would be the kind of the demand outlooks for us. So Q4 being a little bit softer because of the European shutdowns and excuse me, our fiscal Q4, Gabe, and then Q1 being one of the softer ones because of the holidays that we have, both at Christmas, New Year's, Thanksgiving, et cetera, in North America. So Q3, Q2, Q4, Q1. Operator: I'll now hand the call back over to CEO, Curt Begle, for any closing remarks. Curtis Begle: Thank you, operator, and thanks, everyone, for joining the call, your interest in Magnera. We look forward to following up with many of you here over the course of the next few days and look forward to the next earnings call for Q3 or Q2 results. So thanks for joining. Have a great day. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to EnerSys' Q3 Fiscal '26 Earnings Webcast and Conference Call. [Operator Instructions] I would now like to turn the conference over to Lisa Langell, Vice President, Investor Relations and Corporate Communications. You may begin. Lisa Langell: Good morning, everyone. Thank you for joining us today to discuss EnerSys fiscal third quarter results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andi Funk, EnerSys' Executive Vice President and Chief Financial Officer. Last evening, we published our third quarter results with the SEC, which are available on our website. We also posted slides that we'll be referring to during this call. The slides are available on the Presentations page within the Investor Relations section of our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Form 8-K and 10-Q filed with the SEC. In addition, we will be presenting certain non-GAAP financial metrics, particularly concerning our adjusted consolidated operating earnings performance, free cash flow, adjusted diluted earnings per share and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated February 4, 2026. Now I'll turn the call over to our CEO, Shawn O'Connell. Shawn O'Connell: Thank you, Lisa, and good morning. Please turn to Slide 4. During the call today, we will provide an overview of our third quarter results, share progress on our energized strategic framework, update you on the latest demand trends we are seeing in our diverse end markets and provide guidance for our fourth quarter. Please turn to Slide 5. We delivered strong earnings in the third quarter with adjusted diluted EPS ex 45X of $1.84, up 50% year-over-year and a company record for our third fiscal quarter. Net sales were up 1%, in line with the low end of our guidance range as strong price/mix and favorable FX offset lower volumes. Earnings growth outpaced revenue growth, driven by favorable product mix, pricing discipline and our cost improvement efforts resulted in adjusted operating earnings up 34% and adjusted EBITDA up 30%, both excluding 45X. We continue to be excited about mounting growth catalysts across all of our end markets, though near-term softness persists in Motive Power & Transportation. A few highlights from our lines of business. Energy Systems delivered its first double-digit AOE margin on modest sales growth. Despite slightly lower year-on-year sales, Motive Power margins remained in line with prior year. And finally, Specialty delivered remarkable performance improvement with sales up high single digits and AOE more than twice that of prior year, resuming double-digit AOE margins for the first time in 3 years. Free cash flow in the quarter was also particularly strong, and we are pleased to return $94 million in capital to our shareholders this quarter through share repurchases and dividends. Please turn to Slide 6. Through our energized strategic framework, we are continuing to further optimize our core, invigorate our operating model and accelerate our growth. We are capturing realignment savings as planned, and our centers of excellence are continuing to improve execution, speed and consistency. We are also progressing on some of our key growth verticals. The reduction in force actions we announced in July are now largely complete, and we are committed to preserving these savings by disciplined cost management going forward. The closure of our Monterrey battery plant is substantially complete with all manufacturing transition to our Richmond, Kentucky facility in November, 1 month earlier than planned. We expect to begin realizing the benefits mid-fiscal '27 as the savings work their way through our inventory. We've turned the corner on our services improvement, having delivered revenue and margin expansion over the past 2 quarters in this important growth vertical. This is a direct result of improved execution enabled by deploying new project management tools to bring real-time visibility, clear communication and tighter project control. We are also seeing encouraging momentum in our new product development pipeline, aided by our invigorated operating model in which we have enhanced alignment between our engineering teams, centers of excellence and lines of business. This renewed collaboration is helping us accelerate innovation, focusing on expanding our share of wallet in our core markets where we have a right to win. From battery energy storage systems to next-gen power electronics, TPPL and lithium solutions with embedded software, we are developing products that solve our customers' most critical energy challenges. Although the progress on optimizing our core is already becoming evident in our financial results, I am most excited about the speed and focus we're making on our new product development initiatives. While this work won't materially impact revenue in the next few quarters, the milestones achieved represent important building blocks for our future growth. We will have more to share on our long-term technology road map during our Investor Day on June 11. We have also made notable progress aligning our planned lithium cell factory with current administration priorities, and we believe we are close to finalizing our updated plan with the Department of Energy. Progress has been slower than anticipated, but we believe the extra time will result in very favorable outcome adapted to current market dynamics. We will provide updates when our plans are finalized. Please turn to Slide 7. We continue to manage the impact of tariffs on our bottom line. In the third quarter, we fully offset the tariffs realized in our P&L through proactive supply chain actions and pricing strategies. While we anticipate continuing policy shifts, our total exposure remains stable at around 22% of U.S. sourcing with our estimated direct tariff exposure unchanged from last quarter at around $70 million annualized for fiscal '26. Our task force and lines of business continue mitigating risk and enhancing supply chain optionality. Please turn to Slide 8. Our diversified business model is proving its resilience as positive demand signals across most of our end markets help offset near-term softness in tariff-sensitive industries such as forklifts and Class 8 trucking. Both Q3 orders and backlog were up sequentially and year-over-year in all business segments, except Motive Power & Transportation, illustrating the near-term dynamic conditions we are seeing market to market. In Motive Power, industry data for forklift orders in December were up 40% versus prior year, a leading indicator for us, which gives us optimism. However, we are not yet confident a firm recovery is underway as our battery orders were up only 1% sequentially, and thus, we expect the slowness may continue into mid-fiscal '27. In Transportation, Class 8 trucking is still at the bottom of the cycle, but we are managing the impact through pricing, cost improvement and aftermarket growth. Based on conversations with our customers in both trucking and logistics, we understand that fleets are aging and investment is being deferred through delayed ordering cycles, which translates into pent-up demand. This underinvestment is unsustainable and when our customers need to ramp up swiftly in future quarters, we will be prepared to address the demand associated with the technological deficit that has been created. In communications, our customers are updating their networks and planning upgrades. We are continuing to see constructive momentum as they review the need to replace aging equipment across their installed base and improve capabilities to meet the expanding consumer and government demand for quicker and more reliable data delivery and backup power. Our data center business remains strong with Q3 sales up 28% over prior year. Despite the acceleration we've seen to date, the data center market remains in the early stages of a multiyear growth cycle, driven by the rapid expansion of AI workloads and a rising need for energy resilience. Our customers rely upon our solutions to help safeguard essential energy infrastructure. While deployment timing can vary by affecting quarterly trends, we look forward to continuing to benefit from the critical role our products play in the AI development super cycle and compounding that impact with new product offerings in the future. The dynamic geopolitical environment continues to drive an increase in global defense budgets and demand for next-gen power technologies for both tactical and mobile software applications as well as military drones. As such, A&D activity remained robust in the quarter. Overall, we're pleased with our earnings strength and margin performance, reflecting our renewed disciplined execution and operational rigor. As we look ahead, our teams are aligned around the actions that will drive long-term value, including organic innovation and strategic opportunities to expand our capabilities. We are highly confident in our focused growth strategy, supported by durable secular demand trends, including the growing need for energy security and high-performance energy storage solutions. Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail. Andi? Andrea Funk: Thanks, Shawn. Please turn to Slide 10. Net sales came in at $919 million, up 1% from prior year, driven by a 3% benefit from price/mix, a 2% benefit from foreign currency translation, partially offset by a 4% decrease in organic volumes. We achieved adjusted gross profit of $278 million, down $22 million year-on-year, but up $19 million or 8%, excluding 45X benefits. Note that 45X credits in the third quarter of last year were $75 million and included a onetime catch-up of $36 million compared to $35 million in the third quarter of this year. The prior year catch-up impacts the year-over-year comparison of our adjusted gross margins and adjusted earnings, clouding the impressive year-on-year improvement, excluding these benefits. Q3 '26 adjusted gross margin of 30.2% was up 110 basis points sequentially and down 280 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 150 basis points sequentially and up 170 basis points versus prior year. OpEx in the quarter improved as a result of our cost reduction initiatives. As expected, we realized approximately $15 million in Q3 from these actions and anticipate similar savings in Q4. Our adjusted operating earnings were $142 million in the quarter, up $13 million versus the prior quarter and down $13 million versus the prior year with an adjusted operating margin of 15.5%. Excluding 45X benefits, adjusted operating earnings increased $28 million or 34% with a record adjusted operating margin of 11.7%, up 290 basis points versus the prior year. Adjusted EBITDA was $160 million, a decrease of $12 million versus prior year, while adjusted EBITDA margin was 17.4%, down 150 basis points versus prior year. Excluding 45X, adjusted EBITDA of $125 million, a company high, was up $29 million or 30% year-on-year with a company record adjusted EBITDA margin of 13.6%, up 300 basis points versus the prior year. Adjusted diluted EPS was $2.77 per share, a decrease of 11% over prior year. Excluding 45X, adjusted EPS was $1.84 per share, up 50% versus prior year and also a third quarter record. Our Q3 '26 effective tax rate was 14.9% on an as-reported basis and 22.4% on an as-adjusted basis before the benefit of 45X compared to 23.3% in Q3 '25 and 23% in the prior quarter on geographical mix of earnings, which can vary quarter-to-quarter. We continue to expect our full year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2026 to be in the range of 20% to 22%. Let me now provide details by segment. Please turn to Slide 11. In the third quarter, Energy Systems revenue increased 3% from prior year to $400 million, primarily driven by strong price/mix and a positive FX impact, partially offset by the anticipated softer volumes due to the customer pull-ins we noted last quarter and some deferred year-end CapEx spend, both of which included lower-margin product sales that propped up this segment's third quarter margins. Adjusted operating earnings increased an impressive 67% from prior year to $42 million, reflecting the benefits of favorable price/mix from a richer mix of products, OpEx savings from our restructuring efforts and the service margin improvements Shawn noted earlier on the call. Adjusted operating margin of 10.5% increased 400 basis points versus prior year. While we expect some variability in margins quarter-to-quarter due to the project nature of this business, the overall trajectory of this segment remains very encouraging. Motive Power revenue decreased 2% from prior year to $352 million with lower volumes from ongoing market softness more than offsetting FX tailwinds and favorable price/mix. Motive Power adjusted operating earnings were $53 million, roughly flat to prior year, resulting in adjusted operating margins of 14.9%, up 20 basis points versus prior year with OpEx savings mostly offset by the lost leverage from lower volumes. Maintenance-free product sales increased 5% year-on-year and were 29% of Motive Power revenue mix compared to 27% in Q3 of '25. As the pause in capital investments for many in the logistics market continues, we expect improving but still soft volumes in Q4 with this trend likely continuing into the first quarter or 2 of fiscal '27. Longer term, Motive Power remains well positioned for growth, supported by electrification, automation and strong demand for our maintenance-free and charger solutions. Specialty revenue increased 8% from prior year to $168 million, driven by a 4% benefit from price/mix, a 2% increase in organic volumes, a 1% FX tailwind and a 1% contribution from the Rebel acquisition. As Shawn mentioned, Specialty's Q3 '26 adjusted operating earnings of $20 million were more than double that of prior year. Adjusted operating margin of 11.8% was up 560 basis points as this quarter reflected ongoing strength in A&D and transportation aftermarket growth, helping offset the Class 8 OEM softness as well as benefits from manufacturing cost improvements and restructuring efforts. As we've shared previously, this segment is capable of sustained double-digit margins and our efforts to accomplish this are taking hold with additional opportunity in front of us. Please turn to Slide 12. Operating cash flow of $185 million, offset by CapEx of $13 million, resulted in strong free cash flow of $171 million in the quarter, an increase of $114 million versus the prior year same period. This increase was aided by the expansion of the company's receivable purchasing agreement during the quarter. Free cash flow conversion in the quarter was 190%. Excluding the benefit of 45x to earnings and cash, free cash flow conversion was 300% and without the impact of the expanded receivable purchasing agreement, still over 120% free cash flow conversion. Primary operating capital decreased slightly to $934 million versus prior year on the benefits of our expanded receivables purchasing agreement with our working capital efficiency measured internally by primary operating capital as a percentage of annualized sales, improving 70 basis points versus prior year after absorbing the impact of tariffs in our inventory and accounts receivable balances. As we continue to invigorate our operating model, our COEs are focused on further enhancing working capital discipline, which we expect will unlock additional value for our shareholders over time. As of December 28, 2025, we had $450 million of cash and cash equivalents on hand. Net debt of $743 million represents a decrease of approximately $38 million since the end of fiscal '25. Our leverage ratio remains well below our target range at 1.2x EBITDA. Our balance sheet is strong and well positions us to invest in growth and navigate the current economic environment. During this period of heightened geopolitical uncertainty, we anticipate maintaining our net leverage at or below the low end of our 2 to 3x target range, providing us with ample dry powder for our capital allocation choices and to remain nimble to absorb any macroeconomic dynamics that may impact us. Please turn to Slide 13. During the third quarter, we repurchased 672,000 shares for $84 million at an average price of approximately $128 per share. We also paid $9.6 million in dividends. We have approximately $931 million in our buyback authorization as of February 3. We continue to be judicious in our share buyback activity. Our buybacks in addition to the dividend, underscore our long-standing commitment to returning value to our shareholders. Our M&A pipeline for small and midsized tuck-in acquisitions remains active, supporting continued growth and innovation across the business. We are focused on ensuring alignment with our disciplined strategic and financial criteria of any M&A. Please turn to Slide 14. As we navigate the current environment of mixed end market demand trends, we remain optimistic but cautious about the near-term outlook. Year-over-year, our Q4 outlook reflects continuing positive price/mix, the benefits of OpEx improvement from realization of our restructuring efforts, healthy demand in data center and A&D, steady improvement in communications and continued volume softness in Motive Power & Transportation relative to the underlying market needs. For the fourth quarter of fiscal 2026, we expect net sales in the range of $960 million to $1 billion with adjusted diluted EPS of $2.95 to $3.05 per share, which includes $37 million to $42 million of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.91 to $2.01 per share, up 10% year-on-year at the midpoint of the range. Our CapEx expectation for the full year fiscal 2026 remains approximately $80 million. While we are encouraged by the company's overall trajectory and momentum in several key growth areas, we continue to see the impact of a dynamic macro environment on customer buying patterns. Consistent with our fourth quarter outlook and expectations we set at the beginning of the fiscal year, we expect full year adjusted operating earnings growth, excluding 45X benefits to outpace revenue growth, supported by ongoing OpEx savings, sustained price/mix strength and improving though still soft Motive Power volumes. Operational efficiencies aligned with our energized strategic framework are taking hold with continued progress in process optimization, capital allocation discipline and manufacturing performance. These actions are positioning the business for long-term top line growth and margin expansion. In closing, this quarter showcased the strength of our operating model and the discipline of our team, delivering record results, advancing our strategic priorities and positioning us well for fiscal year '27. We have clear priorities, aligned leadership and momentum in the areas that matter most to our long-term value creation. With this, let's open it up for questions. Operator? Operator: [Operator Instructions] your first question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: Let's start with data center. You commented on the growth in the quarter, but also what you said is sort of healthy demand. I think looking at the pretty eye-popping CapEx expectations from the hypers and some of the orders growth rates we're seeing, healthy feels like an understatement. So can you talk about your own data center pipeline and how you think about that scaling in the quarters ahead? Shawn O'Connell: Yes. So Noah, it's Shawn. Good to hear your voice. Listen, we're very excited about this opportunity, obviously. And if we look at it from a lead acid perspective, let me start there. We have a commanding market share in data center. It's over 50% in the United States as an example. And we serve those same hyperscalers around the world. And we're seeing grower demand -- growing demand for higher density products. And so TPPL for us in this space is doing very well. What we're most excited about, though, for all of that strength and all of that growth, we have yet to release a lithium battery product into the marketplace. So for over 50% market share in the lead acid for all the greenfield data centers that are going lithium, today, we have 0% market share. So our product teams under Mark Matthews are doing a tremendous job to get that product over the finish line. We're not being very public about dates and that kind of thing because we'd rather have done it and told you about it than foreshadow something that we didn't deliver on. But that is a massive growth opportunity for us. And it's the exact same customers that we're serving with that great growth in lead acid. So it's just a lot -- a tremendous amount of upside for us and a tremendous amount of willingness on the side of the customer because with EnerSys, you get -- it's not just the product, you get the before and after sales services and care, the logistics support, the staging support. So our customers are very keen to get us involved in that. And it's probably our largest opportunity to date. Noah Kaye: That's helpful. A hat tip to the team on the Energy Systems margins getting above 10%. I think the slide deck talks about sort of normalized margin improvement in 4Q. Maybe we can sort of put a little bit more context around what that normalized means? I know you don't quantitatively guide to segment margins. But just help us think about some of the puts and takes of what normalized could look like given some of the comments around product mix shift and the like. Andrea Funk: Sure. Noah, this is Andi. Nice to hear from you. Consistent with what we've said in the past, as you know, our Energy Systems business is very project oriented, which also has some mix opportunities that can cause it not to be a pure linear progression. And as we talked about in Q3, we both had some pull-ins into Q2 that we had talked about on our last call. And then we had a couple of customers that pushed out one customer in particular in order at the end of the calendar year into our Q4. So that put a little bit of pressure on our volumes in Q3 in Energy Systems, but also aided the margins a little bit. So what I would look at is if we normalize for that, we would continue with the improvement trajectory, but probably a little bit of that 10.5% OE margin in ES, some of that probably should have propped up Q2 a little more and propped up Q4. So if you normalize for that, you would continue to see an improvement and we might be sub-10%, but not much. It will still be in that -- trending in that direction. But I would expect probably a little bit of a step back in Q4, but a continuation of the improvement that we've seen so far to date. Does that make sense? Noah Kaye: It does. It's very helpful. And maybe for the last one, just to touch on Motive Power. We have seen some really strong demand trends in e-commerce and warehouse automation trend that seems like it should play into your wheelhouse. So when do you think kind of this destocking ends? And when do you think you start to see some inflection in Motive order rates? Shawn O'Connell: It's -- I'll take that again. Noah, it's Shawn. This is why we've been so reticent for full year guidance because it's just all the leading indicators have been tough for our forklift manufacturer OEMs, let alone us on how to gauge this market. And of course, there was tariff exposure particularly in heavy steel and then there were the interest rates and just all sorts of things that affect these heavy capital purchases. With that being said, as we said in the prepared remarks, we know for sure, this is pent-up demand that as these trucks age, if there was 0 growth in logistics, which there won't be, that just to keep the fleet moving today that exists, they have to order trucks. We saw evidence of this in December. We mentioned a 40% increase in December in the Americas in the trucking orders. To put that in perspective, about 22,000 units. That's a record December. We've never seen that kind of number. And it's not that the market just decided to grow that much. That's that pent-up demand. So where we're being careful, though, is we saw earlier this year, we talked about some strength coming back in. And historically, when Motive turns, it's basically a linear climb out. This has been a little more choppy for us. But that 40% new truck order number is a big one for us. And typically -- and the reason we're saying, hey, it may take a couple of quarters of fiscal '27 to iron out, that's usually the lag time between trucks being ordered and our batteries being ordered, but it's a very positive sign for us. Andrea Funk: Adding a little bit to what Shawn said as well, Noah, if it's okay. One thing, while we're not thrilled with obviously the volume being down, what I do feel good about is we know that we are outperforming the market. It's not lost share. Our industry data that we received showed that while our volume was down high single digits, the industry indicators were down low double digits in the quarter. So I think we're doing better than the market. Motive Power is not a segment I really worry about. Chad does a tremendous job managing it. We know over time, as long as materials are moving, our products are needed. And there's -- as Shawn mentioned, it will come back. It's a question of when, and I think the team does a great job managing through it. Operator: Your next question comes from the line of Chip Moore with ROTH Capital. Alfred Moore: Maybe I could ask about lithium battery. I know you're limited on what you can say, but you sort of alluded to expecting -- I think it was a favorable outcome. Just anything you can share there and how we might think about how the strategy has evolved and when we might see a final decision? Shawn O'Connell: Yes, I'd be happy to do that. Thank you, and good to hear from you. We are very encouraged, I'll just say that, of where we're at in our discussions with the Department of Energy and the overall administration. If you recall, and we go back to the beginning of this administration, what we saw were grants being canceled, projects being canceled. And we didn't know at the time that the batteries would survive the One Big Beautiful Bill Act. And all that is sort of ironed out, the government priorities being clarified and then putting the people in place that they wanted to put in place on their side to get these initiatives across is what's taken all the time. But I'll tell you that our grant has remained intact. It was never canceled. And we had a really strong audience with the government to talk about their new priorities. And what is that? It's secure domestic supply chains free from foreign entity of concern, content, particularly for the U.S. military and the Department of War. And of course, grid resiliency and electrification is still there, U.S. manufacturing and job creation. But the really interesting thing for us is this has been a bipartisan supported issue. And I've said previously that if we could -- in terms of what the plant does and what its purpose is, if we could point the whole thing at a secure supply chain for the military, we would. I'm not saying that, that's where we're going to end up. And I don't want to get in front of the administration and determining yet what that looks like. What I can tell you right now is it's very positive. We believe we're in the final stages. We were hoping to have some information by -- a little more concrete by this call, but we can only go as fast as the customer on the other side, which in this case, is the government, but we remain very optimistic about where this is trending. Alfred Moore: Understood. I appreciate all that color. And just maybe for my follow-up, just maybe more of a follow-up on Noah's question for Motive and some of the pent-up demand. I mean maybe a similar dynamics for Class 8, I think, that you called out. Just maybe talk about your ability in both those markets, how you think about the back half of next fiscal year if some of that demand starts to come back? Shawn O'Connell: Yes. Well, we are well positioned. The actions we've taken in our factories to be more efficient, to increase the effectiveness of our supply chains, the work we've done through tariff mitigation, we're ready. I mean there's no question about it. And just to give you -- you mentioned Transportation, I didn't really give that color. We have a fleet operator, who is one of the largest in the U.S., and they operate over 400,000 tractors. And they told us today, they have -- they told us if they had to order today, they have some 50,000 tractors to order just to maintain the fleet as it is without any additional growth. Think about that. So they've just delayed and nobody wants to go first because they don't know when this is going to turn back on. But they told us all of their conversations now with the OEM tractor providers and Class 8 OEMs is how fast can you restart? What does that look like? What does that pipeline look like? Because they know -- and they represent just a bit of color, that 412,000 tractors or 450,000 -- whatever that number is, they represent a number approaching 20% of their portion of the market. So it just gives you an idea of the dimensionality of the number of tractors that need to be ordered now just to sustain the fleets out there due to the aging issue, let alone growth. So we're ready. We have ample capacity. We've got Missouri up and running. We've hit all of our milestones there that we committed to. We've got scrap coming down, productivity increasing. OEE looks good at our bottleneck points. So when those drivers turn back on for us, we can execute pretty quickly. Andrea Funk: Yes. I'll just add a little bit more on to that. One thing that's interesting, Chip, and good to hear from you is you mentioned Transportation right after Motive Power. With invigorating our operating model, one of the things that we've been looking at is having Chad, who does a great job leading our Motive Power business, also begin to look at synergies that we have with our Transportation business. And there's immense synergies there because as you can imagine, you've got warehousing and distribution. You have both forklifts and trucking in there. We actually had a really nice quarter for Transportation with the market still being soft. And I think that's aided by some of the benefits from this invigorated operating model as well as the improvements the COE are having in our manufacturing costs, both absorption with a little bit of the volume pickup we had and Shawn's monthly trips that he's taking out to Missouri, I think you're really seeing improvements across the board. And only other thing I'd mention since we're talking about Transportation as you get into the whole specialty line of business, we couldn't be more pleased with our A&D business. That's an area where we mentioned our A&D backlog, I think, up 27% year-on-year. Munitions, in particular, has had a 230% growth in their backlog year-to-date, really a 29% CAGR since we acquired the business in fiscal '19. So lots of opportunity in front of us with the geopolitical environment continuing to drive this increase in defense budgets as well. So bright spot there for us. Operator: Your next question comes from the line of Brian Drab with William Blair. Brian Drab: I just wanted to talk about the Energy Systems segment first and the outstanding growth that you're seeing in data center, I think you said up 28%. If I look at that segment and think about, I think data center revenue for you is over $400 million on an annual run rate now. I think, Shawn, that you had said it was around $425 million. If data center is up 28%, I guess that implies or tells us that the balance of the Energy Systems segment was down maybe low single digits to mid-single digits. And I'm just -- that's being driven, I guess, mainly by dynamics in telecom and broadband, but I don't know if I missed it, but I didn't hear a lot of comments today yet on the call around telecom and broadband. So I'm just curious what is happening in those end markets? And what's the outlook in those end markets? Shawn O'Connell: Yes. And good to hear from you, Brian. We -- I think Andi went into a bit on timing and margin normalization. What I would tell you is that we see only positive signals in the rest of the segments there. Q3 to Q4 for us because we are on this April to March fiscal is always a little weird in the telecom space for us because you either have the communications folks trying to increase their year-end spend before the calendar year flip or they have -- or they're deferring CapEx based on what their CFO is wanting them to do to restart it again in the -- our fourth quarter, their first quarter. So -- and then as Andi mentioned earlier, too, we had the pull-in issue from Q2 into Q2 that if you normalize Q2 and Q3 look a little better. But all of the demand signals are good. We don't talk about it because it's a small segment for us, but we have over 50% market share in power utility. And that specific application for us is electric substation, switchgear and control. That business is up 15% and just doing very, very well. So we see very positive demand signals. I'll tell you the engineering team, particularly under the Center of Excellence realignment is doing a fantastic job with the XM product. The broadband people are under the same pressure everybody else is under. They're trying to plan for more expensive energy, more frequent outages. And so that product achieves a lot of that for them. So we've been in trials and co-developing that with a key customer partner. So I would tell you that there's all positive demand signals for us there. You're probably just picking up on a little of that year-end choppiness and project staging. Andrea Funk: Yes. And just to echo that, Brian, and good to hear from you. As we mentioned, this business is project driven. There are some large customers. So when you look at growth rates quarter-by-quarter, both with volatility in last year as well as volatility in this year quarter-to-quarter, you see some spikes up and spikes down. But I would expect our comms business overall in '26 will be up mid-single digits. Our data centers will probably be up high teens year-on-year. So quarter-to-quarter because of some of these, you have a customer year-end, you have budgets, you got a project that completes early or you're behind, you can have some shifts quarter-to-quarter. But the trajectory is really in good shape. And I would say, while we're not in kind of this robust build-out like we've seen maybe in some of the past communications expansion, it's more slow and steady, continues to improve. This fiscal year, we probably won't be back at the fiscal '24 level, but we'll be trending towards it with opportunity in '27 to get above. Brian Drab: Okay. And the guidance for Energy Systems and -- or I guess the guidance for the revenue overall, does that imply for the fourth quarter, like would I be correct in thinking that Energy Systems revenue is up a little year-over-year and Motives down a little year-over-year? Or any detail there you can help with? Andrea Funk: We don't guide specifically line of business by line of business, but I can give you a little bit of color on each, if that would be helpful, Brian. In Energy. Brian Drab: Whatever you want to give would be great. Andrea Funk: Sure. I'll give you a little -- and hopefully, this will help. Energy Systems, we'll continue to see some growth from data centers, although, again, as we mentioned, the choppiness, prior year is probably a little bit of a tough comp. The comms network refresh will continue with the build-out to enable the AI data delivery necessary, but at this measured pace. And again, some of those pushouts that we had will be materialized, so that will benefit us. Just as the Q3 volume was pressured and margins were aided by this quarterly phasing, that will be normalized. So you'll get a little bit more of the pickup from the volumes as we talked about, but probably a little bit of pressure from the margins quarter-on-quarter. Our cost actions are holding and again, normalizing towards double-digit margins. So very pleased with the progress. And as you know, we've talked about several quarters, service having been a headwind for us. It's now -- we believe we've turned the corner and going to start to become a tailwind, an important part of our strategy going forward. In Motive Power, again, I would use hesitant as probably the best word to describe the market. We see that continuing into fiscal '27. We had a 0.9 book-to-bill in Motive Power, but we're really returning our backlog more to pre-COVID levels. So there's more book and ship business. And again, we -- as Shawn mentioned, we definitely see pent-up demand there that it's just a question of when that's going to be unloaded. There's going to be the Q4 seasonal volume lift that always happens. So we'll benefit from that. We continue to see customer enthusiasm in our maintenance-free solutions. And we will also see some higher cost pass-through from tariffs as our cost optimization opportunities and volume grows. Our Monterrey closure, as we mentioned, is ahead of plan. We substantially closed that 1 month early. You'll probably begin to see that benefit in -- starting around the middle, maybe second quarter or third quarter of next year as we work through the inventory that we had. But that along with the BESS opportunities. There's a great article we just read about how 15% of warehouse operators costs are their operating expenses or energy, and they're asking us for these solutions. So that's on the horizon for next year. And Specialty, I think not unreasonable to expect double-digit AOE for Q3 that we saw and beyond as our A&D business continues strength, aftermarket Transportation picks up and the lead acid COE is driving cost improvements in both trans through automation and the growing benefits of the restructuring. So hopefully, that was a little color that could help. Operator: Your last question comes from the line of Greg Lewis with BTIG. Gregory Lewis: A lot has been covered. So I guess, Shawn, I'll ask a little bit about the rollout of the UPS system in lithium. I mean you mentioned that you're 50% in TPPL. I guess around the rollout, I mean, I imagine it's -- I know it's something you've been looking at since last year. As we think about the go-to-market strategy, I guess a couple of things is, clearly, there's demand. How should we think about EnerSys entering this market as a new entrant? Is this going to be -- like how competitive is that landscape? Clearly, there's a lot of growth to be had. And then just also around that, I'm kind of curious how we can think about that ramping, i.e., hey, we start having a solution maybe this spring. Are we selling out that quickly and then we ramp? Or like just if you could kind of talk about how we should be thinking about the rollout of that the lithium UPS solution later this year? Shawn O'Connell: Thank you for calling in and joining us. It's a great question and the right question. Lithium as a technology does some very interesting things for the user, but also carries risks that lead acid does not carry. And as such, it's the adoption rate for it, to your point, I think to your question, is that you get trials in the field and these centers are so large, that the amount of power that you're generating or the amount of power that are going through the systems is substantial. So what you would expect to see for us is trials, which have already pretty much been pre-agreed by our customer base. Again, I mentioned earlier, there's a lot of pull-through from our customers, and it's more than just the product. It's how we handle them, it's how we service them. It's our global presence. So there's a high desire for our customers. This isn't something we're going out and trying to pitch. But with that being said, we have to get through these trials. They have to get comfortable with the technology. We have to be sure that we're making the little tweaks because our battery doesn't go in isolation. It's communicating with the OEMs UPS systems, and you know the big names and who they are. So that all takes a little bit of time. So what we suspect is that when the trials come in, that will be probably a, let's call it, a 6-month period for that fine-tuning and that customer comfort and then we begin to get into the project queue. And then, of course, the other issue there for us that we have to mitigate is that these data centers are planned a long time in advance and lead times are long. So when we get into that queue, you shouldn't expect a hockey stick ramp in the first year, but a steady growth for us climbing out. And just to give you some context, there are really only 1 to 2 other credible lithium providers in the space today. And so it's not a crowded or mature field. And again, we have a lot of pull-through from customers. But I don't want to dimension it that there will be this astronomic ramp for UPS. It will take a bit of time. Gregory Lewis: Okay. Great. And then, Andi, real quick on Motive in terms of the upward price. I know you called out in the slide deck about the maintenance-free solution growing. Just kind of curious what drove that price mix? And I'm curious, was any of that kind of just tariff pass-through? Andrea Funk: Well, tariff pass-through would be at a lower margin, and we are starting to begin to see more of the tariff impact coming through. We had a nice margin in Q3 '26, again, at 14.9%, up year-on-year and up sequentially. A lot of the volume softness that we saw was in our flooded business. And so that mix really helped us. We think those are the smaller manufacturers, smaller warehouses that are feeling some of the pressure. And those are the ones we think that are kind of holding back and driving some of the mix benefit we're seeing. But of course, our restructuring efforts are holding. Operator: There are no further questions at this time. I will now turn the call back over to Shawn O'Connell, President and CEO, for closing remarks. Shawn O'Connell: Thank you, Bella. I'd like to thank you all for joining us today. We look forward to updating you again next quarter. Hope you have a great day. Thanks again. Operator: That concludes our conference call today. Thank you all for joining. You may now disconnect. Everyone, have a great day.
Operator: Welcome to the X-FAB Full Year and Fourth Quarter 2025 Results Conference Call. [Operator Instructions] I will hand the conference over to Rudi De Winter, CEO. The floor is yours. Please go ahead. Rudi De Winter: Thank you, and welcome, everyone. We have today in the conference call with me Alba Morganti, CFO; and Damien Macq, my successor and CEO. In the fourth quarter in 2025, we recorded revenues of $222 million, up 18% year-on-year and down 3% quarter-on-quarter. The fourth quarter revenue in our core markets was $204 million, up 13% year-on-year and down 5% quarter-on-quarter. The core business represented 94% of our total revenue. Full year revenue amounted to $870 million, up 7% year-on-year. and within the guided range. In the full year of 2025, our core business was $814 million which is 7% growth compared to the previous year, and our core business represented also 94% of the total revenue. Our order intake in the fourth quarter came in at $164 million, and it understates actual underlying demand by approximately $30 million to $40 million as first of all, we have shorter cycle times resulting in customers ordering later. Secondly, we have higher wafer yields resulting in order -- reduced order quantities. And third, because of the absence of new bookings in the 0.6um CMOS technologies that we are terminating in early 2027. Customers already placed these orders following the last time by announcement more than a year ago. The backlog at the end of the quarter was $318 million, down to -- from $347 million and at the end of the quarter. The backlog relative to our revenue is still high compared to history and pre-COVID situation. In the fourth quarter, automotive revenues came in at $133 million, up 3% year-on-year and down 10% quarter-on-quarter. The sequential decline was mainly due to inventory corrections in various channels of the supply chain and also influenced by the end of major LTAs and the underlying end market. This trend is also evident in the full year automotive revenue, which recorded only a slight increase of 1%. Although the shift to full electric mobility in 2025 advanced at a slower pace, it remains an important megatrend, underpinning our automotive business. Key automotive applications driving the growth in 2025 included battery and thermal management systems as well as on-board chargers for electric vehicles. In the industrial end market, we recorded a quarterly revenue of $50 million. This was up 40% year-on-year and 6% quarter-on-quarter. The strong growth was driven by the recovery of the SiC business, the recovery of the fragmented industrial market and the prototyping revenue for Photonics, while an elevated level of production in last-time-buy technologies, also contributed. The fourth quarter medical revenue amounted to $21 million up 28% year-on-year and flat sequentially. The demand for DNA sequencing, ultrasound applications as well as contactless temperature sensors was strong in the past quarter. In the total of 2025, our medical business achieved a record revenue of $71 million marking 26% increase over previous year. For a further update, I would like to pass the word now to Damien. Damien Macq: Thank you, Rudi. Good morning, good afternoon, everyone. Let's start with CMOS and SOI revenue. In the fourth quarter, this revenue was up 7% year-on-year and down 5% quarter-on-quarter. For the full year, revenue grew 8% compared to the previous year. Quarterly microsystem revenue was up 24% year-on-year and down 9% sequentially. In 2025, X-FAB microsystem business achieved revenue exceeding USD 100 million for the first time, representing an 11% increase compared to 2024. X-FAB silicon carbide business demonstrated a remarkable recovery, achieving robust growth in the fourth quarter, driven by solid demand for data centers, electric vehicles and renewable energy applications. Revenue increased by 77% year-on-year and 6% quarter-on-quarter. Silicon carbide wafer starts raised 60% sequentially. This was the largest ever silicon carbide wafer start in the quarter. The weaker quarter-over-quarter revenue growth reflects the much higher share of customer-supplied silicon carbide wafers, which carried lower billings due to the less pass-through of substrate costs. For the full year, silicon carbide revenue reached USD 33.8 million, which constitute a 34% decrease against 2024 when the first quarter was still exceptionally strong. Quarterly prototyping revenue was USD 20.3 million, down 14% year-on-year and up 3% quarter-on-quarter. Over the past 3 quarters, its fab recorded a notable increase in CMOS and SOI prototyping revenue reflecting renewed customer confidence after capacity constraints were resolved with last year completion of it's fab capacity expansion program, and from significant operational improvement in terms of product yield and cycle times. Let's now zoom in specific products and development highlights achieved in 2025. In Q4, we secured a major design win for 110-nanometer CMOS technology, particularly in sensing application, which should contribute to revenue growth from 2028 onward. For our 110-nanometer SOI platform, we see confirmation of the strong ramp-up for motor control and automotive LED drivers, and we booked an important design win for new ultrasonic applications. In microsystem, interest in our through-silicon via technology continues to grow, especially for photon-counting CT scanners. On top of the technology capability of its fab, another key factor in this engagement is our customers' ability to establish a fully localized supply chain for this next-generation scanner platform. In MEMS, we achieved the first design win for our next-generation inertial sensors. For power application, we launched as well an innovative snubber technology, this device is integrated inside silicon carbide inverters to review the switching losses by up to 70% and therefore, improving the electrical vehicle range. This solution has already been adopted by 1 OEM and is under evaluation by several orders. In the photonic space, we teamed up with LIGENTEC on the lowest lost silicon nitride platform for various applications, main one being quantum computing. This already contributed to 7% of our total NRE in 2025. In GaN, we secured several major NRE. A first one for the development of industrial protection devices. 2 additional protraction inverters for small and medium EVs and a fourth one for 800-volt data center applications. In silicon carbide, we continue to make excellent progress with a major Asian Tier 1 in EV traction inverter, achieving record-setting electrical performance. Our latest XSICM03 platform has also enabled multiple customers to reach leading-edge electrical performances, driving further design wins across renewable energy, automotive, data center and circuit breaker applications. Its fab technology portfolio with the emphasis on power sensing and microsystem technologies is strategically aligned with global mega trends, including the electrification of everything with worldwide decarbonization initiative and advancement in health care for aging populations. This alignment creates substantial opportunities within X-FAB key end markets, automotive, industrial and medical, driving sustainable growth in the long term. The short-term visibility remains limited, primarily due to continued inventory adjustment by automotive customers and persistent geopolitical uncertainties. Let's now go through the short operation update. By mid-2025, X-FAB concluded its major 3 years $1 billion capacity expansion program. In September, we celebrated the grand opening of our new facilities in Malaysia, following the launch of our production in this new cleanroom. All equipment related to this expansion have been installed and qualified. Production in X-FAB popular 180-nanometer technology is being ramped up gradually there. The site's target capacity of 40,000 wafer start per month will be fully operational by the end of 2026. The increased capacity and reduced cycle time enable X-FAB to become much more attractive for new business opportunities and to respond more quickly to market opportunity when they arise. In the fourth quarter, significant progress was made in securing financial support under the EU Chip Act for the growth of X-FAB's microsystem business. The funding will be used to further advance the MEMS and microsystem offering and more specifically to support the ongoing transition of the site in Erfurt Germany, to the microsystem hub of X-FAB Group. Capital expenditure in the fourth quarter reached USD 25.2 million, bringing the total CapEx for the year to USD 204.1 million. This is lower than the initially projected USD 250 million as some expenditures were postponed to the current year. New capital expenditure in 2026 are projected to come in at around USD 100 million. This CapEx will be allocated to enhance our process capabilities, to facilitate the transition of the Erfurt Germany and Lubock Texas sites to microsystem and silicon carbide, respectively, and to support necessary maintenance and further autoimmune activities across all sites. In response to the short-term challenge and limited visibility, we are also introducing further cost efficiency measures. This initiative includes a planned headcount return in the high single-digit percentage range for 2026, as well as a gradual reduction of operational costs. By the fourth quarter of 2026, cost savings are estimated to reach USD 6 million per quarter. Concurrently, we remain well positioned to respond swiftly to increasing customers' requirements and growing demand. I will now pass it over to Alba Morganti, CFO of X-FAB for the financial update. Alba Morganti: Thank you, Damien. Good evening, ladies and gentlemen. We will now go to the financial update. I would like to start this financial section by highlighting that in 2025, we totalized $870.3 million sales, meeting the yearly guidance of $840 million to $870 million. This represented an increase of 7% compared to 2024. The sales in the fourth quarter totalized $222.3 million, which is an increase of 18% year-on-year, also in the guided range of $215 million to $225 million. In the fourth quarter, our EBITDA was -- of $42.3 million with an EBITDA margin of 19%. If we exclude the impact from revenues recognized over time, our EBITDA margin would have been of 19.2%, which is still below the guided range of 22.5% to 25.5%. The main reason for that is the miss -- that we missed, our guidance is that the fourth quarter profitability was impacted by a one-off item totalizing $9.3 million, out of which $6 million resulted from the renegotiation of a long-term agreement for the SiC raw wafers while $3 million were due to the reevaluation of our silicon carbide substrates inventory in Lubock and we had renegotiated lower prices. If we exclude these exceptional items, the EBITDA margin would have been of 23.6%. I would like to add that with the productivity improvement plan Damien was referring to, we are in a trajectory to achieve a 30% of EBITDA margin with a quarterly revenue level of $240 million. Since a few years now, our business is naturally hedged and our profitability remains unaffected by exchange rate fluctuations. At a constant USD/Euro exchange rate of USD/EURO 1.07 as experienced in the previous year's quarter the EBITDA margin would have been up 19.3%. Cash and cash equivalents at the end of the fourth quarter amounted to $194.3 million, up $20.1 million compared to the previous quarter, while our net debt decreased by $4.5 million quarter-on-quarter. Our cash position improved despite the fact that in 2025, we repaid several bank loans for more than $75 million as well as leasings for more than $24 million and we also repaid some prepayment that we received from customers, including LTA contracts for about $43 million. And to conclude the financial section, I would like to share our next year's guidance -- next quarter, sorry. Our Q1 '26 revenue is expected to come in within a range of $190 million to $200 million with an EBITDA margin in the range of 18% to 21%. This guidance is based on an average exchange rate of 1.17 USD/Euro and does not take into account the impact of IFRS 15. For the time being, we are not providing a full year 2026 guidance due to the limited visibility and the current macroeconomic environment. And now I would like to give the word back to Rudi. Rudi De Winter: Thank you, Alba. While we remain cautious about the near term, we are observing encouraging developments across our business. Momentum in our CMOS and SOI prototyping revenues is building as our operational improvements make us again more attractive. We see a high level of interest in our microsystem capabilities that is opening substantial new opportunities. Our silicon carbide business is on track for recovery. And we see strong traction for our photonics on the one hand and the gallium nitride on the other hand, demonstrated by several new contracts. I firmly believe X-FAB is excellently positioned for robust growth. The fundamentals of our business remain strong, and I'm confident of X-FAB's long-term sustainable growth. X-FAB is ready for what's next. With that, I'm very pleased to hand over the leadership of X-FAB to Damien Macq, who will succeed me as CEO of the group. And with that, we close the opening, and we are opening for questions. Operator: [Operator Instructions] The first question is coming from Robert Sanders from Deutsche Bank. Robert Sanders: Can I just get a bit of better understanding of the trends by end market? It looks like industrial, medical is performing well, auto clearly soft. Is that what you expect to be the story of the year as it were, even if you can't give specific guidance. Is there any reason to think that that's not the story of the year. And then the second question would just be around your lack of 300-millimeter footprint and your largest customer's business in China, they seem to be under big pressure to use local foundries. What can you do to mitigate the risk that they have to source locally as opposed from you? Damien Macq: Yes. I think your understanding of the end market -- this is Damien speaking -- is aligned with what we see right now. We see uncertainty on the automotive. So -- but strong industrial. So I think the industrial will stay strong, medical -- was a good year in Medical and likely this will be prolonged as well with important design wins as well in the pipe. Regarding the 300-millimeter footprint. At this point in time, we still see customers coming from China to look for our product. So basically, we being a high voltage, being a automotive qualification. And right now, we do not see the absence of 300-millimeter in our site as a handicap. So we keep seeing strong business coming out of companies that are headquartered in China, and we will need to monitor the evolution over the coming quarters to see where other situation are evolving there. Does that answer your question? Rudi De Winter: Operator are we still... Operator: Yes. I think 0- Robert Sanders, I was looking for a feedback, but I guess, this replies to his question. So we have the next question coming now from [ Luke DeSoto ]. Unknown Analyst: First of all, I would like to thank Rudi De Winter for the huge investments which you have done with X-FAB, and this without any dilution for the shareholders. I think this is an incredible good job and how that has been managed financially. I see that there are now a lot of platforms and technologies available at X-FAB. What are the actions? That would be my first question. What are the actions to increase actually the sales because that is still a little bit lagging behind? Damien Macq: Yes. So that's a very good point. Maybe this was not disclosed in this presentation, but we are reorganizing ourselves also across 3 business units. So we have moved some people closer to end customers, and we want to reinforce our co-design capabilities with customers. So business development is and was along 2025, a critical topic that is going to be prolonged in 2026. And if you see some of the results for 2025, so we observed quarter-over-quarter an improvement of our design win in the CMOS technology. So this is something that we need to [ prolonged ]. You have also to realize that we are coming out of a period of allocation with a lot of stress and a lot of stretch with our customers. This period is now over, and it's really time to go hand and [ try ] to collect additional business. And I think the items that were described also in this call, also in regard with microsystem are a good demonstration of the result that this can provide. So it's a very good point, deploying now the technologies and all the good deals that we have in hands to our customer is essential. Also I want to repeat what I said earlier regarding photonics. So photonics is also a technology where we see a lot of traction from our customers. I want to repeat that 7% of the total NRE of the company was realized on photonic -- with photonic technologies. Unknown Analyst: Okay. My second question is more towards finance. I see that the current liabilities are very high, $700 million, $702 million, while the current assets are at $648 million. Are we going to have some stress on a financial basis? Alba Morganti: Look, no, we have credit lines available to support the working capital needs. We have our first revolving credit facility of EUR 200 million, which will expire end of this year, but we are in renegotiation with the banks of the syndication to use the clause of -- which is included in the contract to extend it by 1 year, and we will still have the other one running until -- well, it's of -- we have another 3 years for the other one. And so for the time being, we see rather a decrease of the net debt, thanks to the fact that our major CapEx expansion plan is now over. Therefore, we see a relaxation actually is the other way around of our indebtedness. We have been able to repay several debts which were due, so absolutely in line with expectations in 2025, and we will continue to do so in the future. Unknown Analyst: Okay. So overall, actually, we just need to focus now on getting more sales and then everything will leverage out, and we will get the benefit of the investments. Alba Morganti: That's clear... Unknown Analyst: Yes. It will be marvelous company. Alba Morganti: Thank you for this lovely compliment. But yes, you're absolutely right. Thank you. Operator: [Operator Instructions] There are no further questions at this time. So I hand the conference back to the speakers for any closing remarks. Damien Macq: Thank you. Damien speaking. Before closing the call, I wanted to take a moment to acknowledge the leadership and instrumental contribution of Rudi, as it was already mentioned in this call. I'm grateful for the strong foundation that we have built under his tenure over the past 15 years and for the support from the Board and from our global team as I step into the CEO role. My focus will be on further specialization through continuous innovation, offering unique capabilities on market and customer diversification and on disciplined execution in our operations to serve our customers with the level of performance and quality required to make them successful. For the past 3 years spent within X-FAB as COO, I had the opportunity to interact with our global teams. I trust we are already and committed to building and delivering our robust growth on the momentum already in place. Uta, Alba and myself remain available for any follow-up, and we look forward to speaking with you for our next quarterly conference call on the results of the first quarter 2026. This call is scheduled on the 30th of April. Thank you very much to everyone. Bye-bye. Rudi De Winter: Thank you. Alba Morganti: Thank you. Operator: Thanks for participating to today's call. You may now disconnect.
Operator: Hello, and welcome to Globe Life Inc. Fourth Quarter Earnings Release Call. My name is Jim. I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]. I will now hand you over to your host, Stephen Mota, Senior Director of Investor Relations, to begin today's conference. Thank you, sir. Stephen Mota: Thank you. Good morning, everyone. Joining the call today are Frank Svoboda; and Matt Darden, our Co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release 2024 10-K and any subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank. Frank Svoboda: Thank you, Stephen, and good morning, everyone. In the fourth quarter, net income was $266 million or $3.29 per share compared to $255 million or $3.01 per share a year ago. Net operating income for the quarter was $274 million or $3.39 per share, an increase of 8% over the $3.14 per share from a year ago. For the full year 2025, net operating income was $14.52, $0.02 above the midpoint of our previous guidance. On a GAAP reported basis, return on equity through December 31 is 20.9% and book value per share is $74.17 excluding accumulated other comprehensive income, or AOCI, and return on equity of 16% and book value per share as of December 31 is $96.16, up 11% from a year ago. Before discussing the third quarter insurance operations, I would like to say a few words about the nature of our business. As I reflect on the results of the past year, I remain confident that our business model effectively positions us for future success. Globe Life helps provide financial security in the vastly underserved, lower middle to middle-income market that has largely been ignored by the financial services industry. We distribute basic protection products that are simple for agents and consumers to understand and are designed specifically to meet the needs of this market. Studies indicate that over 50% of Americans are underinsured. As such, we have a significant sustainable growth opportunity without having to compete for market share with other insurance companies. The history of growth at Globe Life is clearly demonstrated by both our recent and long-term results, and we are fully focused and confident in our ability to continue to grow in the future. We are honored to serve this market and grateful to have the opportunity to make tomorrow better for millions of working families. Now in our insurance operations. Total premium revenue in the fourth quarter grew 5% over the year ago quarter. For the full year 2026, we expect total premium revenue to grow approximately 7% to 8%. Life premium revenue for the fourth quarter increased 3% from the year ago quarter to $850 million. Life underwriting margin was $350 million, up 4% from a year ago, driven by premium growth and lower overall policy obligations. In 2026, we expect life premium revenue to grow between 4% and 4.5% compared to 3% growth for the full year 2025. As a percent of premium, we anticipate life underwriting margin to be between 41.5% and 44.5%. In health insurance, premium revenue grew 9% to $392 million, and health underwriting margin was also up 9% to $99 million. In 2026, we expect health premium revenue to grow in the range of 14% to 16% compared to 9% growth for 2025. This is due to strong sales activity and premium rate increases on our Medicare Supplement business. As a percent of premium, we anticipate health underwriting margin to be between 23% and 27%. The midpoint of the range is slightly below the underwriting margin percentage for 2025, primarily due to the strong premium growth expected in 2026 from our United American General Agency division which does have a lower underwriting margin percentage than our other distributions. Administrative expenses were $92 million for the quarter, an increase of approximately 1% over the fourth quarter of 2024. As a percent of premium, administrative expenses were 7.4%. In 2026, we expect administrative expenses to be approximately 7.3% of premium the same as in 2025. I will now turn the call over to Matt for his comments on the fourth quarter marketing operations. James Darden: Thank you, Frank. Now as a reminder, I mentioned last quarter that while growth in our agent count has historically been subject to frequent short-term fluctuations, we continually see significant long-term growth. Over the last 10 years, our agent count has nearly doubled, and I am confident we can continue to see strong long-term growth due to the enormous pool of potential agent recruits and the opportunity that we provide. Our recruiting strategy does not target insurance agents. We are simply recruiting individuals from all walks of life who are looking to improve their financial position and have more control over their career. Now let's discuss the results of each distribution, starting with our exclusive agencies. At American Income Life, the life premiums were up 6% over the year ago quarter to $457 million. The life underwriting margin was up 5% to $208 million. In the fourth quarter, net life sales were $102 million, up 10% from a year ago. The average producing agent count for the fourth quarter was 11,699, down 2% from a year ago. While we generated strong recruiting activity, we had more agent turnover than expected. Now this is not always a bad thing as it can result in a more productive agency depending on the quality of the agent's loss. The 10% sales growth this quarter was due to better overall agent productivity. That being said, we place great importance on agent retention and have introduced an initiative to emphasize agent retention to help ensure continued agency growth. Now at Liberty National, the life premiums were up 4% over the year ago quarter to $98 million, and the life underwriting margin was up 6% to $36 million. Net life sales were $28 million, up 6% from the year ago quarter. Net health sales were $9 million, roughly flat from the year ago quarter. The average producing agent count for the fourth quarter was 3,965, up 6% from a year ago. I believe the initiatives that I had mentioned last quarter are having a positive impact and I'm confident we will continue to see growth at this agency as we move forward. At Family Heritage, health premiums increased 10% over the year ago quarter to $121 million, and the health underwriting margin also increased 10% to $44 million. Net health sales were up 15% to $31 million due to increases in agent count and productivity. The average producing agent count for the fourth quarter was 1,640, up 8% from a year ago. We've now seen 6 consecutive quarters of strong agent count growth for Family Heritage resulting from the continued focus on recruiting and growing agency middle management. In our direct-to-consumer division at Globe Life, the life premiums were approximately flat over the year ago quarter to $244 million while the life underwriting margin increased 3% to $74 million. While life premiums were flat this quarter, net life sales were $29 million, up 24% from the year ago quarter. We are excited to see this continued sales turnaround from the declining trend of recent years. As we've mentioned before, new technology introduced earlier this year, has helped improve the conversion of customer inquiries into sales without incurring incremental underwriting risk. The resulting margin improvement has allowed us to increase marketing volume and further grow direct-to-consumer inquiries and sales. Now we've also seen improved conversion of the direct-to-consumer leads shared with our agencies, which has also contributed to margin improvement, allowing us to invest more heavily in advertising further increasing lead volume, which in turn leads to sales growth in both our direct-to-consumer and agency channels. We expect this division to increase leads generated for our 3 exclusive agencies during 2026 by approximately 10%. United American is our General Agency division, and here, the health premiums increased 14% over the year ago quarter to $173 million and this is driven by sales growth in Medicare Supplement rate increases that we have discussed previously. Health underwriting margin was $8 million, up $2 million from the year ago quarter. Strong activity across the entire agency resulted in net health sales of $77 million, an increase of approximately $47 million over the year ago quarter. We attribute this tremendous growth primarily to the significant movement of Medicare beneficiaries for Medicare Advantage plans to Medicare Supplement plans. As a result -- as a reminder, we do not market Medicare Advantage plans. Now I'd like to discuss our projections and based on recent trends and our experience with our business, we expect the average producing agent count trends for the full year 2026 to be as follows: at American Income, mid-single digit growth; Liberty National, high single digit growth; and at Family Heritage, low double digit growth. Net life sales for 2026 are expected to be as follows: at American Income, high single digit growth; Liberty National, low double digit growth; and direct-to-consumer, mid-single digit growth. Net health sales for 2026 are expected to be as follows: for Liberty National and Family Heritage, both low double digit growth. Now for United American, considering we nearly doubled our sales in 2025, we are currently projecting flat sales growth for 2026. We acknowledge there are considerable dynamics in the Medicare marketplace, and we will refine our estimates as we move through the year. I'll now turn the call back to Frank. Frank Svoboda: Thanks, Matt. We will now turn to the investment operations. Excess investment income, which we define as net investment income less only required interest was $31 million, down approximately $8 million from the year ago quarter. Net investment income was $281 million, approximately flat while average invested assets grew 1%. Required interest is up approximately 3% over the year ago quarter, relatively consistent with growth in average policy liabilities. Net investment income was negatively impacted in the current quarter by lower average invested asset growth. As discussed on prior calls, and lower average earned yield on our short-term direct commercial mortgage loan and limited partnership investments as compared to a year ago. Net investment income also declined sequentially from the third quarter as we had very good returns from our limited partnership investments in the third quarter, but that returned to more normal levels in the fourth quarter. As a reminder, the income reported from these investments is based on income earned by the partnerships in the quarter and will vary from quarter-to-quarter. In addition, we held a little more cash during the current quarter than normal, due to the Bermuda reinsurance transactions executed in the quarter. For the full year 2026, we do expect net investment income to grow between 3% and 4%, required interest to grow around 4% and excess investment income to be relatively flat. Now regarding our investment yield. In the fourth quarter, we invested $131 million in fixed maturities, primarily in the financial and industrial sectors. These investments were at an average yield of 6.23%, an average rating of A- and an average life of 27 years. We also invested approximately $145 million in commercial mortgage loans and limited partnerships with debt like characteristics and an average expected cash return over time of approximately 9% to 10%. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line of our overall conservative investment philosophy. For the entire fixed maturity portfolio, the fourth quarter yield was 5.29%, up 2 basis points from the fourth quarter of 2024, including the investment income from our other long-term nonfixed maturity investments. Fourth quarter earned yield was 5.4%. While we do own floating rate investments, they are well matched with floating rate liabilities on the balance sheet. Invested assets are $21.7 billion, including $18.8 billion of fixed maturities at amortized cost. Of the fixed maturities, $18.3 billion are investment grade with an average rating of A. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. Our fixed maturity investment portfolio has a net unrealized loss position of $1.2 billion due to the current market rates being higher than the book value on our holdings. As we have historically noted, we are not concerned by the unrealized loss position as it is mostly interest rate driven and currently relates entirely to bonds with maturities that extend beyond 10 years. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB comprised 42% of the fixed maturity portfolio compared to 46% from the year ago quarter. This percentage is at its lowest level since 2003. As we have discussed on prior calls, the BBB securities we acquire generally provide the best risk-adjusted, capital-adjusted returns due in part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. That said, our allocation of BBB rated bonds has decreased over the past few years as we have found better risk-adjusted, capital-adjusted value in higher-rated bonds given the narrowing of corporate spreads. While the concentration of our BBB bonds might still be a little higher than some of our peers, remember that we have little or no exposure to other higher-risk assets such as derivatives, equities, residential mortgages, CLOs and other asset-backed securities. Below investment-grade bonds remain near historical lows at $521 million compared to $529 million a year ago. The percentage of below investment-grade bonds to total fixed maturities is just 2.8%, consistent with the year-end 2024. The amount of our below investment-grade bonds at just 6.7% of our total equity, excluding AOCI, is at its lowest percentage of equity at any year-end in over 25 years. Due to the long duration of our fixed maturity liabilities, we invest in long-dated assets. As such, a critical and foundational part of our investment philosophy is to invest in entities that can survive through multiple economic cycles. While there may be uncertainty as to where the U.S. economy is headed, we are well positioned to withstand a significant economic downturn due to holding historically low percentages of invested assets in BBB and below investment-grade bonds as a percentage of equity. In addition, we have very strong underwriting profits and long-dated liabilities, so we will not be forced to sell bonds in order to pay claims. With respect to our anticipated investment acquisitions for the full year 2026, at the midpoint of our guidance, we assume investment of approximately $900 million to $1.1 billion in fixed maturities at an average yield between 5.9% and 6% and approximately $300 million to $400 million in commercial mortgage loans and limited partnership investments with debt-like characteristics and an average expected cash return over time of 7% to 9%. Also at the midpoint of our guidance, we expect the average yield earned on the fixed maturity portfolio to be around 5.3% for the full year 2026. With respect to our nonfixed maturity long-term investments, we anticipate the yield impacting net investment income to be in the range of 7% to 8% for 2026. In total, including these additional investments, we anticipate the blended earned yield to be approximately 5.4% to 5.5%. Now I will turn the call over to Tom for his comments on capital and liquidity. Thomas Kalmbach: Thanks, Frank. First, I'll spend a few minutes discussing our available liquidity, share repurchases and the capital position. The parent began the year with liquid assets of approximately $90 million and ended the year with liquid assets of approximately $80 million. In the fourth quarter, the company repurchased approximately 1.3 million shares of Globe Life Inc. common stock for a total cost of approximately $170 million at an average share price of $134.44. For the full year, we purchased 5.4 million shares for a total cost of $685 million at an average share price of $126.41. Including shareholder dividend payments of approximately $85 million, the company returned approximately $770 million to shareholders during 2025. In addition to the liquid assets held by the parent, the parent will generate excess cash flows during 2026. The parent company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less interest paid on debt and is available to return to its shareholders in the form of dividends and through share repurchases. We invest -- we continue to invest in our growth through making investments in the business, in new business, technology and insurance operations. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made these substantial investments and acquired new long-duration assets to fund their future cash needs. In 2025, parent excess cash flow, excluding the benefit of extraordinary dividends, was approximately $620 million. Although statutory results are not yet final, for 2026, we anticipate excess cash flow to increase to approximately $625 million to $675 million, given recent favorable mortality trends and growth in premium. We will continue to use our cash as efficiently as possible. We still believe that share repurchases provide the best return or yield to our shareholders over other available alternatives. Thus, we anticipate share repurchases will continue to be the primary use of parent's excess cash flow after the payment of shareholder dividends. In our guidance, we anticipate distributing between $85 million to $95 million -- sorry, $85 million to $90 million to our shareholders in the form of dividend payments with the remainder being used for share repurchases in the range of $535 million to $585 million. We anticipate liquid assets at the parent to be in the range of $50 million to $60 million at the end of 2026. Now with regards to the capital positions at our insurance subsidiaries. Our goal is to maintain capital within our insurance operations at levels necessary to support our current ratings. Global Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. Although this target range is lower than many of our peers, it is appropriate given the stable premium revenue from our large number of in-force policies, the nature of our protection products with benefits that are not sensitive to interest rates or equity markets. Our conservative investment portfolio and strong consistent underwriting margins, which result in consistent statutory earnings at our insurance companies. Since our statutory financial statements are not yet final, our consolidated RBC ratio for year-end 2025 is not yet known. However, we anticipate the final 2025 RBC ratio will be within our targeted range. During the quarter, we finalized the licensing and formation of Globe Life Re LTD, a Bermuda reinsurance affiliate for the purposes of reinsuring a portion of new business and in-force life insurance policies issued by Globe Life affiliates and executed the initial reinsurance transactions. As previously noted, we estimate parent excess cash flow will increase from incremental earnings from our U.S. and Bermuda subsidiaries over time as the reinsurance block grows. We anticipate parent's annual excess cash flow will increase over time toward $200 million as earnings emerge from reinsurance additional in-force and new business. This additional excess cash flow will enhance the financial strength of the company and will provide additional financial flexibility for the parent to support growth. Now with regards to policy obligations for the current quarter, for the fourth quarter, policy obligations as a percent of premium has declined from 36.7% in the year-ago quarter to 35.4%, consistent with continued favorable trends in mortality. Health policy obligations as a percent of premium were 53.7% compared with 54.1% from the year ago quarter. For United American individual Medicare supplement claim trends have been relatively stable. However, we did see seasonally high claims in the fourth quarter for both individual and group health products. Now with regards to our full year underwriting margins, normalized for the impact of assumption updates. As I mentioned on previous calls, as required by GAAP accounting standards, each year, we review and generally update actuarial assumptions for mortality, morbidity and lapses, and we have chosen to do this in the third quarter each year. When assumptions changes are made, GAAP accounting standards require a cumulative catch-up adjustment. This cumulative catch-up is the assumption related remeasurement gain or loss, an assumption remeasurement gain lowers the reserve balances and indicates an improved outlook as less premium is needed to fund reserves to meet future policy obligations. The opposite is true if there is an assumption remeasurement loss. To better understand the performance of the business for the full year, we think it is beneficial to look at normalized underwriting margins, which exclude the impact of assumption changes and provide an improved basis for comparison of year-over-year results. For the full year 2025, normalized life underwriting margin as a percentage of premium increased to 41% compared with 39.7% for the prior year. Normalized life policy obligations as a percent of premium improved by over 2 percentage points from the prior year due to favorable mortality trends but was partially offset by higher amortization of acquisition costs. Normalized health margin as a percent of premium was 25.4% compared with 27.3% for the prior year and is reflective of higher claims experience and the timing of premium rate increases during the year at United American. Finally, with respect to our '26 guidance. For the full year '26 we estimate net operating earnings per diluted share will be in the range of $14.95 to $15.65, representing 5% earnings per share growth at the midpoint of the range. This is an increase from our prior guidance related primarily to continued improved mortality and experience trends that we are monitoring, including anticipated positive impacts from life assumption updates that will occur in the third quarter. In addition, we are anticipating higher health underwriting margins given the strong premium growth at United American. Normalized earnings per share growth, which removes the impact of assumption updates in both 2025 and in the midpoint of 2026 is approximately 10%. At the midpoint of our guidance, we anticipate total premium revenue growth of 7% to 8% with life premium growth growing 4% to 4.5% and health premium revenue growth growing 14% to 16%. Health premium growth is benefiting not only from strong growth in Medicare Supplement sales in 2025, but also $80 million to $90 million of additional annualized premiums resulting from approved rate increases on individual Medicare Supplement policies that would be phased in throughout 2026 and fully implemented by 2027. Recall the majority of these rate increases will be effective beginning in the second quarter of 2026. As a result, this delay, along with seasonally high claims typically incurred in the first quarter, we anticipate United American's health margin percentage in the first quarter will be lower than the full year margin percent of 8% to 10%. However, we anticipate an average of 10% to 11% in the last 3 quarters of the year as the full effect of the premium rate increases is realized. We anticipate underwriting margins as a percent of premium to be in the range of 41.5% to 44.5% for the Life segment and 23% to 27% for the Health segment. In our guidance, we anticipate recent favorable trends will continue through 2026. Given this, our '26 guidance range reflects an estimated third quarter benefit from assumption updates and resulting remeasurement gain of $50 million to $100 million, which is expected to increase the life margin as a percent of premium in the third quarter to a range of 48% to 52%. Those are my comments. I'll now turn it over to Matt. James Darden: Thank you, Tom. Those are our comments, and we will now open up the call for questions. Operator: [Operator Instructions] Our first question today will come from the line of Jimmy Bhullar at JPMorgan. Jamminder Bhullar: I had a couple of questions. First was just on the first year lapses. They seem to pick up across various channels, especially in direct response. So hoping that you could give us some color on what's going on there. Thomas Kalmbach: Yes. Thanks, Jimmy. Yes, we -- you're definitely right. First quarter lapses for direct-to-consumer and actually Liberty National were actually a little bit higher than what we had expected. At this point, we see them as fluctuations and we'll continue to monitor them. On DTC, our sales increases are primarily coming from the internet channel, which we actually see higher lapses on the internet channel. So a little bit higher, not to be unexpected, but it was higher than what we would have anticipated from that channel. The one thing I'd say is I think the growth in sales, even with a little bit higher lapses is a positive because it does add to underwriting margins overall, but it is something we'll continue to pay attention to.. Jamminder Bhullar: Then on MedSup, maybe if you could just talk about the dynamics between MedSup and med advantage. Historically, obviously, with the Republican government, you'd assume med advantage was going to grow this time it's sort of going in the opposite direction. But the 2 questions I had on that was, do you expect like -- I'm assuming your outlook for growth in MedSup is fairly constructive. And if that is correct, then if we think about, you filed prices, I think, around the middle of last year, maybe third quarter or so. And since then, claims trends have stayed elevated. So should we assume that you'd have to sort of go through around the price increases to get the margins on the business that you've signed to more of a normal level. So maybe we should expect slightly weaker margins initially and then improved after you implement the higher prices. Thomas Kalmbach: Yes, Jimmy, on the claim trends, we've actually see claim trends stabilize in the third and fourth quarter. So that's different than what we saw in 2024, where we had seen claim trends increase in the third and fourth quarter. So those trends that we've seen recently are actually a little bit less than the anticipated trends that we had in our rate increases. So we do feel like the rate increases that we got approvals for are adequate to bring us over the course of '26 and into '27 back to kind of our normal margins in that 10% to 12% range. As I mentioned in my comments, we'd expect 10% to 11% in quarters 2, 3 and 4 of 2026, and those rate increases will carry into the first quarter of '27 as well. Frank Svoboda: Yes, I'd probably just add just kind of a reminder that fourth quarter would just as -- again, seasonality would be probably just a little bit on the lower end of that range and probably just slightly behind where second and third quarter would have been. And then really, as you get all that rate increase fully into 2027, that's where we would really anticipate getting back into those more normal levels that you get it for the full year. James Darden: And then I'll touch on your market trend. Obviously, our results are very strong for the fourth quarter. A lot of that is, we believe, the dynamic of what's going on with Medicare Advantage market and people continuing to find value in Medicare Supplement. There's been a lot of discussion related to the government reimbursement rates and associated impact on Medicare Advantage. Carriers as well as what they're doing from either premium increase, cost reductions or scaling back. We see that also on the provider side of scaling back, taking Medicare Advantage plans. All of those are beneficial to us for a marketplace perspective. I think it is going to be very interesting to see how Q1 and Q2 play out with the dynamics of that market. As we've mentioned before, we are pricing for profitability. We're not pricing just to gain market share. And so it's very important, as Tom has mentioned, the management of our rate increases consistent with our claims performance is very important for the overall profitability of that block of business. And we're clearly, from what we see, not out of line with what other carriers are experiencing nor the rate increases that we're requesting which bodes well for our premium earnings in 2026. And so there -- the sales side is really hard to predict right now, but we had tremendous growth in the current -- well, prior year now 2025. And so it will be -- we'll really see how things come through as we get into the first and second quarter of this year. Thomas Kalmbach: Maybe one other thing to mention, Jimmy, is just as we think about claim trends is, CMS did introduce prior authorization requirements for traditional Medicare Supplement starting in 6 states in 2026. So I would like to see kind of how that impacts overall claim trends. But I think overall, it should be a favorable impact as they try to reduce fraud, waste and other abuses that they've seen in the Medicare program. Operator: Our next question today will come from Wilma Burdis at Raymond James. Wilma Jackson Burdis: Sales have been quite strong in the last few years, even probably stronger than the long term. And you cited some efficiencies there with branding and lead sharing and sourcing. Is there more tailwind to unlock there? Or has a lot of that work been done there? James Darden: No. I think as we continue to leverage on our technology investments, I think we'll continue to see tailwinds from an efficiency perspective. On the agency side, I think there's still more to unlock. There's a variety of technology that has been implemented, but there's a lot of things on the horizon that we are in process that will come online and in '26 and '27. So I think that will continue to help our agent productivity, which clearly drives sales growth and drives it a little bit faster to the extent that we do that effectively, drives it a little bit faster than our agent count growth, which is our overall goal with those investments. And then the technology on the DTC side, the way we market, as was mentioned, a significant amount of those sales are coming from our online channel. And as we market and target customers that are in our demographic that are looking for our type of product, the sophistication there from a technology perspective continues to be a significant focus of ours, and we continue to invest in that area. And I think that's why you'll continue to see growth trends there as well as just any sort of efficiency that we have through the distribution model. So we've talked about of converting people that are interested, those leads and inquiries into ultimate sales and then keeping them on the books through a great customer experience will continue to benefit us going forward. So I don't -- I'd say my punchline to all that is, I don't think we fully achieved all that we can through the use of technology enhancements, but we'll continue to focus on that in the coming days to get the growth that we're looking for. Wilma Jackson Burdis: Great to hear. Could you talk a little bit about remeasurement gains, which were strong in both life and in health, which actually reversed recently, but health remeasurement gains look pretty strong. Can you just go into a little bit more detail on the drivers there and how you expect that to trend? Thomas Kalmbach: Yes. With regards to kind of what I'd say is quarterly actual to expected remeasurement gains. We are seeing life mortality experience and lapse experience that's favorable relative to our long-term assumptions. And similarly, on the health side as well. I think we continue to expect mortality to continue at kind of where they've been recently, which would result in continued life actual to expected remeasurement gains. And as we're looking at that experience and looking to see how the first quarter and second quarter emerge we kind of follow our process of updating assumptions. We'd also, as I mentioned, expect an assumption remeasurement gain in the $50 million to $100 million range in the third quarter of 2026. Now when we make those assumption changes, I think we can -- depending upon where we set those long-term assumptions, I think that we would continue to see remeasurement gains potentially even in the third and the fourth quarter of next year as well. So I don't think we'd necessarily eliminate all of them. For the health side, it's a little bit different is health the premium rate increases on the health side will help our ability to generate experience that could produce continued remeasurement gains. But the health side remeasurement gains are much more volatile just because of the way Medicare Supplement and the rate increases are applied to in the reserve practices is just a little bit unique versus our normal supplemental health business. So we will see a little bit of volatility around remeasurement gains and losses in the health line. Operator: Our next question will come from Jack Matten at BMO. Francis Matten: First question I have is on excess cash flow. I think the guidance this year is the same midpoint, and that's before even with a higher GAAP earnings outlook. So I guess that's partly related to the kind of the GAAP assumption remeasurement gain that you're embedding now. But anything else that's different across GAAP versus statutory that we should be thinking about there. Frank Svoboda: Yes. And I'm sorry, Jack, you're just a little bit -- it's hard to understand your question, but I think it was looking for differences that were kind of happening that we're seeing on the GAAP or the statutory side that was impacting the excess cash flows. I mean I think in what Tom was providing from his guidance of $625 million to $675 million, we are just seeing that is really being driven in and of itself by just good solid statutory earnings in 2025 that then convert into dividends to the parent company in 2026. That is growing a little bit over, I'm going to say the normal statutory earnings that we had in the prior year there. Of course, we had some extraordinary dividends in 2025 that were brought up as well. But if you kind of pull those out, we're seeing just a nice increase. I feel better that we're actually at a kind of another level with respect to our statutory earnings and therefore, the cash flow generation at the parent company. No real significant changes in the statutory or the GAAP models. If you think about '25 or even '26 at this point in time, that's really impacting it, like we maybe it had in some of the prior years. Thomas Kalmbach: Yes. And just for clarity, we don't expect any benefit from the Globe Life Re Bermuda transaction in 2026 at this point in time. Frank Svoboda: And to the extent that, that changes at all, over the course of the year, as we talk to our regulators, we'll be sure to disclose that and talk about that on future calls. Francis Matten: Great. And then a follow-up on the American Income agent count. I know that there's usually like a stair-step pattern over time, but it looks like a bit of a larger drop this quarter than what we usually would see. Any sense on what's driving that? And then any more detail on the retention initiatives that you referenced in your prepared remarks? James Darden: Yes. I would say for American income, it is not uncommon for the fourth quarter end of the year for agent count from a sequential basis to go down. If you look at 3 of the last 4 years, we've had that phenomenon. So I'd say it's not unexpected. Typically, we see those agents that may be struggling with their productivity and production kind of toward the end of the year, may be a time that they fall off. What we're doing from a focus on that perspective is, as we've talked about in the past, it's our middle management and managers that are out there recruiting, training, onboarding and retaining agents. And so we're looking at some incentives changing their incentive compensation a little bit to continue to focus on that agent retention. So those will go in towards the beginning of the year, and then obviously, they take a little bit of time to get implemented. And so like I said, if you look at it over a long term, it's not a concerning trend. That's why we're projecting that we're going to have agent count growth. But overall, we are focused on the productivity of our entire agency and that continues to be very strong for all our agencies, but including American Income. And so I think that's why you see little bit higher sales growth than just the agent count growth. Again, quarter-to-quarter, we're going to get some of those fluctuations. Operator: We'll take our next question from Andrew Kligerman at TD Cowen. Andrew Kligerman: I want to stay on Jack's question with regard to sales. So it sounds like you're going to put the retention initiatives in place this year. So that wasn't the case last year. So I guess that explains why you cited average producing agents going up mid-single digit and then at American Income and then net life sales going up high single digit. So maybe that's -- I'm trying to get at the productivity a little bit more. What drove it up in the fourth quarter to see a 2% drop in average producing agents with a 10% increase in sales? Was it -- I think you touched on earlier, those -- the lead generation coming from direct-to-consumer, but I can see that you're baking in more productivity even going forward. So trying to get it better. I'd like to get a better understanding of what's driving that. James Darden: Sure. I think as we've talked about in the past, you've got to look at the agent count growth as a leading indicator and then the sales growth follows. And so if you go back for American Income, Q4 of '24 was a 7% growth and in Q1, Q2 and Q3 were all low single-digit growth quarters for just the agent count. And so that carries forward into sales in Q4. We're also seeing some productivity gains as well as just the premium on a per sale basis is up compared to the same quarter in the prior year. And so that's also driving it as well. And as we've talked about, the thing with the product in the marketplace is that the consumer is -- we go through a needs-based analysis that is sitting down with the customer and determining what their needs are and then based upon what those are. We have the right amount of coverage, which obviously has an impact on the amount of premium that we collect on a per policy basis. I think some of the -- when I talked about the quality of the leads and the conversion of those globe leads generated out of our DTC channel into American Income is also helping on that productivity is reflected in the premium on a per sale basis as well as just the agents that are producing every single week what their sales are from that perspective. And so you are correct, just recognizing the agent count, we think the agent count growth might be just a little bit slower than the sales growth for 2026, and it's just reflective of some of those dynamics. And we'll see how some of these incentives come into place. And I wouldn't characterize it that we had no incentives in 2025 for our managers to recruit and retain agents. It's just we found that we always have to kind of adjust to that and make sure we've got the right incentives correct between that balance of sales and recruiting, training and retaining agents. And so we're doing some few tweaks that will go in here at the beginning of '26, and we'll see if we got it right as we move throughout the year. Andrew Kligerman: Very helpful. And if I can go back to the MedSup, I mean, what a fabulous year in terms of sales growth at United American and just saying that you think sales will be flat in '26 is pretty darn good. As we look further out, is there a chance that the dynamic between med advantage and med Supplement kind of shifts in the favor of med advantage where they kind of align better with regulations and compliance and pricing and you could see a dip in the opposite direction, some real pressure on sales as more med advantage gets sold. James Darden: I mean, it's certainly possible. As we mentioned before, we've been in this business for decades. We have more and more people from an age perspective entering into the market in general. So that would be, I would think, a tailwind. But it's really hard to predict the government support within the Medicare Advantage space. And so that will play some into the dynamics. But I think from a Medicare Supplement perspective, there's always going to be a need in a marketplace for that particular product. People that want the freedom of choice and some of the benefits that the Medicare Supplement marketplace provides. So again, I think there will always be a place in that market. We are very much focused on maintaining our margins, and we're really not going to chase market share at the expense of just pricing to gain market share for the sake of it. So I think you've seen that over a long period of time with us is that our sales growth will ebb and flow in that area, depending on the marketplace, but it's very important that we maintain our pricing for the existing in-force block as well that really translates into that underwriting margin dollar that we're really focused on from a long-term stability perspective. Operator: [Operator Instructions] Moving on, we'll hear from John Barnidge at Piper Sandler. John Barnidge: My first question on the investment portfolio, can you talk about exposure to software and how you see the portfolio impacted by AI along with any derisking activities that have been pursued. Frank Svoboda: Sure. Thanks, John. On our -- I think a lot of the discussion on potential exposure has kind of been in that alternative portfolio category. We've kind of taken a look at within the limited partnerships and the different investments looking at information that we have available there. Our best estimate is that there's really less than probably $15 million within that alternative portfolio that is really related to software companies. So we do think it's pretty limited. Overall, our private credit is probably about 1% of our total invested assets. I think that's about the amount we had last quarter, and that really hasn't changed again this year. So overall, we have pretty low allocation to the alternative space in general than private credit. And then it doesn't look like right now, at least in that side, we have much from the software. As we think about it on the fixed maturity portfolio, we've always been underweight, I would say, on tech you kind of think about we're out there trying to buy bonds that are 20, 30 years out, and it's hard to find the technology companies that we really feel comfortable fit into that space. So less than 2% of our invested assets of our fixed maturity portfolio is in some type of a technology type activity within that sector. What we have exposure to mostly are the hardware providers, data service providers and that type of thing. There's probably a couple of names in there. We kind of think probably less than $50 million that have a little bit more susceptibility to be displaced. They do have some moats with respect to some proprietary data that they have with respect to the space that they operate in. So I think it gives them some protection, but that we're kind of keeping an eye on. It is I think the whole AI disruption is a risk that the investment team has been considering for a number of years. And clearly, within part of the matrix that they utilize as they think about the bonds that the companies that we're going to invest in. And again, we're looking for those names that are really long term, we think, are going to be around for the long term. And so it's the IBMs and the Amazons and the Microsofts that are mostly in our portfolio. Operator: Our next question will come from Wes Carmichael at Wells Fargo. Wesley Carmichael: I had a couple of questions on Bermuda. One, I think the press release in December, I think you noticed -- or you noted that the first reinsurance transaction you executed with your business plan. Wondering if you could provide a little more detail on that transaction just in terms of size and scope. Thomas Kalmbach: Sure. Yes, we are pleased to get the licensing information of the company and the approval of our U.S. regulators as well as the Bermuda regulators to complete that transaction. And our goal there was really to get the company established because we wanted to actually get it established in 2025, so we could have audited financial statements for the entity beginning in 2026 that we finalize as '25 results. So that allows us to be on a path for the requirements of reciprocal jurisdiction. And so we're well on that path and we're executing relative to kind of our business plan at this point in time. That initial transaction was about $1.2 billion of statutory reserves that got transferred. And so during the course of 2026, we do intend -- and this is consistent with our business plan as well that was approved by Bermuda. We do intend to reinsure some new business as well as incrementally a little bit more in-force business in 2026. So we'll grow the amount of business that's reinsured in Bermuda over the next 3 to 5 years. Wesley Carmichael: And I guess my follow-up was on that point is, is it still possible to get early approval for reciprocal jurisdiction? And I'm just trying to understand when you get that status. Are there near-term plans for -- to increase the pace of reinsurance? And just really trying to understand how much of a lift in excess cash flows do you kind of expect in 2026 or 2027? Thomas Kalmbach: We've kind of thought through that, and that's really part of kind of our business plan that we established earlier on. We do think it is possible to get early reciprocal jurisdiction, but it is subject to regulatory approval. So we really want to go through the process, and we'll update you if we do, in fact, get reciprocal jurisdiction early. And that would allow the potential for, again, I'd say, potential for additional dividend distributions from the Bermuda sub, but those are also subject to Bermuda regulatory approval. So again, we don't want to get too far ahead of ourselves, and we want to actually go through the process of having those discussions with our regulators. Frank Svoboda: And I just add, if -- I think the kind of the time frame on that as far as working with the regulators is probably something that happens a little bit more mid-year, we do anticipate that if we were able to get that, any potential distributions that we might get in '26 would be toward the end of the year. And so -- we have not built any of that into our '26 plan as of this time, and we'll clearly take a look at that as the year progresses. We do anticipate that there would be some opportunity then starting in 2027. And as Tom has kind of talked about, we think that it can be up to $200 million or at least working toward $200 million over time. And that would be -- just kind of a reminder that is what we would anticipate would be annual cash flows up to the parent. But again, part of that is with the business plan and continuing to build that up with continuing transactions here over the next few years. Operator: And we'll hear from Mark Hughes at Truist Securities. Mark Hughes: On the claims, you said were seasonally higher in individual and group health. Was that normal seasonality? Or is that a little bit above and beyond? Thomas Kalmbach: I think, first of all, we normally expect a little bit higher claims in the fourth quarter in the individual and group health lines. However, I would say is that in the group lines, we did see a little bit higher severity. And so it was a little bit higher than what we had anticipated. Mark Hughes: Understood. And then you've talked to a lot of factors that could influence profitability in the health business, but the 23% to 27% the 4-point swing anything else that we should consider when we think about the high end or low end of that range? Thomas Kalmbach: I think some of it -- Frank alluded to in his comments as well, is that Medicare Supplement has a lower underwriting margin. Just on it as a line of business. And so to the extent that, that grows faster than some of the other lines, we're going to see a little bit of downward pressure on just the overall health underwriting margins as a percent of premium. Now the underwriting margin dollars from health would grow. And so I think we just got to -- so that's why the range of 23% to 27% is somewhat dependent upon how strong Medicare Supplement sales come in. Frank Svoboda: Yes. Mark, that's exactly right. When you kind of look at 2025, United American, that whole side of it, the Medicare Supplement side comprised about 49% of the total health premium, whereas in Family Heritage, Liberty, American Income that have that other limited, our true limited benefit product, that's a little bit more stable. The margins on that limited benefit side are more in that 43% to 44% range versus what we had in 2025 of around 5%, 6% with respect to overall margins on the MedSup side. Now in 2026, we expect that MedSup margin to be up in that 8% to 10% range. But again, it's now at about 53% of the overall premium is what we kind of anticipate right now. And so it's just taking a little higher percentage of that overall premium piece. And so it's kind of -- just bringing down the average just a little bit. Despite the lower margins that we have on that, I mean, it is still a very good business for us and -- because it is very lower amount of capital required ultimately. So when you start thinking about internal rates of return and returns on capital and that type of thing, it is a very good business from that perspective. So we don't find it really overly concerning when you kind of see a slight decrease in the overall health margin percentage. If we think about it as long as it's kind of just from that overall mix of business, we think, overall, that's still a good diversification for us. Operator: And that was our final question from our audience today. I'm happy to turn the floor back to Mr. Stephen Mota for any additional or closing remarks. Stephen Mota: All right. Thank you for joining us this morning then. Those are our comments, and we will talk to you again next quarter. Operator: Ladies and gentlemen, thank you for joining today's Globe Life Inc. fourth quarter earnings. You may now disconnect your lines. Enjoy the rest of your day.
Jukka Miettinen: Good afternoon, everybody. Welcome to discuss Neste's Q4 results that were published this morning. My name is Jukka Miettinen. I'm VP for Investor Relations at Neste. Here with me, we have our President and CEO, Heikki Malinen; and our CFO, Eeva Sipila. We are referring to the presentation that was launched today on our website early this morning. In the presentation, we will go through the key highlights, for example, our Q4 financial performance and the status of our key focus areas, including the performance improvement program and the progress towards our financial targets. We will be also discussing the key regulatory developments, key opportunities and uncertainties in the market as well as the outlook. We will have time for discussions with all of you. And please pay attention to the disclaimer as we will be making forward-looking statements in this call. With these remarks, I would like to hand over to our President and CEO, Heikki Malinen. Heikki, please. Heikki Malinen: Thank you, Jukka. Good morning, good afternoon to everybody. Welcome also to this call on my behalf. Really looking forward to discussing with you about 2025 results, the last quarter and also how this year will work. Okay. So let's start with a couple of slides here. First, I want to show you -- I want to start with discussing the key figures. But before I do that, let me just make a few comments to provide you with a bigger picture on how I see the situation at Neste after having been in charge of the company now for a bit over 1.25 year. I think overall, if we look at 2025, we had a good year. We have been able to achieve a financial turnaround compared to where we were just a few years ago. I'm very pleased about the fact that in 2025, all of our businesses performed better. Each of them had their own successes. I want to highlight in the area of RP, specifically that we were able to increase our volumes from 3.7 million to 4.1 million tons of sales. In OP, I'm specifically pleased by the operational performance of the Porvoo refinery. If you look at the utilization of the OP business, which is mainly Porvoo, we achieved 90% at the -- in the fourth quarter, which actually is one of the best years we've had operationally in Porvoo's history. And we were luckily, of course, then able to capture the cracks -- spike in cracks in the fourth quarter. Marketing and sales, we rarely talk about that, but still, they were able to improve their results by 10%, and they actually launched some very exciting new retail concepts here in the Finnish market, which have been received very well by retail and business consumers. We also met our financial targets for 2025. I was especially pleased that the performance improvement program, that Eeva will go through in more detail, performed really well. In fact, it performed better than I expected. I've done a number of these during my career, and I was really positively surprised how well the Neste team delivered on multiple areas very systematically, quickly and very efficiently. So a big hats off to the Neste team for what they did. On the regulatory front, the year was filled with all kinds of rumors and expectations. But in the end, I think the tailwinds are supporting Neste, both in Europe, gradually in the United States as well with the RVO. And then we're starting to see initial green sprouts, so to speak, when it comes to SAF in Asia. And last but not least, I think overall, where we are today, we have a good foundation then to perform better in 2026. But then looking at Neste in a bit more detail, I always start with safety. This is the #1 subject here in the company. Every meeting starts with safety. On the left-hand side, you can see our total recordable injury frequency rate. This really is people safety calculated on a per 1 million tons -- we were -- 1 million hours worked. We were able to reduce it a bit. We have a long way to go here. I think we have all the means and tools and skills to bring this down. We just need more systematic and discipline. But I'm not happy with the number. We can do much better. On the right-hand side, we see process safety, which in the past has been pretty tough for Neste in some areas. But overall, if you look at last year, we made good progress. We are not yet at first quartile, we need to go lower, but still, I'm very pleased with how the year ended. 0.9 is a big improvement from the past. And one piece of information, which is not shown in the slide, but which I want to mention specifically is that in the Rotterdam capacity growth project, our expansion, we actually have had a very good safety year as well, good progress. And considering how large and undertaking Rotterdam is, and we have thousands of people on the site, so far, we've done well. Of course, the work continues. Then a few numbers from last year 2025. Our comparable EBITDA was EUR 1.683 billion, over EUR 400 million improvement vis-a-vis the previous year. I was very pleased with that. On the other hand, you can see the term. The sales margins on renewable products, $411 per ton. We were impacted by the term deals from the fourth quarter of 2024. They did impact that number in the second half. And in the final quarter, we saw prices rise, but we did have that overhang as we often do when we term a part of the business annually. And then on the right-hand side, maybe I want to highlight the SAF volume. We doubled it to 867,000 tons, pretty much, I would say, at a level which is sort of reasonable given the amount of volume being sold overall. As we know, the renewable -- let's say, the SAF mandates have not risen as rapidly as we had hoped, but still over 800,000 delivered to our customers. Then on the fourth quarter, our -- shown on the bottom left-hand side, our EBITDA for the fourth quarter was EUR 601 million. We had a very strong finish to the year on multiple fronts. As I said, all of our businesses performed better than the year before. And so of course, we're very pleased with that. Free cash flow in the last quarter was exceptionally strong, EUR 809 million. Eeva will talk about the balance sheet further. I think overall, I can say as far as the balance sheet is concerned that, that 40% leverage that we set at the beginning of the year as an absolute cap, well, I think looking at the number, we can say that we're clearly now in much better shape than we were in the past. Maybe [indiscernible] we're in clear waters, but clearly, the direction of travel is very positive. So good on that front. The work continues, of course, into this year. We have a number of major things we are working on. The performance improvement program, as discussed already, and Eeva will go through in more detail, delivered EUR 376 million. So we actually achieved, on a run rate basis, more than what we had set out as a target for the 2-year program. So we've really done extremely well. What I want to do here is now that we will report to you -- we're actually going to continue this program for another year, for '26, and then we will, in '27, move more into continuous-improvement type of a mode. We are not setting new public targets for this year, but we will continue reporting to you on a quarterly basis how the work continues. What I can say is that after having observed the work for 1 year, I see there's still good potential to raise that number even more. So you will then get reports on a quarterly basis, and we'll then see where we end up after 2026, what the total final tally is. Rotterdam is a big undertaking. I go there almost every 6 weeks. During my last visit, I was impressed by the good work people are doing there. It's very, very busy, very intense, a lot of people there. They're making good progress. But as I said, 2027 is then the big year for the startup. And then finally, operationally, we continue to work to increase our own production to make more advancements there and also to be commercially successful. And then, of course, gradually get ready for the Rotterdam launch in '27. So those are some topics on the agenda of the company. We will be happy to discuss these with you in a moment when we get to the Q&A. Now let me hand it over to Eeva to talk about the financials. Thank you. Eeva Sipila: Good afternoon on my behalf as well. And I'll start with the renewables market. This slide shows the reference margin development of renewable diesel. And as you can clearly see, the fourth quarter was better than the previous quarters of '25. We have a bit of a sliding down effect during the quarter and then a small sort of jump at the year-end, quite typical in a way that some late buying tightening the market, which again then typically also in early January of this year has then eased back. So in this sort of a supportive market environment, our EBITDA on a comparable basis reached EUR 601 million. In Renewable Products, we had a maintenance-heavy quarter, but higher sales volumes and margins offset the higher net production costs. In Oil Products, solid utilization, and the November spike in gas oil market prices supported profitability. And finally, Marketing & Services, we saw a nice sales volume increase in Finland and Estonia. Looking at the sort of full year 2025. So we reached almost EUR 1.7 billion in comparable EBITDA and really thanks to higher sales volume and lower costs, as you see on the right-hand side graph. Like Heikki already mentioned, all the business areas improved from the previous year, and we're very pleased with that. The performance improvement program, indeed, 1 year ahead of schedule, so exceeding EUR 350 million by the end of '25 instead of the original target, which was only end of this current year. Very pleased with that. Of the EUR 376 million, that is the run rate in the P&L of 2025, there is EUR 172 million that have come through. And this is just purely from the fact that, obviously, the run rate is ahead as the program started after a few months into the year and then getting sort of all activities ramped up and before there is that annual effect, it takes -- comes then with -- over the coming quarters. Like Heikki said, very pleased with the amount of activities and kind of actions and the overall engagement of the Neste team in improving our competitiveness. So we're absolutely pushing forward. 75% of what we've achieved so far has come really from cost reduction and the big elements being general procurement and logistics, and then 25% coming from margin and volume optimization. Then a bit more detail into the quarterly performance by segment. So starting with Renewable Products. So indeed, despite significant maintenance activities in the quarter, the sales volume reached 1.1 million tons and our commercial team did -- worked very hard to -- for this. The comparable EBITDA came pretty close to the third quarter level, which was always going to be a tough target since that was one of more sort of solid operations. But as you can well see, so sales volumes, margins supporting, and then really the maintenance cost visible in fixed costs dragging the result down. But sort of -- no sort of surprises there per se. Moving to Oil Products. High utilization, we are very proud of this. And especially now in Q4, this was really worth a lot of money for us because the market prices in diesel cracks really went up to almost $30 a barrel. And of course, there being agile and really on top of the market and being able to leverage that opportunity was very, very important in reaching the EUR 321 million for the quarter. And indeed, our refining margin of over $20 is something we're very pleased and did require, as I said, quite a spike in the market price, but good -- really good work from the team here. And with all the volatility that we can expect to continue in the global oil markets, I think this agility continues to be something that we're focusing a lot on in our performance management. Marketing & Services also did well, EUR 28 million. Unit margins were seasonally weaker. And then the fixed costs were also higher. We have a bit more higher investments ongoing in IT and then also the new retail Huili concept here in the Finnish retail market. But good work on the sales volumes from the team and then supporting the result on to the other direction. Moving then to cash flow, and this certainly increased markedly. Obviously, improved results helped but also a lot of good work on the net working capital side. EUR 809 million was the cash flow for the quarter, and this then resulted in a full year cash flow before financing activities of EUR 759 million. And this really despite cash out investments being EUR 260 million in the quarter, so a bit higher than the previous 2 quarters, the Rotterdam expansion and then the additional maintenance work behind that, a slightly higher figure. And as we've said earlier, the Rotterdam investment will keep our investment level high also in '26. And then we have the Porvoo refinery turnaround coming up every 2.5 years, and this is now the time it comes. And so that, of course, adds to the CapEx, but we are guiding on cash out investments to be between EUR 1 billion and EUR 1.2 billion. So very -- I would say, very well in line with what we said a year back. And still on the net working capital, so maybe a few words. So on the inventory side, you'll remember, we were very clear that fourth quarter will be one of reduced inventories as we really push out the pre-maintenance buildup that we had to do in Q3, which hurt cash flow at that time, succeeded in that. But in addition, we had a lot of focus on AP and also AR. And I think, again, the sort of team did very well on that, and we're certainly very, very pleased with the outcome. And this then leads to us being well on track with our financial targets. So as Heikki already mentioned, leverage is clearly now below the 40%, and the other financial target on the performance improvement also being accomplished. Now work continues on both of these areas, and we have a lot of things we can and need to do still at Neste to improve, but successful delivery in any case for '25. And with that, handing back to you, Heikki. Jukka Miettinen: Thank you, Eeva. So let's then talk a bit about regulatory matters. On this list, there's a lot of text here. Sorry for that. We wanted to give you a full compendium of all the things we see happening on the regulatory front, both in North America, Europe and Asia for the different products. I think just the fact that the list is quite long and much longer than we had earlier sends a message that now things are happening here again. What's particularly interesting on the right-hand side is how much activity we see across all of Asia. Yes, there are small numbers, there are small mandates, 1%, 2%. In some countries, they're more on SAF for international flights, not for domestic flights. But still, Singapore has taken the lead with Japan, and now other countries are following. In Europe, of course, for us, the big thing is the implementation of the Renewable Energy Directive III and specifically what that does to Germany. Since we last have spoken -- or since we last spoke, the process has continued in Germany. Now they are in parliamentary review in the Bundestag, and we hope in the coming months then to get a final resolution. But so far, so good. Direction of travel is positive. And as we estimate by the end of the decade, the volume of renewable diesel should go from 5 million to over 10 million-plus tons in Europe. And of course, for us, at Neste, where we can produce both SAF and RD in our refinery. So this is really good news. And then in Europe, of course, the mandates will rise in 2030. We are going to continue discussion with the European Union to make sure that, that really then materializes. So overall, very good. And in the U.S., we're waiting for more news on the RVO renewable volume obligation decision, which was part of the big beautiful bill. And also there, we should hopefully get some more news towards the end of the first quarter. Focus areas for this year. I already talked about these a little bit. But if I just sort of summarize, still what's on my and my team's agenda, so really continuing with the performance improvement program. There's a lot of activity. I've been positively surprised how much team Neste actually is able to do on this front. Maximization of our asset utilization. Here, I would say that we have our work -- we still have work to do, I need to put more efforts into predictive maintenance, make sure that we really prepare for our turnarounds really well. We get maintenance done on time and on budget. And this year, in particular, we have the big TA coming in Porvoo in the fourth quarter or towards the fourth quarter. It's a very big undertaking, but we are monitoring that carefully. So far, what I've seen, I feel good about the preparatory work. And we also do external benchmarking to see how well we're getting ready. So -- and that benchmarking data also indicates that the team has done good work, and we're -- we will be prepared then for the turnaround. And then Rotterdam already, we discussed. It is moving according to plan at the moment. Market opportunities overall. Our world in renewables is -- can be a bit volatile from time to time. As said already, a lot of positive things happening now on the regulatory front. Let's see how those get implemented, but still the tailwind is clearly more positive. The big unknown for us is Chinese SAF volumes, how much will come into Europe. We know there's volume coming. I need to wait and see for the customs data to get a better view on that. We continue to work on SAF, antidumping duties to make sure we have a level playing field on SAF. And then on uncertainties, maybe I want to highlight the feedstock prices. Of course, in our business, feedstocks account for a very large share of the variable costs. So depending on how they progress for animal fats and UCO and then for the Annex IX feedstocks will be critical to then determining the final margin of our products because we have -- we can hedge these costs to some degree, but not fully. And then I think on geopolitics and trade, otherwise, I don't see anything particularly new happening on that front that would impact Neste at the moment. So that pretty much is that story. Then in terms of dividend. Our Board recommends to the Annual General Meeting that the dividend would be kept at the same level as last year. So that is EUR 0.20 overall. And then finally, the outlook for this fiscal year. So renewable product sales volumes in 2026 are expected to be approximately at the same level as in 2025. Oil Products' sales volumes in 2026 are expected to be lower than 2025 due to the planned maintenance turnaround at the Porvoo refinery. So those are our key messages at this stage, and I think we will hand it over to the operator, right, and take your questions. So thank you very much. Operator: [Operator Instructions] The next question comes from Alejandro Vigil from Santander. Alejandro Vigil: The first one is about the outlook for '26. Of course, you are talking about this guidance of volumes flat year-on-year. And I'm wondering something is going on in terms of utilization rates or why you see this flattish performance year-on-year? That's the first question. And the second is regarding profitability. We have seen in the last couple of quarters, EBITDA in the Renewable Products division of about EUR 250 million, EUR 270 million per quarter. This is a good indication of the current status of the market in terms of margins for Neste in this division? Heikki Malinen: So if I take the outlook and if you talk about the profitability. So well, I would say that at the moment, with respect to our refinery, so we are running fairly close to the capacity we have at the moment that we can get out. We are constantly optimizing and trying to squeeze out more. But in our situation, any debottlenecking that we can do to get more out will have to happen during the turnarounds. And the next opportunity for debottlenecking will be end of this year, early 2027, when we have the next turnarounds in Rotterdam and Singapore. So you cannot do debottlenecking until you have done a certain amount of engineering and you've ordered different types of equipment and pipes, et cetera. So there's always delays to how quickly you can do the turnarounds and debottlenecking. So that will be a story more towards the end of this year, early next year. And then Rotterdam, of course, will then be the big volume increase, and that will come in 2027. So that is the situation. And as I said, we are trying to squeeze out safely and reliably as much as possible, but we have to overcome those debottlenecking challenges first. Eeva Sipila: And Alejandro, on your profitability development question. There, so obviously, sales market prices are important. We've had tailwind that we see continuing. At the same time, if you look at feedstock prices '25 versus '24, they were higher. So it's -- we need to continue to work really on finding the right feedstock and really utilizing the whole global network that we have to maximize the margins. But importantly, then obviously, is the performance improvement program. A lot of the actions are RP focused. And we -- as mentioned, we have more in the pipeline just from a sort of timing perspective, but still working on new actions. So we're certainly very focused on improving the profitability at RP. I think we've -- this is not a level where we're yet satisfied in any way. Operator: The next question comes from Paul Redman from BNP Paribas. Paul Redman: Yes, 2, please. The first one is just back to sales volumes. Could you just be clear? You used to provide a breakout of weeks by refinery of how much turnaround activity will go on in the year. Could you just go through each refinery, just highlighting how many weeks' turnaround you're expecting in 2026? Or as you just mentioned, Rotterdam or Singapore possibly in 2027? And then secondly, I have a question about -- it's a bit longer term. So when we look beyond 2026, you previously guided to a material reduction in CapEx post 2026 as the Rotterdam facility comes online. If margins continue to be strong, the balance sheet will degear. How do you think about financial priorities post 2026? Heikki Malinen: Okay. So I will give -- I will start and let Eeva continue. So in terms of this fiscal year, so we have these catalyst changes pretty much every year. And I cannot really give you an exact week number here yet for the turnaround in Rotterdam or in Singapore because they will also include debottlenecking work. So it isn't just the pure catalyst change, but there will be others. But the Rotterdam TA will be at the end of -- sometime in the fourth quarter. And then Singapore will start Line 2. Now that's the first TA on Line 2 in Singapore, that will be starting probably -- as it was this time, mid-December-ish, somewhere there, and it will flow then into the first quarter. But the exact date still will depend a bit also on the holiday season in Singapore with Chinese New Year, et cetera. So -- but anyway, roughly there. So Singapore more into the '27-ish, and that will also include then debottlenecking work, which has to be done. Now then to your question about beyond '26 and CapEx and how we're thinking about that, so maybe Eeva? Eeva Sipila: Yes, financial priorities post '26, Paul, I think it was. So no news here really. Deleveraging is the one word I would say that, obviously, whilst we now had good cash flow and we've clearly turned the corner in leverage, the amount of gross debt remains high and this year being still a sort of CapEx-intensive year, is not going to sort of fundamentally change that. So then as we go into '27, '28, that's really sort of the main focus. And of course, in order then that to build ourselves a stronger balance sheet then that we have more optionality a few years after that. Operator: The next question comes from Henri Patricot from UBS. Henri Patricot: I have 2 questions, please. The first one is just another follow-up on the volumes for this year because, Heikki, you mentioned that you're running fairly close to capacity at the moment, but your utilization rate last year was 73%, and Neste used to run much closer to full capacity. Are you saying that we should assume that full utilization would be close to this sort of level because of the frequency of the catalyst changes? Or is there some upside to that utilization rate over the next couple of years? And then secondly, on the sales structure for 2026. Can you give us an update on the term contracts for this year? Where did you end up in terms of the split between term sales versus spot? And any comment you can make on how this term premium looks in '26 versus '25? Heikki Malinen: Yes. Thank you. Thank you very much for those questions. Yes, the utilization level, I would like to see that also higher. So -- but that will require some more work in the refineries. There's also a bit of how much do we swing between RD and SAF. So last year, we made over 870,000 ton-ish of SAF. So how much we are swinging back and forth between that also impact the utilization. It isn't just a -- although we're happy about the flexibility, getting -- putting the SAF lines on also impacts a bit the utilization. So the more we can run with 1 grade, RD in particular, that helps that. So -- but we are going to try to improve that further and then do some more debottlenecking. Then in terms of the term contracts, I said in the last call, I said that we would take our time and not rush. Well, in the end, then we did ultimately then go and term about 60%, roughly, about the same level as the year before. So about that. Anything you want to add, Eeva? Eeva Sipila: Well, maybe just to mention, Henri, on the premium, so significantly higher than a year back. Obviously, the market situation was healthy. And thanks to that, that actually was behind our decision to term that much. I mean, originally, we -- I think we discussed also with you that we'd aim a bit higher. But when the market was as good as it was, we felt it was the best decision for shareholder value. Operator: The next question comes from Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. Just the first one on your CapEx. You were able to lower your guidance a couple of times last year and still end up spending less than the final guidance at the end of the year. Just can we get some color on the moving parts there? Is that just a phasing thing? And if so, could that mean that this year's spend could be towards the higher end of the range you provided? And then secondly, on your performance improvement program, obviously, very solid results so far. You've noted that the work continues in 2026. Are you able to provide any color on how much further upside there could be beyond the EUR 376 million that's already been achieved? Heikki Malinen: Yes. Thank you. Maybe I'll take the second one first, and then Eeva can take a crack on the first one. On the performance improvement program, the -- we had the 4 modules which were -- there's the efficient organization, which has been done. There were items on procurements or sourcing. A lot of work has happened. Some of it will flow also into this year. There's the commercial piece. There's -- we've had -- we've optimized our logistics and terminal networks. We've closed some terminals, which had very low utilization. So that -- a bunch of that work has been done. On the refinery side, there, we do see a lot of further opportunity. That module has been slower to progress because the changes we need to make to these lines, some of them may need some money or they just need some design work, and it just takes more time to do these adjustments, let's say, safely, plus it's just simply more complex work. So we will continue focusing especially on the refinery side in '26. We are not going to set -- give you any guidance or estimate on the upside. As I said, I only can state that I'm really pleased with what we've accomplished this year. We're going to continue focusing particularly on the upside on refineries, and we will then report on a quarterly basis and try to provide you as much color as we can. That is the current way we're going to move forward. And then in terms of the CapEx, so anything you would like to say regarding... Eeva Sipila: Yes. Certainly, I think it's not a sort of untypical phenomena that you have a bit of slipping. I wouldn't say that it was more than a few tens of millions. So indeed, we were expecting that, that slipped. Now the estimate is based on what we kind of have currently. And yes, then obviously, we've given a range just because there are some uncertainties. And I'm comfortable with the range, but indeed, I think it's a typical phenomenon, sometimes really difficult to estimate exactly right then on how the sort of payments then go out, but not a big thing for last year. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: So I have 2 to be asked. So the first one is relating to renewables volume outlook for this year and basically split between RD and SAF. Is it fair to assume that there will be growth in RD, and maybe SAF volumes coming down, just looking at the market fundamentals currently and the SAF market being pressured by import volumes coming from China? And then the second question is relating to Q4 fixed cost. What it comes to renewables? So there has been quite significant increase sequentially, I think, more than EUR 30 million. How big portion of it was related to this maintenance activity happening in the quarter? And maybe you can provide some guidelines for this year as well? Heikki Malinen: Thank you, Artem. So I'll take a crack at the first one, and then Eeva can talk about the fixed costs. So yes, last year, we sold -- it was 3.5 -- hold on -- 870,000 on the SAF, if I remember correctly, and then the rest was RD. I think I said on the call last time that if the SAF market doesn't develop well, then we have always the option to sell RD, and that is what we will do. So we are constantly optimizing and depending on the -- what really makes sense financially for our shareholders, we will run the refineries according to that. So it is possible that this year, we'll have a bit less SAF. But let's see, it's early. We're just in January, and let's see how the markets -- what happens with the imports, we really don't know yet very well. We don't have any data yet really for '26. And then based on that, we'll have to make the choice. But we will go with what really maximizes the value for the company. Eeva Sipila: And then on the fixed cost item, so indeed, the growth in fixed cost was really all around maintenance. And looking into '26, so we'll have a similar phenomena that obviously, we have some of the performance improvement savings coming through in the fixed cost, and that's supportive. But then at the same time, we will be increasing somewhat the money spent on maintenance for the obvious reason that we do want to sort of max out on the utilization and reach a better utilization, as Heikki already mentioned. So that will probably mean that in a way, net-net, there's not much improvement in fixed cost per se to be expected. But of course, we're very focused on all elements on the margin, then to sort of improve profitability, nevertheless. Fixed cost, relatively speaking, is not the main item. Operator: The next question comes from Henry Tarr from Berenberg. Henry Tarr: The first one is just on premiums and margins. So I think you talked about higher premiums into the term contracts. Obviously, there are lots of push and pull factors, et cetera, driving margins in the renewables business. But as we stand here today, then looking into 2026, does it make sense as a starting point to think about the sort of second half levels from last year being a good base as we think about modeling renewable products? I think that's my first question. Eeva Sipila: Well, I think that if you use the second half as a reference, it wasn't that maybe impressive in the beginning [ on ]. So I would say that we are aiming to sort of -- aiming upwards on that. But like you rightly say, so obviously, the premium we fixed is dependent also how -- what happens on the feedstock side and how we're able to optimize. But I think it's fair to say that our ambition is higher and hence, the higher term rate. Heikki Malinen: I think the feedstock pricing is, of course, really critical here for the final margins. Henry Tarr: Yes. And that's probably my second question then, which is, what are the key sort of drivers and risks that you see for this year on feedstock? Heikki Malinen: We try to buy from all jurisdictions. Globally, we're continuing to expand our reach, both for animal fat for UCO. And what's been really interesting, of course, now with the new RED III requirements is these Annex IX feedstocks. I think we're well positioned -- actually pretty well positioned on these Annex IX feedstocks, which I think is -- could become an asset here as we go forward, but let's see. And then in terms of UCO, what I think is playing here a lot into the equation is how much will Chinese demand be, hard to predict and then also what happens with the RIN, the RIN 50% in North America. So I think those are the 2 maybe triggers which could then impact both UCO and animal fat prices. And then, of course, how much supply of animal fat is available, particularly out of Australia. So I think those are the sort of dimensions or things which are moving the market. But as I said, I think overall, we're probably -- we're the largest buyer of these feedstocks globally, and we have a good sourcing organization. I think we're very well on the pulse of the market, and we have multiple sources to buy from. If one area looks more expensive, we then always have the opportunity to look for other sources. I think that is an advantage. Feedstocks are really critical in this industry. Operator: Next question comes from Nash Cui from Barclays. Naisheng Cui: Two questions, please. The first one is a follow-up on term sales. I just want to clarify on the ability to lock the margin. From your previous answers, am I right to understand that you can lock the sales price, but not the fixed stock price, so we can still see a bit of volatility on the margin? Then my second question is on one of your peers' comments, your other European energy peer CEO mentioned some bearish comment on SAF mandate. I wonder what's your view on that? Heikki Malinen: Well, do you want to comment on the hedging? Eeva Sipila: Yes, sure. So indeed, I think, Nash, the challenge on the feedstock side is that not all of those products can really be hedged. They are not open transparent market. So more on the -- where you can hedge is then on the sort of soya, palm side, and that means that there's certain limitations when we sort of term a sale. But of course, we sort of -- they do, over time, usually sort of have a correlation and then we sort of try to optimize based on the sort of experience we've built on how to do so. But indeed, there is a certain open position and hence, our cautiousness on the commenting on the final sales margin. Heikki Malinen: Regarding your question about the SAF mandate. So I said before that at least based on the conversations I've had and we've had with the European Union, they are pretty committed to implementing the SAF mandates for 2030. I mean between now and 2030, nothing specifically will happen. There will be a review probably somewhere between now and 2030 about these mandates. I know the airlines are, of course, pushing back and trying to move the 6% into the longer-term future. But as I said, our indication is that the mandates are going to grow and [ 6 ] is the number that's been -- which has been decided. I'm very pleased with what we're seeing in Asia. Gradually starting to see mandates coming there as well. I think that's a very positive sign. If Asia now starts to move forward, why would Europe then suddenly move backward, especially when Europe has been the one really pushing for SAF to start off with. So if we hear something different, we will report to you, but I'm not aware of anything that would derail the 2030 program, at least not at the moment. Operator: The next question comes from Alice Winograd from Morgan Stanley. Alice Bergier Winograd: Just one for me, please. So you said about 60% of sales were termed. Can you give maybe a breakdown between Europe and the U.S. within the term sales? Because the EU margins have been extremely high for the better part of the second half, I think, upwards of $900 per ton. So if there's any indication that a lot of these term sales are in Europe as opposed to the U.S., this has some read across to margins, right? So I appreciate any color you can give. Heikki Malinen: Alice, thank you for your question. Unfortunately, we only provide information on the aggregated number of terms across the region. So we do not break that out by markets in more specific detail. So sorry about that. But thanks for your question. Operator: The next question comes from IIris Theman from DNB Carnegie. Iiris Theman: I have 2 questions, please. So the first one is related to renewable diesel prices, which have come slightly down from Q4 over the past 2 to 3 weeks. So what has been driving prices lower? And do you see any drivers that could affect prices for the remainder of Q1. Yes, so this is my first question. And the second question is related to your utilization rates in RP. So I think previously, you highlighted the 80% utilization rate as a good proxy for this year in RP, while now it seems to be 75% or something like that. So is there anything that has changed since the Q3 presentation when you highlighted this 80% proxy? Did you, for example, have a longer maintenance in Rotterdam or Singapore that basically has impacted your volumes this year? Heikki Malinen: So thank you, IIris, for your questions. On the RD prices, on the last few weeks -- I cannot report anything in particular. I think partially it can be also a bit sentiment driven, how these mandates are coming into play. But I think overall, I cannot report anything specific about that. I think what is good is that the level is, of course, much higher for us compared to where we were last year. I think we've now gotten to a more, let's say, healthy level. And I think for Neste, that is what's really critical here. On the utilization level, as I said earlier, we feel that we have more work to do in terms of these refineries. At the moment, we are running at a level which is fairly close to -- well, let's say, that is the performance of the day, if I would say, so forth. Part of our PIP program, our performance improvement program, specifically focuses on getting more improvements out of the refineries. And therefore, we want to also get that number up. But that is the health of the refinery at the moment. Regarding the turnarounds that you referred to, Singapore, I think, is very close to starting, if not starting, and both turnarounds have been done. We don't comment specifically on the individual turnarounds per se, but both of them have been now been completed. Operator: The next question comes from Christopher Kuplent from BofA. Christopher Kuplent: I'm afraid I'm going to keep asking about turnarounds. I'm going to focus on Porvoo and the Oil Products division. As far as I can recall, this used to be a 4-year cadence for major turnarounds. I think the last one we had was in Q2 of 2024. And maybe it's my recollection that's off, but I thought it was -- next going to be in 2027, which was already, to me, earlier than the usual 4-year cadence. And you're now, as far as I can tell, telling us that, that 2027 may actually happen in 2026. So I wonder, not whether you can give us the exact week when it's happening, but I wonder what your thinking is behind reducing the cadence and what can explain the more regular turnarounds and shutdowns? And lastly, again, this is not about a turnaround, but about Rotterdam and the ramp-up that we're looking forward to for 2027. Can you give us an insight into how fast you think that ramp-up can happen once you've gone through the latest rounds of debottlenecking by the end of this year and you then bring the new units online? Is this a 3-month process, a 24-month process, 12 months? What's a reasonable expectation for the speed of that ramp-up, please? Heikki Malinen: Thank you very much. I think the first question is easier for me to answer. It's a good question. The reason why we have gone to a more frequent turnaround is very straightforward. Here in Finland in the Nordic markets, what we have concluded is that the 4-year cycle is just simply too big a turnaround to pull off safely and reliably. We have -- there are certain sort of limitations on how much workers and contractors we can actually physically get into this fairly small market. And therefore, we've concluded that breaking it into more smaller parts simply makes the turnaround more manageable. This is purely driven by efficiency and safety and productivity rather than anything particularly different. So it will be a bit smaller scope, but then more frequency. So then -- yes, so the 2.5-year cycle is what is the way that our engineers have concluded is the safest and most efficient way to do it. Obviously, I cannot tell you the exact day when we're starting. We will report back to you on that later. But we are spending a lot of time really to do our utmost to get this turnaround to be good. The previous turnaround we had actually was quite successful. If you look at the performance at Porvoo, I think part of the explanation why we've done so well is that in terms of utilization is that the previous turnaround was done really well. So taking learnings from the previous one into the '26 program, hopefully will then yield good results. Regarding Rotterdam ramp-up, unfortunately, here, I cannot give you any information yet. We're so in the midst of building the refinery. You know we are 1 year late from the initial schedule that was published, I think, in summer of 2022, if I remember. And so there's still a fair amount of work to do. I think probably -- well, let's see when we are closer to startup and when we are in that phase, we will then start telling you more about the ramp-up curve. But at the moment, unfortunately, I cannot -- I don't have any meaningful information to share with you. So sorry about that. Operator: The next question comes from Yulia Bocharnikova from Goldman Sachs. Yulia Bocharnikova: I have 2, please. First on SAF. So given we see currently SAF trading at discount to RD, is it correct to assume that 100% of SAF should be sold on term contracts? And if you could give any clarification if there is any premium of SAF to RD in terms of prices in term contracts? And the second one on hedging. So you mentioned there is still palm oil or soybean hedging. Is my understanding correct that if we further see lower diesel prices and higher palm oil prices, that would result in a positive hedging impact in Q1 '26? Heikki Malinen: So let me address the first one and then on hedging, Eeva. So indeed, you are right that -- the SAF is trading unfortunately, at a discount to RD. I mean, SAF should be trading at a premium because it's -- obviously, it's a more advanced product and more higher value-added product, but that's how the market is today. I can't comment on the particular prices or how we do the terms. The only thing which I would just say is, what I said earlier is that when we look at the SAF business for us, we pretty much optimize it based on what creates more value for us. And depending on the commercial returns, we will then adjust our lines accordingly. That's really all I want to say about the SAF commercial aspects. Hedging then, please. Eeva Sipila: Yes. I would say, Yulia, that higher diesel is better both in RP and OP kind of irrespective of hedging. Now obviously, that can sort of have some impact. But -- so I would -- in that sense, their conclusion maybe is a bit sort of too focused on the palm oil side. So the diesel component is important in both businesses. And of course, what we've seen so far in the quarter is a healthy level of diesel prices even if we're not sort of where we were in that sort of November spike. Operator: The next question comes from Matti Kaurola from OP Corporate Bank. Matti Kaurola: 2 questions. First, regarding your production flexibility. So could you open up your kind of flexibility to produce more SAF in case the market is recovering. So how easy the switches do? Are we speaking about like S&OP horizon, like 1 quarter or something like that? And then the second one is regarding trade policy. So could you help me to understand why the ADDs to our Chinese SAF is pending because it's -- I mean, the case pretty much the same, then with RD aside where we already have those ADDs in place. Heikki Malinen: Thank you, Matti. I'm sorry, at least I had some difficulty in hearing the... Eeva Sipila: Yes. The first question for Matti was around how easy it is to switch between RD... Heikki Malinen: Yes. That's what I got. What about the second question? Eeva Sipila: And the second was on trade policy that's why -- I believe, Matti, you asked that why don't -- why are we yet to see any ADDs on SAF, that the case would be similar to RD and when we only have RD. Matti Kaurola: Exactly, exactly. The production is happening in the same facility. Heikki Malinen: Right. Okay. So very good. So on production flexibility, so it is -- the advantage of our production system is that we can fairly quickly move back and forth in the lines. It is something in our system. I mean, these lines do have that flexibility. But of course, we only do it if we think it is financially viable. The switch is -- we're not talking of very long lead times to go from one product to another. So I don't know if I have much else to say there. Anything you want to add on the flexibility? Eeva Sipila: No, no. Heikki Malinen: And then on the trade policy, yes, we are actively working with the European Union on this. But European Union takes its -- they have their own procedures. They have their own methods and approaches on how they review these things. They have to do a lot of data collection. And sometimes it just takes time to get the data for them to do the actual calculations on potential injury. So we don't have a deep insight into how the processes work inside the union, but we are hopeful that in 2026, we actually could see some progress. So we will report back to you at the moment we know that the European Union is moving forward. I really hope they will make a decision this year. I really hope so. Operator: The next question comes from Alastair Syme from Citi. There are no more questions at this time. So I hand the conference back to the speakers. Heikki Malinen: Okay. Well, thank you for your questions. Thanks for taking the time to discuss with us about 2025 and 2026 outlook. I want to really summarize our presentation with 4 main points. Looking at last year, I'm very happy with how we were able to deliver the financial turnaround compared to 2024. As you've heard, really phenomenally good success on the improvement program, really very happy with exceeding the targets. And I believe there's more to come, and we will report to you on a quarterly basis. Regulatory development looks to be favorable. And as referring to Matti's question about SAF, antidumping duties, hopefully, we can report something on that as well in '26. And really, I believe we have a good foundation. There is still opportunity to improve the company, and we are working towards getting full asset utilization in place in 2026 and then '27, Rotterdam 2 is coming. So with those messages, both from Eeva, me and Jukka, I wish you all a very good day and look forward to seeing you then after Q1. Take care.
Operator: Good day, and welcome to the First Industrial Realty Trust, Inc. Fourth Quarter 2025 Results Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President, Investor Relations and Marketing. Please go ahead. Art Harmon: Thanks very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2025 results and our initial guidance for 2026, please note that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, February 5, 2026. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors, which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now let me turn the call over to Pete. Peter Baccile: Thank you, Art, and thank you all for joining us today. I'm proud of how our team performed in 2025. For the third straight year, we competed well in a volatile and evolving economy in the challenging environment for tenants investing in new growth. The only thing that is certain in this operating environment is uncertainty. We're well prepared for more of the same. We're positioned with a resilient portfolio and significant growth opportunity ahead. From an operational standpoint, our team remained focused and generated strong cash rental rate cash same-store NOI and FFO growth and continue to sign new development leases. We also executed two recent term loan refinancings, which Scott will address in his remarks. The overall leasing market showed significant activity in the fourth quarter with a record 226 million square feet of leasing according to CBRE, which was 22% higher than a year ago. Total leasing was 941 million square feet for the year, making it the second highest year on record, second only to 2021 and more than 12% higher than 2024. 3PLs continue to be very active, representing 36% of total leasing with retail and manufacturing occupiers rounding out the top 3. According to CBRE, vacancy in the fourth quarter was 6.7%, reflecting net absorption of 58 million square feet, with completions at $78 million. For the year, net absorption was 149 million square feet and completions were $282 million. Construction starts nationally in the fourth quarter were 45 million square feet, in line with the third quarter and still well below 2022's peak levels. Pre-leasing on the under construction pipeline continues to be approximately 40%. Within our own portfolio and development projects, touring activity continues to improve. Since our last call, we signed 231,000 square feet of leases in two of our developments. These leasing wins include the other half of our 425,000 square foot, Houston development, and 19,000 square feet at our First Loop project in Orlando. For 2025, our cash rental rate increase on new and renewal leasing was 32%. If you exclude the large fixed rate renewal in Central PA, we previously discussed, the cash rental rate increase was 37% and the straight line increase was 59%. Our annual escalators for 2025 commencements, excluding fixed rate renewal -- the fixed rate renewal were 3.7% and which has remained steady since 2023 when we started to implement higher escalators in our leases. For the whole portfolio for 2026, they are 3.4%. Regarding our 2026 rollovers, we're off to an excellent start, having taken care of 45% by square footage, and our overall cash rental rate increase for new and renewal leasing is 35%. For the full year, we expect cash rental rate growth to range from 30% to 40%. Moving now to investments. During the quarter, we acquired the 968,000 square-foot 100% leased building from our Camelback 303 Phoenix joint venture for $125 million. The purchase price is net of $18 million, which is our share of the venture's gain on sale promote and fees. The venture also sold the last remaining 71 acres it owned to a data center operator. With these transactions, we successfully concluded the joint venture, which achieved an overall IRR of 90%. We thank Diamond Realty for being an outstanding partner on this and the prior PV303 venture, through which we created significant value for them and our shareholders. And ultimately, we're able to add some high-quality properties to our portfolio. We also acquired a newly constructed 117,000 square foot facility in the Baltimore market, in the infill eastern suburbs of Washington, D.C., near Andrews Air Force Base for $31 million. The property was 2/3 leased at acquisition. The combined stabilized cash yield on the net purchase price of the Phoenix building plus the DC facility is 6.3%. On the development front, we're breaking ground on two new buildings in the first quarter. At First Park Miami in Medley, we're starting a 220,000 square foot project as we continue to methodically build out that park. As a reminder, we've developed 1.4 million square feet across 8 buildings in this infill location, and we own additional land that will support another 859,000 square feet of projects. In Dallas, we're starting the 84,000 square foot First Arlington Commerce Center III. This is the third project in our park in this highly sought after submarket. Total investment for these two buildings is $70 million with a combined projected cash yield of approximately 7%. Lastly, given our performance and outlook, our Board of Directors declared a first quarter dividend of $0.50 per share. This is an increase of 12.4%, which is aligned with our anticipated cash flow growth. With that, I'll hand it over to Scott. Scott Musil: Thanks, Peter. Let me start by recapping our results for the quarter. A REIT funds from operations for the fourth quarter were $0.77 per fully diluted share compared to $0.71 per share in 4Q 2024. For the full year 2025, FFO per fully diluted share was $2.96 versus $2.65 in 2024, representing a 12% increase. Our cash same-store NOI growth for the full year 2025, excluding termination fees, was 7.1%, primarily driven by increases in rental rates on new and renewal leasing and contractual rent bumps partially offset by lower average occupancy. Please note that 2024 same-store NOI excludes $4.5 million of income related to the accelerated recognition of the tenant improvement reimbursement associated with the tenant in Central Pennsylvania. For the fourth quarter, cash same-store NOI growth was 3.7%. We finished the quarter with in-service occupancy of 94.4%, up 40 basis points from the third quarter. Summarizing our balance sheet leasing activity during the quarter, approximately 1.8 million square feet of leases commenced. Of these, approximately 600,000 were new, 600,000 were renewals and 500,000 worker developments and acquisitions with lease-up. On the capital front, we recently renewed two term loans. First is our $425 million unsecured term loan with an initial maturity date of January 2030 with a 1-year extension option. In addition, we renewed our $300 million unsecured term loan and increased its size by $75 million for a total $375 million. The initial maturity date is January 2029 with two 1-year extension options. Pricing for both new term loans removes the incremental 10 basis points so for adjustment. Lastly, in conjunction with these refinancings, we also amended our $200 million unsecured term loan to eliminate the 10 basis points so for adjustment. We thank our banking partners for their continued support and commitments. Before I review our overall guidance, let me quickly update you on our bad debt expense and our credit watch list. Bad debt expense for the year was $700,000 coming in better than our original guidance of $1 million. Note that our forecast for full year 2026 is $1 million. Regarding our watch list, Debenhams Group, formerly Boohoo, remains current. We also continue to work through the collection process for the 3PL tenant we added last quarter, and we've been collecting the subtenant rents since October 2025. Now moving on to our initial guidance for 2026. Our NAREIT FFO midpoint is $3.14 per share with a range of $3.09 to $3.19 per share. Key assumptions are as follows: average quarter-end in-service occupancy for the year, 94% to 95%. At the midpoint, the major lease-up assumptions include 1.7 million square feet of development and the 708,000 square footer in Central Pennsylvania, all to occur in the second half of the year. 2026 full year average cash same-store NOI growth, 5% to 6%. Guidance includes the anticipated 2026 costs related to our completed and under construction developments and today's announced starts. For the full year 2026, we expect to capitalize about $0.08 per share of interest. And our G&A expense guidance range is $42 million to $43 million. Please note that the cadence of our G&A expense will be similar to 2025 with our 1Q expense to represent approximately 40% of full year G&A. This is due to accelerated expense related to accounting rules that require us to fully expense the value of branded equity-based compensation for certain tenured employees. Now let me turn it back over to Peter. Peter Baccile: Thanks again to my teammates for their contributions to a successful 2025. As we've often said, we manage your company to thrive through business cycles. This past year was a strong reminder of why we subscribe to that strategy. In 2026 and always, our team is focused on capitalizing on the opportunities we have both within our portfolio and in our new developments to drive cash flow growth and further enhance shareholder value. Operator, we're ready to open it up for questions. Operator: [Operator Instructions] The first question comes from Craig Mailman with Citi. Craig Mailman: Maybe on the development leasing, that was helpful to give an update there, and I understand that second half. Just as I think through that 1.7 million square feet, how much of that is in projects that have already delivered or drag on the operating portfolio versus projects that are either under construction or lease-up that may not hit until later in the year, so the contributions more for 2027. Scott Musil: Craig, it's Scott. I think the way that we look at it is that we have a 2.5 million square foot development opportunity. These are properties that have been completed or will be completed in 2026, so that 1.7 million square feet that we have in our guidance could come out of any of that 2.5 million square feet. Craig Mailman: Okay. And then just a follow-up. Can you just give us a sense of where you guys stand on Denver? I know you're kind of dual tracking it for sale and lease still. Kind of what's the update there? Peter Baccile: Craig, it's Peter. Correct. The building is available for either lease or sale. We have a couple of active prospects that we're talking to for all of the building on a lease basis as well as a couple of inquiries on portions of the asset, and we'll keep you posted on our progress. Craig Mailman: Maybe a third quick follow-up. How is that treated in same store? Because I know it, $4 a foot of property taxes on it. Like does that high probability in the 1.7 million square foot lease up? Or is that more vacant? And how much of an uptick could that be to earnings on the same store for you guys were to sell that? Scott Musil: Well, like you said, Craig, if we were to sell it, then we don't have the taxes, as you said, was about $2.4 million for the year, if that was something that we leased up and again, it's -- if it did lease up, we're making the assumption back end of the year, it's going to be free rent related, so it's not going to have an impact on cash same-store. Obviously, the taxes would I think all of that kind of comes into our 5% to 6% cash same-store range. Operator: And the next question comes from Michael Carroll with RBC Capital Markets. Michael Carroll: I want to circle back on the development in the PA that's included in guidance. I mean Scott, have you done an analysis, how much FFO does that increase your 2026 guidance? Or how much is that contributing to your 2026 guidance range? Scott Musil: Are you talking about just the 708,000 or the 1.7 million square feet, Mike? Michael Carroll: I guess, both, assuming that those spaces get leased in the back half of the year, I mean, is it in the July time frame or the December time frame, I guess, if we just kind of neutralize those to, I guess, larger buckets of space, I mean, how much FFO contribution is assumed in your guidance range from those specific assets? Scott Musil: Right. So I would say it like this, if we did not lease up, any of the 1.7 million square feet of the 708,000 square footer, we would still be within our FFO guidance range. Michael Carroll: Okay. And then just related to some of the developments, I mean, can you talk about the South Florida campuses? I know this market has been pretty solid and some of the reasons why you're breaking ground on a new project. I know there is space left in Building 12 and Building 3. I know there's some space left in first Pompano 2. I mean, are you just seeing really good activity, and that's why you wanted to break ground on this project in Miami again? Peter Baccile: Sure, Mike. So it's Peter. Yes, is the answer to your question. At Building 12, we only have 32,000 feet. At Building 3, we have some active prospect discussions going on for portions of that building. As you know, when we start a new project in Florida, it takes us about a year to deliver, so that building won't deliver until first quarter of '27. And we feel pretty good about the activity. The smaller building in Pompano. We have active prospects for that different submarket, so it's not the same calculus, but overall activity is pretty steady. Operator: And the next question comes from Blaine Heck with Wells Fargo. Blaine Heck: Can you talk a little bit more about the balance between preserving occupancy and pushing on rental rates? Are there any more markets in which you're kind of leaning more towards pushing on rate versus preserving occupancy and maybe on the flip side, any specific markets or size segments that you still see as more vulnerable on the rate side? Peter Baccile: Yes. I would say on that, look, we're always trying to maximize the NPV of those leases that varies by market. We remain competitive to meet the market, and I'm not sure how else to answer that. We're really looking to maximize the value of each asset in each lease. And of course, that has different inputs, whether it's free rent or TIs or base rate, et cetera. Peter Schultz: Blaine, it's Peter. The other thing I'd add to that is we're going to meet the market. And as Peter said, optimizing all of those economics. The assets that we have are available are high quality, and there is certainly a flight to quality in this market. Lowering the rent is not going to necessarily create incremental demand. There are certainly assets in the market that are second or third gen that do not have the functionality and they're struggling. So that will be a rent challenge for them. But in general, rents are pretty stable and holding certainly concessions and TIs up a little bit. But we don't view lowering the rent on a wholesale basis as the solution. Peter Baccile: There's also been some movement from Class B to Class A, which plays into our portfolio very, very well, given that we've built most of it now in the last 15 plus or minus years. So we're in a good position with the competitive standing of our assets. Blaine Heck: Great. That's helpful color. Second question, Amazon remains your largest tenant about 6% of revenue and their demand is sometimes seen as kind of the barometer for the market as a whole. So can you just talk about any recent discussions you've had with them or indications around their appetite for additional space in '26? Peter Schultz: It's Peter again. We're seeing them active in a number of markets for additional space including a number of large format buildings in Pennsylvania as an example. They continue to be active and looking to add to their portfolio. Johannson Yap: Also, I'd like to add that Amazon has been particularly active in Q4 in 2025, numbers that we researched totaled about 10 million feet just in Amazon. And so they've come back and lease the 1 space. Operator: And the next question comes from Nicholas Yulico with Scotiabank. Greg McGinniss: This is Greg McGinniss on for Nick. I just want to make sure we understand on the FFO per share guidance the difference between the bottom and top end of the range is primarily related to development pipeline lease-up, or are there other key factors we should be considering as well? Art Harmon: That's 1 piece, the 1.7 million square feet of development lease up in the 708,000 square footer. The other piece of guidance we give you is bad debt expense. We put in $1 million for guidance. It came in at $700,000 last year. But you never know, there could be some volatility in that as well. Greg McGinniss: Okay. And with the 2026 lease expirations, it looks like you're down to 4.5 million square feet remaining. Are there any like key tenants in there or a larger spaces that you're focusing on? Johannson Yap: We are working with a renewal in SoCal, about 555,000 square feet, and we are in discussions with the tenant. Operator: The next question comes from Nick Thillman with Baird. Nicholas Thillman: Good success on the Camelback JV. I know you guys also had been evaluating potential higher uses for just through land bank and existing assets when it comes to data center opportunity set. So just curious if you had any updates there. Peter Baccile: Yes, we're still working on that. We're pursuing a pretty narrowly defined set of potential opportunities. It's going to take a while to play out. You have to do a lot of different studies, have a lot of discussions that take a long time. But -- so we're still evaluating that for both land holdings and existing buildings, and we'll keep you posted on any progress. Nicholas Thillman: That's helpful. And then for a follow-up, Peter, you're pretty bullish. It seems a little bit on just the macro turning here. As you look at your land bank, do you view that you have the capacity to develop in the right markets as you see it today? And as we think about new starts for '26, is it more a function of you would like is understanding that you do have that leasing cap. Is it more a function of getting some leasing done before you start new projects, or is it more going to be how you're seeing the demand environment change throughout the year? Peter Baccile: Yes. The cap is not really factored into these decisions. It's really the economics of each project and the condition of the markets. As we've mentioned in the past, places like Texas and Florida and PA are pretty good. Nashville is great. We do -- we're looking to add to our landholdings in Nashville, in particular as well as South Florida. We do have potential opportunities for starts in some of those markets today. And of course, over time, getting into the '27, '28, '29 time frame, we think that some of the other markets, in particular, SoCal, will begin to be a place where you might start thinking again about it. So we're pretty well positioned with our holdings. We certainly do want to add to those holdings, I'll say, in the eastern half of the country, and that counts Texas. Operator: And the next question comes from Todd Thomas with KeyBanc. Todd Thomas: First question, I appreciate the detail around sort of the assumptions related to the development leasing and the Central PA asset. Understand it's skewed towards the second half of the year. But can you provide just a little bit more detail around the pipeline today for prospects, how demand and tenant activities trending? Just trying to get a sense for sort of how much visibility you have today? Peter Baccile: Yes. Jojo or Peter you can comment on it. Peter Schultz: Sure. Todd, it's Peter. In general, we're seeing continuation of the pickup activity from the balance -- at the end of the 2025 year into the beginning of 2026. We have more inquiries, tours, RFPs engagement level from tenants is better. Still hard to predict when some of those deals, if they'll get done and when the leases will start. There's still a lot of deliberate this among tenants. But we feel better today than we did last call in terms of the overall level of activity and tenant engagement. And as we've talked about, new supply is down, sublet space is pretty much stabilized. So the environment is better. Johannson Yap: The part of that 1.7 million square feet, as Scott mentioned, includes the two development projects in IE. I would say that IE -- in the IE, we have a bit more prospects and a bit more RFPs. We're certainly very happy to release our 159,000 square foot First Harley Knox in Q4 of last year in IE. And 1 thing I want to point out on the supply side, under construction deliveries and starts in IE, are in a record low. I mean, significantly decline Q3 to Q4 and the sublease availability is also slightly down. So all in all, if you look at the fundamentals of surrounding those two development projects, it's pointing out to the bottoming of market and with improving supply metrics and some increasing demand activity. Todd Thomas: Okay. That's helpful. How are concessions trending broadly? I realize it's probably market by market and asset by asset, but how should we think about sort of cash rent commencements relative to sort of the date of a lease signing? Peter Schultz: Yes, it's Peter again. I would say concessions are flat to drifting up. And you're exactly right. It's market by market, asset by asset. Free rent is between half of 1 month and 1 month per year of term. And the TIs are really driven by specific tenant requirements, but it's up a little bit as tenants have choices. Johannson Yap: And I just want to add that in terms of renewals, which represents the major bulk of our activity, leasing activity, they're tight, meaning that we're not seeing significant increase on free rent versus -- and the TIs are very low. So once they've committed to the space. And by the way, in terms of renewals, they've been renewing a bit earlier than 2024 or early '25. Todd Thomas: Okay. That's helpful. If I could just sneak in 1 more here. In terms of the capital plan for '26, just curious how you're thinking about dispositions and additional land sales and whether anything is contemplated for the year as sort of a source of capital, I guess, what the appetite is like in the market and sort of what's contemplated around disposition monetizations? Peter Baccile: Sure. Look, I mean, I think the best way to describe it is we remain opportunistic. As I mentioned earlier, we are looking at everything we own to see if it's -- can be converted to higher and better use. In terms of planned sales, that number is not a very large number. But again, we're opportunistic, and we're open to maximizing value in each and every asset that we have. Operator: The next question comes from Caitlin Burrows with Goldman Sachs. Caitlin Burrows: You mentioned the progress you've made on the '26 lease expirations. I guess if we take a look back on 2025, can you comment on what sort of retention rate you achieved and what do you expect a similar result in '26 and for those that are leaving any sense why? Peter Schultz: Yes. 2025, we are at 71% overall retention rate. We expect very similar in 2026. And as you see, we've already taken care of 45%. So we feel pretty good about that at this point. Caitlin Burrows: Does that 45% mean that the other 55% is still TBD? Or are some noose included in that, too? Peter Schultz: Yes. So most of the renewals are the rollouts we're talking to and discussions with. So they're very close to getting done in many cases. Caitlin Burrows: Got it. Okay. And then maybe just on new leasing. I know you mentioned how Amazon was quite active in the industry in 4Q. Can you go through who in 4Q, and I guess so far in 1Q has been active like types of tenants in your portfolio? And do you think those are indicative of the industry or more FR specific? And any comment on like why the activity today versus like a year ago? Peter Baccile: I'll start this, and Peter and Jojo can jump in. Look, generally, 3PLs have been very active. They've got the biggest market share, about 36%. Retail has been active. Manufacturing has been active. Food and bev has been active. And I don't think there's any significant difference other than manufacturing. We don't have a lot of that, but there's not a huge difference between what's going on in the broader market and our own lease up. Peter, do you have anything else? Peter Schultz: Yes. The other groups I'd add, Caitlin, are auto-related energy building materials and products. It continues to be a pretty broad-based group of prospects, as we've talked about on prior calls. And that, I would say, is in line with what we're seeing in the market and across our portfolio. Johannson Yap: That's pretty extensive. We're already the only -- there are some if you compare '24 -- '25 to '24, there's been a slight increase on data center-related either infrastructure or construction-related uses. Operator: [Operator Instructions] Our next question comes from Vince Tibone with Green Street Advisors. Vince Tibone: You mentioned the flight to quality, which is a common theme we've heard from others. So I want to ask a basic question, just like what traits make a building and a building and kind of what factors have changed versus maybe the recent past? And particularly, could you just talk about minimum power load requirements from tenants and how that's changed. I've heard that's come up a lot more in new leasing conversations. Peter Schultz: Vince, it's Peter. So clear height, trailer parking, column spacing, car parking, building depths and geometry circulation. All of those are important. I would say to your comment about power pretty much every large user that we're seeing today wants more power. We design and fit out our new buildings with pretty much the maximum we can supply. Some tenants are requiring more than that, which takes additional time and investment from them to achieve that. But I wouldn't say there's anything materially different today than the last several years and what we've been building and delivering. Vince Tibone: Yes, that's helpful. Is there any like rules of thumb you're able to share around like what would be, in your mind, a strong power load versus 1 that's maybe a little subpar for a new tenant and a bulk building, whether it's like megawatts per square foot or just mega like is there any kind of just helpful metrics you could share on what is -- what would be adequate power for a new bulk building? Peter Schultz: Yes. Generally, we're putting in, depending upon size between 3,000 and 5,000 apps. Vince Tibone: Okay. No, that's helpful. And so I would just to confirm, that would be -- most tenants would find that attractive or they wouldn't need more than that in most cases. Peter Schultz: Most tenants overstate their needs and there's ample power, right? So some certainly have additional needs, but for the vast majority, it's fine. Vince Tibone: No, that's really helpful. And then just 1 more quick 1 on kind of guide and near-term expectations. Just want to see if there's any large known move-outs in '26, we should be aware of or do you want to point out? And just also broadly how you're thinking about retention rates this upcoming year? Like it's been pretty steady. So do you think 70%, 75% still reasonable, or any reasons it could go higher or lower over the next few quarters here? Peter Schultz: Yes, I'd say that it's reasonable, it would be 70% plus or behind us. And then I can also keep in mind that we only have '24 rollovers remaining that are greater than 200,000 square feet. So Again, we feel pretty good about where our retention is going to into this year. Operator: And the next question comes from Tayo Okusanya with Deutsche Bank. Omotayo Okusanya: Just wanted to get your thoughts around tariff policy and this kind of upcoming decision by the Supreme Court, how you think through all those different scenarios, what could happen then if the Supreme Court does strike down current tariff policy, does the administration come back with alternatives? Does that create more kind of headline risk or uncertainty going forward? And how do you kind of think just through all the scenarios, and how it could potentially impact tenant demand? Peter Baccile: Yes, sure. We'll take a shot at this. So a year ago, when we had this call, we were feeling pretty good about 2025. And then April 2 came and it significantly slowed down the interest in investing in new growth on the part of our the prospects and tenancy in our sector. They have had the whole year to think through, digest, remodel, replan and resource and now that topic is far less acute than it was. So I don't know is the answer to your question of whether you're going to see a big reaction to the positive if the Supreme Court knocks them down. I would expect the reaction to be muted. I think many, many prospects have moved on. And I think we're kind of over that hump. Now it doesn't mean as an issue that it's gone, but I think we've gotten over the hard part. Operator: The next question comes from Mike Mueller with JPMorgan. Michael Mueller: In terms of potential dispositions that you've been thinking about, where are you seeing the best economics to you? Is it higher and better use land sales basically or user sales? I'm assuming it's not just traditional industrial sales with lower growth prospects. Peter Baccile: Yes. So certainly, the higher and better use I mean it's potential data center use, that's not a secret. The value pickups can be significant, making them -- those are things we're going to pursue absolutely if we have the opportunity. With respect to everyday sales, industrial sales, certainly, users and users bought our '24 buildings in the third quarter. For example, users and 1031 buyers are always going to pay a little bit more. They have lots of reasons to do so. So those are the target markets. And it doesn't mean that there won't be opportunities with institutional capital as well. So that's the landscape. Operator: And the next question comes from Rich Anderson with Cantor Fitzgerald. Richard Anderson: So just a finer point on the Inland Empire land, you can create a small company out of all the billable square feet you have there. What is your kind of thought process about holding on to most of that or selling some of it. I mean it could become an incredible asset if we get some real sort of stabilization in Southern California in general. So should we expect that to be remain a very large chunk of your land bank? Or is it possible that you would take the bait and sell some of that land for whatever use? What is your mindset as it relates to your longer-term view of the market? Peter Baccile: You've covered the water front appropriately with your question. Right -- yes, we think it's very valuable. Our land holdings. There are very valuable. The -- it doesn't get easier to get entitlements there. It only gets more difficult. It's 1 of the topics that kind of gets forgotten as everyone is focused on development, leasing and rent growth and other things. But it's still getting more and more difficult to build in SoCal. It takes from start to finish meaning first discussions to buy a site to putting a tenant in the building 5 to 7 years. So we think that market is going to come back. Again, on a trend line come back, not hockey stick and that land is going to be very valuable. Having said all of this, we're absolutely open to being opportunistic and taking advantage of opportunities to sell land there. There are some holdings that we might decide to take out anyway, and we're still evaluating that. But again, we're looking to maximize the value there and balance the future opportunity with the present opportunity. Operator: The next question comes from Brendan Lynch with Barclays. Brendan Lynch: One on the power that's available in your building. It sounds like there is some element of stranded power in each asset. Is there an opportunity to either reposition that power elsewhere, or somehow generated rental revenue out of that for edge data centers as we saw with one of your peers recently. Any color around that would be helpful. Peter Schultz: It's Peter. I wouldn't say there's a lot of stranded power. And certainly, some companies want to have the flexibility as they increase their operations or add technology or for newer material handling equipment or air condition in the building. So it's important to have flexibility. Some jurisdictions, we're now seeing where the tenants aren't using all of the power, the power companies may claw it back just given the power constraints generally and some of the power grids. So it's something we pay close attention to and make sure we have the right power to accommodate our tenants. Brendan Lynch: Great. That's helpful. And then maybe a question for Jojo. To follow up on your comments about concessions being very low on renewals and kind of more aggressive on new leasing. I'd imagine that's typically the scenario, but it seems like it's maybe more of an extreme now. So any commentary on what's driving that dynamic now versus in the past? Johannson Yap: I wouldn't say it's extreme, but one thing we always should not forget is that when a tenant is in the space, they've got a tenant investment. And when they relocate, there's a lot of moving costs depending upon the tenant investment. So right there and there, that could be a deterrent from the moving. Second of all, unless they significantly need more space or they need to consolidate, they tend not to move again because of moving costs and business disruption. So then when you juxtapose that with the amount of work that needs to happen, there's a high rate of renewal. That's why in the industrial real estate business, even if you look back over the past 30 years, renewal rates have been 65% to 75%. And that is one of the most stable things in the industrial real estate business. So I wouldn't say what right now, it's an extreme. It's really what's going on. Now the only other thing is that why is renewal a little bit earlier now than in the past 5 years. The reason for that is that tenants have a -- because of what's going on, probably have a longer view and they don't want to be -- they want to commit earlier so they can set their rental rate more and kind of take care of their future more because of maybe potential thoughts of uncertainty. Operator: [Operator Instructions] Our next question comes from Vikram Malhotra with Mizuho. Vikram Malhotra: Just I guess, 2 clarifications. So first of all, just on the lease-up assumptions for developments and kind of how that's translating to occupancy. Do you mind just walking through any other impacts that are driving the occupancy sort of a modest bump up? And just to be clear, if you were to lease those up in the back half, that should be upside to occupancy, correct? Scott Musil: Vikram, it's Scott. What we've assumed again is 1.7 million square feet of development leasing in the 708,000 square footer. Again, that's back half of the year. So if we hit that, you're going to be at your midpoint occupancy rate that we put out last night. I hope that answers your question, but -- if you have something else, please let me know. Vikram Malhotra: Is there anything else that's positively or impacting occupancy kind of in the first half as we go into the second half? Scott Musil: Well, I would say occupancy is going to increase more in the back end of the year due to this leasing assumption that we have. And as far as any other leases, Jojo talked about one of the renewals he's working on in Southern California. And I think Chris mentioned there was only one other renewal or expiration that's above 200,000 square feet. So everything else is pretty bite size, I would say. Vikram Malhotra: Okay. And then just maybe on that PA space and tying it back to like any of the large 3PLs or retailers. We've also heard in addition to Amazon, Walmart, kind of very active in the market looking for space. And I'm just wondering the PA space, do you still think you need to like make the multi-tenant space? Do you think it's most likely a single tenant space for now? Peter Schultz: Vikram, it's Peter. The 708,000 square foot building in Central Pennsylvania is more likely a single tenant, but designed and available to be split for 2 tenants, and we've been in discussions with prospects for either one of those scenarios. Pennsylvania continues to see, to your earlier point, good activity. There's over 8 million square feet of deals that were signed in the fourth quarter -- late third or fourth quarter of '25 that have not yet hit occupancy yet in '26. So they're not in the occupancy numbers or the net absorption. So as we've said a couple of times, vacancies are coming down. The construction pipeline continues to be muted. Activity is good, particularly for the largest buildings, but we acknowledge we have work to do on this asset and look forward to keeping you updated on our progress there. Vikram Malhotra: Okay. Great. And then just one more, if I can. Just some of your peers have talked about certain submarkets or markets seeing an ability to push rate after multiple years. And I'm just wondering, are there any markets across your portfolio where you're being able to push, say, rent 3-plus percent? Peter Baccile: Sure. South Nashville, Texas, Dallas, Houston? Peter Schultz: Central Pennsylvania. Peter Baccile: Central PA. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Peter Bacilli for any closing remarks. Peter Baccile: Thank you, operator, and thanks to everyone for participating on our call today. If you have any follow-ups from our call, please reach out to Art, Scott or me. Have a great weekend. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Rune Sandager: Hello, everyone, and welcome to GN's conference call in relation to our annual report announced this morning. Participating in today's call is Group CEO, Peter Karlstromer; Group CFO, Soren Jelert; and myself, Rune Sandager, Head of Investor Relations. The presentation is expected to last about 25 minutes, after which we'll turn to the Q&A session. The presentation is already uploaded on gn.com. And with that, I'm happy to hand over to Peter for some opening remarks. Peter Karlstromer: Thank you, Rune, and thank you all for joining us today. '25 were a year where we continue to execute on our strategic and operational agenda in a difficult market environment influenced by uncertain trade and macroeconomic weakness. In Hearing, we continue to deliver very strong performance, and we are now at record high market shares driven by ReSound Vivia that was launched in the beginning of the year. Our premium products sell very well, and our margin is under control in spite of an adverse country and business growth mix in '25. Our product and software platforms are in strong shape, and we plan to launch further innovation in '26 that will support our growth. In Enterprise, the U.S. and APAC market continued to grow modestly throughout the year, while the European market still experiences some weakness. We are pleased with our own execution in this environment and well prepared to benefit from a continued gradual strengthening of the market. In '25, we successfully accelerated several supply chain and pricing initiatives to manage the uncertain trade environment. We have managed this well and have mitigated most of this change. We have a strong pipeline of products in video and headsets that we will launch in '26, the most important one for our financial results is the Evolve3 headset platform, which we announced a few weeks ago and will start to ship later in this quarter. Additional launches under this new platform will follow later in the year. In gaming, we continue to gain market shares in a challenging gaming equipment market. While gaming also faced some of the same margin headwinds as enterprise, we have executed sustainable margin initiatives and operational resilience initiatives supporting our long-term margin aspirations for the division. In addition, we have also launched exciting products in gaming, including our new gaming headset, the Nova Elite, which is very much a premium offering. Also here, our product pipeline is strong, and we look forward to exciting launches in '26. The markets that our 3 divisions operate in have been challenged in '25. While we aspire to deliver stronger absolute numbers in the year, we feel very good about our relative performance across our divisions and focus on the things that are within our own control. We have taken several supply chain and operational improvement initiatives that we will benefit from in the years to come. In addition, our product pipeline across our 3 divisions is stronger than it's been for a very long time. We remain firm in our belief that our markets remain attractive and look forward to further developing our business in '26 and the years to come. With this introduction, I'm happy to hand it to Soren for further details on our performance in the group. Soren Jelert: Thank you, Peter, and thank you all for joining us today. Essentially, as Peter mentioned, we are satisfied with what we achieved during '25 under these challenging circumstances. The group delivered a negative 1% organic growth for the year, supported by a 5% organic growth from our Hearing divisions, a negative 6% organic growth from our Enterprise division, and a negative 2% organic growth from our Gaming division. Our profitability, we are pleased with where we landed for the year with an EBITA margin of 11.4% as this essentially demonstrates strong mitigation of what is within our own control. We have successfully increased prices and kept a strong focus on costs while harvesting group-wide benefits from the scale of GN. The profitability also positively influenced the free cash flow generation where we ended the year with DKK 1.1 billion in free cash flow. Moving to the financial details on Slide 6. Starting with the results of the fourth quarter of '25, the group delivered organic revenue growth of a negative 2%, reflecting solid execution across our divisions in some difficult market conditions. The EBITA margin ended at 13.4%, reflecting a group-wide cost focus offset by an extraordinary R&D write-down due to the new partnership with Huddly in our video collaboration business. Lastly, the group generated free cash flow, excluding M&A of DKK 744 million, reflecting the strong profitability and positive development from our working capital. For the full year, the group landed at an organic revenue growth of negative 1%, in line with our financial guidance. The group delivered an EBITA margin of 11.4%, which reflects prudent cost management while strengthening business fundamentals and preparing for future growth. The free cash flow, excluding M&A generated for the year was DKK 1.1 billion, driven by solid earnings and positive impact from working capital. In 2025, we have decreased our net interest-bearing debt by more than DKK 800 million, which also allow us to refinance our main loan facilities during the year with attractive terms. In summary, at a group level, we delivered solid profitability and good cash generation while continuing to improve the balance sheet. We also accelerated our efforts to ensure a flexible and diversified operational setup while making important progress on our product road maps, paving the way for growth opportunities in '26 and beyond. And with those group highlights, I'm happy to hand you over to Peter for some additional color on the 3 divisions. Peter Karlstromer: Thank you, Soren. Let me start with our Hearing division. In Q4, we finished the year well with 7% organic revenue growth, reflecting a market that continued to grow slightly below its normal trends. Divisional profit margin for the quarter was 35.2%, reflecting a focused cost control. When looking back at '25 as a whole, we can conclude that Hearing grew faster than the market and continue to gain market share. The full year organic growth was 5% in the market growing slightly slower than normal. The gross margin ended at 61.1%, which was below 24% due to an adverse development in the country and business mix as well as the divestment of Dansk HoreCenter. Divisional profit margin ended at 33.6% due to prudent management on sales and distribution costs, offset by the gross margin development and ongoing investments to support the strong momentum of our ReSound Vivia platform. The divisional profit margin was slightly below 24%, which is explained by margin underperformance in the difficult and unusual Q1 that we and the market experienced. In the last 3 quarters of '25, we delivered a slightly better divisional profit margin compared to the same period in '24. We are confident in the underlying margin structure and plan for margin improvement in '26 and beyond. Let's move to the next slide for some highlights on the performance on Enterprise. The Enterprise division ended the year with a fourth quarter organic growth of negative 3%. This includes a larger FalCom order that continued its good progress. Our Enterprise business grew in North America and APAC, while the weakness in EMEA continued. Sell-out in the quarter was a few percentage points stronger than the sell-in, reflecting some channel inventory reductions in EMEA. Channel inventories were stable in North America and APAC. The divisional profit ended at 33.3% for the quarter, reflecting positive contribution from price increases and cost control and offset by direct tariff costs. For the year of '25, Enterprise managed to maintain its market-leading position in a challenged European market while executing positive sell-out growth in North America and APAC, resulting in organic revenue growth of negative 6%. As part of these numbers, it's worth highlighting that our sell-out growth numbers were around 3% better than this. So global channel inventories have decreased compared to last year. The gross margin increased 0.3 percentage points compared to '24 in spite of the extra tariff cost. We are pleased about how we mitigated uncertain trade environment through accelerated diversification of our supply chain and targeted price increases. The development in divisional profit margin reflects focused cost control, negative operating leverage and costs related to the upcoming launch of the Evolve3 platform. Moving to the next slide and Gaming. In our Gaming division, we delivered organic revenue growth of negative 12% in the fourth quarter, reflecting a difficult gaming equipment market influenced by low consumer sentiment as well as a very demanding comparison base as we delivered 16% organic growth in the same quarter '24. In the quarter, we demonstrated good cost control, delivering a divisional profit margin of 16.4% despite the direct tariff cost. For the year, we have increased our market share in a difficult market, resulting in organic revenue growth of negative 2%. We increased the gross margin for the division due to strong pricing discipline and benefits from the supply chain integration with Enterprise, partly offset by direct tariff cost. The divisional profit margin for the year reflects investments in product launches and extra costs related to managing the difficult trade environment. Let me move to the next item on the agenda, where we'll provide some more flavor on the divisional growth ambitions for '26 and beyond. Starting with Hearing. In '25 the market grew slightly less than normal. We still very much believe in the underlying growth drivers of the market with increased adoption and a growing elderly middle class around the world. This will continue to support healthy market growth over time. We are pleased that we have managed to outgrow these attractive markets for the last years, driven by strong commercial execution and product innovation. With the help of our latest platform, ReSound Vivia, we have further strengthened our position and our momentum remains strong around the world. As announced earlier this week, we will now also expand the Savi portfolio, which will support growth, especially in countries and channels looking for more affordable product solution. On top of these exciting portfolio additions, we have even more innovative product launches planned for the second half of '26. Altogether, this gives us high confidence that we can continue to grow above the market and strengthen our competitive position in the coming years and further. Let's turn to the development of the Enterprise business. I think it's worthwhile taking a step back and looking on our headset business has been shaped over the last decade. We have been one of the frontrunners establishing the market and driving the professional headset penetration. And the enabler for this has been technology shifts, where we have been successful in developing products that caters for customers' needs over time. Back in 2014, we launched our award-winning Evolve portfolio that supported the rapid adoption of different UC platforms driven by large technology infrastructure companies. What was unique and industry-leading at that time was the easy integration of our headset portfolio in the different user platforms, where we also launched ANC and a strong microphone pickup. The result was clear, professional headset quickly became popular and a standard for the knowledge workers wanting a high-quality experience. Moving into 2020 and the hybrid work age, as we would call it, this was accelerated by COVID-19. This period in time required new technology for headset performance and integration. In early 2020, we launched the Evolve2 portfolio that significantly increased headset performance across multiple dimensions. As a result, global headset penetration increased further to around 20% where it is today. And now with a fast-developing AI solution, we're entering what we believe is the next era. We call this the modern work shift. And with the increased adoption of AI solution, we believe that the next headset penetration will be driven by new technology demands. For it to succeed, you need to have a headset that fits the evolving trends of tomorrow. Let me give you a few examples. Ninety-nine percent of knowledge workers acknowledge that poor sound is impacting online meetings. Seventy-eight percent of knowledge workers from multiple locations, which means that the design of headsets is important and that headset needs to handle ever-changing noise situation in different environments. Currently, we're also seeing a return to office trend among many companies as well as a trend that the majority of new offices being built are having more open landscapes and less square meter per worker. This means that all of us need great solutions for working in these open spaces that are comfortable and where we can have online meetings where all background noise is filtering out. And that would help you to come across very clearly even in these challenging environments. AI workflows will also be a driving force. Voice is 3x faster than typing, making AI voice interaction much more efficient than if we type. Simply, we will likely speak more to our computers and devices and type less. This puts new requirements on the headsets in terms of how they can handle this with great accuracy. It would also like to increase the sound level in open spaces further and further increasing the need for great headsets that can handle that. Lastly, cybersecurity is important today and will likely increase even more into the future and grow in importance while an enterprise-grade framework for security is becoming an essential to be in this market. We have talked to numerous customers, partners, and analysts over the years to form a strong view on what's needed. And we believe that we have announced the -- what we have announced last week is really the headset that can take us into the new modern work area. Our latest enterprise-grade headset launch, the Evolve3 is designed to take the user experience to a new level while playing up against future technology trends. And it's not just another hardware update that is slightly better all around. The Evolve3 is also based to close to 10 years of research and development in its underlying technology. First and foremost, the AI-driven deep learning technology had been trained on more than 60 million real-world synthesis, taking microphone technology to a completely new level with outstanding ability to separate speech from noise, and this is quite impressive considering that it's also been possible even without the traditional boom arm. These headsets captures 99% of words accurately in an open office environment, making it built for voice-led AI and screen productivity in any environment. In addition, it is the first of its kind to feature adaptive noise cancellation while we're on a call and it comes with improved connectivity and a significant step-up in battery life with the possibility of a full day use from only 10 minutes of charging. In addition to impressive technical development, Evolve3 is also designed to be compelling. It is released in black and warm gray with a modern design. It's also designed for comfort. It is light and comfortable to wear all day. From March, the Evolve3 will be globally available in our high-end form factors, the 85, which has an over-the-ear fit and is designed for immersed focus and the 75, which has an over-the-ear fit if you prefer a lighter wear and greater environmental awareness. We call this the best headset for modern work and it's really built to match the pace and flexibility of what we all require. So let me move to the next page. As the working habits change, we need technology that adapts well. Whether you are in an airport, working at home, in the office or somewhere else, Evolve3 is a perfect companion. Even in very noisy environments, voice clarity is state-of-the-art due to our DNN-based voice processing, taking the benefits from the wider GN Group. As an example, you can literally stand in the room with loud music playing in the background and a person that you're speaking to will only be able to hear you and what you are saying and not the music at all. The same applies when you're taking a call outside a windy day, in a noisy coffee shop, or basically anywhere in any situation you can imagine. It's only you that is being heard. And perhaps most important, the strong sound process to make the headset the perfect companion for working also in the normal open landscape where you likely will be shielded from the noise around you. And when you make a call, you need to be heard without any background noise and the shatter to enter your meeting. The sound performance is so strong that you do not even need to mute when you're not talking any longer. The participants in the meeting will essentially only hear your voice and nothing more. We cannot be more excited about this launch and have more confidence in that this is really taking the headset to the next level and help us with the growth for the Enterprise division in '26 and beyond. It is developed to be the next penetration wave, while it also will assist the ongoing replacement of existing legacy products. And stay tuned because more will also come. We will, as normal, launch across mid and entry-level price points later and a more affordable price point will come over time in the next 15 months. Let's move to the next slide, where we'll also talk more about our aspirations for the gaming business. SteelSeries have been on a journey with increasing market shares for quite some time now. Since 2019, we have increased our market shares significantly in our core categories of headset and keyboards due to our best-in-class innovation. In [ mikes ], we have been defending our position during the last 5 years. This will be one of the focus areas for the coming periods as we obviously want to improve our position in this market as well. The core gaming equipment market remains structurally attractive, supported by continued growth in the number of gamers, time spent on gaming, and a growing appetite for premium features. These dynamics underpin a healthy long-term growth profile for the market, even though the near-term environment is held back by a muted consumer sentiment, in particular in the U.S. Against that backdrop, SteelSeries continues to win, and we expect our current momentum to continue in '26 and beyond, and we continue to deliver new product innovation in the market that will support this growth. SteelSeries is not just another gaming equipment option. In SteelSeries, we continue to challenge status quo and expand our categories into new and better options. For '26 and beyond, we expect to harvest broad-based market share gains by strong brand momentum and significant launches across categories and into new form factors on top of the growing core portfolio. While it is, of course, important that Gaming returns to deliver strong growth, the division has also been a journey to increase margins to becoming part of GN. We have come a long way by fully integrating Gaming into the same systems and product flows as Enterprise business and there are even more margin benefits to come over time by fully utilizing the GN at scale. In addition, we will continue our strong pricing discipline to mitigate impact from direct tariff cost and other unforeseen future external headwinds that could be a threat to our margins. Moving to next slide. Let me go through the assumptions for '26. In '26, we are planning for growth across our 3 divisions. We are convinced about our strong product portfolio that will help us to further gain market share in a flat to slightly growing markets. For the hearing aid market, we expect the market growth for '26 to be at the low end of the structural value growth of 3% to 5% due to the current low level of consumer sentiment around the world. In this market, we assume that we can continue to gain market share driven by our current momentum and further product innovation. And this is why assuming an organic revenue growth for the years between 3% and 7%. For the Enterprise market, we believe that the growth patterns that we have observed outside EMEA in '25 will continue. We also believe in some level of stabilization of the macroeconomic environment in the EMEA region to materialize during the year. All in all, we believe the global enterprise market will likely grow between flat and 2% in '26. In this market, we assume we can gain market shares driven by the launch of our Evolve3 headset platform and a gradual strengthening of our video portfolio. As a result, we're assuming an organic revenue growth for Enterprise between 0% and 6%. For Gaming, we expect the market growth for '26 to be modest, influenced by the current low consumer sentiment in the near term. In this market, we're assuming continued market share gains, driven by current momentum and the strong product innovation. And we believe that for Gaming, we can grow between 7% and 13% in the year. And with that, I'm happy to hand it back to Soren to speak more about our guidance for '26. Soren Jelert: Thank you, Peter. All in all, when we apply these divisional assumptions, it leads to our guidance for the group where we guide for an organic revenue growth of 3% to 7%, driven by continued strong execution and market share gains across our 3 divisions, as mentioned by Peter. Moreover, we are guiding for a reported EBITA margin of between 11.5% to 13.5%, driven by continued cost focus and operational leverage, offset by some short-term headwinds. All in all, the financial guidance supports our ambition to grow in a sustainable and profitable way that eventually will lead to realization of our long-term targets. On the next slide, I'll provide you with some more details on the elements that drives our '26 EBITA margin guidance. First and foremost, we are pleased with our ability to mitigate the impact on tariff in '25 by effective price increases and a successful acceleration of our diversification of our supply chain. Specifically, in '26, we will experience a margin tailwind from the temporary cost taken in '25 to relocate our production lines. That tailwind is then more or less offset by the full year effect of tariffs as these were only really impacting our COGS from the third quarter of '25. Then we will have a net negative effect from a step-up in absolute amortizations following the product finalizations of a number of projects, including the recent Evolve3 portfolio. This is, by definition, a noncash effect, but is following our accounting principles. Taking these factors into account, we do believe that we can drive a very healthy underlying growth in '26, which will materialize across gross margins and operating leverage. Depending on the growth development in the year, we will be able to expand our underlying EBITA margin by 1 to 3 percentage points. This once again underpins our strong group-wide margin platform potential. We remain firm on our long-term structural margin target of 16% to 17%. With the underlying margin target we are guiding for this year, we are convinced that we can continue to drive yearly margin expansions beyond '26 as a result of healthy top line growth and prudent OpEx management. On top of this, we will naturally look for gross margin opportunities as well. So to conclude, following a difficult '25 due to a wide range of external headwinds, we are excited about the prospects of the coming year. With growth coming back to our 3 divisions, we will be able to deliver a strong profitable growth while continuing our focus on strong cash flow generation and thereby continuing deleveraging. And with that, happy to hand you back to Rune. Rune Sandager: Thank you, Peter and Soren, for the updates. This was the end of the presentation. I will hand you over to the operator for the Q&A. Please limit your questions to 2 at a time, please. Operator: [Operator instructions] The first question comes from the line of Andjela Bozinovic with BNP. Andjela Bozinovic: Maybe one on Enterprise and one on Hearing. So on Enterprise, having in mind the Q4 performance, can you give us more details on underlying assumptions supporting the guidance and phasing of the growth throughout 2026? And just more broadly, what is your take on the expected decline in the PC volumes following the memory price hikes? How do you see this affecting IT budgets and the end markets in particular? And on Hearing, can you maybe discuss the moving parts going into 2026 and the phasing of growth? And any indication of what is baked in your guidance in terms of market share gains, competitor launches and market growth assumptions for both at the top end and bottom end? Peter Karlstromer: Great questions and quite a lot of unpack there. Let me start with Enterprise. We recognize that '25 was, of course, not the year where we delivered the growth, which we aspired for. But with that, there were still some positive things happening in the year. We saw the U.S. market and the APAC market actually growing throughout the whole year. So the difficulties were in EMEA, and we did see some underlying improvements throughout the year. Q4 ended a bit weaker than what we anticipated. Still, if we look back over the years, it has improved. And then, of course, also with our launches here, I talked a lot in the opening about Evolve3. We also have video products, which we are launching this year. We do believe that will support and growth also on top of the market improvement. In terms of the sequencing, I think it's fair to expect that it will be a gradual return to growth. So we will build up the growth over the year. So in some ways, the second half will be stronger than the first half. We also expect more product launches throughout the years and the launches we have made now, while the products, I think, are truly fantastic, it is a premium product that's still a smaller part of the total Enterprise volume. So all in all, I think we will build up the growth in Enterprise throughout the year. Then you asked about the relationship to PC shipments. I think we need to admit that we have seen a correlation before over time. We saw a little bit less of that last year, and it's probably also linked to quite an accelerated forced upgrades of a lot of PCs. So with a significant amount of budget for many companies spent on this. So it's probably crowded out spending in other categories. So while perhaps PCs decline a bit, we do not necessarily see this as something negative for us. And so we believe in the underlying growth here and the gradual improvement of our market. Then if I move to Hearing, I think it's fair to say that there is, of course, a lot of many moving pieces when we're building up our growth aspiration here for the year. I mean as we talked to, we believe that the market underlyingly is growing slightly below its normal trends. And we're talking about the lower end of the 3% to 5% value growth, which we consider to be normal. And you asked about what we have factored in. We have tried to factor in everything that we know, of course. We do assume some competitive launches. We do assume, of course, some larger customers making different type of decisions with opening up for more entrants. So we have tried to factor in everything we can. But we're, of course, also factoring in our own new innovation and our own launches. And we are entering the year with a good momentum. We had a 7% growth in Q4. We're entering with that momentum into this year and feel good about the momentum of Vivia. And with more innovation throughout the year, we think we can support a healthy growth over the year. So in Hearing, in terms of sequencing, I think you should probably expect a fairly even momentum throughout the year. Every quarter, we see a good opportunity to grow in essentially. Operator: Next question comes from the line of Martin Brenoe with Nordea. Martin Brenoe: I have a quite long question here. So I think I'll just limit myself to this one question, and then I'll jump back in the queue. In your Q3 report, you wrote that GN has minority investments in noncore assets that may contain significant value and could be divested. I've done some channel checks, which are indicating that NationsBenefits is a $1 billion valuation company, which is looking for external funding here in 2026. And this should translate into a potential divestment opportunities with potentially billions in DKK, based on my analysis at least. I know it's a bit out of your hands, whether this happens or not. But could you maybe just confirm whether you expect a funding round in 2026 and whether you expect to monetize that opportunity when it arises. And then just as part of that, I guess it would also explain why you're not having a cash flow guidance for this year, which indicating that you are a bit more comfortable with your leverage ratio. And if possible, I know I'm asking for a lot here, but could you maybe just provide some details on what you think such an opportunity would affect your deleveraging path from here and how you -- if you monetize it? Otherwise, potentially just give some basic information about the revenue and the growth of these minority investments? Peter Karlstromer: So Martin, thanks a lot, and thanks for laying this out and your work around this. We started to talk about Nations because we realized it started to build up to a valuable asset that we wanted to be very open about. And -- but we've also been clear on that there are some unknowns also for us. This is a company that is privately held. It is, of course, we have an ownership share of about 19%. We have a founder in that, that's been there since the beginning and another large investor also. So we're one of the larger investors. I think we are very happy, of course, with the underlying performance of the company. We do not want to comment on the details here since it's not a public company. I think that all of you can approach Nations for request directly from them. But I can just confirm that our view is that the underlying performance of Nations is strong and is strengthening over time, and it's been a very successful business buildup. So that's probably all we can say. And then in terms of how we think about our ownership, this is not strategic to us in terms of that is interlinked a lot with our existing business. At the beginning, Nations were very hearing aid focused, but they've grown to be much more than that today. And as such, there is not a very strong link to our existing business. So at the right point in time to the right valuation, we would be open to consider if we're the right owner. But it's not anything we are unilaterally seeking. We probably will do that in great harmony with other key owners and the founder, which we respect a lot. And we will update you over time as opportunities will present themselves. There is nothing very imminent around this, but could very well be over time. I hand it back to Soren for more commenting on the cash flow guidance and how to think about it. Soren Jelert: Yes. I think in many ways, you're absolutely correct that we do not guide for cash flow this year. And just to echo what Peter said, in the event something would happen, it would be M&A. And as such, we would always guide excluding M&A. So in that sense alone, it is not interlinked. But that's fundamentally not why we are not guiding for free cash flow this year. It's more the fact that we now, the last 3 years have generated more than plus DKK 1 billion in free cash flow. We have demonstrated that when we have the margins that we've had that we can generate the cash flow. In addition to that, we have also now made a new loan agreement that in many ways, is also a testimony to that our endeavor to go towards 2.0 leverage by '28 is definitely on the right track. And it was our opinion that where we need to focus now is to generate growth and the earnings. And when we do that, it will yield cash flow. And rest assured, we'll stay focused on getting to the deleveraging of 2.0 as fast as we can. Operator: Next question comes from the line of Hassan Al-Wakeel with Barclays. Hassan Al-Wakeel: Firstly, can you talk us through the drivers of hearing aid market outperformance and any regional performance that you can highlight? Your market outlook is for another softer year in 2026. It'd be great if you can walk us through how you see Europe within this and whether you're seeing any signs of improvement? And then secondly, on margins, given this should be a strong year of launches across your businesses. Can you talk us through some of the building blocks for expansion in the margin over the course of 2026? And I appreciate this is a wide range for the year, but the gap to the midterm ambition remains pretty large. So any updated thoughts on the bridge to 2028 would be very helpful? Peter Karlstromer: And let me start in the order you're asking this essentially. So if you take Hearing, if we look on '25, as you have heard us talk about before, in the first 3 quarters, this was very much Europe and international markets providing the growth for our business. We have been doing very well there. I think what's positive is that in Q4, we saw a bit of a stronger performance and growth contribution also from the U.S. side of our business. And if we look into the next year, I would say market-wise, we do expect the U.S. to be a little bit stronger than it was in '25. As we remember, Q1, in particular, was a very difficult quarter in the U.S. But generally, still the global market outlook, as we're saying, we do believe it's adding up to slightly below the structural growth of the market. That's our planning assumptions. Then in terms of our own plan for how to outgrow that market, I would say it's broad-based. We like to see outperformance versus the market growth in each of the region and also very focused to drive success in each of the channel types, everything from larger key accounts to more smaller independents. So this has been the approach we have taken in the last few years. It's very important for us to have that kind of balanced exposure and balanced ambition for our growth across. And the same is how we think about '26. And then you asked about Europe specifically. I think it's clear that Europe has been, I think, lately a little bit better. I would say that the markets where we have been doing very well has been, in particular, in Germany, that has been a growth driver for us, and we continue to have a very good momentum there. I think it's probably what I would highlight. But generally, I mean, the European markets for us has provided quite healthy support for our growth. I think it's also fair to say that in some European markets, we have a bit of a lower market share, also presenting an opportunity for us to catch up a little bit to what we think are natural market shares for us. Soren Jelert: And then when it comes to the margins, I think a couple of questions here, one linked to this year's margin. And for us, I think it's important to also recognize that we all the time have said that Gaming is an area where we will, through the good synergies with Enterprise, improve, amongst others, our gross margin. And as such, we also do believe that the group as a whole will be able to improve its gross margin in '26. Then in addition to that, actually, we also do see an opportunity on leverage of the OpEx base essentially. But to your point, we have factored in that we are launching. And then bear also in mind that within Hearing, we did launch Vivia in '25. So those costs were actually sitting in '25 as well. So in many ways, we are at a level of the cost base, which we believe is adequate to actually support the growth that we are striving for within the 3 divisions. Then when you look at the long-term margin aspiration of 16% to 17%, I think fundamentally, it's also important the decomposition we did of the aspirations for '26, where we have some cost items, amortizations as one, we do believe when you come out to the outer years we will be able to leverage the top line growth and as such be able to generate these margin increments as you see. So fundamentally, the underlying performance of our business should be able to get us to the 16% to 17%, which we believe is right for GN as a group. Operator: Next question comes from the line of Carsten Lonborg Madsen, Danske Bank. Carsten Madsen: Yes, a quick follow-up on Nations and the value here. Could maybe -- I know you cannot really talk about the value of it, but what will happen tax-wise if you realize a gain on this? Should we extract some tax from that, at least then we know that? And then I have a question on Huddly. You talked a lot about Huddly and you also mentioned video as a growth driver for you in 2026, something we have on the outside been waiting for a very long time. How meaningful is this collaboration? And do you expect -- and have you factored in sort of the meaningful growth of the video segment into your Enterprise outlook for this year. That's it? Peter Karlstromer: Let me start with the video and then hand it back to Soren for Nations and tax. I think that the Huddly partnership is meaningful in the way that it's addressing a gap which we've been having for a while, which is to work with companies in large video rooms. And Huddly is a company -- it's a smaller company, but with great technology for how you can add cameras into video rooms. So we essentially have integrated this into our existing video platforms together with their R&D. So it helps us a lot to now be able to address the full needs of companies, and it's been very well received when we're talking to customers and have presented this. We are launching this now in Barcelona this week at the big conference here, ISC. And we also have own other video launches, some which we have made and some that's coming. I think it's meaningful for the video business, what we're launching. It should definitely support the growth of the video business. If you look on the total growth support for both Enterprise and for the group, we need to remember that video is still a relatively small part in absolute numbers, so to say. But it certainly are important steps to see some acceleration of growth on the video side. But if you look into the growth ambition of our -- of Enterprise of 0% to 6%, we are counting on some contribution from video, but the majority will come from the core of the business, which still is headset. Soren Jelert: And then, Carsten, when it comes to your further deep dive on Nations question, I mean, I'll refer back to the question or the answer that Peter gave before. And as such, neither are we speculating in a potential tax implication of this and as such, are planning on group level still with around this 22% as we have also reported out on this year. Carsten Madsen: I was more thinking about whether we should -- when we calculate the value, whether we should just assume that the value is the value or whether we should subtract 20% tax? Soren Jelert: Again, I wouldn't speculate in the value is the value. I mean, honestly, we do not have a comment on the value as such and when it will materialize on Nations. So that's the way we look at it. Operator: Next question comes from the line of Veronika Dubajova with Citi. Veronika Dubajova: I will keep it on to 2, please. One, I just was hoping you could quantify the contribution from FalCom to the fourth quarter revenues and then what your expectations are for 2026 and whether those have changed in any way? And kind of maybe just gate some sort of risks to the upside and the downside around that just so that we can think about that since it was a driver. And then I apologize, but I have to go back to sort of the expectations around the Enterprise business growth. I guess there is a lot of concern and uncertainty in the sort of broader IT spending market. I guess it'd be helpful to understand the conversations that you're having with your distributors with some of the larger customers. What are you picking up in terms of corporate willingness to spend, especially as they face a lot of other competing priorities for investments, whether that's PC units or it's things like AI. I'd be kind of good to understand what you're hearing there. Just to give us a bit more confidence in your kind of -- what seems to be a very clear message that Enterprise should grow this year after many years of decline. Peter Karlstromer: Starting with FalCom, as you remember, we had a very good quarter in Q2 where we talked about more than DKK 100 million of business. In Q4, we had a similar quarter. So also a very good quarter. And we did preannounce that already earlier in the year because we had more or less agreements for that order in a firm way already then. But it was delivered and revenue in Q4. So if you look on the year in total, we made a bit more than DKK 200 million on FalCom for the full year of '25. And if we look into '26 that at the minimum, we see that we should be able to do the same level of revenue, but our base case scenario is probably to grow that a bit further. So I would say it could have some small growth contribution to the overall group growth. But I think we also need to remember FalCom still is relatively small in absolute terms. So it's not a real needle mover. But we continue to see a very positive development of FalCom, and we are pleased about that and very focused on continuing to growing it, of course. And then if I move to Enterprise, I appreciate a lot your questions around this and also how to think about this? I do think that we can approach this both top down, what we hear from leading analysts in terms of IT budgets and how much they spend on software versus hardware and so on. And if you do that, I think you're coming to a conclusion that IT hardware is probably modestly growing in most of the forecast, but relatively low growth numbers. And then if we observe it more from our own trends and the markets where we operate, which is predominantly headsets and video, as I talked about before, the market has been growing in the U.S. and APAC, which is great to see actually a stability of that growth. It's been going on every quarter for more than a year. And then EMEA has been the traveling area for us and the whole industry. And it's still not in growth in EMEA. So I would say that, that's perhaps a major uncertainty here and what the market growth will end up with. But our best assumption, if we take the growing North America and APAC and an improving Europe is market growth then for around 0% to 2%. And that is also consistent with what we are picking up with our largest distributors and resellers and when we speak to large customers and I mean trying to both plan our own business, but also talk about how they see and observe the future. So that's a market. And then we are guiding slightly above that because we feel very good about the products we are launching. I hope you all have a chance to test them at some point in time soon because we really think that this is not just like another product, so to say, another headset, but it really is taking the performance to next levels. And the initial reception has been very positive. It will take some time to build up the volume on this new line of products in Evolve3. We will see some limited contribution already in Q1, but more throughout the year essentially. So that's the combined thinking in resulting into the guidance of 0% to 6% growth for Enterprise. Veronika Dubajova: Got it. And can I just maybe ask a very quick kind of financial modeling question. Would you expect Enterprise to grow already in the first quarter? And I guess maybe, I don't know, Soren, if you want to comment on the phasing of growth for you specifically given some of the destocking dynamics you saw in the fourth quarter? Soren Jelert: No, we don't know and we're not guiding per quarter per se, but we do believe you will see gradual strengthening of it. And at this point in time we have some level of negative growth momentum, and we need to turn that into a flat to growing momentum. If that is happening in Q1 specifically or a little bit later in the year, we are not really guiding [indiscernible] it will be gradual. I do think though, and I could have talked about that also in the overall dynamics, it's worthwhile to highlight that we did see some channel destocking for the full year of '25. So that affected our growth in Enterprise with a few percentage points. And what we have assumed for next year are fairly stable channel inventories, and that is also what is a little bit helping to create the range of the guidance, what is happening to the channel inventories. Operator: Next question comes from the line of Jack Reynolds-Clark, RBC Capital Markets. Jack Reynolds-Clark: I had a couple also on Enterprise, please, and then across the U.S. and Europe. So within the U.S., can you kind of quantify the positive growth coming out of the quarter? And has that sell-out growth translated into a recovery in sell-in so far in Q1? And how much -- and if not, kind of how much destocking is there left in the U.S.? Then within Europe, again, in Enterprise, you mentioned some sell-out growth recovering there. Could you point to which markets are seeing sell-out growth and kind of quantify that recovery? And again, are you seeing any kind of translation into sell-in growth recovery and/or kind of how much destocking or how much inventory are your distributors holding there? Peter Karlstromer: So on the U.S. market, in the quarter, we did see sell-out growth, and we also had the sell-in growth, and they were actually fairly aligned those 2 numbers. So the channel inventories in the quarter in the U.S. were stable. We saw some more significant channel reductions in the beginning of the year '25 in the U.S. But towards the end of the year, they have actually stabilized. So the delta of sell-out and sell-in in the last quarter were predominantly in EMEA, and there, we saw it with several percentage point differences. And then to the markets have been going best. I mean, the last few quarters, a highlight of EMEA has been Germany, which is very encouraging for us because it is the largest market in EMEA. It is also a market where we have a very strong position. So that market has been both in sell-out and sell-in growth in the last few periods. U.K. has also improved a lot lately. And then I would say the Nordics and a few others of the more Central European countries have been -- I mean, also improving. And then we've been having a bit of a further challenges in Southern Europe. But I think that overall, if you look in EMEA, it is ending stronger than it started '25, so to say, and that's why we're talking about some level of improvement in trends. But the channel destocking have impacted also the numbers in EMEA. Operator: Next question comes from the line of Martin Parkhoi with SEB. Martin Parkhoi: First, a question again to Soren on the margin. I'm still a little bit curious to understand the bridge towards '28, in the short-term, which is '26, you have a range of 2 percentage points on the margin. And you believe 3 years later, you have a better transparency, only have 1% range in your margins? So how can that be? How can you -- if you land in the low end like 11.5%, how can you reach up in the 16%? What tools do we have to make such cost control? Then second question on the hearing aid market. We saw your gross margin going down this year, as you also rightfully say that you use some channel and country mix. And how should we see that mix in '26? Also if we get a soft hearing aid market, slightly soft hearing market again in '26 as we saw in '25, then there's a tendency to manufacturers starting to compete a little bit more on prices to reach their budget. So what kind of pricing environment have you baked in and margin have you baked in on hearing? Soren Jelert: Soren speaking, and that's on the longer-term aspiration. I think it's the way we have also decomposed the '26 guidance. We are of the opinion that in the event that we come in lower, it will, in our minds, also be a question of timing as we will strive for the growth as the key vehicle for us to get to the long-term 16% to 17%. Fundamentally, some of the investments we are taking in 2026 in, for instance, operations will yield gross margin improvements when we come out in the outer years closer to the '28. So in reality, we believe we will be able to catch up in the event that we land in the lower end. And we believe that if it's timing, it will definitely be possible. So we are investing in an underlying improvement structure that will yield results towards the '28 target. Peter Karlstromer: Martin, for more the hearing aid margins in '26, as we commented and you also highlighted in '25, the gross margins reduced due to the growth mix essentially we had in areas where we have low gross margins, channel types and geographies basically. As we're looking into the '26, we do expect a little bit of reversion of that into the more higher margin areas growing more normally and as such, supporting the gross margins. What I'd also like to highlight here and had that in the opening readout the divisional margins because they were actually -- if we look on -- after the difficult Q1, which was challenging in many ways, we were actually stable vis-a-vis the year before. And the explanation of that is that some channels where we have low gross margins also have a very, what should we say, compelling cost to serve. And as such, you might get a lower gross margin, but you still can protect a very good divisional margins. And we remain very focused on both type of margins. They're helping us to manage the business in a good way. But the planning assumption is some type of improvement on the gross margins for the year. Operator: Next question comes from the line of Richard Felton with Goldman Sachs. Richard Felton: Two, please. The first one is on Gaming. I'd like to understand the confidence in the 2026 guide. I suppose that that business was down slightly in 2025, momentum sort of decelerated into the end of the year. So just trying to understand sort of the gap from 2025 to the 7% to 13% guide for '26 between how much of that is the market getting better? How much is market share gains and product launches? That's the first one, please. And then the second one, thanks very much for sharing the detail on the Evolve3 launch. My question is, how impactful the launch has been historically on the Enterprise business? I know for hearing aids you get quite excited about new platform launches. But thinking about the business model and the type of customer base in Enterprise, how important is that launch cycle to drive growth? Peter Karlstromer: If we take the Gaming first, I think it's a combination of an improving market and then market share gains. If we look on the '25, the market was, I mean, relatively weak, around the world and in particular in the U.S. and Europe, where we have the majority of our business. So we do expect a bit of a stronger market environment. And then also have several great launches in the pipeline for the year across key core categories where we have meaningful business. Then I appreciate also when you're looking at, we all get a bit scared, of course, about Q4, which looks like a loss of momentum. I think it's important to bear in mind the outstandingly strong quarter Q4 the year before. So the comp was also part of seeing that decline in growth. So if you look more on sequential growth, quarter-on-quarter growth, it looks a little bit less daunting, so to say, to go from where we ended the year to growing into '26. So it is what we believe in as the base assumptions. And then the Evolve3 launch for Enterprise, we think it's a very meaningful launch and that this really will support our business. And given that we are the market leader in headsets also, hopefully, it can help the whole market to grow. So maybe get a double help here in some way. We have had this headset in early trial programs with both channels and lead customers for a while, and the feedback is overwhelmingly very positive. At the same time, we need to recognize it several years since we launched a line like this. So it's hard for us to analytically come back and say exactly what it would mean. But definitely, we are of the firm belief it will be a strong contributor to finding our way back in growth for Enterprise essentially. Operator: Next question comes from the line of Niels Granholm-Leth with DNB Carnegie. Niels Granholm-Leth: You are calling out a headwind in your margin for this year because of less positive effect from R&D capitalization. I mean, the effect for '25 was actually a little bit more than 2 percentage points. So would you expect to neutralize the effect completely this year? Or is it just going to be a less positive effect in '26? So that's my first question. And then getting back to the phasing in the Enterprise division. So how should we think about the growth trend throughout the year? I mean, are you continuing to expect kind of flattish to negative growth in quarter 1 to improve in the second half? How should we think about that? Peter Karlstromer: The way we have planned it out and can see it, of course, operating in the asset bases we have under R&D, we believe that the headwind or the less headwind is -- of the headwind in this case is to the tune of 1%. So it's not a full erosion of the 2% that you rightfully quote, but think of it at least as 1%. That's for the planning purposes. Soren Jelert: And then when it comes to Enterprise facing, I think the best way to do it is to expect a gradual buildup of the growth. So second half stronger than the first half. And I think it's both about generally getting the growth momentum going and also linked to the Evolve3 launch. We will see some impact in Q1, but we will see more impact of the Evolve3 launch later in the year. We will also launch more headsets later in the year, also further contributing to that growth. Then, of course, if we look on the Enterprise overall number, I think it's helpful, of course, to keeping a track on the large 2 FalCom orders in the comparison base from last year. And if we look on FalCom for '26, I said we aspire to have at least the same level of revenue, but also FalCom will likely be bigger in the second half than in the first half for '26. So that's probably as much as we can help you here, but do expect a gradual buildup of the growth momentum. I think that's the conclusion here. Niels Granholm-Leth: But shouldn't we expect any channel filling from the Evolve3 launch already here in quarter 1. Soren Jelert: Some level, definitely. But again, as I said, the Evolve3 85 and 75, these are the premium products, which is meaningful, but a smaller part of the total Enterprise sales. The mid-tier is where we have most of our Evolve3 sales and these type of products will launch at a later point in time. So that's what I meant with the sell-in will contribute in Q1 to some extent, but I think you will have even stronger Evolve3 contributions later in the year. Operator: Next question comes from the line of Julien Ouaddour with Bank of America. Julien Ouaddour: And sorry, guys, I come last, it won't be too different from my peers. I want to focus on the Enterprise guide again. I just think you need to give us a little bit more confidence for that. Just if I summarize, you're talking about gradual market improvement, 1Q and likely to grow back-end loaded year for Enterprise and Gaming. I think 4Q was softer than expected and not yet significant improvement in EMEA with declining PC shipments for next year. That's basically what I take from the call. I'm just wondering why putting such guide with ambitious market and share gain expectations instead of trying maybe to rebate expectations for beat and raise if the market recovers and the share gains materialize later. So that's just a question about just your thoughts behind how the guide was set and the visibility you -- I mean, you have today given, let's say, it was a little bit challenged to call the market in recent years? That's the first question. The second one, so switching to Hearing, you're the largest OTC player out there probably. Could you maybe address on what you're seeing on this channel in the U.S. and globally? And I'm asking the question because we're seeing some slowdown in the hearing aids market. AI seems to have unlocked possibility for smaller OTC players to get out with pretty good products from a performance standpoint. So my question is just, do you see some traction from small competitors? And could it be one of the reasons the U.S. market was soft for prescription hearing aids recently? Peter Karlstromer: Now back to Enterprise, and I run the risk of repeating some of the things I said before, but we have really tried to take all facts into accounts. I mean, both what we are picking up top down from all the sources we have available to us and then discussions with partners, distributors, and customers. And finally, what we observe ourselves in the underlying momentum of the business. And as I highlighted before, we do see the U.S. and APAC market in growth. It's been a lot about EMEA. And I mean, what we do believe and have into the guidance is some gradual improvement in EMEA. It doesn't say that the market will enter a high growth. We are saying a global growth of flat to 0%. It can even cater for some level of decline in EMEA for the year for the flat scenario there. And then we very much believe in the launches we are doing across the portfolio. And we do believe that the guidance we are giving with the midpoint as the most likely is our best effort here to give a meaningful guidance. We could, of course, have given an even broader range, but we do think the best way we can help you and the market is to guide like this in what we believe will be the most likely outcome. Then if I move to the OTC side. We -- I can speak about our own business first. I mean we have shared with you that we saw a little bit of a disappointing growth momentum in the first 3 quarters of '25. We actually had a fairly good quarter in Q4, so reentered double-digit growth in our Jabra Enhance our OTC offering. But I think I will say that still, if we look on the whole for both the market and our business, I think we've seen actually relatively similar dynamics to what we've seen in the overall hearing aid market. In the beginning of the year, and particularly in Q1, also the OTC business was really negatively impacted then the Q2 and Q3, I mean, our business, but I would also believe that's true for the overall business didn't really perform in the normal ways. And now we're seeing a little bit of stronger momentum in OTC. But to be fair, we actually see that in the U.S. business overall for ourselves. I personally do not believe it is, what should we say, cannibalizing significantly the traditional market. I think it continues to be a complement. It's interesting for us when we analyze our customer data. And so we do see that the customers buying from OTC are a bit different from the traditional hearing aids. In particular, it seems to be people that are younger. On average, it's about 10-year younger profile. And so there probably are some differences in the user base also. I appreciate there might be some limited overlap, but this is our best read on the market. So we don't think it will be the key explanation of the performance of the traditional hearing aid market, so to say. Julien Ouaddour: Perfect. I mean if I may just squeeze a very last one. Do you have any view on the Section 232, maybe any potential impact like on the protocol for the hearing aids? I mean, could it change your -- the original tariff for '26? Peter Karlstromer: No, we don't have any privileged insights in this. We're, of course, observing this also. So I have no further insights or comments. Operator: Next question comes from the line of Martinien Rula with Jefferies. Martinien Rula: I think you can hear me okay. Most of my questions have already been addressed. So I'll probably keep it to 2 quick ones and just to be as well conscious of time. So the first one is on your formerly called Lively business, which, if I remember correctly, was supposed to be breakeven by late '25, early '26. Could you elaborate a bit on how much of a drag it was for 2025? And if you have considered any potential scenarios for divestment or something like that into 2026 and beyond for this business? And the second question would be on the Gaming. I appreciate that you've been gaining consistently some share in the headset and keyboard categories. But I was a bit surprised to see that your share in the mike category, sorry, have remained stable. As such, I would appreciate if you could remind us of the revenue contribution of each of these categories and elaborate on why you haven't been able to grow your share in mike. Peter Karlstromer: Now, starting on the Lively business, which is what we call Jabra Enhance today. And as I mentioned, this year, we have not been able to have the same growth profile as in the previous years. The positive, I mean, fact is that Q4, we are back to the double digit growth, which we like to see. But given that the slow growth profile this year, our breakeven has been a bit delayed. We talked about that it will happen late '25, early '26. I will say with the growth momentum we have now, it's probably a bit later in '26 or early '27. But what is positive is that, I mean, the P&L works, so to say. I mean it will help the breakeven with the growth of volume. So we've been very focused on getting the business back to growth, and it's encouraging to see that now in Q4. Then on the Gaming side, I mean, you're absolutely correct. I mean the key category for us in Gaming are headsets. And here, we're really the leader for premium headsets in Gaming. And we are also large in headsets overall. So that is the largest category for Gaming. And then keyboards has been another category where we've really been building up a good business over time and very meaningful. You highlight mike as an area where there should be a growth opportunity, and I would say I agree with that. I don't want to forgo future launches, but it was a while ago since we launched new products into the mikes area. So I think you should expect us to have something going there that can help us to capture that opportunity essentially. I very much agree with your observation that that is a growth opportunity for us. Operator: This concludes our question-and-answer session. I would now like to turn the conference back over to the management for closing comments. Rune Sandager: Thank you very much, operator, and thanks, everybody, on the call.
Operator: Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Energizer's First Fiscal Year 2026 Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to John Poldan, Vice President, Treasurer and Investor Relations. Please go ahead. Jonathan Poldan: Good morning. and welcome to Energizer's First Quarter Fiscal 2026 Conference Call. Joining me today are Mark LaVigne, President and Chief Executive Officer; and John Drabik, Executive Vice President and Chief Financial Officer. In just a moment, Mark will share a few opening comments, and then we'll take your questions. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. In addition, please note that our earnings release, prepared remarks and the slide deck are also posted on our website. During the call, we will make forward-looking statements about the company's future business and financial performance, among other matters. These statements are based on management's current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in reports we file with the SEC. We also refer to a presentation to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed on this call relates to the categories where we compete and is based on Energizer's internal data, data from industry analysis and estimates we believe to be reasonable. The battery category information includes both brick-and-mortar and e-commerce retail sales. And as always noted, all comments regarding the quarter and year pertain to Energizer's fiscal year and all comparisons to prior year related to the same period in fiscal 2025. With that, I would like to turn the call over to Mark. Mark LaVigne: Good morning, and thanks for joining us today. As we've done in prior quarters, we posted prepared remarks on our website, which provides a comprehensive overview of our achievements this quarter and our forward outlook. But I first wanted to open the call with just a few comments before we head into Q&A. As we closed our first quarter of 2026, our agenda is unchanged and firmly aligned with long-term value creation for store growth, rebuild margins that were pressured by tariffs and returning the business to our historical cash flow profile. In the first quarter, we made meaningful progress on all fronts. Our performance exceeded expectations, and we've established a clear foundation for sequential gross margin expansion and a return to meaningful earnings growth in the back half of the year. The quarter demonstrated that our strategy is working. We secured final customer decisions on the APS to Energizer brand transition, which is expected to contribute over $30 million of organic growth in the year, most of it landing in the third and fourth quarters. We strengthened distribution across our value and premium brands with key U.S. retailers, advanced innovation across both Batteries and Lights and Auto Care and substantially completed the supply chain realignment that is central to restoring margin. These actions position us to deliver over 300 basis points of gross margin expansion from Q1 [indiscernible] to Q2 with another 300 to 400 basis points anticipated by year-end. We also delivered robust cash generation that allowed us to pay down over $100 million of debt, while returning nearly $28 million in capital to shareholders through dividends and share repurchases, reinforcing the durability of our cash flow model. And finally, I wanted to spend a brief moment on our capital allocation strategy, which remains a cornerstone of long-term value creation. We will continue to prioritize reducing debt, which directly shifts value to equity holders while strengthening our balance sheet. In addition to reducing leverage, our free cash flow supports a balanced shareholder-first capital allocation strategy. We intend to return capital through an attractive dividend, which reflects our confidence in ongoing cash generation and through share repurchases when market conditions create attractive entry points. This disciplined deployment of cash, paying down debt, maintaining an attractive dividend and buying back shares reinforces our commitment to maximizing long-term shareholder value. Thank you for your continued confidence in Energizer. And with that, let's open the call for questions. Operator: [Operator Instructions] Your first question comes from Lauren Lieberman from Barclays. Lauren Lieberman: Great. So one quarter into the year, I wanted to just get a sense for how you're thinking about things broadly versus what you might have said 3 months ago. So thinking about the consumer backdrop, maybe what you're seeing in terms of category trends, any kind of uptick from private label. We know the continued pressure on the lower end consumer has been a dynamic. And it just feels like there's a lot of moving parts and now a very back half weighted year. So just kind of degree of confidence in hitting that ramp in the second half. Mark LaVigne: Let me start high level. So when we were building our plan for '26, we knew it was going to be a transitional start to the year. We saw softening consumer trends in October and November. We were lapping last year's hurricane-driven demand. And we had some orders which were planned for the first quarter, which benefited the fourth quarter of fiscal '25. On the cost side, we were managing through elevated tariff pressures, which were the result of tariffs, which were levied at higher than the current rates. And in light of that, we were reshaping our network, which also created some short-term operational inefficiencies, including some absorption. These affected the results at the end of last year and we expected them to continue into the first half of '26. These were understood going in were fully embedded in our plan and the quarter thus far -- the year has thus far unfolded largely as we expected. Looking ahead, we're encouraged by the trends we're seeing in the business. Consumer demand has stabilized. We saw a strong rebound in December volumes in the U.S., which remains our largest market. We also strengthened our in-store presence with broader and higher-quality distribution across major retailers, which you'll see over the back half of the year. At the same time, we've done additional work to reposition our cost structure, and that's starting to take hold. We are starting to cycle through inventory, which were impacted by those higher rates and our mitigation efforts are starting to come to fruition. That includes relocating production capacity in the U.S., diversifying sourcing and investing in efficiencies to make the network more efficient. We've taken targeted steps to increase production, to increase the tax credits which we expect to earn this year, which should drive a benefit of roughly 50% above last year. These dynamics are all come together and setting us up for a strong acceleration of net sales and earnings in the back half. So while the first half reflects the short-term factors, the underlying trajectory is improving. This year is really about restoring growth, restoring margins and restoring free cash flow. And thus far, we're off to a great start. Specific, Lauren, to your question on battery consumption trends, we saw meaningful improvement in the quarter, as I just mentioned. December inflected the volume growth. You see in the standard trends, the 13-week volume was slightly negative. But then when you see the December data in the 4 weeks, that was where volume inflected the positive. Obviously, January is going to have a very positive volume growth with winter storms in the U.S. For the balance of the year, we expect the category to be stable and the trajectory of the category is essentially what we assume going into the year. Anything I missed? Lauren Lieberman: No, I think that was perfect. Operator: Your next question comes from Peter Grom from UBS. Peter Grom: I guess I wanted to follow up on that last point, right, just on the January trends and kind of the impact of weather. And so I ask this in the context of -- you mentioned in the release that your outlook does not contemplate any impact from the recent winter storm activity. So just whether it's based on what you've seen thus far, maybe what you've seen over time, can you maybe just help us understand what this could do to your guidance as it relates to either the second quarter or for the full year outlook? Mark LaVigne: Sure. Peter, why don't I start with the storm impact and then maybe John can bridge a little bit of kind of the front half, back half dynamic that we're seeing. I mean the storm volume in the U.S., clearly, there's a benefit to POS. I mean the 1 week numbers were significant category value north of 50%. It's really too early to quantify the impact that this that this will have on our business as we'll need to work through replenishment orders. We need to manage through any shipments, which may have been disruptive because of the weather as well as work through resulting inventory levels at retailer inventory levels. It will certainly be a benefit for our business, but it's just too early to tell how much. I would say there's just more to come on that in connection with the Q2 earnings call. John, do you want to walk through kind of the bridge as we think through the balance of the year. John Drabik: Yes, Mark, I can take us down maybe a level from where you were setting it up. So our view for the back half of the year or the rest of the year is really that the category is relatively flattish. And as Mark said, that's kind of what we've seen in December and into January. So we've got a good base to build on. Some of the key drivers on the top line that we're looking at, we've called out the transition of APS customers to Energizer our branded product. That's like -- we expect that to contribute $30 million or roughly 200 basis points of organic growth. One of the other things -- we have plans to really increase distribution in the back half of the year, and that's by leveraging innovation and leaning into our full portfolio. That's across both brick-and-mortar and fast-growing e-commerce. So based on current planogram changes that we've got as well as NPD sell-in and then that e-com growth, we're expecting 400 to 500 basis points of growth in the back half. And then we've got some carryover pricing as well as some targeted tactical pricing that we expect to have kind of a 50 to 100 basis point benefit as we go into the back half of the year. So we're seeing good things within our plan on the top line. And then gross margin, obviously, first quarter was really impacted by a number of factors. A lot of them are not going to continue. So we kind of wanted to give some color around that. I mean the first one is, the tariffs were almost a 300 basis point impact in the first quarter. We're still flushing through some of that inventory that we bought in the spring and in the summer. So the rate was higher at that point. We expect that to improve as we go throughout the second quarter and into the rest of the year. We also -- you'll see in our report, we sold about $65 million of Panasonic branded product in Q1. That's really related to the APS transition. So we sold through -- we're losing that market at 12/31 and we've lost it already. We sold through all that inventory and worked with our customers there in Europe to try to transition, that had a pretty big impact on gross margin. So that was a 200 basis point hit. That's not going to recur as we go throughout the rest of the year. The other big one that we've been talking about for a while are the transitional product cost impacts, those were almost 100 basis points. We've done a lot of work to reset the global supply chain. We should flush through most of that as we get through Q2 and then the rest of the year, we should be in really good shape. So as we look at Q2, we expect 300 basis points of sequential improvement and then we see continued expansion as we go through into Q3 and Q4. I think our plan is to get back into the low 40s, which is kind of where we were before the tariffs really hit. And I think we're going to get past these transitional onetime costs and leverage targeted pricing and then optimize production credits really in the back half of the year. So we've got some good trends going on. Mark LaVigne: We brought your question a little bit. We thought it was important to sort of highlight that front half, back half. Peter Grom: No, that is helpful. I mean, I guess one follow-up to that. I mean, in the building blocks are really helpful, but it remains a pretty volatile uncertain environment. So how would you characterize or how do you think about layering in flexibility or cushion as you think about the guidance from here? Mark LaVigne: Yes, Peter, we always try to build in enough flexibility in the plan to be able to deal with uncertainty. I mean what you just described has been a constant over the last 5 or 6 years. So every year evolves differently than you expect going in. I think if one thing this organization has developed over that time period, it's the muscle memory to be able to read and react the situation and adjust our plans accordingly. And that's daily occurrence around here. So I think we've got the right plans in place. We're confident in the outlook that we provided. It may not play out exactly as we as we forecast sitting here today. But ultimately, we feel like we can deliver the financials we've laid out. Operator: Your next question comes from Rob Otenstein from Evercore. Unknown Analyst: I think you may have just answered my question, but I want to make sure. So batteries much stronger than we would have expected, less increase in gross profit than we would have expected. Is that -- have you just basically totally explained what happened there in terms of Panasonic and the tariffs? Or are there other factors? Or do I just have that all wrong? John Drabik: No, that's right, Robert. It's the 3 items. It's the higher tariffs. APS was really -- it was a 200 basis point drag on its own in the quarter. And then it's the product cost transitional nature of some of those changes that we've got going on that should continue to improve. Unknown Analyst: Great. And then can you talk about the strength in December. Was that the category? Or was it more you? And does that tell us anything about potential market share gains in '26 and maybe you could touch on what you see in calendar '26 in terms of shelf space, point of distribution, those sorts of drivers? Mark LaVigne: Sure, Robert. The category certainly improved in December, but we also have gained share in the latest reporting periods as well. So that's continuing to be -- so the category is improving and we're improving slightly ahead of the category. As we look ahead in calendar '26, we do expect our distribution footprint to increase both a broader distribution footprint but also higher quality distribution. We're leveraging our full portfolio to do that from value to premium to make sure that we're meeting consumers where they are. We also sold in some exciting innovation in both Batteries and Auto Care that you're going to see in Q2 and Q3. So we're excited about the plans we have with our retailers as we head into the rest of the year. Operator: Your next question comes from Andrea Teixeira from JPMorgan. Andrea Teixeira: Just want to just drill down a little bit on the top line. And -- obviously, you said that stable categories and you're also taking pricing, selective pricing. I was curious to see how the dynamics within private label in particular, obviously, the largest e-commerce partner that you have, like how are you thinking of pricing against volume within that guide? And from there, like what is your expectation in terms of shelf reset, you did say -- I believe you did say, as usual, like some additional shelf space. So just thinking of that instance. We haven't discussed the autos yet, [indiscernible], just a state of the union there, that would be great. Mark LaVigne: Sure, Andrea, let me start with Auto. I mean, it's the smallest quarter we have in Auto in Q1. There was a slight impact from weather as well as some timing as well within the auto business. We're heading into peak season. We're really excited about your terpodium series. We have additional innovation that we're launching across the portfolio. We always are excited about the prospects of international growth as well as growth in e-commerce. You are seeing a little bit more of a bifurcated consumer in the auto in the auto category where higher-end parts of the category are showing growth. We're middle to the lower end of the category. You're having some consumers that are delaying purchases or opting out all together. I think that makes the terpodium series launch all of the more timely for us, which we're participating now in growth at the high end. So as we head into Auto Care for the balance of the year, still expecting growth, but you are seeing a little bit more of a pronounced bifurcated consumer in that part than maybe what you're seeing in batteries. Now if I want to switch over to batteries, I mean let's just talk consumers generally. I mean consumers are continuing to search for value. You are seeing consumers stressed about finances. In light of those dynamics, they're comfortable switching channels, retailers, brands, pack sizes. So they're willing to rotate their purchases to meet their needs. It's critical that we meet them where they are, and this is where Energizer is uniquely positioned with our portfolio. Private label plays a role in the category. Certainly, some retailers are looking to connect with consumers in light of those trends. In the first quarter, we did see an increase in private label at certain retailers as well as some aggressive pricing. This results in volume growth for those retailers, but actually erodes category value at the same time. And -- our view is this is all about balance, and we've already seen some retailers recalibrate their approach and bring more balance to both private label value and premium equation. Even with those dynamics, we gained share over the holiday period, and we're excited about some of the plans that we're leveraging in order to be able to compete with private label, but also leverage our value brands and our premium brands to connect with consumers. Operator: Your next question comes from Carla Casella from JPMorgan. Carla Casella: I'm wondering if you're -- with your guidance, do you have a leverage target where you think you would like to get to by the end of this year? John Drabik: Yes. I think by the end of this year, we're expecting to get 5% or a little bit below. We're going to continue to prioritize debt pay down. We feel like we can -- we paid down over $100 million in the first quarter, still targeting $150 million to $200 million. So I think that's what we'll drive the leverage level over the rest of the year. Carla Casella: Okay. Great. And should we assume that M&A is back burner and tell you delever? Or are you looking at M&A opportunities? Mark LaVigne: We will always look at M&A opportunities. I think any deals that we would look at would be leverage neutral and not impact our debt paydown trajectory that we're looking to achieve. So that would be on the smaller side. Carla Casella: Okay. Great. And then I know in the past, you've often talked about storms affecting, the hurricanes, winter storms. Are there distinct differences between winter storms and summer storms, do you prefer one or the other? Just curious. Mark LaVigne: Well, I mean, hurricanes tend to be a little more isolated in terms of impact and whereas this winter storm that we saw over the last couple of weeks really covered a broad section of the country, which is a little different. So the response is going to be different and the impact on our business will be different. But I wouldn't say we prefer either, but we make sure that we can deliver products where consumers need them. And obviously, this is something that the organization excels at. Carla Casella: Great. Yes, I can figure how to word that was for word, but [indiscernible] you got my just. Mark LaVigne: Don't worry. We struggle with that, too. Operator: [Operator Instructions] Your next question comes from William Reuter from Bank of America. William Reuter: The first, you mentioned that there were impacts of products that were produced during periods when tariffs were elevated, which have since normalized to the current levels. Can you talk about what the amount of impact that we should kind of normalize this quarter's EBITDA buy based upon the elevated tariff rates? John Drabik: Look, I think I'd probably -- I think we're calling for something like $60 million to $70 million of tariffs or around $60 million was maybe the last where we were. I think that would be relatively fixed as you go through. We took maybe a bigger hit in the first quarter, but that should be the run rate. William Reuter: Okay. So I guess I thought you guys had highlighted that the elevated tariff rates, the [indiscernible] probably on some products. impacted you. Did I misunderstand that? John Drabik: Yes. It will go down a bit as you go through the year. I don't have the exact tariff hit in the first quarter. We'll come back to you on the exact number. But it does get a little bit better. Plus remember, we've got pricing and credits. And the credits, the tax credits that we've got will continue to grow as we go throughout the year. So the total impact that we're calling for tariffs will improve as we go throughout. William Reuter: Got it. And then on the gross margins, you were explicit that the second quarter will improve 300 basis points. And then you said an additional $300 million to $400 million by the end of the year. So does that mean you will see a sequential improvement from the second to the third and fourth quarters of 300 to 400 basis points in each of... John Drabik: That's exactly, Bill. It will be sequential. And we did -- I mean, our first quarter tariff impact was about 300 basis points. That will get better on a margin rate as we go forward, for sure. Mark LaVigne: And Bill, just to clarify, just to make sure you're not walking away with a different models. So it's 300 basis points from Q1 to Q2 and then 300 to 400 million between Q3 and Q4, not in each of Q3 and Q4. John Drabik: That's right. William Reuter: Okay. I might send you an email just to make sure I understand that correctly. Lastly, for your input costs, certainly, there's some inflation in some of those metals. Can you talk about what you're seeing now? How much you have locked in? And then what that might mean for necessary price increases next year for products which you haven't hedged if these elevated input costs remain? John Drabik: Yes. We did see a bit of a drag in the first quarter. It was about 80 basis points, and we had some momentum offset to that, but it was really input costs, especially freight and some of our production inefficiencies. Raw materials were -- right now, were about a bit of a push. But on spot prices we're seeing, especially zinc has gone up. We've also seen some moves, some negative moves in lithium, obviously, silver and then R134a, which is the gas and a lot of our refrigerant products. On zinc, we're over 90% fixed for '26. We've got between contracts and inventory, we're probably in a decent position on a lot of these. I think, we'll continue to see pressure as we go more into '27. We've also taken some targeted pricing, especially on the Auto Side for some of those cost impacts. That should come in, in the second and third quarter, and that's a little bit what we alluded to earlier. So all in, the trends are slightly negative. I don't expect it to be a huge impact to '26, but it's something that we've got to continue to manage. Unknown Executive: Bill, one follow-up on question on margin. We have a slide within the earnings deck that provides a little bit more color on the margin progression over the balance of the year, which I think you may find helpful, but happy to connect after the call as well. Operator: And there are no further questions at this time. I will turn the call back over to Mark LaVigne for closing remarks. Mark LaVigne: Thanks for joining us today. I hope everyone has a great rest of the day. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.
Operator: Morning, everyone, and thank you for standing by. My name is Gil, and I will be your operator for today. At this time, I would like to welcome each and every one of you to the InterDigital's fourth quarter twenty twenty five 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 a telephone keypad. If you would like to withdraw your question, kindly press star one again. I will now turn the call over to Raiford Garrabrant, Head of Investor Relations. Please go ahead. Raiford Garrabrant: Thank you, Gil, and good morning, everyone. Welcome to InterDigital's Fourth Quarter 2025 Earnings Conference Call. I am Raiford Garrabrant, Head of Investor Relations for [COMPANYNAME]. With me on today's call are Liren Chen, our President and CEO, and Rich Brezski, our CFO. Consistent with prior calls, we will offer some highlights about the quarter and the company, and then open the call up for questions. For additional details, you can access our earnings release and slide presentation that accompany this call on our Investor Relations website. Before we begin our remarks, I need to remind you that in this call, we will make forward-looking statements regarding our current beliefs, plans, and expectations, which are not guarantees of future performance and are made only as of the date hereof. Forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from results and events contemplated by such forward-looking statements. These risks and uncertainties include those described in the Risk section of our 2025 annual report on Form 10-K and in our other SEC filings. In addition, today's presentation may contain references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the supplemental materials posted to the Investor Relations section of our website. With that taken care of, I will turn the call over to Liren Chen. Liren Chen: Thank you, Rayford. Good morning, everyone. Thanks for joining us today. At the beginning of 2025, we set aggressive goals to grow our company, including building on the momentum of our smartphone licensing program to drive revenue growth with a special focus on increasing annualized recurring revenue and margin expansion, building a strong licensing pipeline by advancing our video service licensing program, expanding our AI research capability, and growing our standard leadership and patent portfolio at a critical stage in the development of 6Gs and the next-generation video codecs. I'm pleased to say that we have exceeded our goals on all these fronts. We finished 2025 with a strong fourth quarter delivering revenue and EPS above the high end of our outlook, built strong momentum across our licensing programs, completed a key acquisition to strengthen our AI research, and added new inventions to our patent portfolio, reaching a new record-breaking high. This rounded off an excellent year where revenue for the full year was $834 million, the second-highest in our history. We increased our annualized recurring revenue to $582 million, up 24% year over year. Adjusted EBITDA was $589 million, and our non-GAAP EPS was more than $15, both at all-time highs. Today, I will focus on progress throughout the year and why we believe we are well-positioned to drive shareholder value in 2026. Rich will then talk you through our fourth-quarter financial performance, and our 2026 outlook in more detail. In our smartphone program, we had a record-setting year in 2025. We completed the Samsung smartphone licensing contract, extending one of our longest customer relationships all the way to 2030. We signed new deals with two more top 10 global smartphone vendors, Vivo and Honor. With these additions, we have now licensed eight of the top 10 largest smartphone manufacturers, covering about 85% of the overall market. Our new agreement with Samsung is the most valuable license in our history, continuing our win-win relationship that stretches back to the 1990s. In 2025, we also renewed agreements with Sharp and SAICL. For the year, our smartphone revenue was just below $680 million, up 14% year over year to an all-time high. This strong momentum has continued into 2026 as we renewed our license with Xiaomi at the beginning of the year. We now have the three largest smartphone vendors, Apple, Samsung, and Xiaomi, licensed through the end of the decade, providing a strong foundation for the company to build on future organic growth. In our CE and IoT program, we continue to make good progress. In 2025, we signed a new agreement with HP, the world's largest PC manufacturer. We now have licensed about half of the global PC market. In the fourth quarter, we signed a CE device license agreement with a significant social media company covering our video coding and Wi-Fi patents. At the start of 2026, we completed a new license with LG Electronics, covering the company's digital TV and computer display monitors. LG is one of the top global TV manufacturers with strong sales in the premium part of the market. We are thrilled to add it to our CE licensing program. Including the latest deals, we have now signed over 50 license agreements with a total contract value of more than $4.6 billion since 2021. We also continue to make good progress in our video service program and our focus on licensing some of the world's largest streaming platforms. We believe that this space continues to represent an excellent growth opportunity for us. Initially, our focus is on streaming services, but we also see opportunities in other video-driven platforms where our innovation in areas like video compression is central to the efficient processing and delivery of video content and to the consumer experience overall. At the beginning of 2025, we launched our enforcement campaign against Disney+, Hulu, and ESPN+ streaming services. We received two preliminary injunctions in Brazil and two injunctions in Germany against Disney, and in the fourth quarter, we launched our enforcement proceedings against Amazon. These are important steps toward our goal of signing long-term agreements with both companies. As I've said many times before, we always prefer getting license deals done through bilateral negotiations, but we will rigorously pursue fair value for years of investment in our research and deepen the value of our intellectual property, which allows us to continue to invest in the next generation of technology. And when we enforce our patent rights, we have a strong track record of ultimately signing a license that's fair to both parties. The central role we play in the connected world is only possible because we have built and continue to expand our research pipeline, which provides us with a strong foundation of assets to license today and which ensures that we have a platform that drives growth across licensing programs through 2030 and beyond. In 2025, we placed particular emphasis on deepening our AI expertise and strengthening our leadership in developing AI-based solutions for the next generation of standardized technologies. Through our standard contributions and our technology leadership, we drive much deeper use of AI to make networks more efficient and reliable, to make video of better quality and more energy-efficient, and by leading the development of advanced wireless networks to better support the rapid growth use of AI across devices and services. Our recent acquisition of AI startup DeepRender, which we completed in Q4, is a perfect example of how we strengthened our engineering team to lead research in AI and video compression in the years to come. In our wireless research, we are already actively contributing to the 6G standard development, which is due to be the first native AI wireless standard. AI impacting wireless and video growth means that the leadership position we hold in multiple standard groups becomes even more important. In 2025, one of our senior engineers was reelected chair of a key working group within 3GPP, the standard organization which is leading the development of 6G. We also hold multiple leadership positions in AI working groups in several other standard organizations. The strength of our research and our expertise in building a world-class patent portfolio to protect our innovations are key drivers behind our business success. In 2025, our portfolio grew by 14% year over year and surpassed 38,000 granted patents and applications. Our portfolio is one of the largest across wireless, video, and AI, and more importantly, is also ranked as one of the highest quality in the world according to several independent third-party reports. Through 2025, our success was recognized by multiple third parties, including by Newsweek, which named us one of our market's greatest companies, by Fortune, which included us among America's fastest-growing companies, and by Time, which recognized us as one of America's growth leaders. More recently, another sign of our momentum at the start of 2026, Forbes recognized us as the number one most successful mid-cap company in America for 2026. In this analysis, Forbes looked at long-term performance and this award reflects our success in building a foundation for the future and delivering even greater shareholder value going forward. Before I hand it over to Rich, I want to let you know that next month we'll be back at Mobile World Congress in Barcelona, where we'll be demonstrating some of our cutting-edge technology, including how 6G will reshape connectivity, our innovative application of AI, and how we are leading the development of more immersive video. We'll also present a demo alongside gaming technology pioneer, Razer, continuing our track record of showcasing cutting-edge innovation alongside industry partners. Please get in touch if you'd like to meet at the show. And with that, I'll pass you over to Rich. Rich Brezski: Thanks, Liren. Q4 was a strong finish to an excellent year as we delivered revenue, adjusted EBITDA, and non-GAAP EPS in Q4 that all exceeded the high end of our outlook. The upside was driven primarily by the new CE device license agreement with a significant social media company that Liren mentioned earlier. Total revenue of $158 million exceeded the high end of our outlook of $144 million to $148 million and included $13 million of catch-up revenue. ARR increased 24% year over year in Q4 to $582 million. Our adjusted EBITDA for the quarter of $88 million exceeded the high end of our outlook of $68 million to $76 million, resulting in an adjusted EBITDA margin of 56%. GAAP EPS for the quarter of $1.20 exceeded the high end of our outlook of $0.72 to $0.95. Non-GAAP EPS of $2.12 for the quarter exceeded the high end of our outlook of $1.38 to $1.63. Cash generation for the quarter was robust, with cash from operations of $63 million and free cash flow of $48 million. Building on Liren's comments, I'll highlight a few key metrics from our full-year 2025 results and provide additional perspective on how each item has improved over the last four years. First, total revenue for full-year 2025 was a near-record at $834 million, roughly two times the 2021 levels of $425 million. Next, adjusted EBITDA for full-year 2025 reached a record high of $589 million, almost three times the 2021 level of $208 million. Finally, for full-year 2025, we delivered record non-GAAP EPS of $15.31 per share, more than four times the $3.73 per share we reported in 2021. The dramatic gains in these metrics reflect both strong execution and the operating leverage in our business model. Over the past four years, roughly two times revenue growth has delivered nearly three times growth in adjusted EBITDA and more than four times growth in non-GAAP EPS. All of this was driven by our recurring long-term investment in research. Turning to our outlook, we have guided to another very strong year in 2026, with expectations for total revenue in the range of $675 million to $775 million, adjusted EBITDA of $381 million to $477 million, and non-GAAP diluted earnings per share of $8.74 to $11.84. For Q1, we expect revenue will be $194 million to $200 million from existing contracts, including catch-up sales of $55 million to $60 million. Based only on existing contracts, we expect an adjusted EBITDA margin of 52% to 55% and non-GAAP diluted earnings per share of $2.39 to $2.68. Entering 2026, we saw a step-down in ARR from year-end expirations, but we have already renewed about two-thirds of the $92 million that expired at the end of 2025, and we expect additional renewals and new agreements will drive further increases in ARR, keeping us on pace to reach $1 billion by 2030. Before I turn it back to Raiford, I want to reiterate that our quarterly guidance for Q1 2026 does not include the impact of any new agreements or arbitration results we may sign or receive over the balance of the first quarter. This is because it is harder to predict the timing of new agreements in short windows. In contrast, our full-year guidance includes potential contributions from both new agreements and arbitration results. As was the case last year, we believe we can achieve financial results within our full-year guided range through different combinations of new agreements and arbitration results. With that, I'll turn it back to Raiford. Raiford Garrabrant: Thanks, Rich. Before we move to Q and A, I'd like to mention that we'll be attending a number of investor events in Q1, including the ROTH Conference in Dana Point, California, and the Sidoti Conference, which is virtual. Please reach out to your representatives at those firms if you would like to schedule a meeting. Now we are ready to take questions. Operator: At this time, I would like to remind everyone that in order to ask a question, you may press star then the number one on your telephone keypad. Also, we kindly ask to please limit your questions to one and one follow-up only so that everyone can have the chance to engage with our speakers today. Your first question comes from the line of Scott Searle with Roth Capital. Your line is open. Scott Searle: Hey, good morning. Thanks for taking the questions. Congrats on a nice quarter and outlook. Rich, maybe just to dive in quickly on the guidance. I think I heard the number in terms of the $194 million to $200 million in the first quarter that's got $55 million to $60 million of catch-up. So it kind of implies that recurring has gone down, or at least the immediate outlook of contracts in hand is down sequentially from the December. Now I know that there are expirations that go along with it, but I'm wondering if you could provide a little bit of color if that's the right ballpark in terms of where we're starting with recurring fees, and the outlook and expectation of resigning some of those contracts that I believe Xiaomi was one of them, but Samsung TV, etcetera. How should we be thinking about that over the course of the next couple of quarters? Rich Brezski: Yes, Scott. That's right. So as we disclosed, you know, coming a year ago that we had roughly $90 million of expirations at the end of '25 and we updated that disclosure in the current K. But as noted, we did renew Xiaomi, so about two-thirds of that was covered. And then we also had the LG agreement, which is contributing recurring revenue as well. So net net, you know, we haven't recovered all of it yet. We're still working on other renewals. And certainly, we look to get new agreements to drive further increases in ARR over the course of the year. Scott Searle: Got you. Very helpful. And then I'll jump in on the litigation front. Wondering, Liren, if you could provide a little bit of color just in terms of potential timelines as it relates to Disney. You've had some positive outcomes in terms of Brazil and Germany. But is there an expected timeline of when you start to get some more, I guess, court feedback on that front? Similarly, the updated timeline with Amazon and, Rich, on the litigation cost front, I know it was elevated this past quarter. I think the number was about $19 million, which is the highest in recent memory. But given the events and the litigation that's ongoing, how should we think about that going forward into the first, second quarter, and course of 2026? Thanks. Liren Chen: Hey, Scott. Good morning. This is Liren. So on the litigation side, we could not be happier with where we are with the Disney case. As I said in my prepared remarks, we filed the litigations in '25 and already got really positive results from Brazil and Germany. Of the four patents being decided, we essentially won all of them in regard to the infringement. And we've already got preliminary injunctions in two different countries. But that's not all. We have more than a dozen patents asserted, and therefore we still have a majority of the cases coming to trial in even bigger jurisdictions like the United States, as well as UPC, and those are starting in the summertime and also in the second half of this year. We have disclosed each of these cases in our 10-K filings. So we are confident about our case and we await the outcome of those decisions. Regarding our Amazon case, as I said in my prepared remarks, the assertion was frankly starting in Q4. As you might recall, Amazon was actually litigated in Salesforce, and so the case was filed on our side in Q4. So it's trailing a little bit behind in terms of timing. But we are asserting multiple cases in four-plus jurisdictions plus ITC, and Amazon also has devices that we are also asserting against. So it will take time to go through each one of them. Again, there's more disclosure in our 10-K file. Rich Brezski: Yeah. And, Scott, on litigation cost, well, the first thing I'd say is you can infer from our guidance that we have some uptick in expenses going into Q1. Without being too granular, let me give you broad strokes there. We have revenue share on the new Madison Agreement we signed, which is roughly almost half of the catch-up sales for Q1. And then, even accounting for that, expenses are still up a little bit, and that's mostly driven by an expectation for increased litigation expense. We do expect it to be higher in Q1 and broadly for 2026. That's all factored into the 2026 full-year guide as well. And then, beyond that, we continue to invest in our research and portfolio, so we have some a little increase there as well. Scott Searle: Great. Thanks so much. Very helpful. I'll get back in the queue. Operator: Your next question comes from the line of Kevin Durden with Jefferies. Please go ahead. Kevin Durden: Yeah. Hey. Good morning, guys. Congrats on the strong results and all the progress. Wondering if you can talk a little bit more about the consumer electronics device agreement with the social media company. Do you guys see that being a high-volume agreement? Liren Chen: Yeah. Hey, Kevin. Good morning. This is Liren. Of that particular agreement, it's a device agreement, and it's licensed our video access and Wi-Fi. So it's actually not a huge volume agreement, neither do they apply to the service side. So that's as far as I can say on that agreement. Kevin Durden: Okay. Got it. That makes sense. And then just looking at a litigation question, I know you guys had a strong start to 2025, with positives on Disney, and you are working on Amazon. I mean, what do you guys kind of see as the biggest threats on the litigation front? Is it really just kind of the budgets that Disney and Amazon have? Liren Chen: Can you clarify by "threat" do you mean threats to us? Kevin Durden: I guess just the threat of them potentially not signing or the court cases not going your way. Liren Chen: Gotcha. Yeah. Hey, Kevin. As I mentioned earlier, we are being very careful in terms of our litigation strategy. We always prefer negotiations for deal-making. However, on both cases here, after, frankly, lengthy negotiations, we decided it was the right thing to do to enforce our patent rights. But you can also probably tell in our disclosures here, it's a multi-jurisdictional enforcement campaign. In either case, we are asserting more than a dozen different patents even though there's potential risk for each patent litigation. I mean, any litigation carries its own inherent risk. But our patents are really high quality, and some of the patents have already been battle-tested in regard to durability and other issues. So we are doing really, really well. Therefore, our whole litigation campaign does not really depend on winning every single patent assertion, but we feel very strong about the value of our portfolio, and we feel that the right thing for us to do is to get, you know, what is fair so we can keep on funding R&D. So that's our global enforcement campaign, broadly speaking. And you should know that in most of those cases, when we assert them, we ask both for past damages for the infringement as well as injunctions if we win. Kevin Durden: Okay. Perfect. I appreciate the color. Thank you. Operator: Your next question comes from the line of Alinda Lee with William Blair. Your line is open. Thank you. Alinda Lee: With the focus on R&D, how should we think about M&A as part of the effort to expand and deepen the patent portfolio here? Liren Chen: Yeah. Hey, good morning, Alinda. This is Liren. Yes, so we take a pretty broad approach in our R&D investment. As I said in prior calls, we believe strongly we have one of the most advanced R&D engines in the industry. We have some of the best innovators led by our CTO Rajesh Pankaj, who is widely recognized as one of the most brilliant minds in our industry. But having said that, though, we are also having the luxury of having resources, having the industry reputation that we engage leading companies like DeepRender, which allows us to fill certain gaps in our research, and frankly, allows us to accelerate some areas where we are quite strong already. So we are pretty open-minded, and we have a fairly broad funnel. We are considering them, you know, as they come. Alinda Lee: Yep. That makes sense. And then, from a litigation perspective for streaming services, is there anything that's fundamentally different from a litigation perspective as compared to the litigations with smartphones and also the CE and IoT? Liren Chen: Yeah. Hey. That's a great question. So as I said earlier, we always prefer bilateral negotiations. And I'll say one of the differences in the smartphone industry is that we have been licensing for multiple decades, and we have some of the longest relationships, as I said earlier, including the Samsung relationship, which goes all the way to the 1990s. On the streaming platform side, this is a relatively new industry for us, even though our fundamental technology has been used by those vendors for many, many years now. But it does take a bit of extra time for us to demonstrate the strength of our portfolio, to convince them that this would be a fair price. So I'd say we are in the early stage of this industry, so therefore, that's where I see that customer engagement takes a bit of extra time. Alinda Lee: Got it. That makes sense. Thank you so much. Operator: Thank you, everyone. And that concludes our Q&A session for today. I will now turn the call over back to Liren Chen, InterDigital's CEO, for the closing remarks. Please go ahead. Liren Chen: Thank you, Gil. Before we close, I'd like to thank all our employees for their dedication and contributions to [COMPANYNAME], as well as our many partners and licensees for a very strong quarter and a record-breaking 2025. Thank you to everyone who joined today's call. And we look forward to updating you on our progress next quarter. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Have a nice day ahead, everyone, and keep safe always. Thank you.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Acadian Asset Management Inc. Earnings Conference Call and Webcast for the Fourth Quarter 2025. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question and answer session. To be added to the queue, please press the star followed by one at any time during the call. If you need to reach an operator, please press star followed by 0. Please note that this call is being recorded today, Thursday, February 5, 2026, at 11 AM Eastern Time. I would now like to turn the meeting over to Melody Huang, SVP, Director of Finance and Investor Relations. Please go ahead, Melody. Melody Huang: Good morning, and welcome to Acadian Asset Management Inc. Conference call to discuss our results for the fourth quarter ended December 31, 2025. Before we begin the presentation, please note that we may make forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including the Form 8-Ks filed today containing the earnings release, our 2024 Form 10-K, and our Form Thank you for 2025. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update them as of new information or future events. We may also reference certain non-GAAP financial measures. Information about any non-GAAP measures referenced, including the reconciliation of those measures to GAAP measures, can be found on our website, along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment product. Kelly Young, our President and Chief Executive Officer, will lead the call. And now I'm pleased to turn the call over to Kelly. Kelly Ann Young: Thanks, Melody. Good morning, everyone, and thanks for joining us today. I'm delighted to share our Q4 2025 and full-year 2025 results with you. I'm pleased to highlight that we delivered breakthrough results across assets under management and profitability. We ended Q4 2025 on another high note. Our US GAAP net income attributable to controlling interest was down 18%, and EPS was down 14% compared to the year prior due to increased non-cash expenses, representing changes in the valuation of Acadian LLC equity and profit interest. Our ENI diluted EPS of $1.32 was up 2%, driven by share repurchases, the highest level of quarterly ENI EPS in the firm's history. Our adjusted EBITDA was up 1%. We realized $5.4 billion of positive net client cash flows in Q4 2025, 3% of beginning period AUM, driven by enhanced extensions as well as emerging markets equity. And finally, AUM surged to $177.5 billion as of December 31, 2025, making another record high for Acadian. Moving to slide three, full-year 2025 strong outperformance. Our US GAAP net income attributable to controlling interest was down 6%, and EPS down 0.5% compared to the prior year, driven by increased non-cash expenses representing changes in the value of Acadian LLC equity and profits interest. We will discuss the full-year ENI, EPS, and net flows on the following slide. Our adjusted EBITDA was up 9% compared to 2024, driven by significant growth in recurring management fees. Focusing on slide four, this slide captures the exceptional and historic year 2025 was for Acadian. We generated $29 billion in net client cash flows. That organic growth combined with robust equity markets drove our AUM to an all-time high of nearly $178 billion as of December 31, 2025. At the same time, our 2025 ENI total revenue grew to nearly $549 million, up 9% from 2024. We also expanded our ENI margin more than two percentage points to 35.5% and reduced our gross leverage to one times as of year-end 2025, down from 1.5 times at year-end 2024. Finally, we delivered record annual 2025 ENI EPS of $3.25, up 18% year-over-year, supported by greater ENI earnings and the efficient return of capital to our shareholders in the form of share repurchases. These milestones and financial results reflect our team's discipline and dedication in executing the organic growth plan we articulated when I assumed the CEO role in 2025. As we enter Acadian's fortieth year in business, I believe we are better positioned than ever. We remain focused on delivering solutions and generating alpha for our clients, as well as expanding targeted product and distribution initiatives that promise to deliver long-term growth and value for our shareholders. Turning to Slide five, Acadian's investment performance track record remains strong despite a challenging 2025. We have five major implementations which comprise the majority of our assets. As of December 31, 2025, global equity, emerging markets equity, non-US equity, small-cap equity, and enhanced equity have 100% of assets outperforming benchmarks across three, five, and ten-year periods. Global equity markets delivered strong returns in Q4 2025 to close out 2025. However, crowding in lesser quality, high beta stocks created a more challenging environment for the fundamentally driven signals, such as quality, that drive Acadian's approach, particularly in the second half of the year. Toward the end of the year, value and quality-oriented stocks performed better, a welcome change after their struggles in Q3. Our performance improved in Q4 2025. As we enter a new year, we remain confident in our disciplined, systematic approach and believe we are well-positioned as markets begin to refocus on company fundamentals. Slide six details how our investment process has weathered various market cycles and generated meaningful long-term alpha for our clients. Our revenue-weighted five-year annualized return in excess of the benchmark was 4.7% as of the end of the quarter, on a consolidated firm-wide basis. Our asset-weighted five-year annualized return in excess of the benchmark was 3.8% as of the end of the quarter. By revenue weight, 95% of Acadian's strategies outperformed their respective benchmarks across three, five, and ten-year periods as of December 31, 2025. And by asset weight, 91% of Acadian strategies outperformed their respective benchmarks across three, five, and ten-year periods. The next slide highlights our sustained momentum in net flows. We realized positive net flows of $5.4 billion in the fourth quarter, representing 3% of beginning period AUM. The quarter's net flows were again diverse across products and client types. Enhanced extension and emerging markets equities all generated strong net client cash flows. As I referenced earlier, for the full year of 2025, we generated net flows of $29 billion, and with positive flows of $2 billion in 2024, we have now generated eight consecutive quarters of positive net flows. Our current pipeline remains robust and active after the funding of a number of significant client wins in 2025, and we expect continued positive momentum in the year ahead. I'm now going to turn the call over to our CFO, Scott Hynes, to provide you with more detail on our financial performance this quarter and an update on capital allocation. Scott Hynes: Thanks, Kelly. Turning to slide nine, our key GAAP and ENI performance metrics are summarized here on both a quarterly and full-year basis. As previously noted, we manage the business using ENI metrics, which better reflect our underlying operating performance. You can find complete GAAP to ENI reconciliations in the appendix. Let me now turn to our core business results. Starting on slide 10, Q4 2025 management fees of $140 million increased 32% from Q4 2024, reflecting a 43% increase in average AUM, driven by strong positive net flows and market appreciation. Total ENI revenue of $170 million increased from Q4 2024 by 2%, primarily due to recurring base management fee growth partially offset by a decline in performance fees. We have now delivered nearly 8% or higher quarter-on-quarter management fee growth for three consecutive quarters, and with fourth-quarter end-of-period AUM of $178 billion, we enter 2026 with a significantly stronger recurring revenue base. This stronger entry point enhances our confidence in our ability to deliver earnings, generate free cash flow, self-fund organic investments, and return capital to shareholders. Moving to slide 11, Q4 2025 ENI operating expenses increased 5%, primarily driven by higher sales-based compensation, as well as general and administrative costs, including continued investments in IT and infrastructure. Our ENI operating margin expanded 338 basis points to 45.7%, from 42.3% in Q4 2024, driven by increased ENI management fees. While our Q4 2025 operating expense ratio fell 10 percentage points year-over-year to 40.9%, reflecting the impact of improved operating leverage. Q4 2025 variable compensation decreased 18% year-on-year, primarily driven by reduced performance fee-related compensation, as well as increased non-cash compensation. In sympathy, our Q4 2025 variable compensation ratio decreased to 29.4% in Q4 2025, from 35.7% in Q4 2024. While our full-year 2025 variable comp ratio decreased to 39.4% from 42.3% in 2024. Assuming revenue mix and levels similar to 2025, contractual allocations would imply a 2026 variable compensation ratio of approximately 40 to 43%. Turning to slide 12 on capital resources, as of December 31, 2025, we had $101 million of cash and $97 million of seed investments on the balance sheet, with a $200 million balance on our new term loan credit facility, and zero balance on our revolving credit facility. We completed the previously announced refinancing of our $275 million senior notes in Q4 2025, reducing our gross debt by $75 million and helping lower our gross leverage ratio from the prior year by half a turn to one times and our net leverage ratio to 0.5 times. This refinancing has left our balance sheet stronger and more durable, better positioning us to navigate various market environments and to continue to return excess capital going forward. As a reminder, Acadian's leverage typically peaks in the first quarter of each year, as we draw down on our revolver to fund annual compensation, but then declines through the year as we generate cash and pay down the revolver. We expect this dynamic to continue in 2026. Moving to Slide 13, we have a track record of creating significant value through share buybacks in recent years. Outstanding diluted shares have decreased 58% from 86 million in Q4 2019 to 35.8 million shares in Q4 2025. Over the same period, $1.4 billion in excess capital was returned to shareholders through share buybacks and dividends. Share repurchases were suspended in Q4 2025, as balance sheet cash supported the previously discussed deleveraging. We repurchased 1.8 million shares of common stock in 2025, a 5% reduction in our total shares outstanding from 2024, for an aggregate total of $48 million. Acadian's board has declared an interim dividend of 10¢ per share, an increase from the prior $0 per share level, to be paid on March 20, 2026, to shareholders of record as of the close of business on March 13, 2026. This increased dividend level reflects the board's confidence in our recurring revenue base and continued strong free cash flow generation. Going forward, we expect to continue generating strong free cash flow and returning excess capital to shareholders through dividends and share repurchases. I'll now turn the call back over to Kelly. Kelly Ann Young: Before moving to Q&A, let me recap some key points on slide 14. Acadian is competitively positioned as the only pure-play publicly traded systematic manager with a forty-year track record and competitive edge in systematic investing. Our investment performance track record remained strong this quarter, with more than 95% of strategies by revenue outperforming over three, five, and ten-year periods. Business momentum continued to pace in 2025, with net inflows of $5.4 billion for the quarter, and $29.4 billion for the year, the highest annual NCCF in the firm's history, and with record AUM of $177.5 billion. Q4 2025 financial results included record management fees of $146 million, up 32% from Q4 2024, record ENI EPS of $1.32, up 2% from 2024, and operating margin expansion to 45.7%, up from 42.3% in Q4 2024. Finally, capital management remained a focus in the quarter as we strengthened our balance sheet with the senior notes redemption and Term Loan A refinancing, and announced an increase in our quarterly dividend to 10¢ per share. Acadian is well-positioned to continue to drive growth and generate value for shareholders through targeted distribution initiatives and strategic product offerings. Our talented and dedicated team is acutely focused on achieving these goals, and I look forward to building on the momentum we saw in 2025. This concludes my prepared remarks. Operator: At this time, those with questions should lift their phone receiver and press star followed by the number one on their telephone keypad. To cancel a question, please press star 1 again. Please hold for a brief moment while we compile the Q&A roster. Your first question comes from the line of John Joseph Dunn with Evercore. Please go ahead. John Joseph Dunn: Thank you. I wanted to go back to the institutional pipeline. You said it remains robust. Maybe if you could just give a little flavor of the composition of it and maybe the cadence of timing you expect over the course of 2026? Kelly Ann Young: Yeah. Hi, John. It's Nicole. Thanks. Thanks for the question. Yes. As I said, I think, you know, the pipeline remains very strong, and the pipeline looks exactly how we would want it to. So in terms of very diverse by product type, by geographies, and by vehicle. We continue to see a lot of interest in enhanced. As you know, that was a theme that we saw a lot through 2025. That continues, I think, to resonate with clients looking for, you know, lower risk but consistent returns at a lower fee, and we continue to see that as a key feature in the pipeline. On the other end of the risk spectrum, our extension strategy, we've seen real interest there, I'd say particularly from North America, but increasingly across the globe. So those are the two key features and, again, two of the key terms that we talked about in terms of our growth strategy last year. And then a real resurgence of interest in some of our core areas like EM, which, you know, has been muted over the last few years, and that was a feature of cash flows in Q4, and we continue to see interest there, I think, as clients are looking for diversification, you know, away from the US and with strong tailwinds from dollar weakening. So again, it looks very diverse. Really, I'd say that, you know, the features of enhanced core and extensions continue to hold as things. And, again, we're continuing to see that diversification and interest really across the globe, driven by, you know, not just our US clients but internationally as well. So again, broad pipeline, a continuation of the things that we saw in 2025. But as I say, with areas like EM that historically, it's perhaps a little more used over the last couple of years continuing now to sort of feature as a theme. Scott Hynes: Hey. Hey, John. It's Scott. I just had to add to what Kelly provided there that, you know, since I joined last spring, and we obviously stare at very granular pipeline data, you know, the levels have been remarkably durable. Even through, as you know, with the digestion or the realization of some really large wins. So again, we feel incredibly well-positioned going into the year, and that's probably suggested kind of if anything. From my chair, it should be remarkable the extent to which we've seen that pipeline refill. John Joseph Dunn: Got it. And then maybe just a word on your current areas of investment. And looking over the course of the year, any changes we should be thinking about in the more like fixed expense line items? Scott Hynes: Yeah. Well, I'll start, and I'll let Kelly add anything if she'd like. I mean, one, stepping back, I think we are very bullish in this regard in our ability to continue to generate positive operating leverage. We're focused on scaling the business. We're confident in our ability, you know, to do so. When we think about investment areas, you know, I think there are some key areas, some of which are related to certain of the positive initiatives that we already announced in the last year. You think about areas like systematic credit. I know Kelly's team has already talked to you and others about some of the continued investments we make there that take the form. Usually, at this point of people. So to make that more real, dedicated salespeople, for instance, systematic credit, you know, when we think about technology, that's obviously a huge focus for us. Part of the mode around the business. So, you know, we're seeing continued investments there. A pick around here is, like, data. How we work with data that does involve some ongoing AI investments just to amount our research team, for instance, to be more focused on strategies, achieving outcomes, less on manipulating data so to speak. So, hopefully, that gives you a bit of a flavor of where we're headed. But, again, I think overall, expenses we made a lot of headwind this year in terms of realizing margin improvement. As Kelly said earlier, we remain really confident in our ability to where the business is heading today to effectively self-fund and investment we see going forward. But there's certainly no step change. It's just ongoing investments in areas where we see, you know, growth like systematic credit. John Joseph Dunn: Thanks very much. Operator: Your next question comes from the line of Kenneth S. Lee with RBC Capital Markets. Please go ahead. Kenneth S. Lee: Hey, good morning and thanks for taking my question. Just one on the outlook for capital returns. And realize that you increased the quarterly common dividend there as well. How do you think about share repurchases in this context? Is there a certain level that you could be looking at or some kind of payout ratio, you know, any kind of, you know, guardrails around that? Thanks. Scott Hynes: Yeah. Thanks, Dan. I appreciate the question. Look. I think we feel really well-positioned, right, in terms of capital return. You know, I know you know and our investors know we completed a refinancing last year. We think that makes the balance sheet much, much more durable, provides a lot more flexibility here. The business is behaving really well and generating a lot of free cash flow. The dividend, I would add, up from a penny to 10¢ a quarter, is there a signal as I suggested earlier in Kelly underlying as well, a signal of confidence in the way the business is behaving and for that to be durable. I would add that when you set that aside, share repurchases, I would not want folks to misread that that's some sort of either-or conversation. We need a more reflection that dividend increase of the business growing and scale in such a way in our level of free cash flow that we think that's durable. Right? But that in no way is a binary either-or conversation to share repurchases. To be very direct on the levels, as I said, we want to be athletic. No. There's not a payout ratio per se that we're managing to. And, you know, stepping back and from your balance sheet management, if over time, and this is over the long term, I do think it is our intention to march newer toward a net cap position versus more net debt position. And the term loan, we could all provide this flexibility in this regard. That was purposeful. But that's certainly not a rush, and we do think that share repurchases will be a priority this year. Again, very healthy free cash flow. We did pause in the fourth quarter with that plan refinancing. That is over. That is done. And with more than $100 million on balance sheet as we printed at the end of April, let's put it this way. It wouldn't be our intention to just sit on that. Right? We're going to be athletic. We're going to be active. It is now put balanced against the investment that Kelly and team would be looking at us for is the finance side. But, again, we think no step changes there. We've already had the investment we need for announced product initiatives. Could there be incremental seed capital? Yes. But, again, there's no big step change. So again, that's a long way of saying that AUD and your purchasing is over. And we think, again, we're really well-positioned heading into this year. The business is behaving well. And we're going to be active in athletic industry. Kenneth S. Lee: Gotcha. That's very helpful there. And one follow-up if I may. I'm not sure whether I might have missed this early in the call, but what was the composition of net flows in the quarter in the fourth quarter? Were there any particular outsized mandates, to want to see what strategies were driving some of the flows there? Thanks. Kelly Ann Young: Yeah. Sure. Of course, Ken. Yeah. No. Just again, it was a sort of quarter that we really want to see from the NCCS standpoint. So, no one big dominant mandate that is driving those numbers. Again, very diverse across, I'd say, everything from enhanced at the lower risk end through to extensions on the higher risk side. As I mentioned earlier, EM was an EM core strategy with a core feature of Q4 flows as well. Very much balanced, I'd say, between international and our US clients. So very diverse, not one large sort of theme there that's dominating on one particular mandate. And very diverse, as I say, by strategy group, by geography of client, and then by vehicle type, some of those separate accounts, some of those coming into our existing funds. So broad and diverse and exactly what we really want to see in the quarter, you know, from an NCPF standpoint. Kenneth S. Lee: Right. Very helpful. Thanks again. Operator: Thanks. Again, if you would like to ask a question, press 1 on your telephone keypad. There are no further questions at this time. This concludes our question and answer session. I'd like to turn the conference call back over to Kelly Young. Kelly Ann Young: In closing, I'd like to reiterate our excitement for the business. We were delighted by the 25% increase in net client cash flow in the period, the 52% increase in AUM, and the 32% growth in management fees. And we remain incredibly positive for the trajectory for Acadian in 2026 as we continue strong growth ahead. Thank you, everyone, for joining us today.
Operator: Good day, and welcome to the Peabody Energy Corporation Quarter Four 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference over to Kayla Finckling, Director of Investor Relations. Please go ahead. Kayla Finckling: Thanks, operator, and good morning, everyone. We appreciate you joining us for Peabody Energy Corporation's fourth quarter and full year 2025 earnings call. Joining me today are Peabody Energy Corporation's President and CEO, James C. Grech, Chief Financial Officer Mark A. Spurbeck, and Chief Commercial Officer, Malcolm Roberts. After our prepared remarks, we will open up the call for questions. Before we begin, I want to remind you that our remarks today will include forward-looking statements. Please review the full statement contained in our earnings release and consider the risk factors referenced there along with our filings with the SEC. I'll now turn the call over to Jim. James C. Grech: Thanks, Kayla, and good morning, everyone. I couldn't be more proud of the work of our Peabody Energy Corporation team which turned in an excellent quarter and year that was marked by a number of achievements. We are also seeing improving market fundamentals and have a full agenda of priorities for the new year. Safety always comes first at our operations. And we turned in another record safety year. With an incident rate of 0.71 per 200,000 hours worked. That's 12% better than our prior all-time record set just a year ago. It is still safer to work in a Peabody Energy Corporation coal than a grocery store or shopping mall, based on national incident rates. Peabody Energy Corporation also prides itself on environmental excellence. As witnessed in 2025, where we reclaim twice as many acres as we disturbed. This allows us to shrink our footprint and reduce our financial obligations over time. We also tied our all-time record low for environmental notices of violation. Operationally and financially, the quarter was right down the fairway in meeting or surpassing expectations across key metrics. Mark will cover these results in more detail in a few minutes. I'm pleased to announce that I was in Australia last week. Where the team was installing the very last shield and the finishing touches on the Centurion mine in advance of starting long wall mining. Well ahead of its original schedule. I have to say the culture that had been built at Centurion is outstanding, and our team is charged up and has started mining some of the best metallurgical coal in the world. Let me remind you of some of the extensive benefits Centurion has on the Peabody Energy Corporation portfolio. First, Centurion is expected to ship an average of 4.7 million tons per year of premium hard coking coal in a world that we remain convinced is structurally short of that product over time. We expect the mine to deliver 3.5 million tons in 2026, ramping up to that 4.7 mark by 2028. Second, Centurion's product is of the highest quality and coupled with proximity to key demand nodes in Asia, results in full benchmark pricing. Our realizations across our entire met coal segment are expected to increase from 70% of the recognized benchmark in 2025 to 80% this year. And as volumes ramp to 4.7 million tons, we expect it will further exceed that 80%. Third, this mine is a long-lived asset. Combined with the Wardswell acquisition in 2024, that allows significant development to the north Venturion accesses the coveted Goonyella middle scene and is expected to have a mine life of 25 plus years with an integrated mine plan of 140 million tons. Finally, we previously reported a net present value for the project of $1.6 billion with all-in costs of $105 per short ton and $2024 dollars at an average benchmark price of $210 per metric ton. A level we are already above today. Our latest assessment is that Centurion alone represents an NPV of $2.1 billion at $225 benchmark pricing. So top realizations with full benchmark pricing, low cost, and a long mine life. Centurion is truly the cornerstone asset in our strategy to maximize long-term shareholder value, and to intentionally reweigh our portfolio toward higher margin metallurgical coal. This event marks a culmination of years of disciplined strategic investment, and a position centering to deliver the scale, cost performance, and premium product quality needed to meet the growing global demand for high-grade steelmaking coal. Also during the quarter, we continued to make good progress in our asset optimization activities. Here our goal is straightforward. Our Peabody Energy Corporation development division is tasked with evaluating our vast land and mineral holdings to maximize our long-term earnings and cash flow potential from these assets. Actions include our work to locate renewable projects and formerly mine lands, notably in The United States with our three renewables. We're also working on Australia at the Centurion mine, developing a gas power station to convert waste gas to electricity starting at five megawatts and expanding to 20 megawatts. Activities also include a small plant facility to capture coal seam gas that will then be converted into LNG. During the fourth quarter, Peabody Energy Corporation development advanced activities in several developing areas. First, we conducted additional work to assess the rare earth and critical mineral potential at our US mines with extensive testing conducted at our PRB mines. Second, we held initial discussions with government officials and private partners regarding the siting of power plants that would make use of Peabody Energy Corporation's extensive US coal reserves. And third, we are working with the Trump administration to increase US coal exports from the West Coast to the growing Asian coal markets. Earlier this week, I had the opportunity to participate in the C SIS sponsored event Securing Critical Cold Mineral Supply: A Government Industry Dialogue. Held in partnership with the Critical Minerals Ministerial and the Trump Administration. I want to express our appreciation to the White House National Energy Dominance Council and Department of Energy for including us in this dialogue. This discussion underscored the growing national focus on strengthening domestic critical mineral supply chains, and the important role US companies can play in that effort. We were pleased to contribute our perspective particularly as we continue to evaluate opportunities where Peabody Energy Corporation's assets expertise and partnerships may support emerging critical mineral initiatives. We look forward to continued engagement as the federal government and industry work together to address strategic supply chain challenges. Regarding Peabody Energy Corporation's progress in pursuing opportunities with rare earth and critical minerals, let me share where we are at at this stage. Peabody Energy Corporation has conducted a robust critical mineral testing program since the middle of last year. In excess of 800 samples from the PRB alone. In addition to the standard array of light rare earth elements, our assessments to date have uncovered promising concentrations of heavy, rare earths, and other critical minerals. We're encouraged by the presence of heavy rare earths account for an estimated 21% to 28% of the critical mineral oxide concentrations. I would also note that targeted concentrations of germanium and gallium in select locations show good potential. In addition to our testing program, Peabody Energy Corporation is developing flow sheet with multiple third parties to support the technical and economic assessments as well as the ultimate production of rare earth products. Is also continuing to work with government agencies at the state and federal level. We were pleased to be recommended to receive funding of a $6.25 million grant by the Wyoming Energy Authority for a pilot processing plant in the state. The application now goes through a public comment period before consideration by the governor later this month. At this time, we are taking an options-based approach using multiple feedstock locations, and process partners. We do so to expand our opportunities for success, and potentially accelerate time to market. These are still early days in our rare earth and critical mineral journey, We are sufficiently encouraged to continue our progress here to further evaluate the commercial potential. We look forward to sharing more detail as this work reaches appropriate milestones. Turning to energy policy. Several weeks ago, I was honored to be appointed by the US secretary of energy to chair the newly reconstituted National Coal Council. Key priority of the NCC will be to advise administration on ways to expand use of coal fuel generation, build new coal plants, and export greater quantities of US coal. Why should coal be central to any discussion of US energy policy? Coal is, quite simply, America's largest energy asset. More than that, America has more energy in its coal, than any nation has in any one energy source. More energy than Saudi Arabia has in its oil, and more energy than Russia has in its natural gas. It would be irresponsible to not use this unique asset for the benefit of the American people. It's clear that Peabody Energy Corporation is at the intersection of multiple policy and market trends. Both structural and cyclical, that are moving in a highly favorable direction. To set the stage, our market discussion, I'll note that the International Energy Agency recently came out with their annual coal report. 2025 once again set an all-time record for global coal use at 8.8 billion metric tons. That means that world coal use has nearly doubled in the 25 years since the new century started. As nations pull people from poverty, urbanized, and electrified. A trend that continues today. This occurs at a time when US went through a deep freeze and unsurprisingly to us coal moved to the top of the dispatch list on many of the most extreme days. Renewables are largely unavailable on multiple regions. And natural gas prices more than doubled in just one week. As utilities were forced to compete with residential customers, and businesses at their most vulnerable times. Not so with coal plants, which can stockpile once a fuel supply of fuel supplies and face nowhere close to the price volatility, and surges of some other forms of energy. Peabody Energy Corporation is seeing substantial strength in the markets for both domestic thermal and seaborne metallurgical coal markets. For more on supply demand dynamics, I'll turn things over to our Chief Commercial Officer, Malcolm Roberts. Malcolm Roberts: Thanks, Jim, and good morning, all. I'll start with the seaborne metallurgical coal markets with benchmark pricing has risen to a highest mark in 18 months. And increased 15% from $190 per tonne levels of the beginning of the fourth quarter. Since the beginning of the year, pricing has increased a further 15%. For several quarters now, we've been projecting the Chinese anti evolution policies would tighten up the supply and demand dynamics in the global metallurgical coal markets. That trend continues in China, We've seen a shuttering of unprofitable steel mills, increased safety checks, at coal mines, implementation of two seventy six day work limits, and other on the ground changes that have worked together to form a foundation for met coal pricing. As we moved into 2026. 2025 saw the increase of blast furnaces along the coast in India. And the gradual transition of global steel production from China to India is a trend that we expect to continue during 2026. We expect India to increase its direct purchase of coking coal as well as supportive coke imports from countries such as Indonesia that also don't have major domestic metallurgical coal supplies. China is still exporting more steel than the world needs. And in the process of suppressing steelmaking from other nations that rely on the seaborne markets for much for a much greater percentage of their coking coal needs. We've begun to see some protectionism come into play in Europe, and India that will likely support domestic steel production. During 2026. Metallurgical coal, and in particular, hard coking coal markets were tightening, and prices were improving even before the monsoon season settled into Queensland. Further constraining cement coal production and transportation. Overall, this market backdrop makes a perfect time to bring on increased shipments from the Centurion mine. Thermal markets have remained mostly stable in recent months. The benchmark Newcastle product is approximately a $115 per ton, That's within a 10% of where it was two years ago. One year ago, and one quarter ago. That's the epitome of a trading range. Even with a substantial amount of individual countries' supply and demand dynamics, affecting individual coal flows. But it also remains a highly profitable trade for Peabody Energy Corporation with lower cost seaborne thermal coal. Production. A fundamental to watch on the supply side is the recent government policy adjustments in Indonesia where production quotas for thermal coal, if enforced, could have the effect of removing more than a 100 million tonnes of thermal coal from the seaborne market in 2026. How all this plays out is yet to be seen. However, if followed through, on this dynamic can be seen as positive for Newcastle pricing. As the year progresses. This occurs against the backdrop in which Asian Asian countries continue to add coal generation capacity. China added some 80 gigawatts of new capacity in 2025, and China is expected to launch more than a 100 coal units this year. India's coal-fired capacity has been projected to rise 87% reach 420 gigawatts by 2047. Indonesia, the world's largest thermal coal exporter, saw power capacity more than double in the last decade. In Southeast Asia, coal demand is growing at a 4% compound annual growth rate, while Vietnam set another record. For coal use in 2025. Turning to US coal markets, I'd point to one number that is most noteworthy of all, Coal fuel generation was up an estimated 13% year over year. In 2025, 13% That ran well ahead of any projections. That occurred at the time when coal production was up just an estimated 4% in 2025. To make that equation work, utility stockpiles declined an estimated 15% year over year. Coal was reemerged as a solution because demand growth was not only unforeseen, but unplanned for because other forms of energy are constrained and because existing US coal plants can run much harder. That's why Peabody Energy Corporation calls coal plants the best form of incremental generation. For the next several years. Other forms will struggle to provide incremental growth versus what is planned. Let's check through the list. Renewables continue to be built out. But don't solve the problem of data centers and factories that they twenty four seven generation. Natural gas has been increasingly relied upon but gas generation has a substantial backlog Many gas plants ordered today are unlikely to be placed in service before twenty third. Gas prices have remained highly volatile in recent months, of course. Nuclear generation faces lead times and permitting that make it a best of ten, fifteen, or twenty year solution. And then there's existing coal plants. Which ran at 42% of capacity in 2024. Versus 72% at historical high levels. Running those plants harder could add up to 10% of total US power generation from 2024 levels. And accommodate US power demand growth by itself for multiple years. That would also translate into more than 250 million tons per year in additional coal demand. Coal plants offer a great cost advantage for utilities and consumers. A recent report punctuates this. Energy Ventures analysis looked at the cost of replacing existing coal plant generation with comparable new generation from other sources. And these results strongly favor continuing to operate existing coal plants. For instance, replacing retiring coal plants with new solar sources, would be 10 times more expensive than continuing to operate the coal plants. Coupled with economics, grid stability supports coal plant extensions. Plants that were slated for retirement have been extended in record numbers. With 35 gigawatt of coal plants having seen their proposed retirements be deferred. Just several weeks ago, we saw another plant extended into 2026. How is this changing utility behavior? In one more punctuation point added to the caller's backstory, Peabody Energy Corporation reached agreement recently with a major Midwestern utility for more than 20 million tons of Illinois Basin coal over five years. The contract exceeds $1 billion in total sales over time. We have sourcing flexibility from multiple mines and market reopeners. This is just one more sign, of course, that USA coal plants are here for the long term. Mark, over to you. Mark A. Spurbeck: Thanks, Malcolm, and good morning all. Let me start with a brief overview of our financial performance. In the fourth quarter, we reported net income attributable to common stockholders of $10.4 million or $0.09 per diluted share. And adjusted EBITDA of $118 million a 19% increase from the prior quarter. Supported by higher seaborne thermal realizations and consistent focus controlling the controllables. We generated $69 million of operating cash flow from continuing operations during the quarter and $336 million for the full year. Peabody Energy Corporation ended the year with $575 million in cash and total liquidity above $900 million reflecting disciplined capital deployment through the period of intense development at Centurion and consistent cash generation despite lower than mid-cycle seaborne coal prices. We ended 2025 with another quarter of strong execution. For the full year, results met or exceeded original guidance for seven of eight volume and cost metrics. Seaborne Thermal delivered 3.3 million tons exceeding expectations. Realized export pricing averaged $81.80 per ton, up 7% from the third quarter. Costs came in below the low end of guidance and 12% lower quarter over quarter supporting a robust 31% adjusted EBITDA margin and $63.5 million of fourth quarter EBITDA. For the full year, the segment reported $222 million of adjusted EBITDA and total capital requirements were a mere $40 million Costs were down over $3 per ton year over year, driven by disciplined cost management and higher production at the Wambo open cut. Seaborne Met shipped 2.5 million tons. Up 400,000 from the third quarter and above the fourth quarter target. Realized pricing began to improve and cost at $113 per ton were consistent with expectations. The segment delivered $24.6 million of adjusted EBITDA in Q4. For the year, the segment generated $56 million of adjusted Shipments increased 1.3 million tons year over year to 8.6 million But better yet, full year cost beat original guidance by more than $10 per ton. Peabody Energy Corporation's met segment will be further meaningfully improved with the startup of Centurion, increasing volume to 10.8 million tons in 2026 and increasing segment wide price realizations 10% versus the premium hard coking coal index. The US thermal platform contributed $63 million of adjusted EBITDA in the fourth quarter, For the full year, segment generated nearly $250 million of adjusted EBITDA against only $57 million of CapEx, demonstrating the consistent free cash flow generation capability of our reliable low-cost US thermal portfolio. Over the last five years, The US thermal business has generated $1.1 billion of cash net of capital investment. The PRB operations shipped 22.3 million tons in the quarter and 84.5 million tons for the full year, almost 5 million tons or 6% more than the prior year. Answering the call for more reliable and affordable power as a result of increasing load growth. The segment contributed $44.8 million of adjusted EBITDA in Q4 and $175.8 million for the full year. Interestingly, a 6% increase in tons resulted in a 20% increase in EBITDA margin year over year in a mostly flat price environment. Demonstrating torque to higher volumes tight cost management, and the benefit of reduced federal royalties. The other US thermal segment contributed $18.1 million of adjusted EBITDA in the fourth quarter on shipments of 3.7 million tons exceeding expectations. Twentymile is performing well in its new longwall panel, and mining is expected to continue through the 2027 as we fulfill the existing contract with the Hayden plant in Colorado. Full year adjusted EBITDA reached $71.4 million Looking ahead to 2026, I'll briefly review guidance for the full year. Seaborne thermal volumes are expected to be lower than 2025 due to the closure of the Wambo underground mine in Q3 last year and lower production at Wilpinjong due to reduced operating phases as the mine progresses into narrowing pits ahead of the pit nine and ten extensions. Shipments are targeted at 12.5 million tons including 8 million export tons. Costs are projected to be above 2025 levels at $50 per ton and lower production. We anticipate a quality mix of 45% Newcastle and 55% higher ash product. Seaborne met volumes are projected to increase over 2 million tons to 10.8 million, with the start of longwall production at Centurion. At the CMJV complex, we expect production to increasingly transition to the Capabella mine as it completes the additional bench of pre-strip to improve high wall stability in the 2026. And Moorville depletes its reserves. Met coal costs are targeted at a $113 per ton about a dollar lower than last year. We anticipate segment wide average price realizations increasing to 80% of the premium hard coking coal index. For US thermal, expect a very similar year to 2025. In the 82 million tons and have 78 million tons priced at $13.4 Costs are expected to be consistent with 2025 levels at $11.50 per ton. Other US thermal volumes are expected to be 13.7 million tons. We have 13.2 million tons priced at $54.40 and expect costs of $47 per ton. Also in line with or better than 2025 results. Total capital expenditures are estimated at $340 million seventy million dollars lower than 2025 as Centurion begins longwall production. As we reflect on 2025, Peabody Energy Corporation delivered a year marked by disciplined execution and strategic investment. Our balance sheet remains robust and provides sufficient flexibility through price cycles. And the step change in met coal production reshapes our competitive position. We have invested approximately $750 million of organic cash flow to develop and expand Centurion. An investment that significantly enhances our leverage to premium hard coking coal markets and provides a cornerstone asset for the next 25 years. As a result, Peabody Energy Corporation enters 2026 from a position of strength. With an enhanced MET platform rapidly improving PLV benchmark prices, continued strong cash flowing thermal operations, and overall supportive market conditions. Together, these factors position the company exceptionally well for the year ahead. I'll now turn the call back over to Jim. James C. Grech: Thanks, Mark. That closes the book on a successful 2025 and let's focus for a minute on our full slate of priorities for the new year. Peabody Energy Corporation's key focus areas include driving safe, reliable, and efficient operations across the portfolio, That's essential in the mining industry and remains our clear number one priority. Achieving full operational performance at the Centurion mine, The promise of Centurion now turns to reality for our shareholders. I'll remind investors that this feeds into the increasingly short premium hard coking coal market. Continuing the strong EBITDA to CapEx margins from Peabody Energy Corporation's high cash flowing thermal coal assets, That's true for both the Seaborne and US thermal business. Preserving balance sheet strength and improving free cash flow to support shareholder returns Our first priority for the use of cash remains shareholder returns. And all other potential investments must pass a high hurdle to compete for funding. And finally, progressing work streams to best advance and monetize commercial Peabody Energy Corporation development opportunities. With that, operator, we're happy to turn the call over for questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Katja Jancic with BMO Capital Markets. Please go ahead. Katja Jancic: Starting on the cost guide for '26 especially for your Australian operations, what do you assume for the Australian dollar in the cost guide? And then also, what do you assume on the met size for met pricing? James C. Grech: Good morning, Katja. For the Australian dollar, we're looking at 70¢. Pretty much where we're at today. Malcolm Roberts: And then now we're using a 225 benchmark pricing. Katja Jancic: And then on the Centurion development, just looking ahead, can you remind us how much CapEx is potentially still left, especially to get to that Northern part? James C. Grech: Yeah. So we're we're obviously starting the longwall here imminently in the South so that initial $500 million has been spent. We talked about $750 million in total. There were some already allocated to the North as well as the acquisition awards well. When we move forward now into 2026, nothing's changed what I said before. It's probably about a $100 million a year in development for the North for the next three years. On top of that, there's some sustaining capital in the South, call it $25 million a year. Katja Jancic: Okay. Thank you. The next question comes from Nick Giles with B. Riley Securities. Please go ahead. Nick Giles: Hey. Thanks very much, operator. Good morning, guys. My first one was just on the domestic thermal side. I mean, pricing in the PRB stepped down and 2025. Volumes rose. Seems like there could be a similar setup in 2026. So my question is, how should we think about pricing in '27 and beyond? I mean, is is there a scenario where prices revert to the upside or is is there kind of limited torque because of existing contracts? Appreciate any any color there. James C. Grech: And Malcolm, would you like to comment on that, please? Malcolm Roberts: Yeah. Sure. Look. The way we price is we layer in volumes probably on from from three to four years before the delivery period. And I'm not gonna give specific guidance in terms of how contracted we are for '27, but there's still quite a lot of contracting to be done there. And so that should be exposed to a favorable pricing environment because our view is is that this is a favorable pricing environment vis a vis the last two or three years. Nick Giles: Got it. Thanks for that Malcolm. And then on the volume side, mean, do you think there's demand for incremental tons beyond your current guide? I know know increasing volumes is a different story, but would there be incremental demand? Malcolm Roberts: Absolutely. I think so. I mean, we started the year with with quite a lot lower inventories. We've had reasonable cold snap, and and and we're already seeing those out there in the in in the the market. You know, we're responding to those today. So I still see incremental demand. There was incremental demand last year I see something playing out fairly similar. And I guess in terms of Peabody Energy Corporation participating on that, you know, our view is is value over volume. So it'll be about where the price point is. For those incremental tons. But I think as we've said in previous calls, the latent supply and capacity in the basin is starting to become quite stretched. So I'd expect that the people were pretty careful as to as to how they'd bid into these opportunities moving into this year. Nick Giles: Understood. A appreciate all that color. One one more if I could. I mean, when we look at seaborne thermal costs, the midpoint's at $50 a ton. Pretty meaningful step up there year on year. So just was curious on what are the drivers there? Is it really just the lower volumes Is it mainly the drag at Wilpinjong? And you know, how how should we see see things improve over the course of the year? Thanks a lot. Yeah. Nick, for year over year cost in seaborne thermal, it's really a story of the lower production volume. So certainly an increase from lower production at Wilpinjong. There's a bit also lower production at Wamba Wilpincut, but much less so. And then know, the answer to Katja's question there about a 70¢ Aussie dollar, that's about 4¢ four cents higher than we realized last year. So that has a probably about a $34 impact as well. Got it. Very helpful. Well, guys, nice work at Centurion, and continue best of luck. Thanks, Nick. Operator: The next question comes from Nathan Martin with the Benchmark Company. Please go ahead. Nathan Martin: Thanks, operator. Good morning, everyone. Mark, just curious, how should we think about the cadence of shipments as the year progresses? Especially for the seaborne met and seaborne thermal segments? You know, it would seem the first quarter probably anticipated to be the weakest just given the the century and longwall will just be starting up. Obviously, you've got the sequencing. You called out. Any other operational items as well to keep in mind for the year longwall moves, etcetera, just when we think about that cadence? Thanks. Yeah. You got your finger on the right items there, Nate. Mark A. Spurbeck: Seaborne thermal much less than ratable in the first quarter. And that's and that's Wilpin Young and Wamba OpenCut being less than rateable just simply from a mine sequencing perspective. So that that'll bounce up nice for us. In Q2 and even higher in Q3. When we think about seaborne met, we do have the two long wall moves. So both met trop and Shoal Creek are going through a longwall move so that's going to lower the production and, obviously, just getting, about two months of production from Centurion versus the full quarter. When we think about Centurion, you know, that's gonna ramp up probably about know, 700,000 tons in Q1, about a million to a million one Q2 and Q3, and then it'll fall back down in Q4 as we have a longwall move. Nathan Martin: Very helpful, Mark. Appreciate that. And then maybe sticking with the seaborne met segments, I understand you guys now expect to realize approximately 80% of the the benchmark there with the additional centurion tons coming on. But could you maybe just give us a sense of kind of the the quality breakdown there? Like, maybe a percentage selling at at, you know, POV index versus five zero eight versus PCI, etcetera? Mark A. Spurbeck: So not really, the only change year over year is Centurion. So think of all of those tons, 300,000,000 tons selling at benchmark, full benchmark pricing, maybe even a small premium. And then the rest of that portfolio will be selling at what is historically done in that 70% range. Nathan Martin: Okay. Perfect. And then just maybe one to end on shareholder returns. As you guys said, spend for Centurion kinda winding down here. You know, met prices have improved here in the near term. When do you expect to be able to begin generating enough available free cash flow in order to return to to your share buyback? Thanks. Mark A. Spurbeck: Yes. As Jim mentioned, it's our number one focus from a cap capital allocation perspective as shareholder returns. I think back on 2025 on the amount of dollars we invested to get Centurion online, $2.52 60,000,000 last year alone So we'll be down substantially at Centurion from a capital perspective probably $150,000,000 less going forward. We also had a lot of expenses related to the previously announced proposed transaction with Anglo. So we're starting the year at about $230,000,000 better. Then we look at premium hard coking coal prices being at $2.50 right now, substantially better than prior years particularly with Centurion coming online. So at today's prices, I think anyone could look at the guidance you provided and see some substantial free cash flow generation. And our policy remains the same to return that to shareholders Jim mentioned it's the number one priority with the Centurion development risk off the table. That return should be much closer to a 100% versus 65%. Nathan Martin: Alright. Thanks, Mark. I'll pass it on. Appreciate the time, and best of luck this year. Mark A. Spurbeck: Thanks, Nate. Operator: Again, if you have a question, please press star then 1. The next question comes from George Eadie with UBS. Please go ahead. George Eadie: Yes. Hi, team. Jim, Mark, Malcolm. So maybe first question for Malcolm. Can you just following up on the question before, can you help me what percent of prices in the PRV are cost linked? I guess, my question is if you're locking in contracts for late twenty twenty seven delivery, at just under 17 a short ton, which it looks like the futures is now at, If cost hold flat for those tons alone, can you essentially capture all that $5 as short tonne margin? Is that right? And good way to think about it? Malcolm Roberts: Yeah. George, it's not difficult for me to get into specifics of each of the contracts, but but generally, we don't have a lot of rise and fall for cost within the PRB contracts. They rise and fall on the basis of government policy impositions, taxes, those types of things. So when pricing business, we gotta take a view of of of what costs are and what the market can bear out there. But we're not really a cost plus business. We look at at what we think the fair market level is out there, and and we'll pitch that in in that year's dollars effectively. George Eadie: Okay. Then, like, in terms of taxes and forth, rebates, like, how how much is that sort of run out? Like, is it fair to assume, like, 20% of that price upside gets taken away and those sort of factors, or is it more about a give and take negotiation and those contracts prices aren't, like, exactly what you'll get? Malcolm Roberts: Yeah. Look. I think you got it about right. I mean, if you go across our book, you you could say royalties, taxes, and the like. You know, could be could be 25%, something like that. So if you think about that, if the if prices go up, some of that gets taken away. George Eadie: Yep. Okay. No. Thanks. Maybe to Jim and Mark. But just on volumes in Australia, Morbell, when does that deplete exactly which quarter And just on that, given a better 27, hopefully, for Coppabella, is sort of a million ton down year on year net for that JV sort of a right way to think about potentially? Mark A. Spurbeck: George, first question on Moravail, I think, was the was the question We will be mining there all of this year and into 2020 Well, probably second half of the year will wind down at Moraville, and it'll it'll really transition all the capabella So looking for a little bit of decline year over year, as the combined entity. But I would say we'll be done midyear at Moorville. George Eadie: Okay. Yep. Thanks for that one, Mark. And and sorry. Just on volumes as well there. Wilpinjong, can you remind us where that's at operationally and CapEx Is there anything sort of material to come back end of the decade with the sort of pit sequencing and that going on? Mark A. Spurbeck: Yeah. So it's really sustaining capital for the next two, three years. We talked about the pit, you know, kinda eight, nine, 10 extensions. Back end of the decade, probably 2029 where we'll see a slug of capital and that'll be fleet and equipment as well. You know, maybe total of a $100,000,000 FRO George Eadie: Okay. Thanks. I'll jump back in the queue. Cheers. Mark A. Spurbeck: Thank you, George. Operator: This concludes our question and answer session. I would like to turn the conference back over to James C. Grech for any closing remarks. James C. Grech: Well, thanks for your time today, both for our longstanding investors as well as the many of you have been new to the story in the recent months. I believe we have a great year ahead of us, and we're looking forward to keeping you updated as the year goes on. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. May now disconnect.
Operator: Greetings, and welcome to the Thermon Group Holdings Third Quarter Fiscal 2026 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the presentation. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Ivonne Salem, Vice President FP&A and IR. Thank you. You may begin. Ivonne Salem: Good morning and thank you for joining Thermon Group Holdings' Third Quarter Fiscal 2026 Results Conference Call. Leading the call today are CEO, Bruce Thames, Chief Financial Officer, Jan Schott, and Chief Operating Officer, Thomas Cerovski. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found on our IR website under News and Events, IR Calendar Earnings Conference Call, Q3 2026. During the call, we will discuss some items that do not conform to Generally Accepted Accounting Principles. We have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP. I would like to remind you that during this call, we might make certain forward-looking statements regarding our company. Please refer to our annual report and most recent quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Our actual results might differ materially from those contemplated by these forward-looking statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as might be required by law. Today's call will begin with remarks from our CEO, Bruce Thames, who will provide a review of our recent business performance, including an update on our strategic initiatives. Following Bruce, our Chief Operating Officer, Thomas Cerovski, will share an update on our progress and opportunities in the data center market and medium voltage heaters, which are two key components of our organic growth plans going forward. After Thomas, our CFO, Jan Schott, will provide a review of our third-quarter financial results. Bruce will then wrap up our prepared remarks with an update on our business outlook. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Bruce. Bruce Thames: Thank you, Ivonne, and good morning to everyone joining us on the call today. I'll begin my commentary with our third-quarter highlights, which you can find on Slide four. I'm exceptionally proud to announce that we achieved record-breaking results in the third quarter, delivering the highest revenue, profitability, and bookings in our company's history. These outstanding outcomes are a testament to our unwavering commitment to executing our strategic initiatives and to the dedication and excellence demonstrated by our entire Thermon team across the globe. Our strategic actions have positioned us well to capitalize on significant secular trends that are reshaping the industrial landscape, including the growth of data centers, increasing demand for power generation, the global shift towards decarbonization, and accelerating electrification. We believe that our recent booking strength and pipeline growth illustrate improving macro conditions coupled with renewed capital project momentum that are reinforced by strong customer relationships, all supporting a positive outlook for the remainder of the fiscal year with momentum continuing into 2027. Now turning to our quarterly results in more detail. Our third-quarter revenues were up 10% from last year, which combined with our solid margin execution resulted in a 12% increase in adjusted EBITDA. Our third-quarter adjusted EBITDA margin was just over 24%, which brings our trailing twelve months adjusted EBITDA margin to nearly 23%, illustrating the strong earnings potential of our business. We remain committed to our Thermon business system initiatives and our margin priorities, and we're very pleased by our recent profitability conversion. While I'm encouraged by our third-quarter operating results, I'm most excited about the strong order trends and the building momentum we're now seeing in our business. Orders in the third quarter increased by 14% year over year, resulting in a book-to-bill ratio of approximately 1.1 times, with our total bid pipeline up 8% at quarter-end, with nearly 80% of these coming from our diversified end markets. Large project orders in the quarter were up approximately 60% year over year, driven by LNG project activity, midstream gas processing, and a large sustainable aviation fuels project in Asia. Much of this activity is tied to the value chain around natural gas, for both power generation and LNG export facilities, as well as continued momentum in renewables in the Eastern Hemisphere. While these orders help grow our installed base, the execution timelines are more protracted than our flow business will begin to convert in our fiscal 2027. The power sector is another area where we also believe Thermon is well-positioned, with offerings ranging from emissions monitoring solutions with our tubing bundle products to temperature management with our Genesis heat tracing control systems to auxiliary boilers for conventional and nuclear power generation. While early in what appears to be a large CapEx cycle, our pipeline of opportunities in this sector has now grown to $180 million, up 58% year over year, with over 60% of these opportunities in the US market. Another area of emerging growth in the US is in the reshoring of manufacturing, where customers are restarting shuttered facilities or expanding production in existing facilities across pharmaceuticals, chemicals, steel, and other industries. Last quarter, I highlighted that we received our first order for our new Poseidon liquid load bank solution. I'm pleased to report that we delivered these first units during the third quarter and, more importantly, continue to see bookings and extremely strong quoting activity for our data center products. Thomas Cerovski, our COO, will provide a more detailed update on the data center market later on this call. Another important driver during the quarter was the continued rebound in our large project business for the second consecutive quarter. As we've discussed on recent calls, our large CapEx order rates were improving, leading us to ramp up our engineering capacity to handle the increased project workload, including the launch of our new global Engineering Center in Mexico earlier this year. The increase in our engineering team has enabled us to move through the design phase on several large projects, which has translated to improved financial results in our large project business, with third-quarter CapEx revenues up 37% versus the third quarter of last year. Based on our strong third-quarter results, combined with the building momentum in new orders and backlog growth, we're once again raising our guidance for fiscal 2026, which I will detail in my closing remarks. I'd like to now turn the call over to Thomas Cerovski, our Chief Operating Officer, who will provide a more detailed update on the data center market and medium voltage heaters. Thomas? Thomas Cerovski: Thank you, Bruce, and good morning to everyone. Moving on to Slide six, I'd like to provide an update on our liquid load bank solutions for the data center market, which has quickly become a meaningful growth opportunity for Thermon. As we've discussed on prior calls, the recent shift to liquid-cooled data centers driven by investment in artificial intelligence, or AI, has created a rapidly accelerating demand for liquid load banks to validate critical cooling systems and power infrastructure. Thermon has moved aggressively to position the company to benefit from this trend in both the short term and long term. As Bruce highlighted, we shipped the first 20 units of our newest designed liquid load bank solutions and also began installation and commissioning during the quarter. And the momentum for this product continues to grow. It is important to note that we moved from initial development to shipping units in just six months, highlighting the ingenuity, responsiveness, and agility of our team. Quoting activity remains robust, as our quote log has doubled sequentially to $60 million. We continue to expect a significant ramp in orders for our liquid load bank solutions, and we are currently expanding production to support what we believe will be a multiyear growth opportunity. Another exciting opportunity for Thermon is our participation in the medium voltage heaters market. Medium voltage heaters are heaters that look like and function like traditional process heaters but operate at significantly higher voltages. This creates a large and growing market for these high-performance heaters that operate at higher efficiencies, higher power densities, a smaller footprint, have lower installation costs, and less auxiliary equipment. Thermon's medium voltage heater pipeline has expanded to over $150 million, benefiting from global electrification trends and the superior nature of our product. Our sales and marketing activities for these heaters are also an extension of the efforts of our current commercial teams in existing industries with existing skill sets and with existing customers, allowing us to move quickly to capture market share. These heaters also benefit from the secular tailwinds and the macroeconomic trends regarding decarbonization and electrification in industrial heating. Aside from the previously mentioned features and benefits, these electric heaters can perform at the highest levels of efficiency and have no emissions, where a combustion-based heater would operate at lower efficiencies and is not emissions-free. It is also worth noting that from a competitive perspective, there are significant barriers to entry into the medium voltage heater market. Although this is well within Thermon's strike zone of expertise in heat transfer and thermodynamics, this is a capability we have developed over a number of years with our deep and extensive engineering talent. These heaters come with international certifications and approvals that require exhaustive testing and compliance reviews. Quite frankly, these medium voltage heaters are difficult to engineer and even harder to manufacture. Thermon is a leader in this space, and we are on our front foot ahead of a very, very short list of competitors that have even attempted to participate in this space. We've secured our third medium voltage heater order, which increases our backlog for this product to over $11 million. We are currently quoting opportunities and selling manufacturing slots for these heaters into our FY 2027 and FY 2028 fiscal years. Last, we are also scaling our manufacturing processes, leveraging our global manufacturing footprint to increase capacity for these heaters. This technology is well within our strengths and capabilities, and we are utilizing our global engineering and operations team to meet the growing customer demand for these products. With that update on the exciting products of liquid load banks and medium voltage heaters, I will now turn it over to Jan for a detailed review of our third-quarter results. Jan? Jan Schott: Thank you, Thomas, and good morning, everyone. I'll walk through our third-quarter financial performance, followed by updates on working capital, cash flow, and our balance sheet and liquidity. Moving to slide seven, revenue for the quarter was $147.3 million, a year-over-year increase of 10%. The growth this quarter reflects more favorable spending patterns, including continued improvements in large project spending by customers, ongoing momentum in electrification and decarbonization in Europe, and benefits from pricing. With the Fati acquisition reaching its one-year anniversary this past October, all of the growth this quarter is now considered organic. Our OpEx revenues were $122 million during the third quarter, an increase of 5% compared to last year, driven by increased spending from our installed base and pricing. OpEx revenues represented 83% of total revenues for the quarter. Large project revenue was $25.4 million for the third quarter, up 37% from last year. As Bruce mentioned earlier, momentum in our major project markets is now flowing through to our results, with several projects progressing from engineering into execution this quarter. Our engineering teams remain fully utilized, and the active bid pipeline gives us confidence that the strength will continue into the new calendar year. Our gross profit was $68.7 million during the third quarter, an increase of 11% compared to last year. The increase in gross profit was the result of operating leverage from increased volumes, price tariff mitigation, and productivity gains enabled by our Thermon business systems. As a result, gross margins were 46.6% for the third quarter, up from 46.2% last year. We were pleased to see our gross margin performance continue this quarter, given the higher mix of large project revenue. We also saw this trend last quarter, which is encouraging. Adjusted EBITDA was $35.66 million for the quarter, up from $31.8 million last year, an increase of 12%. The increase was driven by our solid revenue growth, sustained gross margin improvement, and disciplined cost management, partially offset by continued investments in growth initiatives and higher performance-based compensation. Adjusted EBITDA margin was 24.2% during the third quarter, up 50 basis points from last year. GAAP earnings per share for the quarter was $0.55, up modestly from $0.54 in the prior year. Adjusted earnings per share was $0.66, up 18% from $0.56 last year. Third-quarter orders grew 14% to $158.2 million compared to last year. As Bruce noted earlier, this included strong activity across LNG, midstream gas processing, and a major SAF project in Asia. Our book-to-bill ratio for the quarter was 1.1 times, up from 1.0 times a year ago. Backlog increased 10%, driven by a positive book-to-bill for the quarter and favorable project timing, even as we delivered record revenue this quarter. Turning to performance by geography, US Lam delivered a solid 10% year-over-year increase, driven by sustained demand across large capital projects and continued pricing discipline. Canada posted a 1% revenue increase, supported by heightened project activity. In EMEA, activity remained robust, with revenue increasing 37%. This growth reflects strong execution across our legacy business as well as rising demand tied to electrification and decarbonization trends in Europe. Meanwhile, APAC delivered 9% revenue growth, supported by continued momentum in project activity. Turning to Slide eight for an update on our balance sheet and liquidity. Working capital was $190 million at quarter-end. Capital expenditures were $4.9 million for the quarter, compared to $1.4 million last year, reflecting our investments to support growth initiatives, including our liquid load bank and medium voltage heater product lines. We generated $13.1 million of free cash flow in the third quarter, up from $8.4 million last year, reflecting healthy operating performance and moderated by growth-focused investments. Year-to-date free cash flow was $25.7 million, up from $23.9 million in the prior year period, highlighting continued discipline even as we invest to support growth. We did not repurchase shares in the third quarter. Cumulative repurchases since the beginning of fiscal 2025 stood at $36 million, or 4% of our shares outstanding. We still have $38.5 million remaining under our existing authorization. We ended the quarter with net debt of $96.3 million and a net leverage ratio of 0.8 times. In summary, we continued our financial discipline during the third quarter and remained focused on maintaining a strong balance sheet. We have $141 million in total cash and available liquidity as of quarter-end, providing us ample financial flexibility to execute on our balanced capital allocation strategy, which remains focused on driving growth both organically and through strategic acquisitions, while balancing opportunistic share repurchases and debt reduction. With that, I will turn the call back over to Bruce. Bruce Thames: Thanks, Jan. As we shared on this call, we were very pleased with our third-quarter results and are encouraged by the continued momentum we're seeing across many of our end markets. This team has spent considerable time and energy over the past several years repositioning the business for growth, so it's very rewarding to see this hard work beginning to pay off. Based upon our strong results through the first three quarters of the year and the continued momentum in our business, we're raising our full-year 2026 financial guidance for revenue and adjusted EBITDA. As we detail on slide nine, our fiscal 2026 financial guidance calls for revenue in a range of $516 million to $526 million, representing 5% growth over the prior year at the midpoint. We're raising adjusted EBITDA guidance to a range of $114 million to $120 million, representing 7% growth over the prior year at the midpoint. Our guidance continues to assume that the current tariff structures remain in place and any future announcements do not have a notable positive or negative impact on input costs or customer sentiment, and the improved business trends we've seen are sustained. Turning now to slide 10. We believe we're strategically positioned to benefit from several powerful macroeconomic drivers, including reshoring, electrification, decarbonization, power, and data centers. We're in an extremely strong financial position with more than sufficient financial flexibility to continue pursuing our strategic priorities, including the disciplined allocation of capital, all with an ongoing focus on generating long-term value for our shareholders. That completes our prepared remarks. We're now ready for the question and answer portion of our call. Ivonne Salem: Thank you. Operator: And at this time, we will conduct the question and answer session. A confirmation tone will indicate that your line is in the question queue. Before pressing the star keys. And your first question comes from Brian Drab with William Blair. Please state your question. Brian Drab: Congratulations on the great results. I've been covering the company for a long time, and I know a lot of people have been expecting Thermon to put up results like this. And it's I usually don't take time to do this congratulating on the calls, but it's worth, I think it's deserving. For sure. Thanks, Brian. I was wondering, yes, can you talk about the 46% plus gross margin that, you know, two quarters in a row? The sustainability of that, what is structurally changed if it has, you know, and you're doing that in the face of improving large project activity where you typically see somewhat lower gross margin. Bruce Thames: Yeah. That's a great point, Brian. The mix is shifting towards more large projects. There's a number of things that are really driving the improved gross margins. The Thermon business system, we've been able to systematically drive productivity and efficiency gains that are translating into bottom-line results. I think that's something that's in place and we'll continue to drive going forward. Price has been another area where we've certainly gained some incremental margin in the marketplace. We also are seeing the benefit of operating leverage. And I would also note that when you look at the project mix we have today, it is largely design and supply, with much less of what we call turnkey or additional content around field labor, around installation, or third-party materials that we would have conduit wire, breakers, relays, and the like. So that all helps improve the margin profile of these projects. As we look at our backlog going forward, we still have a very significant backlog building around large projects that are heavily weighted towards design and supply. So those margins I think, would be sustained. I would go on to say that typically, our Q3 is always the highest gross margin just due to the mix around heating season and just operating leverage on the incremental volume. So having said that, when you look at our business on a seasonality basis, I think we can continue to drive similar margins going forward. The key here is understanding that Q3 is typically the peak, and it'll fall off somewhat in Q4 and Q1 and then begin to rebuild in Q2 and Q3 of next year. So that's just the normal cadence of the margin profile of our business. Brian Drab: Okay. And this shift to more design and supply versus projects with the significant labor content. Is that something that was by design, like, by your design? Or is that more a function of trends in the overall market? Bruce Thames: It's a little of both. We've focused there particularly, but then there's also been a shift with some of the general contractors and also in the EPCs to be able to bring more of that field labor and installation in-house. So it's been a bit of a mix of both. Brian Drab: Okay. And then, on the data center side, just really good momentum there. Clearly, can you talk about how your conversations with the potential customers in the industry have evolved? Are you talking to the data center construction contractors, the HVAC contractors, the hyperscalers themselves, all of the above? Thomas Cerovski: Yeah. Hey, Brian. This is Tom. Thanks again for the congratulations. Look, the answer to your question is all of the above. We've formed some relationships through our discovery process and design thinking of developing these projects. We did a lot of customer research and feedback before we launched the project and launched the products. But we are forming relationships with, let's say, rental companies out there that specifically rent equipment into this market. There's also a burgeoning group of companies that do nothing but commissioning of data centers and meet the testing around insurance and regulatory compliance. And then, as you said, we've also worked directly with end users. In some cases, they're these units and load banks permanently. It'll become a fixture of their overall asset. So, look, the answer is we've worked with all types of customers and have formed relationships through many different types of channels. Brian Drab: Okay. Perfect. I'll pass it on for now and talk to you later. Thank you. Thomas Cerovski: Thanks, Brian. Operator: Thank you. And your next question comes from Justin Ages with CJS Securities. Please state your question. Justin Ages: Hi. Good morning, all. Bruce Thames: Good morning. Thomas Cerovski: Good morning. Justin Ages: Another question on the liquid load banks. In the past, you've mentioned the market size around 80%, $90 million. Just wondering if your assumptions have changed there. And I know you gave some detail on the competitive landscape for the medium voltage heaters, but any detail you can give us on the landscape for these liquid load banks would be as well, please. Thomas Cerovski: Yeah. Hey. Great question. We have not updated our management estimates of what we believe the market to be. I think we'll stay consistent for now with what we put in previous communications and what we've mentioned earlier. I will say, you know, that the market is robust. But the most important thing is our quote log has actually doubled, I believe, sequentially quarter over quarter. We're now at about $60 million. So we believe this will be both a short-term material impact on our potential FY '27 results and then also a longer-term multiyear opportunity. I think, you know, data centers is something that many different companies out there that are selling electrical and other types of products are still trying to get our arms around how big this growth cycle is and how long it will last. But it's clearly very large and it's clearly multiyear. Justin Ages: That's helpful. Thanks. And then on the CapEx guidance, you said 2.5% to 3% this year. This quarter, it was 3.3% ahead of sales. Just wondering if these investments in these two new growth platforms as we look, you know, peek into '27 and '28, if it's gonna be a bit higher as you guys are, you know, ramping for growth there. Bruce Thames: Yeah. That's a great question. We are making more, you know, if you think about Justin and over the last five years or more, our CapEx has probably averaged around two and a half percent. We've got these two opportunities, which are, you know, significant organic growth opportunities, and we are making investments to scale manufacturing. And so we're in the process of finalizing our plans for next year, but we would expect CapEx to be in probably closer to that 3% range next year. And just investing for growth in these two different platforms. And really, that's to build capacity both in the Western Hemisphere as well as in the Eastern Hemisphere to grow and scale these products. Justin Ages: That makes a lot of sense. Alright. I appreciate you taking the question. Thank you. Bruce Thames: Thank you. Operator: Your next question comes from Arun Spychala with Craig Hallum Capital Group. Please state your question. Arun Spychala: Yeah. Good morning, Bruce, Jan, and Tom. Thanks for taking the questions. You know, maybe first for me on the medium voltage opportunity, you talked about the pipeline and the backlog and scaling the manufacturing. Can you just kind of talk about how you see that progressing over the next couple of years given that pipeline and kind of how growth can look as you kind of scale manufacturing? Thomas Cerovski: Yes. No, thanks, Arun. Great question. This is a very, very early stage of engagement with customers on the medium voltage. You know, as I've said, we've taken three orders. You know, we have worked down some of the backlog, but the existing backlog right now at the end of three was $11 million. Again, just to repeat, the quote pipeline on that is over $150 million. This is another opportunity for us that we believe is both large and multiyear. We have begun the process of investment there both on the CapEx and OpEx side to increase capacity, again, both in the Eastern Hemisphere and then future in the Western Hemisphere and then future investment in the Eastern Hemisphere to be able to build these heaters and meet customer demand. This has been a tailwind for us. Again, there's the other thing to keep in mind, this has a very large competitive moat around it in terms of the capabilities to build these heaters. But it will certainly be something that is multiyear and have an impact on not just FY 27, but a material impact on years in the future. Arun Spychala: Alright. I appreciate that. And then you kind of called out LNG in midstream as nice growth drivers. Could you just talk a little bit more about how you're offering fits in that market, where that business is today, and how you see that ramping moving forward? Bruce Thames: Yeah. So, yeah, LNG midstream, kind of thinking through those. You know, what we're seeing is certainly the LNG export facilities, we do quite a bit in LNG liquefaction. And so we've, in the first quarter of this year, we had secured about five projects for LNG, and those began to execute in our Q2 of this year and continued into our Q3. We also booked some additional LNG projects. When you think about our products, there's a number of different applications. We have even the medium voltage heaters are used for natural gas regeneration, which and then our heat tracing products are used extensively just due to the colder temperatures and to freeze protect on a lot of different valves and piping. We also have immersion heater opportunities in various applications there. And then our tubing bundles are sold in there. So it's really a broad swath of our products for LNG. And then we think about moving upstream, you know, to increase production in natural gas. One of the areas where we do a lot of work is in gas processing, particularly in fractionators. And so we've secured some orders in those areas as well with some nice projects emerging here, particularly in the US around increased natural gas production and processing. And then all of that also ties to just the increased power demand and the shift towards combined cycle power generation, with some of the legislative changes that are increasing demand for natural gas as well. So all of those tie in pretty well in our demand drivers for our products and services. Arun Spychala: That's great. Thanks for the color and for the questions. I'll turn it over. Bruce Thames: Thank you. Operator: Thank you. To withdraw your question, press 2. Once again, to ask a question, press. Your next question comes from Jonathan Braatz with Kansas City Capital. Please state your question. Jonathan Braatz: Good morning, everyone. Bruce Thames: Good morning, Jonathan. Jonathan Braatz: Bruce, going back to gross margins, they've been very strong despite the higher capital CapEx revenues. And you talked a little bit about the reasons, but independent of those reasons, given the strength of the market, are you just seeing better margins in that business than maybe you had seen years ago? Initial margins? Bruce Thames: Our project margins are healthy. I would say, Jonathan, as I reflect back, they are not necessarily above what we've seen in large CapEx cycles. You know, the company historically, I mean, we go back to the 2013 time frame, had enjoyed gross margins and project activity when there was just a super cycle in the oil sands. So I would say we're not at those levels, but on a relative basis, our project margin profile has improved, and the mix has had a big impact on that as well. So I think it's a little of both. The mix of design and supply as well as just the overall market conditions for pricing and the nature of the projects we're executing have both helped with price and gross margins. Jonathan Braatz: Okay. Alright. Thank you. The second question, the Fati acquisition last year has been very successful. How do you see that going forward? What you're doing, what else are you doing to maybe improve the revenue outlook for that operation and the profitability? What's ahead for Fati in 2027? Bruce Thames: Yes. Great question. Well, that business has performed exceptionally well. A few things to note. One is we continue our commercial efforts there in Europe and the Eastern Hemisphere, which have been quite successful. A lot of the CapEx investments that we talked about, both Jan and the prepared remarks as well as just questions I answered earlier, are related to scaling capacity there in Milan. We are building capacity for our medium voltage heaters there, and we'll begin to be completely vertically integrated and be able to produce those in Europe for Europe and the Eastern Hemisphere. And that's going to be a significant growth driver. You know, in less than eighteen months, we've essentially doubled that business. We expect that to be, you know, to double that business over the next two to three years. And that would be really serving the increased demand for electrification as well as the market opportunity represented by medium voltage heaters. So that business, we would expect to continue to build and grow. And, you know, while as we look at that, our product portfolio, quite frankly, has historically had immersion heaters and the like. But having that manufacturing capacity there in Europe has really enabled and unlocked the next level of growth. So it's really been a great success story, really commercially and operationally. Jonathan Braatz: Okay. Thank you. Operator: Thank you. And ladies and gentlemen, final reminder, if you would like to ask a question, please press 1. We'll pause for a couple of moments while we poll for questions. Thank you. And there are no additional requests for questions. So at this time, I'll hand the floor back to Bruce Thames for closing remarks. Thank you. Bruce Thames: Thank you, Diego, and thank you all for joining on the call today. We appreciate your interest in Thermon. And if we don't talk to you in the coming months, we look forward to providing an update on our full-year financial results in the May time frame. So thank you all for joining today. Operator: Thank you. This concludes today's conference. All parties may disconnect.
Joshua Carroll: Good morning, and thank you for joining us for RBC Bearings fiscal third quarter 2026 earnings call. I am Joshua Carroll with the Investor Relations team. With me on today's call are Dr. Hartnett, Chairman, President, and Chief Executive Officer; Daniel Bergeron, Director, Vice President, and Chief Operating Officer; and Rob Sullivan, Vice President and Chief Financial Officer. As a reminder, some of the statements made today may be forward-looking, under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. I refer you to RBC Bearings Incorporated's recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. These factors are also listed in the press release along with a reconciliation between GAAP and non-GAAP financial information. With that, I will now turn the call over to Dr. Hartnett. Michael Hartnett: Okay. Thank you, and good morning, everyone, and thank you for joining us. As usual, I am going to start today's call with a short review of our financial results and the outlook for the industry with our sectors. Rob Sullivan will follow me with some detailed details on the results. Third quarter net sales were $161 million, a 17% increase over last year. We experienced continued strong performance in our A&D segment and growth from our industrial businesses. Consolidated gross margin for the quarter was 44.3%, or 45.1% on an adjusted basis. Adjusted diluted EPS was $3.04 versus $2.34 a year ago, a 30% improvement. EBITDA came in at $149.6 million versus last year's $122.6 million, up 22%. Free cash flow for the period was a strong $99.1 million. We paid down an additional $81 million of debt in the third quarter. 56% of our revenues were industrial, 44% from the A&D sector. Total A&D sales were up 41.5% year on year. Commercial aerospace expanded 21.5%, and defense expansion was 86.2%. Rob Sullivan will talk more about these details later in the call. Demand across the A&D sectors continues to be robust. As evidenced, we have modestly exceeded our $2 billion backlog mark that we spoke about last call. Remember, most of our A&D business is contracted and managed through daily or weekly orders, or polls communicated to us electronically, and as a result, represent only a modest footprint in today's backlog statement. If these joint contract obligations were extended based upon the statement of work content awarded, and projected build rates, they would likely exceed another half to a full billion dollars of backlog. Today, the strength and outlook on the A&D sector can only be described as extremely robust. Clearly, we are at a national inflection point in the commercial aircraft and defense industries. Let me explain with an overview of some of our key markets. So we will start with submarines. Submarines are facing accelerated fleet build-out. The number one defense priority today is submarines. This drives an unprecedented demand for our proprietary quiet running valves both for new construction and replacement. To support the current fleet, 66 Virginia ships are planned, 25 have been commissioned to date, and 12 Columbia class ships are planned. Number two, missiles and guided arms. Support for broad multiyear refurbishment initiative, for offensive and defensive missiles, and vision targeting systems, both here and overseas, create a strong environment for our precision assemblies and fuel management products. In Europe, NATO's 5% GDP initiative is growing demand for our products from the ground warfare system builders in Europe. This creates strong new requirements for RBC Bearings Incorporated products developed over the past decade. In the USA, the refurbishment of new and refurbishment and new construction aircraft systems as well as the maintenance of untold numbers of helicopters and airframe platforms, including engines, creates strong and continuous needs for our proprietary components. We expect an expanded defense spending bill will likely accelerate the repair activities further. We also support the expanding need for both engineering support and staple components for systems that the big three space explorers are building, as well as others. They are racing to the moon and/or creating low earth satellite systems requiring sophisticated precision assemblies for targeting, thrust vectoring, fuel management, structural members, etcetera. I think you can see the picture that we are faced with right now in the A&D sector. Of course, all of these macro extremes in space and defense are simultaneous with the unprecedented build rates for commercial aircraft, including engines. RBC Bearings Incorporated is deeply embedded in all of these areas, which create a tremendous continuous market for our product both at the OEM and the replacement levels. We are working diligently to add machinery and staff to several of our existing sites guided by our five-year per site plan to support these growing A&D revenues. Well, I hope this brief abstract gives you a 40,000-foot view of what our world is today in the A&D sector. We can certainly go into specific programs, outlook, products, proprietary positioning as well as the moats to any depth needed at another time. We have been working well over a generation to achieve industrialized catalog and fortify the portfolio that you see today. So let's turn to the industrial businesses now. Overall, our industrial business was up 3.1%. Industrial distribution was up 1.5%, while the OEM sector was up 7%. We saw strength in aggregate and cement, food and beverage, and the warehousing markets during the period. Recently, we have been seeing positive trends in some of these markets in terms of order demand, which will show as revenue as they work their way through lead time. The semiconductor industry is the biggest standout in this regard. Broad industrial demand strengthened measurably in late December and continued throughout January. In addition, we are introducing several new products to the industrial lineup for FY '27, many of which have been in testing and development since the Dodge acquisition. Combined, they promise to bend our curve on industrial growth. Also, we are opening a service center in the Midwest to better attend to the needs of our and tailor our product response to more customers in that region. I hope I gave you a feel for our environment and the momentum that exists at RBC Bearings Incorporated today. I will turn the call over to Rob Sullivan for more discussion on the third quarter and the fourth quarter outlook. Rob Sullivan: Thank you, Mike. As Dr. Hartnett mentioned, we had another strong quarter. Net sales grew 17%, which led to a 16.9% increase in our reported gross margin. Gross margins were 44.3% for the quarter, or 45.1% on an adjusted basis compared to 44.3% in the same period last year. During the quarter, we delivered strong performance across our business segments, specifically within aerospace and defense, which has demonstrated strong growth, as Dr. Hartnett stated. Third quarter A&D sales increased 41.5% year over year. Importantly, the increase was 21.7% excluding sales from VACCO, demonstrating significant expansion from both our legacy commercial and defense markets. A&D gross margins during the quarter were 40.1% or 42.2% on an adjusted basis, and industrial margins were 47.5%, or 47.4% on an adjusted basis. Excluding VACCO, our aerospace and defense gross margins were 43.4% during the period. We are encouraged by the margin progress we have achieved within A&D, driven by increased efficiencies achieved in our plans, coupled with improving pricing on customer contracts. Looking ahead, we expect these benefits to continue to further support margin improvement while recognizing the impact will be gradual as these benefits flow through. On the SG&A line, we had total costs of $77.9 million, or 16.9% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $149.6 million or 32.4% of sales for the quarter. That represents an approximate 22% increase in adjusted EBITDA dollars during the quarter compared to the same period last year. Interest expense for the quarter was $13 million. This was down 8.5% year over year, reflecting the improved leverage position achieved over the last twelve months, coupled with lower interest rates compared to this time last year. We paid off $81 million of debt during the quarter and another $67 million since the end of this third quarter. The tax rate in our adjusted EPS calculation was 22.1% compared to last year's 22.2%. This led to adjusted diluted earnings per share of $3.04, representing growth of 29.9% year over year. Free cash flow in the quarter came in at $99.1 million with conversion of 147% compared to $73 million and 127% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter. As we have noted previously, our capital allocation strategy going forward will remain focused on deleveraging by using the cash that we generate to pay off outstanding debt. Our expectation is to pay off the remainder of the term loan by November 2026. Looking into the fourth quarter, we are guiding revenues of $495 million to $550 million, representing year over year growth of 13.1% to 15.4%. On the gross margin side, we are projecting adjusted gross margins of 45% to 45.25% for the quarter and SG&A as a percentage of sales to be between 16% and 16.25% for the period. With that, operator, please open the call for Q&A. Thank you. Before pressing the star keys. Operator: Our first question is from Kristine Liwag with Morgan Stanley. Please proceed. Kristine Liwag: Hey, good morning, everyone. Rob and Dr. Hartnett, I just wanted to follow up regarding your commentary on the industrial business. So you mentioned that you are seeing strength in aggregate and cement, food and beverage, and warehousing. You have got the new products that you are introducing for fiscal year 2027, and, you know, it sounds like the semiconductor has been doing really well. I was wondering for these, can you provide what is embedded in your 4Q revenue outlook? And also when we go into 2027, how do you think about growth for these end markets? Michael Hartnett: Yeah. Kristine, you know, the way we have our April in terms of what we are forecasting for year over year growth. Maybe slightly conservative on the industrial side. So, you know, we are just expecting more of the same. Obviously, we saw the PMI this week was positive. Rob Sullivan: So if that trend were to continue, that would be a certainly a bullish sign for our business. Kristine Liwag: Okay, great. And then if I could follow up with VACCO, the quiet running valves is a really differentiated technology. I was wondering outside submarines, are there other use cases for this product? Michael Hartnett: Mike, you on? So Kristine, it is Dan Bergeron. For Sargent Aerospace, their products are specifically for submarines. And on the VACCO side, there are some applications for them in space on satellites. Kristine Liwag: Gotcha. Super helpful. And then does it, you know, I mean, just following up on my question, with the improving outlook and also when we think about the order activity that you have faced, is it fair to say that fiscal year 2027 would be a higher growth year for industrial than fiscal year 2026? Michael Hartnett: We are expecting that, Kristine. Yes. Rob Sullivan: Yes. Kristine Liwag: Great. Thank you. Operator: Our next question is from Michael Ciarmoli with Truist Securities. Please proceed. Michael Ciarmoli: This is Alexandra Mandry on for Ciarmoli with Truist Securities. And thanks for taking my question. We have seen that backlog growth has been strong and at all-time highs with that 30% year over year growth. So could you add some more color in terms of order composition and submarket breakdown? And also, what is the relationship with backlog and revenue going forward? Michael Hartnett: Okay. There was a number of questions there. The first question was the composition of the backlog. And I think Rob has that. Yeah. I but I can tell you that over 90% of our backlog is really our A&D market. Most of our industrial business tends to move in and out and does not really get stuck in the backlog. And in terms of the duration, which I think was another part of your question, you know, some of these contracts specifically with Sargent or VACCO can be, you know, multiyear going well beyond the next, you know, twelve to twenty-four months. Michael Ciarmoli: Great. And then I guess, like, can you break down the backlog further between the sub within A&D? Rob Sullivan: You know, I do not have all that detail right in front of me to share with you at this time. You know, we just kind of look at the segment level. But, obviously, with Sargent and VACCO, there is a significant portion of our backlog with the marine products. Michael Ciarmoli: That makes sense. And then I guess just one other one. So on the fiscal 1Q 2026 call, you mentioned using roughly $30 million run rate for VACCO quarterly revenue. So given that, did you divest maybe from any contracts or make any other changes? That would reflect that slight performance discrepancy? Rob Sullivan: I mean, they were at 29 this quarter, so they were pretty close to that $30 million run rate. There is just timing. We are in the middle of integration, and these contracts can be a little bit lumpy quarter to quarter, but I would say we feel pretty good with where that business is operating and are optimistic for the next year. Michael Ciarmoli: Great. Thank you. Operator: Our next question is from Steve Barger with KeyBanc Capital Markets. Please proceed. Steve Barger: Good morning, Dr. Hartnett and Rob. This is Christian Zyla on for Steve Barger. Thanks for taking the questions. Good morning. Just following up on your industrial comments, it does seem like you guys started growing before we actually saw an industrial inflection or at least have been less impacted by recent weakness. But January PMI was strong a few days ago. U.S. Industrial production is inflected positively. Sentiment in short cycle manufacturing seems to be improving. So looking back, what do you think drove your outperformance? And then based on your business and your mix, do you think you can outgrow peers or continue your strength of growth? Michael Hartnett: Well, I think one of the outperformance number one, the Dodge brand is a very strong brand in the industrial marketplace, particularly the industrial MRO marketplace. And that marketplace is pretty short cycle. And as a result of being such short cycle, your product availability needs to be high in order to capture the sale. And so Dodge does an outstanding job at managing their product availability and their hit rates. And stocking of their core products. So I think we are probably industry best in that regard. And so that helps performance when times are tough. There was a second part of your question, Steven. I forget what it was. Steve Barger: Yeah. It was just based on like your current business and mix. Do you think that can continue into calendar 2026? Michael Hartnett: Yeah. It should. I absolutely think it should. You know, we are expecting a stronger industrial economy in '26. Certainly, it started January started off well. Semicon has come back in a significant way, which was dormant for a long period of time, and that is an important sector for us. So yeah, I think we are going to do better on the industrial side. And calendar '26. Steve Barger: That is great. And then just switching gears to Aero and Defense. A couple of quarters ago, you mentioned some synergies on the space side with VACCO and legacy RBC Bearings Incorporated. Just any quick update there and maybe more broadly, any updates on how you are thinking about the broader space industry and what specific markets or applications that you currently are not exposed to or not involved in that could be interesting. Does that require more engineering expertise or capacity? Just any kind of thoughts there. Thank you. Michael Hartnett: Yes. Well, VACCO is a, you know, a company we learn more about every month. And one of the things that we are learning about VACCO is they have a very good product program that services the space market with staples that the space market requires in order to build out satellites. And they have a tremendous brand and following in these staples. And so it is a little bit like the bearing business. If you have a stocking position on these staples, you are liable to get the order. And you are liable to significantly improve your sales. And so we are looking at their product offering and deciding exactly which products we should be stocking. And to some extent, we think if we had those products in stock, people would actually develop or design satellite systems around those products because when it is undefined, it is undefined. And people kind of grow their own spoke. So, we could help guide the industry by making these products more available. And at the same time, improve our sales to the satellite OEMs. And there are quite a few of these people. Steve Barger: That is great. Appreciate the color. Thank you, guys. Operator: Our next question is from Scott Deuschle with Deutsche Bank. Please proceed. Scott Deuschle: Hey, good morning. Dr. Hartnett, can you clarify whether the new Airbus contract included a meaningful shipset content increase on any of your programs? Michael Hartnett: Yeah. Yes. It did. I guess it is definitely, you what do you define as meaningful? I mean, we I am just running through some of the programs, the new programs that we captured in my own mind here on the Airbus contract. So yeah, I would say it is probably increased Airbus content 20%. That sort of thing. Scott Deuschle: Okay. Can you say when that might layer into your revenue? Is there maybe a one to two-year lag as you tool up for that higher content? Or could you see it sooner? Michael Hartnett: We expect to see it in this particular quarter. Scott Deuschle: Okay. That is great. And can you also give us a sense for how large the missile business is today? Relative to defense overall? And would you expect missile revenue growth to outpace commercial aerospace given some of these big contracts Lockheed and Raytheon have gotten? Michael Hartnett: Yeah. I mean, missiles are they are a funny breed. I mean, they are used for all sorts of things. You know, there is the HIMARS and there is the JDAMS, and then those are bombs. And there is the hypersonics and then there is the standard missiles that go into just our part of the F-16 package. And so we are pretty much across the board on all of these programs. I cannot, you know, it is hard to see exactly how big this missile business can be. Particularly when they start building out hypersonics. But you know, a lot of those hypersonics are going to go on the Columbia's and the Virginia's. So we are definitely going to be part of that program in a meaningful way. But I do not have an answer for you with regard to how big the overall missile business can be at RBC Bearings Incorporated versus commercial aircraft. I do not think it is going to be as large anywhere near as large as our commercial aircraft business. Scott Deuschle: Okay. And then Rob, I was wondering if you could pull apart the gross margin guidance by segment for the fourth quarter. In particular, help us understand the rate of sequential gross margin improvement in A&D given that pricing step up? You have coming through? Rob Sullivan: Yeah. I mean, I think one of the best ways to look at it is, you know, we are guiding you to a gross margin that is, you know, at the high end incrementals where we were in Q3. And we would expect aerospace and defense to be growing at a rate faster than industrial. So that should imply that there should be some increment to what we have seen in aerospace and defense. So as I said, it was about 42.2 this quarter. You know, you should see some gradual improvement in this quarter that is getting us to that guidance. So that is how it breaks down. I think industrials should more or less look where they, you know, they have been. You know, I think we have some opportunities, but we have a little bit of headwind just from some absorption challenges that we always have in the third fiscal quarter. With the holidays and just fewer earned hours. But generally speaking, industrial should look like it did in the third quarter, I would expect. Scott Deuschle: Okay. Thank you. Operator: Our next question is from Peter Skibitski with Alembic Global. Please proceed. Peter Skibitski: Just a couple for me. Mike, can you update us or remind us kind of where you guys are at on the production rates right now for the core Boeing and Airbus programs? Michael Hartnett: Oh, yeah. Well, I think Boeing is, you know, they are pushing towards they are at 38 737s a month. Looking to go to 42, looking to go to 50. An overall objective of getting to 60. The exact dates that those occur, I do not have them in front of me, but I do have, you know, in one of my files. But the 60 is not that far off. And then the July is, you know, six as I remember, six going to eight per month. And that is a significant step up for us. We have a plant that is, you know, very dependent upon the 787 shift. And so that is very helpful. And then, you know, the triple seven, triple seven x, seems to be coming into its own. But I think that is only a few ships a month in the distant future. I do not have that number in front of me. Peter Skibitski: Okay. And just are you guys producing kind of in line with where Boeing is? Or are you I think typically, I do not know, six to nine months ahead of their production rates. Is that where you are at right now? Or do you feel like they are maybe working off some inventory? Michael Hartnett: I think, you know, in one of our smaller plants, Boeing is working off some inventory and that sort of turns around in July. And all of the other plants, they are pretty much lockstep with their production rates. Peter Skibitski: Okay. Okay. Got it. One last one for me, maybe for Rob. Hey, Rob, you guys were kind of hot this quarter on the CapEx spend, inflected up a bit. Are you still on is that just timing or are you still on tap to be about 3.5% spend for the full year? And maybe continuing that level into fiscal 2027? Rob Sullivan: Yeah. We have made some strategic investments in some capacity build-outs, but I think we will still end up three and a half less than 4% for the full year. Peter Skibitski: Okay. Got it. Thanks, guys. Operator: Our next question is from Tim Thein with Raymond James. Please proceed. Tim Thein: Great. Thank you. Had two on the Industrial business. On the I think, Rob, you said earlier that what is embedded in the fourth quarter guide is a growth rate for that business. Comparable to what you did, call it 3% in the third, if I heard that correct. I am just curious, is that in terms of your obviously, this is a business a lot harder to predict than A&D in the short term. But I am curious what you have seen kind of in recent months trends and just in terms of order activity. Does that get you to a similar kind of outcome? Or is that I do not just maybe just help us in terms of what you have actually seen in terms of incoming order trends relative to that number? Rob Sullivan: Yeah. I know. We you know, what is built in for the fourth quarter is probably even a little bit below that 3%. But to be honest, the orders have been pretty good. In the recent months. So we feel really comfortable with what we are forecasting. Tim Thein: Okay. And then, just as part of is it as you integrate Dodge, there is a lot of investment that the company has made over the years in terms of making that more of a global business. Where are you in terms of realizing some of those growth initiatives? You highlighted the service center piece earlier. I do not know if that is because obviously, I am not international. But maybe just if there is a way to kind of help us in terms of the underlying growth prospects of Dodge, Yes, that is all. Thank you. Rob Sullivan: Yeah. You know, I think we are still in the middle innings. On that process, and we realized a tremendous amount of synergy on the cost side with Dodge as we have all talked about in the past. I think we are in the middle innings, and then some of those new initiatives being put in place. We have had a lot of great meetings and discussions around that new service center. Some new product initiatives that, you know, that we are in the process of deploying. So I think there are some bright things ahead on that business. Tim Thein: Thank you. Operator: Our next question is from Jordan Lyonnais with Bank of America. Please proceed. Jordan Lyonnais: Hey, good morning. Thank you for taking the question. I wanted to touch on missiles again. If we the frameworks that Lockheed and Raytheon now have, when we start to see those turn into real contracts in production, how are you guys thinking about CapEx or do you need additional investments, to hit these quadruple production rates? Thank you. Michael Hartnett: Well, it is the question you asked is the same question the missile builders ask us. Do you guys have the capacity to take on this much demand? And we do. And so we do have to add some equipment. The equipment that we add is certainly within that 3.5% that Rob has been talking about. So it is modest, and it usually it is just going to use our capital base that we have in place today for the most part to a more effective level. So, yeah, you should not see any surprises on the cap side in order to tool up this business. Jordan Lyonnais: Great. Thank you so much. Operator: Our next question is from Ross Sparenblek with William Blair. Please proceed. Ross Sparenblek: Good morning. Just starting with VACCO, I mean, it looks like some really strong performance on the margin side in the quarter. Can you maybe just help us parse out the success there? If this is one time and if we should expect that to be the largest kind of margin contributor to aerospace and defense gross margins in the fourth quarter? Michael Hartnett: Well, aerospace gross margins in the fourth quarter ought to be pretty good, Ross. And it is a little bit difficult for us to predict how good, but I suspect they are going to be better than they were in the third quarter. You know, given volumes and pricing and sort of the other factors that go into the calculus to make it all work well. So, yeah, those margins will definitely expand. When we put together the outlook for the fourth quarter, you know, it implies a 7.5% organic growth rate in a 14% total growth rate. You know, versus last year's fourth quarter. The 7.5%, you know, sort of balances aircraft and defense out at 10%, whereas, industrial is somewhere less than 5% in order to get to the 7.5%. So we are looking at an aircraft, you know, a little bit north of 10%. Against a third quarter, which was 21.3%. So I think, you know, I think the fourth quarter outlook is very conservative. But we elected to make it conservative because really, for no other reason than to be conservative. So notwithstanding that, I think we expect to have a very strong fourth quarter. We have great market positioning. Strong teams, good order book, it is only a matter of execution. And there is one thing about RBC Bearings Incorporated, we always execute. So I think in the fourth quarter, I think investors are going to be very pleased with the results. Ross Sparenblek: Yeah. And that is pretty clear with the gross margins from VACCO in the quarter. I do not get the impression that it is a lot of operating leverage there. I mean, was it more cost out and what is kind of maybe the revised outlook on where those margins can go? It feels like we should be converging with, you know, consolidated aerospace more aerospace and defense gross margins sooner rather than later. Michael Hartnett: Yeah. I would think those margins are going to, you know, A&D margins are going to chase up towards the industrial margins. I do not know if they will reach them, but they are going to close the gap. Ross Sparenblek: Okay. That is helpful. And then maybe just another one on the industrial business. So it looks like your peers are kind of guiding for low single digits 2026. You maybe help us think through kind of the more sorry? Michael Hartnett: The peers are guiding to what for '26? Ross Sparenblek: Looking like low single digits. Kind of a, you consolidated. And I think a lot of that is kind of cyclicality maybe the heavy machinery, capital goods, and that is the more cyclical piece of your industrial business. Anything to call out in the channel there? I mean, do you think inventory is balanced? And if we do start to see elevated build rates like the OEMs are expecting, how soon should we expect a catch-up there? Michael Hartnett: Yeah. I think our industrial business will be sort of better than the single digits. It will be we are expecting sort of high single digits as worst case. So but we are not, you know, we are not coming out with full-year guidance. We never do. And but we are looking at it. We are pretty optimistic about what is involved in the year ahead. Ross Sparenblek: Alright. Well, thank you very much. Congrats on the quarter, guys. Michael Hartnett: Thank you. Thanks. Operator: With no further questions, I would like to turn the conference back over to Dr. Hartnett for closing remarks. Michael Hartnett: Okay. Well, this concludes our third quarter conference call, and we thank you all for taking the time today to participate and look forward to talking again probably late May. Good day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time.
Operator: Welcome to the Geospace Technologies First Quarter 2026 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rich Kelley, President and Chief Executive Officer. He is joined by Mr. Robert Curda, the company's Chief Financial Officer. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. [Operator Instructions] It is now my pleasure to turn the floor over to Rich Kelley. Sir, you may begin. Richard Kelley: Thank you, Katie. Good morning, and welcome to Geospace Technologies conference call for the first quarter of fiscal year 2026. I am Rich Kelley, the company's Chief Executive Officer and President. I am joined by Robert Curda, the company's Chief Financial Officer. In our prepared remarks, I will provide an overview of the first quarter, and Robert will then follow up with more in-depth commentary on our financial performance as well as an overview of our financials. I will then give some final comments before opening the line for questions. Today's commentary on markets, revenue, planned operations and capital expenditures may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on what we know now, but actual outcomes are affected by uncertainties beyond our control or prediction. Both known and unknown risks can lead to results that differ from what is said or implied today. Some of these risks and uncertainties are discussed in our SEC Form 10-K and 10-Q filings. For convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website, which I invite everyone to browse through and learn more about Geospace, our subsidiaries and our products. Note that today's recorded information is time-sensitive and may not be accurate at the time one listens to the replay. Yesterday, after the market closed, we released our financial results for the period ended December 31, our first quarter of fiscal year 2026. For the 3 months ended December 31, we reported revenue of $25.6 million with a net loss of $9.8 million. This past year was not without its challenges, many of which are reflected in our first quarter performance. We continue to operate in an environment shaped by economic uncertainty. Inflation drove up material costs faster than we could adjust pricing, tariffs impacted margins and supply chain challenges forced us to carry higher inventory costs. With that said, we remain committed to what we can control: serving our customers; running the business efficiently; and making smart long-term decisions that benefit our clients, our shareholders and our employees. Overall, I am encouraged by how our organization performed in this difficult operating environment. We continue to invest wisely in our future, advance our strategic initiatives and leverage innovative technology to further diversify our business. These efforts position us well to drive sustainable growth and long-term value for our shareholders. The Smart Water segment continues to operate in a stable yet increasingly demanding environment. As is typical of the first quarter, revenue was reduced due to seasonal deployment schedules and the timing of municipal government budget cycles. However, long-term demand for water infrastructure, treatment and management services remains strong, driven by population growth, urbanization, aging infrastructure and heightened regulatory and environmental standards. We are expanding the geographic reach of our sales and marketing operations where these pressure points are most acute, where demand criteria exists and our technology offers significant added value. At the same time, the industry faces challenges, including rising operating costs, climate-related variability, evolving compliance requirements and the need for sustained capital investment. These dynamics reinforce the importance of prudent planning, operational discipline and long-term asset stewardship. The environment surrounding our Energy Solutions segment is defined by uncertainty and change. The global energy demand remains resilient, reflecting the essential role that oil and natural gas play in supporting economic activity, industrial production and energy security. We were encouraged by the award of the large Permanent Reservoir Monitoring contract in fiscal year 2025, which reinforces the strength of our capabilities and marketing position. In addition, our Pioneer land node solution continues to drive interest in the market. We have completed several sales and anticipate additional sales later this year. At the same time, the sector faces ongoing volatility driven by geopolitical events, inflationary pressures, regulatory developments and evolving expectations from investors and policymakers. While commodity prices have fluctuated over the past year, these movements reinforce the importance of maintaining a disciplined approach rather than reacting to short-term market signals. The long-term fundamentals of our industry remain intact, but success requires caution, adaptability and operational excellence. Our Intelligent Industrial segment continues to generate steady predictable revenue from our industrial sensors, imaging products and contract manufacturing solutions. As previously announced, we strengthened our security portfolio with the acquisition of GeoVox Security, the exclusive licensee of a human heartbeat detection algorithm developed by Oak Ridge National Labs. Since the acquisition, customer interest and engagement has exceeded Geovox's historical levels, driven largely by the reduced product form factor and the introduction of a monthly subscription model, which simplifies procurement by enabling purchase orders under operating budgets rather than capital expenditures. Combined with the consistent revenue from our long-established industrial product lines, this recurring revenue model positions the Intelligent Industrial segment for growth in 2026 and beyond. Over the past year, we prioritized safe and reliable operations across our company. We manage costs carefully, maintain capital discipline and continue to strengthen our strategic position. Our investment decisions were guided by conservative assumptions and rigorous return criteria, ensuring that capital was deployed where it could generate durable value. Looking ahead, we expect continued uncertainty in global markets. While challenges remain, we believe the company is well positioned due to the quality of our portfolio, the experience and professionalism of our workforce, and our conservative financial framework. We will continue to evaluate opportunities carefully, avoid speculative investments and remain guided by returns, risk management and long-term shareholder value. I will now turn the call over to Robert to provide more detail of our financial performance. Robert Curda: Thanks, Rich. Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during our call this morning. In yesterday's press release for our first quarter ended December 31, 2025, we reported revenue of $25.6 million compared to last year's revenue of $37.2 million. Net loss for the quarter was $9.8 million or $0.76 per diluted share compared to the first quarter of last year's net income of $8.4 million or $0.65 per diluted share. First quarter revenue from the company's Smart Water segment totaled $5.8 million for the 3 months ended December 31, 2025. This compares to $7.3 million in revenue for the same period a year ago, a decrease of 21%. The decrease in revenue is due to lower demand for the company's Hydroconn cable and connector products. The Energy Solutions segment revenue totaled $14.6 million for the 3 months ended December 31, 2025. This compares to $24.3 million in revenue for the same period a year ago, a decrease of 40%. Revenue for the 3 months ended December 31, 2025, included $10.6 million of Pioneer and related equipment for an order to Dawson Geophysical announced in August of 2025. However, in comparison, revenue for the first quarter of the prior year included a $17 million OBX marine wireless product sale. Additionally, the reduction in revenue for the first quarter of fiscal year 2026 was due to lower utilization of the OBX rental fleet. Revenue for the company's Intelligent Industrial segment totaled $5.1 million for the 3-month period ended December 31, 2025. This is compared with $5.6 million for the same year ago period, a decrease of 8%. The decrease in revenue for the 3 months ended December 31, 2025, was primarily due to lower demand for industrial sensor products. This decrease was partially offset by an increase in demand for our contract manufacturing services. As of December 31, 2025, the company had $10 million in cash and cash equivalents. Additionally, the company's working capital was $52.2 million, which includes $25.4 million of trade accounts and financing receivables as of December 31. The company continues to own unencumbered property and real estate in both domestic and international locations. In fiscal year 2026, management anticipates a capital expenditure budget of $5 million and does not anticipate additions to the rental fleet given current market conditions. This concludes my discussion, and I'll turn the call back to Rich. Richard Kelley: Thank you, Robert. This concludes our prepared commentary, and I will now turn the call back to the moderator for any questions from our listeners. Operator: [Operator Instructions] Our first question will come from [ Martin Lorentzon ], private investor. Unknown Attendee: Can you talk about the strategic importance of the heartbeat installed base? Specifically, when should we expect a meaningful portion of those contracts to come up for renewal? And if that installed base were fully subscription-based today, which I realize it's not, but just hypothetically posing, what would be the implied annual recurring revenue for us? Richard Kelley: Thanks for the question, Martin. So I'll break it into two pieces. The first one is that we have reached out to the historical installed base. The prior system was designed to last for many, many years. However, that equipment is aging out. And there is obviously interest in replacing their legacy equipment with the new subscription model. However, that base is pretty diverse and it's international in nature. We've not really run the numbers if we did 100% replacement, knowing that really wasn't possible. So I don't have a good answer for you. But that clearly would be -- there's several hundred installed bases, so you can sort of imply what that might be. That's a good question. Operator: [Operator Instructions] Our next question will come from Bill Dezellem with Tieton Capital. William Dezellem: I have a group of questions. First of all, on the government's -- the U.S. government's website, there is a reference to Homeland Security doing an RFP for persistent surveillance detection system for 15 miles. Did you all bid on that? Richard Kelley: Bill, thanks for the question. So even though that's out there, if you also look, they actually did a direct award. We followed up with that. And this administration in order to expedite contracts has taken the mindset to do direct awards where applicable. And so in the areas of interest, they did direct awards. We were not direct awarded in relation to that. So there is no expectation of a further RFP. William Dezellem: Okay. And then shifting to Petrobras and that contract win. Would you discuss the time line for the deployment of that and how you anticipate revenues will be reflected over time? Richard Kelley: Do you want to speak to the revenue recognition? Robert Curda: The revenue recognition will be an overtime model, which will be very similar in nature to percentage completion. So as we accumulate cost against what our total anticipated cost, we'll recognize revenue proportionately. Richard Kelley: And we anticipate recognizing revenue for the first time in Q3. Robert Curda: Yes, beginning in Q3. Richard Kelley: And that project is slated to -- as you remember, Bill, in prior discussions, the goods contract, which is our portion of that, is expected to be completed in Q1 of 2027. So we'll have revenue recognition through that. And then on the actual installation, that's the consortium that we're partnered with in Brazil, and there'll be a small other portion of revenue recognition later in 2027. William Dezellem: And so as we shift into Q3, what is your anticipated revenue level that you would experience in that quarter and then in Q4? Richard Kelley: We're not really speaking in actuals at this time, Bill. But if you can imagine, I mean, the portion of the contract, if you divided it over the next 3 quarters, roughly, it will be slightly lower in the first quarter as we build up production capacity, full capacity in Q4 going into Q1 and then downgrading at the end of Q1. So you can think about the revenue curve being kind of a curve versus a fixed number. William Dezellem: Got it. And literally, you do think it will be over 3 quarters that this will be recognized? Richard Kelley: The expectation is that we ship this equipment out in Q1. So yes, I mean, the goods portion should be completed in Q1, possibly depending on the customer's final schedule in Q2 of 2027. Robert Curda: We'll continue to recognize revenue on the services contract as services are performed... Richard Kelley: Afterwards. Robert Curda: Afterwards, yes. William Dezellem: And Robert, roughly how large will that be? Richard Kelley: The total value of the contract, which we've announced in the past is in the $90-ish million range. Robert Curda: With the vast majority... Richard Kelley: We've never announced what the difference is between the goods and the services, Bill. Robert Curda: The services is a much more insignificant portion in comparison to the goods. William Dezellem: Okay. That is helpful. And then let's shift, if we could, to GeoVox. Would you provide a detailed update on the deployments that you have experienced to date and on the pipeline of the -- on essentially the pipeline? Richard Kelley: So we've just started shipping the units this quarter. So we'll have revenue recognition in this quarter, which we'll announce at the next call, the next release. We anticipate a couple of hundred units in this year and then that building over the subsequent periods. There is a tremendous amount of interest, both domestically and internationally in that. William Dezellem: And so if you think about the pipeline, what's the magnitude or what's the size of it? You mentioned you have a couple of hundred units that will be deployed, it sounds like, starting next quarter? Richard Kelley: The first deliveries are this quarter, ramping up into next quarter. As far as the pipe, I mean, we anticipate -- we've talked about this in the past. I mean, the overall market size is in the thousands, it's not tens of thousands. And so we anticipate over the next couple of years, reaching a saturable -- close to saturable level. William Dezellem: And is the market continuing to be prisons and jails, essentially incarceration facilities? Richard Kelley: Short term, yes. And then, of course, border crossings, and then we are trying to expand into secured sites like nuclear power facilities, power transfer stations where you want to protect the egress and ingress on the site. Robert Curda: Yes, that's really the new market we'll be moving towards as we develop that product line. William Dezellem: And relative to the border, where does the Border Patrol's interest lie in this product? And how large could that be? Richard Kelley: They're definitely interested in the technology. I mean they utilize a couple of different technologies today. They're obviously looking at ways to make it more efficient and effective. As we've said in the past, the number of trucks that are checked coming across the border are in the single percentiles. They would obviously like to increase that. And they do like the efficiency as far as the timeliness of the system. There are 300-ish border crossing points in the U.S. alone. So if you talk about multiple units on each site to build -- check multiple trucks, it could be 1,000-plus units for CBP. William Dezellem: That's helpful. And then two additional questions. You did increase the contingent consideration on one business here this quarter by, I think, $196,000. Which business was that? Robert Curda: It's related to Heartbeat Detector. William Dezellem: Okay. And then lastly, what's the prospects for the rental fleet seeing activity levels pick up a little more on the deployment front? Richard Kelley: So overall, the ocean bottom node business as of last year, expected this year is still to be flattish. We have seen a number of requests for quotations going into the summer season, but none of those are developed into orders yet. So the volume has increased as far as requesting information, but we've not seen any actual impact on orders yet. Operator: [Operator Instructions] We do have a follow-up from Martin Lorentzon. Unknown Attendee: Just on PRM, could you disclose the number of parties you have ongoing discussions with, excluding Petrobras? Richard Kelley: No, due to confidentiality, we're not able to discuss which parties. There's a couple of other companies we're talking to, but we're not allowed to disclose those discussions at this time. Unknown Attendee: And just a number of those? Is it one additional party? Or is it two or three, without going into... Robert Curda: It's multiple. Richard Kelley: I would say it's multiple, Martin. Operator: At this time, this concludes our question-and-answer session. I'd now like to turn the meeting back over to management for any final or closing remarks. Richard Kelley: Thank you, Katie, and thanks to all of you who joined our call today. We look forward to speaking with you again on our conference call for the second quarter of fiscal year 2026. Thank you, and have a good day. Operator: Thank you. That brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Welcome to the ScanSource, Inc. quarterly earnings conference call. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mary M. Gentry, Senior Vice President Finance and Treasurer. Please go ahead. Mary M. Gentry: Good morning, and thank you for joining us. Our call will include prepared remarks from Michael L. Baur, our Chair and CEO, and Stephen T. Jones, our Chief Financial Officer. We will review our operating results for the quarter and then take your questions. We posted an earnings infographic that accompanies our comments and webcast in the Investor Relations section of our website. As you know, certain statements in our press release, infographic, and on this call are forward-looking statements and subject to risks and uncertainties that could cause actual results to differ materially from expectations. These risks and uncertainties include the factors identified in our earnings release and in our Form 10-Ks for the year ended June 30, 2025, and in our subsequent reports on Form 10-Q. Forward-looking statements represent our views only as of today, and ScanSource, Inc. disclaims any duty to update these statements except as required by law. During our call, we will discuss both GAAP and non-GAAP results and have provided reconciliations on our website in our Form 8-Ks filed earlier today. I'll now turn the call over to Mike. Michael L. Baur: Thanks, Mary, and thanks, everyone, for joining us today. In the second quarter, we generated strong free cash flow and delivered net sales and gross profit growth in both segments. However, our profitability was negatively impacted due to some unexpected expenses contained in the quarter. This resulted in declines in both gross profit and EBITDA margins compared to our very strong first quarter. In Q2, we had organic net sales growth for both segments, though slower than expected for our Specialty Technology Solutions segment. Today, we're excited to announce the launching of a new converged communication sales team at ScanSource, Inc. This communications team unifies the ScanSource communications products and the Intelisys products and services to fully embrace the accelerating convergence of hardware, cloud, and customer experience technologies. We believe end users are embracing cloud-based UCaaS and CX platforms, and this is a growth opportunity for our channel partners. We're bringing together the expertise of our people to form one unified sales team. A team with deep knowledge of communications products and Intelisys cloud-based CX solutions. By giving this one team responsibility for both the hardware and recurring cloud business for these partners, we are strengthening partner alignment, expanding our share of wallet, and positioning ScanSource, Inc. at the center of this converging ecosystem. In our Intelisys and advisory segment, our investment strategy is driving growth and momentum in new orders. We make these investments ahead of the revenue understanding that it typically takes about a year for new orders to convert into billings. As a result, we're seeing our new orders increase at a faster rate than our current revenue from billings. New investments for Intelisys include building out our new Converge communication sales team, which is designed to further accelerate growth and capture new end-user solution opportunities. As we move ahead, our strategy centers on helping our channel partners deliver innovative converged solutions driving both organic net sales and free cash flow through solid execution of our strategic plan. Our team is focused on profitable growth, executing our strategy, and making progress toward our three-year strategic goals. I'll now turn the call over to Steve to take you through our financial results and outlook for fiscal year 2026. Stephen T. Jones: Thanks, Mike. Q2 net sales grew 3% year over year in both segments. And gross profits increased 1% year over year. Profits for the quarter were negatively impacted by some higher period expenses in our Specialty Technology Solutions segment impacting both COGS and SG&A. We delivered strong free cash flow in the quarter and closed on a new five-year credit facility that will support our strategic objectives and capital priorities. Turning to our segments, I'll start with our Specialty Technology Solutions segment. Net sales increased 3% year over year and 4% quarter over quarter. Gross profits increased 1% year over year. Higher period expenses, including freight cost and mix, impacted gross profit margins by approximately 30 basis points. Excluding these costs, gross profit growth would have been in line with the revenue growth for the segment. The percent of gross profit from recurring revenues grew to approximately 18% for the segment and includes positive contributions from the acquisition of Advantix and DataZoom. The Specialty Technology Solutions segment adjusted EBITDA margin was 2.8%. For the quarter, the impact on segment adjusted EBITDA margin from higher period expenses is approximately 60 basis points. In our Intelisys and Advisory segment, net sales increased 3% year over year, in line with our expectations. Annual net billings increased to approximately $2.85 billion. Gross profits increased 3% year over year, while adjusted EBITDA margin for the segment was 41%. Going a bit deeper on our balance sheet and cash flows. We ended Q2 with approximately $83 million in cash and a net debt leverage ratio of approximately zero on a trailing twelve-month adjusted EBITDA basis. Adjusted ROIC was 11.9% for the quarter and 13.3% for the year. Share repurchases for the quarter totaled $18 million and we have $179 million remaining under our share repurchase authorization. We continue to have a strong balance sheet and are well-positioned to execute our strategic priorities and achieve our three-year goals. Our three-year goals focus on growing the company's gross profit contributions from recurring streams, expanding our profitability, delivering strong free cash flow, and disciplined capital deployment. You can find our goals in the infographic and our investor presentation in the investors section of our website. We are pleased with the contribution from our acquisitions, including the most recent acquisition of DataZoom and what they bring to our channel capabilities and our strategic plan. We continue to explore acquisition opportunities that could expand our capabilities and help us drive additional value across our partner ecosystem. Our capital allocation priorities also include continued share repurchases. We are confident in our business model and are optimistic for growth in the second half of our fiscal year. For the first half of our fiscal year, our gross profit margin was close to 14%, and our adjusted EBITDA margin was over 4.6%. We are updating our full-year projections based on our first-half performance. We now believe that full-year revenue will be in the range of $3 billion to $3.1 billion and adjusted EBITDA will be in the range of between $140 million and $150 million. For annual free cash flow, we maintain our expectations of at least $80 million. Our expectations include an increase in the second half of large deals, as well as investment in our Intelisys and Advisory segment to drive new order growth. We'll now open it up for questions. Operator: Ladies and gentlemen, if you have a question or comment at this time, please press 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. I'm sorry. Simply press 11 again. Again, if you have a question or comment, please press 11 on your telephone keypad. Our first question or comment comes from the line of Gregory John Burns from Sidoti. Mr. Burns, your line is open. Gregory John Burns: Morning. Could you just give us a little bit more color maybe on the period cost that you highlighted and, you know, whether or not you expect that to continue into the second half of the year, or are they just gonna remain kind of localized into this quarter? Stephen T. Jones: Hi. Good morning, Greg. This is Steve. I'll take that question. Yeah. You know, in our 10-Q, we outlined some of the costs both in our COGS and in our SG&A. You know, in the COGS piece of it, it's really around mix and freight expense in the quarter. That pushed our margins down. We also called out some bad debt expense driven by a customer-specific reserve that we took. And we closely manage our receivables, and we have a very healthy receivables portfolio. So when we look at that, we do think that's more period-related. Gregory John Burns: Okay. And I guess you mentioned also a little bit slower than expected growth in the technology segment. Could you just maybe give us a little bit more color on where specifically the lower growth was coming from or, you know, maybe some detail around product categories that might be helpful for us to better understand the dynamics? Michael L. Baur: Hey, Greg. Good morning. It's Mike. I think what I would say about that is the large deals are really part of the story here. And maybe that's where I'll talk about it. We saw large deals get broken up into smaller pieces. And so as they're rolling out, they're not happening normally. And we saw this even last quarter. And so I believe that's the real story here is that we've got a slowdown in large deals that are being invoiced in the quarter. And we see that by the way, we see that as part of the challenge for the hardware business as we look out. And implicit in our adjusted guidance is that we do need the large deals to resume. And we believe that that will happen. Gregory John Burns: Okay. Is there any specific reason why you have more confidence in that? Are you seeing anything specifically? Anything you're hearing from your customers? Michael L. Baur: Well, it is based on information. We just had last week, our sales kickoff for our internal specialty sales teams. So we spent a lot of time talking to our sales teams about what they're hearing from partners, from suppliers. So, yeah, it's based on surveys of our partner community. And what they believe as they look at their calendar year. And many of these partners, as we all know, you know, they don't have large, long pipelines. So they generally have very good shorter-term information. And we believe that the information we're getting suggests the large deals will continue to happen. But, again, they may be broken up over the quarter, so this is really more of a for the year, we feel good about it. Q2, we had expected more than we actually booked. Gregory John Burns: Okay. Alright. Great. Thank you. Operator: Yep. Our next question or comment comes from the line of Keith Michael Housum from Northcoast Research. Mr. Housum, your line is now open. Keith Michael Housum: Great. Thank you. Can you guys hear me okay? Michael L. Baur: Keith, we got you. Keith Michael Housum: Okay. Great. Great. I appreciate it. Hey. Mike. I understand the memory issue that's affecting the wireless technology world. On the price side, it may not impact you guys so much because you guys know, pretty much pass through the prices. But into what are you hearing from the customers in terms of are you seeing prices increasing now? And, you know, any concerns that you have that perhaps should be some of the supply shortage at some point through not only the second half of your fiscal year, but throughout all 2026. Michael L. Baur: Yeah. Good morning, Keith. We talked about that for sure is the suppliers are indicating that the memory issue will affect them. They don't know, you know, what's the near-term impact versus long-term. And some of it is a pricing issue, as you know, and some of it potentially could be a shortage issue. Right? And since so many technology companies use the same memory sources, I think that'll be a challenge for some of our suppliers. So we certainly think that we're gonna be in the same position as everyone else in the channel to manage through this. But right now, there's just a lack of visibility as to the near-term impact. So we've adjusted our guidance knowing what we know today about the potential for that to happen. And right now, it's not significant in our guidance. Okay? Keith Michael Housum: Okay. Appreciate that. I'm gonna ask you to look into your crystal ball a little bit here as you talk about the Intelisys business. You guys have been restructuring that business now for a few quarters. Are we thinking the 2026, the calendar year, we should see Intelisys sales start to accelerate from the current levels? Michael L. Baur: Well, I would say this, Keith. We probably didn't restructure as much as we added additional sales capabilities. That's the way I would frame it. And what we expected from our sales teams when we brought on Ken Mills, which will be over a year and a half ago now. So for sure, we believe we had to get more aggressive at acquiring new customers and focusing on new orders and not just at the existing book of business that many of our partners had. And I think part of it too is we went through a couple of years ago an aging of the Intelisys partner community. We had many of the partners, as you recall, that were selling their books of business, that were selling their agency, and we kinda saw the peak of that, I believe, a year and a half ago and I believe that has diminished to some extent. And so I believe even the partners that have been around a long time are now focused more on new orders. And I believe the new order growth that we referenced that is growing faster than our billings is indicative of what we'll see next year. Already in '26, we're benefiting from what Ken put in place a year ago. And I think that's why we're starting to see momentum. And I expect it will continue to grow at a faster rate than new orders. Yes. Keith Michael Housum: Okay. And in Brazil, I see it was down 9% organic this quarter. Anything new happening there? I know, you a year or two ago, we lost Broadcom, but I was kind of surprised by how much that declined year over year. Michael L. Baur: Yeah. I don't think there's anything specific we can call out, but certainly, we wish that market would recover. It's a market condition that we're in with all the other distributors in Brazil. So from a market perspective, we feel like our management team is managing and pulling the levers that are under their control. Whether that's managing expenses or whether that's managing inventories and bringing on new suppliers to replace the supplier that we lost. So I think the management team is operating at a very high level. But it's a challenging market right now for the distribution segment in Brazil. Keith Michael Housum: Yeah. That's a higher than company average gross profits, correct, in Brazil? Michael L. Baur: Yes. That's right. And I would say, historically, don't know how much we talked about it, Steve, but it would drop to the bottom line as well. It would be a higher profitability, Steve. Stephen T. Jones: Yeah. That's right, Keith. This is Steve. I would say that a lot of their GP flows through. They manage cost very well, and a lot of that does flow through. Keith Michael Housum: That's certainly not helping your gross profit line either. Michael L. Baur: That's right. Correct. Keith Michael Housum: Okay. And then maybe help me understand a little bit more in terms of the launch that you did today in terms of one communications team. Perhaps can you describe how it was operating previously and how you how that's gonna be different going forward? Michael L. Baur: Yeah. Sure. So we've been trying to figure this out for a while as to how do we have a partner. Let's say it's a traditional communications partner, or it might be a Mitel partner, Keith, or ShoreTel or Avaya, any of our communications heavy partners that were traditionally selling premise-based equipment and maybe not selling cloud yet or maybe they're selling cloud. But the sales team at ScanSource, Inc. under specialty was only selling on the hardware. And so if a Mitel partner wanted to buy some connectivity products or services or solutions, the ScanSource, Inc. specialty seller would have to pass that on as a lead to someone on the Intelisys team. So now we're gonna have one team that can service that partner that will sell the Intelisys products and the specialty hardware products to the same partner. We're gonna make it much easier for the partner. It's also gonna give our communication hardware sellers a lot more to sell to their partners. So I think the partner community will love this idea. We're gonna enable them, gonna make it easier, we believe this is gonna create new solutions from suppliers that will see this as a very attractive way to reach more of the VAR community. Keith Michael Housum: Okay. How are we gonna see that in the income statement going forward? Are you gonna move some of the communications down to the Intelisys segment? Stephen T. Jones: No. Hey, Keith. This is Steve. Now we'll wind up with the same reporting in our segment. That's a segment reporting discussion. This is more of a management alignment and a go-to-market discussion. Michael L. Baur: Yes. Because, again, let me finish that part of the description. I left out the there'll be Intelisys employees that will be part of this virtual team, and they will sell hardware now. And so if you've got an Intelisys agent that's working with an Intelisys salesperson that reports into the Intelisys management team, they'll now have the right model so they can sell hardware. Whereas in the past, the Intelisys employee here at ScanSource, Inc. would flip that lead, the hardware, over to the hardware guys. And they just wasn't working. There was not the right incentives and opportunities. So that's what's changing. Keith Michael Housum: Okay. Got it. Thanks, guys. Good luck. Michael L. Baur: Yeah. Thank you. Thanks, Keith. Operator: Our next question or comment comes from the line of Guy Drummond Hardwick from Barclays. Your line is open. Guy Drummond Hardwick: Wondering how much of the lowering of guidance is the absence of large deals versus the potential shortages of product that you mentioned? Michael L. Baur: Hey, Guy. It's Mike. Yeah. I think our view right now, I think this is what I was trying to say earlier, is our guidance is relative to large deals, not to shortages. So we're not in our guidance indicating that there's going to be a shortage impact on our guidance. That's not what we're suggesting today. Guy Drummond Hardwick: Okay. And just as a follow-up, could you just kind of update us on the kind of competitive environment in the TSD market? I mean, look. Looks like the headcount additions of your competitors have already slowed quite sharply, and it's pretty much flat or down for the last six months. So just wondering have things improved? Have you noticed any improvements in terms of the market or not yet? Michael L. Baur: Well, I think the overall TSD space is very competitive and has been, as you know, for a while. We believe that there have been some changes in their approach to how they're gonna grow their business organically. Because we know that from a competitive standpoint, there's been a lot of acquisitive activity from the TSDs. And you've not seen that, of course, from Intelisys, from ScanSource, Inc. So we believe that has come to a has slowed down. And now the yeah. I think the opportunity and the pressure on all the TSDs to grow organically. That's why you hear us talking about new order growth and that's what we believe is the right metric because that will show that we can obviously, in some cases, take market share from the other TSDs, and that's reflected in the new order growth. But it also it also talks about improving the value proposition for the TSD both in the eyes of the partner, who's the seller, but also in the eyes of the suppliers. Because the suppliers they need organic growth to happen, not just share shift among the TSDs. So we're very focused on organic growth. And we believe that you will see a change in the market share between all the TSDs over the next year as we execute on our strategy. Guy Drummond Hardwick: Thank you. Michael L. Baur: You bet. Operator: Again, ladies and gentlemen, if you have a question or comment at this time, please press 11 on your telephone keypad. Our next question or comment comes from the line of Adam Tyler Tindle from Raymond James. Mr. Tindle, your line is open. Adam Tyler Tindle: Mike, just wanted to take a step back. I know we've gone through a lot of detail in this call, but if we take a step back and think we're two quarters into the fiscal year now, you're reducing guidance. If you were to rewind to your initial fiscal 2026 plan, what would be, you know, sort of the biggest variance areas versus your expectations entering this year? I hear on the large deals. I just wanna push back. I mean, we would think that would be just kind of more of a timing issue throughout the course of the year. So if you were to kinda, you know, sit yourself back in the seat when you were entering this year, versus now? What are kind of the key areas that maybe have been a little bit disappointing relative to your expectations that caused the reduction in guidance? Michael L. Baur: Yeah. Yeah. Good morning, Adam. Well, let me go back to something I used to say a lot is that our business is very hard to forecast. Orders come in today. They go out today. This is in the specialty business, which is where the challenge has been. So no news there that that's how that business has always worked. Very difficult to forecast what we're gonna do beyond today. We get orders in today. We ship today. Right? We don't work off of a backlog traditionally. We get information on large deals that will happen there's no guarantees when they'll actually ship. So if I go back to and to answer your question directly, Adam, if I go back and remember what we were saying back in August, we were saying, like the year before, this is gonna be a second half loaded year. That we believe going and give an annual guidance is again, not something that I enjoy doing, but we did. Because we have for the last few years. And so give an annual guidance back in August with the visibility I have today, I would have said, well, we probably should have forecasted the first half a little lower. Expecting the second half to be bigger. And what we're trying to say now is second half is gonna show growth. And the second in this guidance that you'll see, like, at the midpoint, that's gonna show that we're gonna have a modest growth. Year over year for the second half. For the year, that's not a great number, but if we can, in the second half, show growth, we believe we'll then build momentum going into '27. And that's the way we've always built our business. Adam Tyler Tindle: Yep. I understand. Trust me. We I think we can fully empathize with the difficulty in forecasting. I think you're telling my boss that I need a raise. Michael L. Baur: Exactly. Yeah. Exactly. Exactly. Adam Tyler Tindle: Steve, I wanted to ask on the magnitude of the cut. I mean, I think it makes a lot of sense for investors to kinda take the medicine now and, you know, rather than set expectations to climb back for the year, let's just go ahead and reduce. But on the magnitude, understand you don't guide, you know, on a quarterly basis necessarily, but you know, relative to, I think, a lot of our expectations in the quarter this guidance was reduced by kinda more than that annualized miss quote unquote. How did you think about, you know, the magnitude of the guidance reduction? And I also noticed that you've I think you maintained free cash flow. So maybe touch on how you're able to do that. Stephen T. Jones: Yeah. Good morning, Adam. Yeah. A couple of things. When we look at the second half, we look at it a couple of ways. Right? We're trying to take the information that we have from our customer base, what they're working on, and then we put that against really, if you look back over our years, and you look at first half versus second half, performance, and I'm thinking about the last two years, we've been kinda 49, 51, fifty fifty. So that's how we get confidence in this the second half looks a whole lot like the first half, a little bit of growth that we see coming because, again, we're thinking large deals are going to have to return. This to your point before, it's been more of a push out than it is a loss. And so that's what's really guiding our expectations. On the free cash flow, I think this comes back to the way we've changed our business model. And I confidence we have in our business model. This is what should happen if we're growing in that low single digits rate. So we have a lot of confidence in our team's ability to deliver that at least $80 million in free cash flow, which has a really good cash yield for us. Adam Tyler Tindle: Yep. That makes sense. And you know I'm gonna ask about capital allocation following that question, of course. Mike, I mean, you know, obviously, you know, one day is not necessarily a trend, but the stock's now hovering below book value. You know, does this so, you know, obviously, you're gonna maintain free cash flow for the year, as Steve just mentioned, so you have some, you know, cash to work with. How are you thinking about priorities? Around capital allocation? And does this, you know, perhaps elevate share repurchase? Michael L. Baur: I think what we'd like to do as a management team and at our board level is talk about what are we trying to do on a three-year basis. And our three-year goals, we believe, are still intact. We said that in our call. And we believe if you look at our three-year goals, we believe we can have growth. And from a gross profit perspective, which is where we've been saying we gotta focus on gross profit growth. To do that, we have to have some top-line help. There's no doubt about it. And we believe that for us, there's a combination of organic and inorganic that needs to happen on the growth side. At the same time, as we've said, I believe we said our share repurchase authorization is still $179 million. And in the first half of this year, we bought about $40 million in shares, Steve. Is that right? Stephen T. Jones: Right. Michael L. Baur: So we believe that's indicative of our strategy, that our strategy hasn't changed. This quarter. We hope our investors don't believe our strategy has changed. We hate to deliver news that's not what we expected. But, again, if we think about this is a quarter, this isn't the year, and we want to be fair, though, to everyone about our expectations for the second half, and make sure that we're not oversteering. We believe we're being we have a strong history of doing our best to give our investors an accurate, clear view of what we know today. But our goal is let's keep our three-year strategic goals in mind. We believe those are very strong. And, again, as we look at the second half, based on our annual guidance that we've adjusted to, that's still a very strong EBITDA margin for the year. That'll come in consistent with what we're doing from a three-year goal perspective. And I think that's the important part. Just look at the metrics that we'll still deliver. This is a very strong company. Excellent balance sheet, strong profitability. Adam Tyler Tindle: Got it. I'm gonna do one more. I think I might be last in the queue. So on Intelisys, I did wanna ask Mike. The dynamic of, I think, billings lagging new orders was something that sounded a little bit newer. I just wanted you to, you know, maybe double click and help explain that dynamic. I mean, you've been operating in Intelisys for many years now. I could have missed it, but I don't recall hearing that dynamic much. Over the past number of years. So maybe just kinda double click on what that was and what changed. To drive that. Steve, is there any way to and this is probably a difficult one, but to quantify that, the impact that that's having and maybe when that, like, catches up, how, you know, how we think about it in the financial statements. Michael L. Baur: Well, the reason we started talking about new order growth was I'm a think back now. It's probably three years ago, Adam, that we started talking about this margin pressure, if you recall. Margin pressure that was happening at Intelisys and in the TSD community as all the other TSDs started bringing in new ownership PE investments. And there was a market share land grab, which drove margins down for Intelisys, which drove down our revenue growth. Right? And we would start talking as you know about our revenues, and we talked about end-user billings. And, generally, the end-user billings were really, at the end of the day, a great metric for is this market growing. Because we would have margin pressure that in a year or a quarter would reduce our growth because of just margin compression. But it looked like the TAM was slowing down. The opportunity was slowing down. That wasn't the case. So we decided a year ago that we needed to start being able to talk about new orders. If we can have a and we decided not to give a number because we're in a competitive market against other private companies. So we believe new orders growth faster than our revenues is indicative of what will come. And so this delay that happens because if we close an order today, it may not get billed for six to twelve months from now, maybe even fifteen months. And so it's just focused, Adam, on new orders that you won't see in the quarter that are indicative of future revenues. And that's why this pivot to that is important that we communicate it. Stephen T. Jones: Yeah. Adam, this is Steve. I'll take the second half of that question. The impossible one to answer. Right? Is how do we know? Well, we believe, and I think the message to our investors is as we invest, we're looking for the right ROI. On those investments. So if you're hearing us continue to invest in Intelisys and in that order growth, we believe that there's a good ROI on that because this all has to hold together with our three-year goals and the goals that we've laid out and we're committed to. That's the best way to think about is this are we still confident that we're continuing to accelerate the new order growth? If we're still investing in there, our expectation is it's a good ROI. And we continue to do it. Adam Tyler Tindle: Very helpful. Thanks. Look forward to seeing you next month at our conference. Michael L. Baur: Yeah. Thanks, Adam. Operator: Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Stephen T. Jones for any closing remarks. Stephen T. Jones: Yeah. Thank you, and thank you for joining us today. We expect to hold our next conference call to discuss March 31 quarterly results on Thursday, May 7, 2026, at approximately 10:30 AM. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
Operator: Good morning, and welcome to Blue Owl Capital's 2025 Q4 earnings call. I'd like to advise all participants that this conference call is being recorded. I will now turn the call over to Ann Dai, Head of Investor Relations for Blue Owl Capital. Ann Dai: Thanks, Operator, and good morning to everyone. Joining me today are Marc Lipschultz, our Co-Chief Executive Officer, and Alan Kirshenbaum, our Chief Financial Officer. I'd like to remind our listeners that remarks made during the call may contain forward-looking statements which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described from time to time in Blue Owl Capital's filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements. We'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the shareholders section of our website at blueowl.com. Please note that nothing on this call constitutes an offer to sell or to solicit an offer to purchase an interest in any Blue Owl fund. This morning, we issued our financial results for the 2025 reporting period, with fee-related earnings (FRE) of $0.27 per share and distributable earnings (DE) of $0.24 per share. For the full year 2025, we reported FRE of $0.96 per share and DE of $0.84 per share. We declared a dividend of $0.25 per share for the fourth quarter, payable on March 2 to holders of record as of February 20. We also announced an annual fixed dividend of $0.92 for 2026, or $0.23 per quarter, starting with our first quarter 2026 earnings. During the call today, we'll be referring to the earnings presentation which we posted to our website this morning, so please have that on hand to follow along. With that, I'd like to turn the call over to Marc. Marc Lipschultz: Great. Thank you so much, Ann. Blue Owl experienced significant growth in 2025, measured by record fundraising across an increasingly diversified set of strategies globally. We raised $56 billion of capital across the business, including over $17 billion during the fourth quarter, with record years for both our institutional and private wealth channels. During the fourth quarter, we crossed $300 billion of AUM, another milestone for the firm, and we are seeing robust investor demand and investment pipelines across the business as we enter 2026. Our ability to drive strong results for shareholders starts with investment performance, and we continue to deliver for our clients. Investment performance matters greatly to us as it relates to long-term growth for Blue Owl, and if we deliver great results, business growth will follow. Performance of funds we manage remains strong, supported by our focus on generating attractive returns to income, leveraging our scale to create opportunities that offer attractive returns per unit of risk, and protecting the downside with investment structure and rigorous underwriting. Our net lease strategy generated gross returns of over 13% in 2025, and our OREP product net return was approximately 11%, meaningfully outperforming the FTSE REIT index total return of 2.3% due to our differentiated investment strategy. Fundraising for OREP has accelerated with inflows up 11% quarter over quarter and 55% year over year, making OREP the top net fundraiser in non-traded REITs in 2025. On a fully realized basis, our net lease flagship funds have generated a net IRR of 24% since inception. During the fourth quarter, we sold the final assets of our Digital Infrastructure Fund I for a realized net IRR of approximately 11.5%. Direct lending net returns were 8.7% for the year, compared to the leveraged loan index return of 5.9%. Our continuously offered BDCs had continued strong performance, with net returns of 7.4% for OCIC and 8.4% for OTIC. Our GP stakes funds continued to generate very strong IRRs with a significant amount driven by cash yield. In credit, the fourth quarter was marked by a high level of debate and discussion about the health of the private credit markets. The fact of the matter is the trends we observed within Blue Owl's credit portfolios remained strong and did not align with the headlines or investor fears. The sentiment seems to be echoed broadly by other asset managers and banks alike across broader credit markets. As of the fourth quarter, we continue to see resilient KPIs across our direct lending strategy, with healthy underlying portfolio company growth and no meaningful movement in our metrics such as watch list, LTVs, amendment requests, or revolver draws. On average, our borrowers have delivered high single-digit revenue growth and low teens EBITDA growth year over year. Specifically, in our tech lending portfolio, this growth has been even higher in the low to mid-teens range on average. Notably, since the launch of ChatGPT in November 2022, which is widely regarded as a turning point in AI, borrowers in our tech portfolio have achieved cumulative weighted average revenue growth of nearly 40% and cumulative weighted average EBITDA growth of nearly 50% through September. Our average annualized net realized loss rate has been eight basis points, encompassing realized losses and gains. This remains well below the industry average. Remember, this is not a zero-loss strategy. We have hundreds of borrowers, and we will have losses in the portfolio. No one can lend money without having losses. The expectation of our investors is that we will rigorously underwrite our deals to minimize the bulk and maximize recoveries over time, which will drive attractive total returns as we have done very well. In alternative credit, our portfolios similarly continue to perform as expected, putting up gross returns of 16.6% for the year with no meaningful signs of stress. From a fundraising perspective, industry non-traded BDCs experienced a slowdown in capital raising and elevated redemptions during the fourth quarter. This is in line with what we have seen in prior market environments with heightened volatility and fear. We saw this during COVID, with the Silicon Valley Bank failure, and after tariffs were announced last year. We've always managed our funds with a sharp focus on leverage and liquidity, and during the fourth quarter, we met all investor requests for tenders as we have every quarter since inception. Our view is that while sentiment for a particular product, strategy, or asset class will fluctuate, strong risk-adjusted performance is the only thing that matters over the intermediate and long term. Our products have performed very well in this regard across a wide range of economic and market environments. Despite the headwinds, we had a record quarter for equity raised in private wealth, with about $5 billion raised during the fourth quarter and over $17 billion for the full year. We are now beginning to see the synergies of the acquisitions we made over the past eighteen months. During the fourth quarter, we held a $1.7 billion first close on our digital infrastructure evergreen product, ODiT, which followed an $850 million close earlier in the year on our alternative credit interval fund, LLCX, which has already reached $1.8 billion of AUM in just three quarters. In 2025, equity capital raised across our five wealth-dedicated evergreen products totaled $15.4 billion for the year, which represents 66% of the beginning of the period fee-paying AUM in these products despite substantial market shocks earlier in the year and near-term headwinds in the non-traded BDCs. All this is to say, we have expanded and diversified our private wealth footprint substantially, and we continue to feel that we are just scratching the surface of this market. Moving to our institutional business, we likewise benefited from ongoing diversification and the investments we have made in global distribution. We saw record institutional equity fundraises of $25 billion in 2025, up 80% year over year and constituting about 60% of total equity raised in 2025. This includes about $5 billion raised for direct lending across funds and SMAs and over $6.5 billion raised for our net lease strategy across our global, European, and co-invest vehicles. Since 2020, the average time to market for our real estate fund has nearly doubled to more than two years, with roughly half of those funds also falling short of their fundraising targets, highlighting the broader challenges in this asset class. Blue Owl's net lease strategy bucked these trends, with our prior flagship fund, net lease fund six, holding a final close in 2024 above its hard cap having been in market for just sixteen months. The momentum has continued into our current vintage, which remains in market and has raised 60% of its hard cap in just three quarters. And now we have very complementary capabilities in digital infrastructure, which is similarly focused on generating attractive income-driven returns through a net lease structure, working with tenants that have some of the best credit ratings in the world. We think we have a very unique offering for investors in digital infrastructure, a pure play that will benefit from the demand for hyperscalers for data centers while remaining focused on principal preservation. And finally, to call out some of the contributors to our fundraising that have been less observable, we have now reached our $2.5 billion target for the latest vintage of our opportunistic alternative credit product, with $1 billion of that raised in 2025. In total, we raised nearly $4 billion across alternative credit in 2025, after having closed on the acquisition in September 2024. Our GP-led continuation strategy is approaching final close of its first vintage, for which it will have raised approximately $2.5 billion. We think this is an excellent result for a first-time raise in a new strategy. It has exceeded our recent expectations on fundraising, and we've deployed a meaningful amount of the capital already. And in GP stakes, as we previously disclosed, the strip sales we completed in 2025 drove $2.6 billion of capital raised on top of fundraising for our minority stakes funds. Looking at the big picture on fundraising, we took substantial steps forward by strengthening our global distribution platform, launching new products, and expanding or launching new partnerships throughout the course of 2025. Entering the year, we knew this would be an investment and execution year, laying the tracks for future earnings growth. You can see the early successes of that long-term plan in the results that we reported this morning. Despite the significant investments we've made, we were able to end the year with FRE margins slightly above our guidance for 2025, and heading into 2026, we believe we can achieve modest operating leverage and continue to make progress on FRE per share growth. Bringing it back to where I started, we continue to deliver for our clients. We strongly believe that high-quality performance drives business growth over time, and that the continued diversification of the business will support well-balanced growth. We're very proud of the work that we've done over the past two years to position Blue Owl for long-term success across a variety of market environments, and we look forward to sharing more updates in the quarters to come. With that, let me turn it to Alan to discuss our financial results. Alan Kirshenbaum: Thank you, Marc, and good morning, everyone. We are very pleased with the results we reported this quarter and for the full year. We had another very strong quarter of fundraising in Q4, raising $12 billion of equity. You can see the breakdowns on Slide 14 of our earnings presentation. As you can see from our results, we ended the year with FRE margins of 58.3%, slightly above our guidance for 2025 and showing disciplined expense management. We believe we can see modest margin expansion for 2026, targeting approximately 58.5% FRE margin. We also ended 2025 with FRE per share growth of 12%. As we focus on 2026, we believe we can show a modest increase in the growth rate for FRE per share, and we feel we can accelerate that growth in 2027 versus 2026. Now a quick run-through of some other metrics for 2025. We grew FRE 19% and DE 16%. Total capital raised was $56 billion, which represents an increase of 18% year over year. Equity fundraising was $42 billion, which represents an increase of more than 50% year over year. AUM not yet paying fees grew to $28.4 billion, representing over $325 million of expected annual management fees once deployed. This is equivalent to approximately 13% embedded growth off of 2025 management fees. As Marc walked through in his remarks, the performance across our strategies continues to be very strong, as you can see throughout our earnings presentation, including on Slides 4 and 22. We continue to deliver for our clients. Our products performed very well again in 2025. Turning to our platforms, in credit, weighted average LTVs remain in the high thirties across direct lending, and in the low thirties, specifically in our tech lending portfolios. On average, underlying revenue and EBITDA growth across our portfolios was in the high single digits. As Marc mentioned earlier, credit quality remains very strong. In direct lending, growth and net origination in the fourth quarter were $12 billion and $3.3 billion, bringing last twelve months gross to net originations to $45.4 billion and $13.2 billion, respectively. Despite strong public loan market conditions, we continue to see a growing pipeline of discussions, and importantly, we are seeing the benefits of incumbency, as approximately 60% of our gross originations in 2025 resulted from existing borrower relationships. We also continue to see very large deals being done in the direct lending market, with an average deal size of nearly $2 billion for Blue Owl in 2025, up 23% from the prior year, and we continue to lead or co-lead many of them. Turning to alternative credit, we have continued to deploy meaningfully across investment grade and non-investment grade. In this strategy, we have been able to take advantage of market dislocations given the flexibility with which we approach various asset classes. We can buy assets, finance assets, engage in structured capital transactions depending on where we see relative risk-reward. In real assets, we remain focused on our core competency, owning mission-critical assets for investment-grade counterparties, whether those are logistics facilities, manufacturing plants, or data centers leased to some of the largest companies in the world with exceptional credit ratings. We have called close to two-thirds of the capital for net lease fund six and believe that we will have nearly fully deployed the fund within the next couple of quarters, within three years of its final close. We have also started committing capital out of the current vintage of net lease with a meaningful pipeline of over $60 billion of transaction volume under letter of intent or contract to close. In digital infrastructure, we are similarly seeing a substantial pipeline and have called over 50% of the capital in fund three, which just held its final close in April 2025. In GP strategic capital, performance across the funds remained strong. We have begun to see increasing levels of activity in partner manager funds across both deployment and monetization, including what we believe to be the largest transaction ever announced by a sponsor. The consolidation trend remains in place, with the percentage of capital raised by funds raising more than $5 billion continuing to increase over the past five years. This has been a central part of our investment thesis in our large-cap strategy, and our fund investors have been beneficiaries, with the AUM of our partner managers growing more than 30% faster than the broader market over the past ten years. Okay. A couple of notes I wanted to highlight before we wrap up. On our effective tax rate, we expect 2026 to be in the mid to high single-digit percentage range, in line with our general expectation that our effective tax rate increases a few percent each year. As a reminder, we pay our tax receivable agreement during the first quarter each year, so expect a higher effective tax rate for the first quarter of 2026 and a much lower rate for the second through fourth quarters. For reference, we disclose an estimate of the next few years' TRA payments in our quarterly SEC filings. On stock buybacks, the company buyback and senior executive purchases totaled approximately $70 million in 2025. When we see our stock deeply discounted, we intend to utilize our existing stock repurchase program. As it relates to share count, we currently expect 2% growth in 2026, with roughly 14 million shares to be issued related to the acquisition of our digital infrastructure strategy and the remainder being driven by normal course stock compensation. As for stock compensation, we have three types of items running through our stock comp expense numbers, all on Slide 28 of the earnings presentation. The line to focus on, our regular way year-end stock compensation expense, is equity-based compensation other, which we expect will be running at approximately $365 million for 2026. As a reminder, the amortization of stock-based compensation from business combination grants will tail off by 2026, and the line called acquisition-related is GAAP amortization expense related to some of the acquisitions we've made over the last few years. Finally, I'd like to pull the lens back for a moment. There's been a lot of noise about our sector over the past several months. Across our portfolios, we have a very diversified set of investments that generate high income for our investors with downside protection. We have high FRE margins that we expect will continue to expand and are laser-focused on increasing the growth rate of our FRE per share each year. We have invested for expansion and diversification across the business, with the results showing continued strong fundraising across our products and, importantly, strong performance returns. Thank you very much for joining us this morning. Operator, can we please open the line for questions? Operator: Thank you. If you would like to withdraw your question, simply press 1 again. We ask that you limit yourself to one question, and please rejoin the queue if needed. Thank you. Your first question comes from the line of Craig Siegenthaler with Bank of America. Your line is open. Craig Siegenthaler: Good morning, Marc, Alan. Hope everyone's doing well. And despite the stock reaction, it's nice to see the strong fundraising and 62% FRE margin result in the quarter. Marc Lipschultz: Thanks, Craig. Thank you. Craig Siegenthaler: So my question is on software AI disruption, which has really emerged as a big theme recently. Can you help us size up your exposure across both debt and equity? And then as you take a step back and look across your hundreds of private investments, what are you seeing in the pipeline in terms of credit quality? Because if you look at returns, revenue, EBITDA growth, interest coverage, general credit quality, it doesn't look like there's any red flags yet. So are there any sections of the software book that concern you? Marc Lipschultz: Thank you very much. So let's level set and come to those specific answers. A couple of observations to start with. Tech lending has worked, continues to work, and to get very direct right to your answer, no. We don't have red flags. In point of fact, we don't have yellow flags. We actually have largely green flags. The tech portfolio continues to be the most pristine amongst all of our portfolios, amongst all of our subsectors. I appreciate we're all looking forward, but remember, these are loans that are on average 30% of the value of the enterprise at the time of acquisition or LTV, with huge equity cushions. These are companies, on average, let's be fact-based as opposed to headline-driven. Since November 2022, the advent of ChatGPT as some kind of moment of AI's arrival, since that time, the portfolio on average has grown revenue 40% and EBITDA 50%. We'll bring it much more current because we can all agree that in November, it was doing poems, so maybe it didn't matter. But let's bring it to this quarter. Fourth quarter, the revenue growth was 10%, and the EBITDA growth in those software names was mid-teens. That's fourth quarter, quarter over quarter. It is not a monolith, and it's listen. This is the opportunity. Obviously, when this happens, of course, markets get deeply disrupted. That hopefully leads to spread opportunity. It certainly leads to dispersion in performance, and we will outperform. If you look at all of our products, we led with this in my early beginning of my comments here were there for a reason. End of the day, stories don't drive results. Results drive results. And as you can see, we have delivered on every one of our products. An absolutely top-level performance in both total return and in terms of nonaccruals and in terms of loss. Think about what we've run at an eight basis point net loss rate. And so these facts do matter. Remember, yesterday, everyone I'm sure is tuned in to both on the one hand, the software performance, but on the other, I mean, that's to say the software stock performance, but then folks that actually understand this, like, let's say, we can all agree Jensen Huang has a pretty good understanding of AI, say this idea that AI is the end of software is one of the most ridiculous things he's heard. And the reason it's ridiculous is because AI, I mean, software itself is not a monolith. Software was it's a system of record where you are integrated into the business processes of large companies. From our business processes are a big part of how companies operate. Software is an enabler. And the best companies, what we are seeing that are embedded in that position and have data moats and operating environments like health care, financial services with zero tolerance for risk environments, regulatory limitations. We're seeing is they're the ones of the adopters of AI. They're the ones that are then turning around and saying, here, I can offer you an agentic solution to replace some of your human costs, some of your labor costs, by integrating these capabilities into the software I already have resident in your system and fully integrated into your daily behavior. So we understand the generic there are certain parts of software that are vulnerable, and they are. We've studied our portfolios very carefully. We do not see any meaningful exposure to those more susceptible areas. We see deep exposure where we have it, to businesses that have the attributes I described, where there are actually very significant business process, data, and kind of environmental regulatory constraints. And we see them adopting agentic solutions. Now as to the specific numbers, remember, we have a variety of different vehicles. And to be clear, the tech-only vehicles actually have the best credit performance. So I want to be clear. We're not negative in any manner on software. However, we also run diversified funds. If you take, for example, our continuously offered BDC, our credit fund, actually, amongst the peer group, we have the lowest software exposure. So, again, even we're not a monolith. Different strategies and different ways to participate in those strategies. But the reality is we don't see any material indication of any change in the accruals or non I'm sorry. Non-accruals ask for amendments. At this point, things look very healthy, which certainly gives us a meaningful certainly a very meaningful runway. Last point I'll say is the PE firms let's remember you'll remain active in this space. I want to make sure everyone understands that software remains an area where sophisticated buyers are still highly active. Because, again, if you have the right software solutions, you're gonna benefit from the adoption of AI. And so, again, this monolithic view and action people are taking is gonna prove, I think, quite misguided, and it's gonna lead to a miss in significant opportunities. The book is strong. We don't see meaningful losses. We don't see deterioration in performance. And last point, the typical duration of a loan remaining in our books, let's say, a software loan, is a few years. So when you have a business that is still growing double digits, and only a few years left and a 70% equity cushion, all we're talking about is do we get our money back? We're not a software company. You know, we're not here to tell you whether the model we've better or worse, whether growth is higher or lower, we're not a software company. We're we are an asset manager. We're not a bank. An asset manager. We get paid to manage assets and do it well, and that's what we're doing very successfully. If the software business evolves over time, well, that'll be to the maybe benefit or loss of the equity holders. But we're in a position, we think, to continue to get our capital back and earn a very strong return. Alan Kirshenbaum: The only thing I'll add quickly here, Craig, is as I think we would all agree in this type of market environment, it's important to ground down to the facts, the data. So our publicly traded BDC, OTF, 11.4% inception to date return, 18% NAV growth since inception, in this case, a positive net gain of 16 basis points since inception. Nonaccruals is 0.1%, 0.1% of the portfolio. Average weighted EBITDA is almost $300 million, 94% leading private equity sponsor-backed. And with 185 positions, it's half a percent on average for position size. Craig Siegenthaler: Thanks, Alan. Alan Kirshenbaum: Thank you, Craig. Operator: The next question comes from Glenn Schorr with Evercore ISI. Your line is open. Glenn Schorr: Hi there. So Hello. Hi. Hello. Hello. I appreciate the comments you made earlier on the past periods of anxiety and how you've met all requests for tenders each of those times. So my question is a little bit on should this time be different? Meaning, we all got to live through the B-REIT experience, and I felt like it trained the wealth channel to understand what semi-liquid or not-so-liquid means. But you and others have gotten some high redemption requests and have been making good on them. A bit of a confidence in your portfolio, good thing. The flip side is what are we undoing in terms of the teachings we've taught in the channel on how these products are supposed to act, and what investors are gonna expect going forward. So I know it's a big picture thing, but I feel like it's really important because you have lots of products in the channel that we kinda wanna smooth volatility over time. Thanks so much. Marc Lipschultz: Sure. Look. Our job is to deliver for our investors, our LPs, and our shareholders. And to do that, what that means is considering the results of a tender and what fulfilling those investor requests would do for remaining shareholders. And, of course, obviously, by action, we're seeing the preferences of the shareholders that are seeking redemptions. We've seen these periods of volatility as you know. We've seen the pattern of behavior. Where there are these moments of fear, and they in the face of facts, facts again will bear out this time, they tend to fade because performance, in fact, is strong and remains strong. With regard to fulfilling tender requests or not, you starting with something like liquidity management. And portfolio position is a meaningful consideration. Indeed, there is a structure that has been built with this semi-liquid nature. And to your point, you know, we say investors have been trained. I mean, they're aware for sure, as they should be, that there are limits. And that limit might be the 5%. But at the same time, investor behavior in the presence of limiting people can also be very negative. Remember how long you can get into a world of negative outflows, negative redemption cycles when people feel trapped. And if they're, in fact, really not trapped, you know, what behavior are you conditioning people to understand? Are they is it just look. The hard cap is a mechanical hard cap, or is the hard cap, you know, the proper limitation? Unless, you have the added flexibility to accommodate. And I put it in the latter category. We manage our businesses with very low leverage. Manage with a lot of liquidity. I say this with no arrogance. We're very good at both the liability and asset side. The book. In this instance, when we had these large redemption requests, we have lots and lots of liquidity, still do. Lots of liquidity. So there really was no reason to you know, not fulfill an investor's request for their capital back. And we see that as actually meeting investor needs. Being an investor-friendly and investor-focused firm, which we think leads to much quicker recoveries in fund flows, and leads to much better performance, that is to say growth in funds flows over time. You'll pay attention to your customer, your client, meet their needs. If you can't do that in a manner that would leave the remaining investors, remaining portfolio in an equally or even perhaps better place then, of course, the limit is there for a good reason. But if you have plenty of capital as we did in these vehicles, then we fulfill those requests, and that is client meeting client needs, client satisfaction, that will lead to more wealth growth over time. Thanks, Marc. Operator: The next question comes from Brian McKenna with Citizens. Your line is open. Brian McKenna: I had a question on OwlCX. You know, there's clearly a ton of great momentum here. But a few things stand out to me. 80% of these assets are fixed rate. While leverage stands at just 0.2 times, yet the strategy generated net returns of nearly 3% in the fourth quarter, so I'm curious, is there an opportunity to expand leverage here to drive even stronger performance over time? And then given the fixed nature of these assets, the fixed rate nature of these assets versus floating rate, at the BDCs, are you seeing any incremental demand and acceleration in flows into alternative credit more broadly? Alan Kirshenbaum: Yeah. Thank you, Brian. I appreciate the question. We think there's a very big opportunity in alternative credit. We think there's a big opportunity with the interval fund. We're actually really excited. We are in a very short time frame already over $100 million a month in flows with the interval fund. So we've made really great progress in a short amount of time. When you think about the overall opportunity in the wealth sector, first, let's talk about what does it take to be successful in the private wealth channels. We have large because you have to build the foundation and then using that foundation, how do you go out and expand and continue to grow? Even in environments like this? So we have a large high-quality, most importantly, well-performing products. How do you scale with wealth? With well-performing products. That's the key to scaling these products. Last year, we added two new wealth products, as we all know, ODiT, which is our digital infrastructure wealth-dedicated product, and the Interval Fund, which you just asked about. So we now have three key categories, private real estate, private credit, and private infrastructure. And so each one of our wealth products we offer is scale. We've been able to scale these very quickly, in particular, as I mentioned, the interval fund and ODiT. So all of our products are now of scale. And we're still in the early days. We know adoption rates are low. And so there's no doubt that sentiment and demand will move around based on market conditions. Our expectation, though, is real assets and asset-based finance are of more interest today. And we're in a great position to take advantage of this. But now from a tactical execution perspective, we're only able to do these things because we built that foundation. But what we're able to do now is to continue to look at new local theaters. So what did we do in 2025? We added a Japan feeder. We added an Australia feeder. So we're very focused on continuing to be able to do this. Into 2026. We are onboarding new distribution partners, whether it's RIA platforms, wirehouses, private banks, independent broker-dealers. So continue to expand our distribution partners for each of our wealth-dedicated products. And expanding the amount of FAs that sell our products with existing distribution partners. Now because we have large, well-performing evergreen funds, as I just mentioned, we're now being placed in many model portfolios. And we expect to be at the forefront of adoption in this regard. And I guess, last as the rulemaking around 401(k)s evolves, we have our partnership with Voya. We're launching our CIT shortly. Our target date funds will be out later this year. Just 2026 will still be more of a building year than a flows year. But there's a lot of momentum around this build. So we think there's a lot of runway here overall. Brian McKenna: Appreciate it, Alan. Alan Kirshenbaum: Brian, thank you. Operator: The next question comes from William Katz of TD Cowen. Your line is open. William Katz: Okay. Thank you very much for taking the question. It's a little bit of a two-parter, so I apologize for violating the one-question rule. But I think these are two things that are presaleon on the stock. First, can you help maybe unpack the disconnection that seems to be happening between the prolific CapEx cycle on the hyperscalers against the opportunity set that you speak to on the digital side? And maybe walk us through how you think about credit risk. And then the second thing that's been coming up quite a bit is, can you reshape or just go through where you sit today versus your Investor Day goals? And how you get to those goals given some of your 2025 and now 2026 sort of implied guides. Marc Lipschultz: Thank you. So on the CapEx cycle, most clearly encapsulated yesterday in Google raising their CapEx guidance to $175 billion to $185 billion, up from $93 billion. You know, this is something we've been talking about and is an enormous opportunity. As you know, we are in the premier position, premier provider of capital solutions to the hyperscalers. That capital cycle is only accelerated. You know, again, sometimes it's fact and fiction or too much noise. You know, whether there is or isn't an AI bubble in valuations is secondary to the question of whether people with some of the largest market caps, best credit ratings in the world, you know, a, think otherwise, and b, are willing to commit to fifteen and twenty-year leases, which they are with us, which is allowing us to deliver outstanding results for our investors in digital infrastructure, and in triple net lease. Remember our ORAD product as an example delivered an 11% return this past year. We just raised the yield on our ORAD product to 7%. 7% exceeds the performance in and of itself of almost every other real estate product out there. So again, all the headlines and noise aside, facts matter. And we're delivering those results. We see that continued super cycle as an enormous opportunity. We know how to structure those leases so that they're ironclad. We have a unique skill to actually build, develop, operate as people want it. We've done it with every one of the big hyperscalers in terms of being their partner. Proving we can be a really great partner. I captured it perfectly in the meta transaction. So this is gonna continue to be an area of great opportunity for LPs, investors, by extension for us. You saw the great success we had in raising our latest digital infrastructure fund three, which we already are heavily invested. So we'll be back this year with digital infrastructure fund four. You saw our real estate fund, which was closed fourth quarter, 2024. We're already back, as you know, and well down the path toward our target on our next real estate fund. So we have big successful flagships that are both raising faster, deploying faster, and very importantly, most important, delivering spectacular results for our investors. And that makes us a pretty special animal. And last note in the wealth channel, ORAD has become the market leader by every measure. We have raised over the last two years 5 and a half billion dollars with almost no redemptions. This has become a gigantic and market-leading product because it's different. It's better. Back to the back to this question. These are not monolithic answers. Our job was to deliver exceptional results. That's what we've done and we think we're positioned to do that across the board on our products. Alan Kirshenbaum: So, Bill, on your second question, as it stands now, we're behind our Investor Day goals. Now remember, we're just one year into a five-year long-term target. But we've seen the last few months, we've had headwinds in private credit, AI, software, we've seen a slowdown for non-traded BDCs and private wealth flows. We've seen an increase in the tenders for non-traded BDCs. So what you heard in my prepared remarks is we believe we can show a modest increase in the growth rate of FRE per share in '26 versus '25. And we feel we can accelerate that growth in '27 versus '26. We also brought our FRE margins above our initial guide of 57 to 58. And we have another guide out there with another modest increase in 2026 versus 2025. Operator: The next question comes from Crispin Love with Piper Sandler. Your line is open. Crispin Love: Thank you. Good morning. I appreciate you taking my question. On software exposure and the metrics, can you just let us know what needs to happen for you to take losses in your software portfolio and then impact the net returns to your end investors just from a standpoint of LTVs, how much is first lien senior secured, remaining maturities there, a private equity value destruction that would need to happen ahead of you. And then if there are companies failing, how you think about recoveries. I'm just trying to differentiate between equity and debt here and then what could happen in a draconian scenario because that's what it seems that markets are pricing in today. And then just what is software exposure as a percent of total AUM? Marc Lipschultz: So it's a really important question you're asking. And, again, let me just be really factual for a moment. The stock equity versus debt is kind of an important starting point with all this is getting conflated. Over the last three years, the software index is up 23%. We're all reading about and know what happened in the last year. It's down 20% now in the last year. But it's up 23% over the last three years. So if you think about that as some indicator of the vintage, a lot of big software deals PE firms did. In point of fact, software equities, equities, are up. We are a first lien lender in almost every instance we talk about software. We are, on average, around 30% loan to value. So what's happened objectively in the marketplace is since the vintage of those transactions, equity values on average are up 23%, but pick whatever number you want. We started at 30. So now let's answer your question. In order for us to have material losses, I can't describe for you anything back based in fact. Anything based on any measure of default rates recoveries that would lead to a material degradation in performance of the funds. This is not a mathematical of course, I can do it in math. But there's no relation to any practical statistic that would lead to anything other than, sure. You could have a lower return. For a year. You can have a lower return a couple of years. But you have to destroy 70% of the value of every one of these software companies when the markets actually judge them net up. And, again, it's not a monolith. We do a lot of software that in very consciously, they're not simple application layer. We're doing things that are business process-oriented, have data moats, and work in high low risk low error tolerance environments. And that's why, in fact, in the fourth quarter, currently, the companies are actually performing mid-teens growth still. I can't really answer it in a mathematical way because the numbers would be so silly to try to create anything more than of course, there'll be loss I wanna be clear. We're in a lending business. We have 400 companies. And, of course, there's losses. Every quarter, we're gonna have companies that go and get in trouble and companies that get out of trouble. And even trouble doesn't mean we've lost anything. Means they might be struggling. We may have to own them. That's already built into the calculation. And that's what with all that said, we've been running eight basis points net. So the real answer, you are correct, is there's an awful lot of noise about what is the value of a software company worth. Again, we're not a software company, so I'm not here to really answer that question. But I can tell you that when you have a portfolio of 100 loans to software companies that are on average growing significantly, generating a lot of cash, have a three-year tenor, on average or so left, and are currently in very healthy positions to get from that to all the value has been destroyed, and you have a credit loss. Is a journey that just doesn't make sense. And that's the way this broad paintbrush is being used today. They are big companies. That are deeply embedded. Our software companies have hundreds of millions of dollars of average EBITDA. That are deeply embedded in Fortune 500 work processes. And for those who've gotta pause and think, there's not just a matter of technology. There's the adoption of behavior. And for those on the call that are thinking Fortune 500 companies, are gonna take all their software and just rip it out and just say, I'll just ask ChatGPT. That's simply not the way it works. Don't take my word for it again. We're not technologists. Take Jensen Wong's word for it. Alan Kirshenbaum: I can answer one part of that mathematically. Which is the total exposure of software loans across our AUM is 8%. Crispin Love: Great. Thank you, and I appreciate the answers. Operator: The next question comes from Benjamin Budish with Barclays Capital. Your line is open. Benjamin Budish: Hi, good morning, and thanks for taking my question. Alan, I was wondering if you could talk a little bit more about the FRE margin outlook for the year. I know in Q4 actually, if you could unpack that a little bit as well, it looked like your FRE comp expense line steps down quite significantly. So I'm curious if there's anything going on there to call out. And then just as you think through next year, what are the key pieces of the operating leverage? Is it more cost controls? And I'm curious how you see or how you would sensitize that to the potential paths, especially the non-traded BDCs where we've seen a couple months of slower flows, elevated redemptions, it's not quite clear how things are gonna shake out. So I know there's a couple things in there, but just curious to get your thoughts. Thank you. Alan Kirshenbaum: Sure. Ben, appreciate the question. So in 2025, we brought down expenses. We see the full year that comes together in Q4 when we make our year-end compensation. And we're very focused as a management team on showing progress on the FRE margin. Again, we guided 57 to 58. We wanted to make sure we came in a little above that. We came in at 58.3. And as we think about 2026, you're of course right. There is uncertainty today. Good news, we have seen a general stability in the daily flows of our wealth products. So that's all the data we have through the first don't know, month, a little more than a month, but it's encouraging. That we've seen a general stabilization there. And the answer for 2026 is simple. We need to have revenue growth outpace expense growth. So we have some levers on the revenue side, and we have some levers on the expense side. We will use those levers accordingly to guide to that 58.5% FRE margin increase from 2025. Benjamin Budish: Alright. Appreciate it. Thank you. Alan Kirshenbaum: Of course. Thanks, Ben. Operator: The next question comes from Patrick Davitt with Autonomous Research. Your line is open. Patrick Davitt: Good morning, everyone. Obviously, a lot of direct lending noise kind of unknowable where that's going at this point. But it seems like the ABF business did quite well. So could you give us a little bit more color on what percentage of your total credit AUM is now not direct lending? And then maybe help frame what you're thinking about or modeling for growth in that side of the business this year. And then specifically, I think you said LCX is at $1.8 billion. So does that mean it has taken in $550 million in one queue, or is there something else in the bridge from $1.25 billion in the deck? Thank you. Alan Kirshenbaum: Thanks, Patrick. There's a little debt on that I think we've raised about $1.3 billion in inflows a little debt that takes us to about $1 billion. We're about 30% of our credit business is away from direct lending. So we've diversified quite a bit. From just a year or a year and a half ago, let's say, alternative credit, I have some interesting stats that I think are worth running through. Alternative credit is definitely a large growth area for us. We've talked about both alternative credit and digital infrastructure. We view those as having at least the same opportunity in terms of future growth. And when I say future growth, I'm talking three to five-year growth. As what we saw with our UpStreet acquisition. So a couple of very quick data points. Let's look. We're now one year in on our two acquisitions for Adelaia and for IPI. Let's flash back very quickly to our net lease business, which as of today, has grown almost four times revenue growth and almost four times AUM. And so that's extraordinary growth. I know everyone has seen that. We've talked about that. So one year into our net lease business, we acquired Oak Street. We were at 15 and a half billion of AUM. The following year, we raised $3.5 billion, so that's a low twenties percent growth rate. That's one year in. And remember, the first year is usually the hardest. You have integration. You have streamlining everything. You have a lot of work to do. Now let's flash forward digital infrastructure. We are now one year in. So what's the head-to-head comparison? We closed at $14 billion, raised about $3 billion in 2025 in our digital infrastructure business. That is also the same low 20s percent growth rate. So we have already accomplished at least what we've done in digital infrastructure is what we did in net lease. One year in. Now let's look at alternative credit. I'm glad you asked specifically about that. Alternative credit, we closed a little more than a year and a little more than a year ago. We closed at 10 and a half billion. We've raised nearly $4 billion since then. So that's a high thirties percent growth off of where we closed our Adalaya acquisition. So we're really proud of what we accomplished here. We see a lot of growth ahead in particular for alternative credit. And digital infrastructure. We have obviously, Marc mentioned, Fund IV in the back half of this year coming out. We have both wealth products for digital infrastructure and alternative credit. Wrapping up, ASOP nine coming out with more fundraising alternative credit in 2026. And what we're really excited about is now flash forward one or two or three more years, what is that arc of trajectory and how does that compare our Oak Street acquisition? And we still feel as much as ever the conviction that these acquisitions will be the same or more than what we were able to do with the Oak Street acquisition. Marc Lipschultz: And I'll add one point, then we'll move on. We're also building organic products. Not to be lost in all of this, we mentioned this, I mentioned this in my comments, our Bose product, while strategic equity GP-led secondaries, which we stood up at a time when people said, I don't even understand what this business is, which now, as you are well aware probably, has grown to become a huge share of the overall secondary market of LP and GP. And a meaningful contributor to the liquidity environment for PE. That's now a 2 and a half billion dollar profit. That we started from scratch. And that's a product that we see enormous potential for over time. We think that's a way for example, both institutions and individual investors to truly participate in the very best of private equity from the very best firms. In this multitrillion dollar industry. So there's another example of just the growth legs that lie outside of direct lending. Still think direct lending is gonna prove to be an outstanding business. Facts matter. The results are and we expect continue to be very, very strong. But, yes, we're delighted with the performance of asset-backed, and we're delighted with the growth in those businesses. But we're delighted with digital infrastructure and with our real estate businesses that are growing dramatically. And we're continuing to turn in great performance in our GP safe business. And, you know, that are all things that count that will drive that future growth. Operator: The next question comes from Wilma Burdis with Raymond James. Your line is open. Wilma Burdis: Hey. Good morning. Could you build a little bit on your earlier comments on fundraising momentum? So far in 1Q '26, and just give us a little bit more color on what you're seeing in both the retail and institutional side. Thanks. Alan Kirshenbaum: Sure. Thank you, Wilma. So we included a slide in our earnings presentation where we show kind of the step functions that we've been talking about throughout 2025. And we're really proud of what we've been able to accomplish. You can see meaningful increases here on slide six for each of the last two years. We raised $42 billion in 2025. A lot of momentum on the institutional side, record year. For institutional, and a record year for wealth. As we think about 2026, and I commented on the daily flow, so that's as much data as we have right now in the wealth. Kinda how do we think about 2026? So we're encouraged by a general stabilization there. In the daily flows. Overall, if I were to pull the lens back here, we have wrapping up Net Lease seven, wrapping up GP six, back half of this year, digital infrastructure four, as we've talked about, we have our two newly launched wealth products plus our three original wealth products, if you will, CICTIC and ORAD. So when you put all of that together, we can certainly see another year where we put up a similar level in '25 as we did in '26. Wilma Burdis: Thank you. Alan Kirshenbaum: Thanks, Wilma. Operator: The next question comes from Mike Brown of UBS. Your line is open. Mike Brown: Okay. Great. Thanks for taking my question. Alright. Appreciate all the color on the software side this morning. I guess I'll ask a different question. I wanted to ask on the capital allocation side. So you declared a dividend of 92¢ for 2026, so a modest bump year over year. How are you thinking about the dividend growth from here, along with the payout ratios and maybe just overall capital flexibility going forward? Alan Kirshenbaum: Thanks, Mike. Appreciate the question. A lot of the same. So modest dividend growth, bringing our payout ratio down. We are at 107%, 108% payout ratio for 2025, bringing that down. It's going to take a couple steps, as we've talked about in the past, to bring that payout ratio back to and this isn't hardwired, but a general ballpark of 85%. We wanted to show some level of modest growth. And we'll we expect to continue to do that as we bring that payout ratio back down to that 85% level. Mike Brown: Okay. Thanks, Alan. Alan Kirshenbaum: Yeah. Of course. And as I said, over the course of the next few years. Mike Brown: Thanks, Mike. Operator: The next question comes from Brennan Hawken of BMO. Your line is open. Brennan Hawken: Hi, good morning. Thanks for taking my question. You spoke to the flexibility and ability to provide liquidity by raising the threshold for OTIC, which is I would agree was certainly encouraging. That product was sort of heavily distributed throughout Asia. What I'm curious about is I know you've got distribution across the world. What does the wealth management AUM look like by geography? Like, you know, what portion is US versus Asia versus Europe? Marc Lipschultz: So the bulk of our assets and our products is US-based in the wealth products. So just to cut to the chase, OTIC is really in our world, the exception, not the rule. And there's history that we don't need to get into and have the time to get into now. But the time of that launch led to less wide distribution, which led to concentration in Asia. We actually really don't have meaningful exposure in Asia in any of the other products. Really, they're very domestic, and the behavior patterns are very different. Between those. Very little. So very little outside the US in our other products. So OTIC is kind of an exception corner case of its own. I wouldn't read much into OTIC across to other products of ours. Brennan Hawken: Okay. Well, but is it appreciate that. Is it to get a number maybe ex OTIC where that stands? You know, because very little is sort of subjective. Marc Lipschultz: We'll try to get back to the number. It's a very, very small part. I appreciate that. It's subjective. We'll get back to you with a number. Brennan Hawken: Perfect. Thank you. Alan Kirshenbaum: Thanks, Brennan. Operator: The next question comes from Kenneth Worthington with JPMorgan. Your line is open. Alex Bernstein: Hi. This is Alex Bernstein on for Ken. Thanks so much for taking our questions, and congrats on all the strong metrics that we're seeing in triple net lease in particular, really showing differentiation. Touching upon direct lending and originations in particular, we saw that both gross and net moved up this quarter for the second quarter in a row. Similarly, the gross to net conversion ratio improved a little bit. I'm getting in the high twenties percentages. As we zoom out and look at a full year over full year comparison, still seeing that gross net and conversion are all still lower. Wanted to think through those metrics, how they're evolving relative to historic levels, think, especially on a gross net, which I understand historically is a bit higher. Competition with the banks, how that looks. And then maybe how you're thinking about deployment potentially being or not. Some of the sentiment in the market. Especially if we're seeing slower subscription, at least on a net basis. Growth for the BDCs. Thank you. Marc Lipschultz: Sure. The gross to net, you observed the patterns. I won't repeat all the facts. We continue to see a very strong pipeline of activity. We are certainly participating in what we think are a lot of great new originations and credits. We're certainly getting at least our fair share. Business is good. I think we continue to build ever deeper relationships with the users of our capital. So right now, it's really more about overall PE activity. Within direct lending. Obviously, as we just talked about, enormous activity in things like the real estate business and in alternative credit away from PE activity. But it's really about the PE cycle and how much transaction is occurring there. We certainly have seen upticks, and we're seeing uptick, therefore, in our inbounds, our demand for capital. And I guess the only silver lining of all of this kind of misinformation about credit and misinformation about software and the like, you know, usually that environment ends up leading to better spreads and a rotation of more product back to the private market because the public markets get deeply disrupted. So all the indicators would point favorably, as far as we can see, but it'll all depend up really at the end of the day, on just how much activity is there in the PE world in a given quarter. Alan Kirshenbaum: Thanks so much. And the only thing I'll follow-up with is about 7%, 6% to 7% of non-US dollars in our other wealth products. So as Marc said, it's a very small number. Operator: This concludes the question and answer session. I'll turn the call to Marc Lipschultz for closing remarks. Marc Lipschultz: Great. Thank you very much. We appreciate it. We know that the hour is up, and so we will release you to the next activity except to say, at the end of the day, this was a great quarter. Continue to see very healthy portfolios. At the end of the day, performance is the ultimate measure, not anecdote. And performance is top tick in all of the products that we talked about. So we have a very favorable view going into 2026. We look forward to updating you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Hello, and welcome to Xcel Energy's 2025 Year End Earnings Conference Call. My name is Jordan, and I will be your coordinator for today's event. Please note this conference is being recorded. For the duration of the call, your lines will be in listen-only mode. A question and answer session will follow the prepared remarks, and questions will only be taken from institutional investors and analysts. Reporters can contact media relations with inquiries, and individual investors and others can reach out to investor relations. I would now like to turn the call over to your host today, Mr. Roopesh Aggarwal, Vice President of Investor Relations. Please go ahead, sir. Roopesh Aggarwal: Good morning, and welcome to Xcel Energy's 2025 year-end earnings call. Joining me today are Bob Frenzel, Chairman, President, and Chief Executive Officer, and Brian Van Abel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer your questions if needed. This morning, we will review our 2025 full-year results and highlights, provide updated 2026 assumptions, and share recent business and regulatory updates. Slides that accompany today's call are available on our website. Some comments during today's call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and SEC filings. Today, we will discuss certain metrics that are non-GAAP measures. Information on the comparable GAAP measures and reconciliations are included in our earnings release. As a reminder, we recorded a charge of $300 million or 38¢ per share in 2025 reflecting the settlement in principle reached with plaintiffs in the Marshall Wildfire. As a result, our GAAP earnings for 2025 were $3.42 per share while our ongoing earnings, which exclude this nonrecurring charge, were $3.80 per share. All further discussion on our earnings call will focus on annual ongoing earnings. For more information on this, please see the disclosure in our earnings release. I will now turn the call over to Bob. Bob Frenzel: Thank you, Roopesh. Good morning, everybody. At Xcel Energy, we continue to deliver on a once-in-a-generation opportunity to meet the increasing demands of our customers as they electrify more parts of their lives, support the economic development of our communities, fuel the rapid growth of AI and data centers, and continue to lead a clean energy transition in the country. Over the next five years, Xcel Energy expects to invest in excess of $60 billion to modernize and expand the grid. Adding advanced transmission and distribution infrastructure, new natural gas and renewable generation, smart, weather-hardened infrastructure, these upgrades will strengthen sustainability, reliability, and resiliency while keeping our customer bills as low as possible. We've also continued our decades-long track record of producing strong results for our owners. In 2025, Xcel Energy delivered ongoing earnings of $3.80 per share, marking the twenty-first consecutive year of meeting or exceeding our initial ongoing earnings. We achieved that outcome with some of the lowest electric and natural gas bills in the country. This consistency reflects the strength of our strategy, the diversity of our business, and the dedication of our Xcel Energy team who show up every day for safety, reliability, affordability, and sustainability as their top priorities. 2025 showcased what our people are capable of as we reached several important customer and operational milestones. With our disciplined execution and geographic advantage for renewables, we continue to deliver for our customers. Our residential electric customers in Colorado have the lowest share of wallet out of all 50 states. And average electric bills in our other states occupy five of the top 11 spots in the country. Since 2020, residential electric bills in Denver and Minneapolis have grown far less than inflation, and less than common expenses like groceries, gasoline, health care, insurance, and housing. And when compared to other national electricity providers, these bills have grown 40-80% less than other regions. It's a testament to our focus on affordability, our productive regulatory jurisdictions, and importantly, our integrated regulated utility model that allows for long-term asset investment. Also a testament to our one Xcel Energy Way continuous improvement program that has realized over $1.5 billion in cumulative savings since 2020, while also improving customer and operating outcomes. As a result, when looking at our five-year average O&M expenses per megawatt hour, Xcel Energy ranked fourth lowest out of our peer utility companies. And even with some of the lowest energy bills in the country, we know some of our customers still struggle to make ends meet. In 2025, our energy assistance programs reached nearly 200,000 customers and provided nearly $200 million in funding, our highest ever one-year total. Our focus on reliability, affordability, and customer service was recognized by JD Power, who ranked Xcel Energy in the top quartile for the Midwest region and had the second-highest score in customer satisfaction. Across our eight states, we continue to build and maintain the critical infrastructure that supports our customers' energy needs. In 2025, we invested nearly $12 billion, our largest one-year total. In September, phase two of our Sherco solar project started commercial operation, and a third phase will come online in 2026. Once complete, Sherco will be the largest solar facility in the Upper Midwest. We also completed the conversion of our 1,000-megawatt Harrington coal plant to natural gas, which provides essential energy resiliency and reliability to our customers. And we source and deliver that natural gas for Harrington from the Permian. That combination will benefit the local community for years to come. We completed 370 megawatts of wind repowerings at our Border and Pleasant Valley facilities in the Upper Midwest. We expect $750 million in PTC benefits, which exceeds the investment that we made into these facilities, creating more affordable energy for our customers. We placed our 325-megawatt Rocky Mountain solar project in service this year, our first utility-scale solar farm in Colorado, with many more to come. And we released our updated 2026 to 2030 capital plan, which includes, relative to our previous plan, an additional 7,000 megawatts of company-owned renewables, natural gas generation, and storage across our states to transition our fleet and build for growth. Speaking of enabling growth, over the past fifteen years, Xcel Energy has been the leading builder of new transmission line miles in the country. Last spring, we energized our first two segments of the Colorado Power Pathway ahead of schedule, on scope, and under budget, delivering significant value to our Colorado customers. The remaining segments will be energized in 2026 and 2027. Across SPP and MISO in 2025-2026, Xcel Energy has been awarded over 760 miles of new 765 kV transmission lines. This includes the second 765 kV line in SPP that was awarded this week, which gives us line of sight to $1.5 billion in additional investment over our base five-year plan. This will be the first voltage lines of this class in SPP and constitute 20% of the approved new ultra-high voltage transmission in this country, recognizing Xcel Energy's expertise in building and operating transmission networks. We also reached several milestones as we continue to make efforts to protect our customers and communities from the threats of extreme weather. In 2025, we rapidly accessed accelerated system investments, including completing eight times as many pole inspections and 25% more pole replacements than the previous year. We installed over 250 Pano AI cameras and weather stations. In 2025, we received approvals from both Colorado and Texas commissions for our wildfire mitigation and system resiliency plans, as well as published wildfire mitigation plans in each of our other states. Favorable wildfire legislation passed into law in Texas and North Dakota, and we're working on similar frameworks in other states. And we continue to improve and refine operational measures to protect our communities, including daily wildfire risk monitoring, proactive customer communications, wildfire safety operations, and in very rare circumstances, public safety power shutoff capability. And our investments are paying off. During winter storm Uri this January, our electric and natural gas operations across NSP, PSCO, and SPS performed exceptionally well. Thanks to rigorous winter readiness, proactive fuel management, and strong coordination across our operations teams, we reliably served customers through periods of high demand, constrained gas supply, and challenging weather. And we were able to export our generation length when the system needed us most, providing grid stability and incremental customer benefits. Our operators and field crews executed cold weather procedures flawlessly. We maintained system reliability and managed costs responsibly despite record-setting conditions. I'm very excited about our achievements in 2025. I want to turn to our strong start to 2026. Today, we are advancing our data center pipeline with a new recently signed ESA with a large data center in the Upper Midwest. This brings Xcel Energy to over two gigawatts of new contracted data center capacity. Our goal for 2026 is another one gigawatt, bringing our total to three gigawatts of contracted data center service by 2026. And while we had length in the Upper Midwest this winter and forecast so through the end of the decade, we also know that it's critical that we have the right resources to develop new generation infrastructure to deliver on the opportunities in our 20-plus gigawatt large load pipeline. So earlier this week, Xcel Energy announced an MOU with longtime partner, NextEra Energy, to co-develop generation storage and interconnections to serve data center projects across our operating companies. By engaging early with leading developers like NextEra, we can better anticipate system needs for new data centers, streamline development timelines, advance innovative grid technologies, and continue to provide the network benefits that data centers bring to all of our customers. With this agreement, we now expect to have six gigawatts total data center capacity contracted by 2027, with electricity sales and generation investment that will ramp into the 2030s. We will deliver the benefits of two of the best development teams in the industry to meet this moment for our country and our customers. As we've talked about over the past two to three years, execution against our capital and growth plans are critical to our stakeholders. We believe that our scale and our diversity are assets we can deliver to the benefit of our customers and our regions. We have strategic agreements in place with multiple tier-one EPC firms across our portfolio of renewable and natural gas generation projects, as well as transmission, distribution, and natural gas systems. And earlier this week, we announced a landmark strategic alliance with GE Vernova to support our growing portfolio of wind and natural gas generation, transmission, distribution, and technology projects into the 2030s. This partnership will focus on delivering key benefits to Xcel Energy's customers and stakeholders through enhanced certainty of supply, operational flexibility, and cost affordability. Each of the partnerships is a mutual commitment to innovation and strategic collaboration. We will work together to explore advancements in areas such as artificial intelligence, grid modernization, and joint research and development programs. As a first step, Xcel Energy has five additional natural gas turbines from GE Vernova, bringing our total to 24 gas CTs on order across our vendors. Additionally, we're integrating GE Vernova into our renewable energy pipeline, bidding several gigawatts of wind projects with GE turbines in our pending and upcoming RFPs. Combined with agreements with other equipment and engineering construction firms, Xcel Energy has built a scalable, resilient, and flexible engine to ensure delivery of critical system investments. This engine has also enabled us to safe harbor equipment for approximately 20 gigawatts of renewable generation storage, preserving a significant volume of production and investment tax credits for the benefits of our customers. Finally, Xcel Energy's commitment is about much more than energy. The heart of what drives our people is a deep compassion, connection, and commitment to the communities that we serve. That's because these communities are not just customers who receive our energy. It's because our people live in the same neighborhoods. Our children attend the same schools. And we attend the same community events. And so it goes without saying that the tragic events across the Twin Cities have weighed heavily on our communities, our customers, and our employees. We've engaged extensively and proactively with senior federal, state, local, and community officials with a goal to deescalate and identify a sustainable path forward. I was pleased to sign on to the letter with 60 other Minnesota companies urging for a solution. And alongside peer companies in the Twin Cities, the Xcel Energy Foundation has committed to help fund the Minneapolis Foundation to support local small businesses impacted by recent events. I know that our Xcel Energy community will continue to do what we do best, making energy work better for our customers while supporting our teammates and caring for our neighbors. Looking at the broader community engagement in 2025, Xcel Energy initiated 15 economic development projects for our local communities, which are projected to create more than $7 billion in capital and nearly 1,400 jobs. Additionally, nearly 53% of our supply chain spend was local, and we spent nearly a billion dollars with small and diverse suppliers. Xcel Energy employees, contractors, and retirees supported by the company's foundation provided over $14 million in over 60,000 volunteer hours to support over 400 local charitable organizations and causes in 2025. And for the twelfth year, Xcel Energy was honored as one of the world's most admired companies by Fortune Magazine. We ranked first in social responsibility and placed fourth among the most admired electric and natural gas companies in the country. I continue to be thankful and grateful for each of our employees and partners who shared their time, resources, and talents this year to make energy work better. With that, I'll turn it over to Brian. Brian Van Abel: Bob, and good morning, everyone. Starting with our financial results. Xcel Energy reported ongoing earnings of $3.80 per share for the full year 2025, compared to ongoing earnings of $3.50 per share in 2024. The most significant earnings drivers for the year include the following: Higher electric and natural gas revenues due to rate case outcomes, nonfuel riders, and sales growth, partially offset by higher fuel and purchased power expenses, increased earnings by $1.21 per share. Higher AFUDC increased earnings by 27¢ per share. Offsetting these positive drivers, higher interest charges and common equity financing decreased earnings by 46¢ per share, reflecting funding of our infrastructure investments and financial discipline to maintain a strong balance sheet. Higher depreciation and amortization decreased earnings by 28¢ per share, reflecting our capital investment programs. Higher O&M expenses decreased earnings by 25¢ per share, and other items combined to decrease earnings by 19¢ per share. Turning to sales. Full-year weather-adjusted electric sales increased by 2.2%, driven by increased C&I load in SPS and PSCO. For 2026, we continue to expect full-year weather-adjusted electric sales to increase 3%. Shifting to expenses. O&M expenses increased $190 million in 2025. Increases are primarily due to accelerated wildfire mitigation costs in Colorado, excess liability insurance costs, and higher benefit costs in late third and fourth quarter 2025, and increased costs from generation maintenance. Moving to regulatory activity. During the fourth quarter, in Colorado, we filed both electric and natural gas rate cases. We anticipate commission decisions on each and the implementation of new rates by the end of Q3 2026. In November, we filed a New Mexico electric rate case and anticipate a commission decision in 2026. And in Wisconsin, we received final approval for our electric and natural gas rate case and implemented new rates in January. As we look to additional investments to our base capital plan, Xcel Energy has 10 to 12 plus gigawatts of additional generation RFP and transmission opportunities in SPP and MISO. These investments align with our approved resource plans and are critical to ensure we have the energy we need to serve our customers, retire legacy generation, and ensure reliability. These RFPs also help capture expiring production and investment tax credits, which will help keep customer bills low. For the recommended portfolio in Colorado's near-term solicitation, we are now expecting the commission to review these resources in multiple tranches through early 2026. Additional needs under our approved IRP will be subject to RFPs later this year. In December, we issued an RFP in NSP for 4,100 megawatts of renewable generation and storage to be placed in service by 2030. Bids are due in March, and we expect a recommendation filing later this year. In October, we issued an RFP for 1,500 to 3,000 megawatts of additional nameplate generation. Bids were received in January, and we expect a report from the independent monitor in late Q2 2026. And finally, as Bob mentioned, in SPP, we were awarded another 765 kV transmission line, which gives line of sight to $1.5 billion of additional investment over our base five-year plan. We also continue to make strong progress on the 222 of the 287 submitted claims. We've reached settlements with 79 of the 83 potential claims presented for mediation by parties represented by attorneys. And finally, 22 of 47 complaints have been settled or dismissed. We have updated the low end of our estimated liability to $430 million. We've committed $382 million in settlement agreements, including agreements with the subrogated insurer plaintiffs and the three largest claims by acreage. As a reminder, we have approximately $500 million of insurance coverage. Regarding the Marshall Wildfire settlement, final settlement agreements have been executed with the subrogation insurers and nearly all individual plaintiffs. Xcel Energy is aware of three individual plaintiffs, out of 4,000 plus, who have not yet accepted a settlement or otherwise stopped prosecuting claims. Moving to guidance. We are reaffirming our 2026 EPS guidance range of $4.04 to $4.16. We remain confident in our ability to deliver six to eight plus percent long-term earnings growth and expect to deliver 9% EPS growth on average through 2030. Updates to key assumptions are included in our slides and earnings release. With that, I'll wrap up with a quick summary. Xcel Energy posted strong ongoing 2025 earnings of $3.80 per share, meeting or exceeding ongoing guidance for the twenty-first consecutive year. We continue to lead a clean energy transition while ensuring safe, clean, and reliable service and keeping customer bills as low as possible. We continue to make progress to realize our 10 plus billion dollar pipeline of additional investment opportunities, including a new 765 kV awarded in SPP this week. We've announced two strategic alliances with industry-leading development and supply chain partners to ensure we have the resources, technology, and capacity to deliver on our capital plan. We now have signed ESAs for over two gigawatts of data centers and remain on track to contract three gigawatts total by 2026. In addition, we have updated our plan to contract six gigawatts of total data center capacity by 2027. We continue to maintain a strong balance sheet and credit metrics, using a balance of debt and equity to fund accretive growth. We are reaffirming our 2026 EPS guidance of $4.04 to $4.16 per share. And finally, we remain confident in our ability to deliver 6% to eight plus percent long-term earnings growth and expect to deliver 9% EPS growth on average through 2030. This concludes our prepared remarks. Operator, we will now take questions. Operator: In order to ask a question, press 1 on your telephone keypad. Your first question comes from the line of Julien Dumoulin-Smith. Your line is live. Brian Russell: Good morning. It's Brian Russell on for Julien. Hey. Good morning. Hey. Just, I want to just understand more clearly what the upcoming filings in Colorado for the JTS and how that ties into the large tariff filing. Should we expect as you sign customers to the large tariff, you'll then submit the capacity need to the commission and issue an independent RFP for each, or will you group them together to make the process more efficient? And then how does it tie into that six-gigawatt target by 2027? Bob Frenzel: Yeah. I'll start with that answer. And if I didn't answer all the pieces of that question, just feel free to chime in. As we think about it, we're aiming to file that large load and work through that regulatory proceeding in Tariff in Colorado early in Q2. And once we have that kind of large load tariff and that construct, we'll seek to bring forward large loads within that framework along with likely a package of generation to serve that large load. But really focused on driving customer benefit for all of our current customers. So that's really the timing in terms of getting the large load tariff filing in Colorado. The kind of six gigawatts, right, we doubled our data center expected contracted capacity from three gigawatts to six gigawatts. That six gigawatts is contemplated across our system right now. You saw the one we just signed is focused on the Upper Midwest, and I think that's our focus on the Upper Midwest right now. We have some really good opportunities that we're working through. And then as we work through the large load tariff filing, not only in Colorado but Texas and New Mexico, we'll seek for opportunities there too. Brian Russell: Okay. Great. And then just to follow on that, the $10 billion CapEx pipeline, right, that only includes kind of that low end of the 5,000 to 14,000 gigawatts of range of potential capacity data center-driven needs in Colorado. Right? So there's notable upside even at the $10 billion. Bob Frenzel: Yes. That's absolutely a fair characterization. Right? As we think about it. And, really, that kind of low end didn't include significant data center growth in Colorado. So as we look to data center opportunities thereafter, the large load tariff filing would include additional generation to serve those resources. Brian Russell: Alright. Great. Thank you very much. Operator: Your next question comes from the line of Jeremy Tonet from JPMorgan. Your line is live. Diana Niles: Hey. Good morning. This is Diana Niles on for Jeremy. Brian Van Abel: Morning. Diana Niles: Hi. Good morning. So my question is considering data centers coming online in the coming years, how should we think about that ramp to sales CAGR reaching 5% across service territories? And do you still expect 3% of this 5% from data centers? Brian Van Abel: Yeah. Thanks for the question. This is Brian. Now we'll update our five-year sales forecast as we typically do in Q3. That 5% sales CAGR was based on the three gigawatts of data center that we had all tied in our last Q3 update. Clearly, we've updated that from three gigawatts to six gigawatts. But I think there's some of it when you look at the timing, and we expect to have these contracts signed by 2027. In the construction cycle, a lot of those may come in kind of that '29 type period. And then it's really about energizing in the 2030 and the early 2030s and about extending our capital investment opportunity, our generation need. So, certainly, significant sales growth opportunity, but we think about it more in this later part of this five-year driving significant growth, significant sales growth, and benefit for our other customers into the 2030s, about extent. So it's really about extending our growth opportunities, sales growth, capital investment growth, and benefit to our current customers. Diana Niles: Great. Thank you. And then on the Smokehouse Creek, I saw the low-end estimate rose about the same amount as the finalized settlement agreements. So there were estimated losses to the low end stay around $50 million. I'm just wondering how many lawsuits that $50 million might represent and sort of how sticky finalizing those might be. Brian Van Abel: Maybe I'll take a step back and try and answer that question. I think we've made really good progress if you look at just the number of claims we've settled. We have over 320 claims settled. And about roughly 420 claims and lawsuits in total. So we've settled on a significant number, only about 90 to 100 outstanding. And I think you look at and I've talked about it before, is we've settled some of the largest claims. We settled the three largest claims by acreage, which were high-value ranches. We settled with our subrogation insurers. So when I think about it, we've made considerable progress from this time last year to today. This time last year, we just had over 100 settlements, and now we have three times that amount. So we'll continue to evaluate it. We expect to get some additional claims in as we near the two-year deadline. And then we'll evaluate it like we do every quarter. But we continue to make really good progress on the overall claims. And, again, it's a low-end estimate, but we feel good when we think about we have $380 million of that $430 million already settled. And so it's really our low-end estimate focused on that $50 million. Relative to about $120 million of insurance proceeds left when you look at our coverage amount. Diana Niles: Great. Thank you. Operator: Next question comes from the line of Carly Davenport from Goldman Sachs. Your line is live. Carly Davenport: Hey, good morning. Thanks so much for taking my question. Maybe just to start on the partnership with NextEra. Could you talk a little bit more about the roles that each of you will play in developing these data center projects? And maybe if there are any time-to-market advantages given that is still the top priority for data center customers? Bob Frenzel: Yeah. Hey, Carly. It's Bob. Thanks for the question. The last time we got together, it was in the third quarter last year sometime. We talked a lot about executing on a capital backlog plan, executing on a data center large load plans for the company, and really finding the mechanisms that allowed us to execute in totality across the company. And I think what you heard from the team today was execution across all three of those areas. With regards to NextEra in particular, you used a word that I use a lot here, which is speed. So we do think there'll be increased clock speed as we think through combining two of the best sales teams, two of the best development teams, two of the best analytical teams in the country to deliver solutions for a very sophisticated customer set. We also think that it brings scale, and the ability to put an inflection point in the curve of data center delivery and signed ESAs and contracts and ultimately investment opportunities in all three of our big regions. When I think about roles and role clarity, you know, still at MOU stage, although I'd tell you a lot of the terms and conditions have been really agreed upon by the organizations. We've got to get to sort of final joint development agreement type framework, which I think will get too quickly. I think about us having a great backlog and visibility and conversations with hyperscalers and data center developers. We know NextEra has a national platform of this as well. And bringing those two together and being able to sit in a room and compare notes of who we're talking to, where is the best place to do this as it pertains to our regulated footprint. And then do we have generation that we can bring to the table that we need to bring to the table with speed, with certainty, price transparency, and with competitiveness. I think that's what the teams are gonna bring together collectively. It's not an exclusive arrangement, but we expect to do a lot of work through this agreement, and it's not fuel type limited. If you think about where we sit in sustainability goals as a company, where these hyperscalers and data centers and customers of data center developers wanna be, it's a highly sustainable product, and no one's delivered more wind or solar or storage development across the country than NextEra. And we've been twenty-year partners with them, signed our first PPA with them in 2006, our first PSA for a development transfer a decade ago. So this is a great working relationship. All we're doing, I think, here is codifying it for the purposes of speed and execution certainty. Carly Davenport: That's super helpful. Thanks, Bob. And then, maybe just the follow-up. Just there are a number of elections across your states this year. Any early views in particular on Minnesota and Colorado? Where you have ongoing rate cases and just sort of the role that you'd expect affordability to play in the respective campaigns? Bob Frenzel: Yeah. Great question. Something we pay a ton of attention to. And if you saw my heard my prepared remarks, I spent a lot of time talking about where I think we sit as a company in terms of affordability. You know, Colorado number one, lowest energy bills, electric and gas in the country. I think that's a great starting spot. We needed to file both electric and gas cases there. We've invested substantially into that state over the last two or three years. We haven't filed a case. We did file a case at the end of last year, and that'll go through prosecution through the course of this year. You know, the election, probably early to tell. There's a lot of great candidates in Colorado for governor. Two big names on the Democratic side, one big name on the Republican side of the ticket, and probably early innings for us to see how that's gonna play out in November. Certainly, energy and energy goals for the state have been very critical. We know that one of the things the state legislature is gonna look at is 2040 legislation for some clean energy standards. It's been a Governor Polis priority for a long time. So we know that clean energy is gonna be on the table. We are a huge leader here and in Colorado, and I think we got a great seat at the table when it comes to energy policy in that election. In Minnesota, obviously, Senator Klobuchar just put her hat in the ring for the governor's election. And there's a crowded field of folks on the Republican side as well. So probably early innings to tell what might happen there. You know, we've got a rate case here in Minnesota that we've been prosecuting for about a year. We expect decisions here by, call it, midyear this year. And potential to settle between now and then. So I'm not certain how much the gubernatorial cycle will affect the outcomes of the cases that we have in front of us in Minnesota. That's right. And, Carly, just a couple things to add. I mean, we have echo all Bob's points on affordability, and we have a great affordability story while we're driving state in those two states. And so we're really aligned both on state energy policy and the affordability narrative. And then if you looked at our Colorado electric rate case filing, we put forth an enhanced affordability proposal, really getting at our customers that do have a higher energy burden, and we proposed something for customers that were at a five to 6% energy burden down to two and a half percent in the combined electric and gas bill. So, really, looking at where can we address the affordability issues. So we were pretty excited about where we sit from affordability story. Our narrative but also looking to address it in the pockets where we can. Carly Davenport: Really helpful. Thank you both. Operator: Your next question comes from the line of Steven D’Ambrisi from RBC Capital Markets. Your line is live. Steven D’Ambrisi: Bob. Hey, Brian. Thanks very much for taking my question. Good morning. Bob Frenzel: Morning, Steve. Steven D’Ambrisi: Good morning, Bob. I just had a quick one about, this the effectively the data center pipeline update. You know, I think on the third quarter when you rolled out your formal financial plan, you had talked about roughly three gigawatts between the two buckets of contracted and high probability, and that those two buckets would drive 3% of the 5% total sales growth. And so can you just give me a little color about now that that combined bucket looks like it's doubling to almost six gigawatts. What does that mean for your sales growth? And then the attended question would just be as we get clarity on some of the high probability pipeline, you know, when do we see do we see updated IRPs that reflect some of this load? Incremental load growth, and just how does that filter down into capital ultimately? Thanks. Brian Van Abel: Hey. Hey, Steve. Thanks for the question. And absolutely right in terms of we said on the Q3 call, three gigawatts of data centers in our high probability bucket. We also said on the Q3 call that we would execute on two gigawatts by this time, and we did execute on two gigawatts by this time. So want to ensure that we're delivering on what we tell our investors because I think that's really important. And so, you know, we feel that we have clear conviction by essentially doubling our data center opportunity from three gigawatts to six gigawatts. And so excited about that. In terms of our sales forecast, that three gigawatts translated to three of the 5% growth. We'll provide a holistic update in Q3 like we normally do when we roll forward our five-year sales forecast plan. But certainly an opportunity. Although I do think if you look at the timing and when you'd execute an ESA, we say through 2027, and kind of think about that cycle. You might see a lot of these coming in maybe that 2029-2030 as they energize and then ramp up into the 2030s. So I think it's really the opportunity is how do we think about extending our growth beyond 2030. So some potential sales impact within this five years, but, really, it's post-2030 as we think about these, particularly with the call it, the very large data centers, the one gigawatt plus where they ramp up over time. And then you would see there's really two ways they could come in through our you asked if they come in through the resource planning process. Certainly could come in through the resource planning process, but I think more often, you'll see them come packaged with an ESA. You know, in terms of we're gonna bring forward a specific data center, and here's the package of resources. That will serve it with. Bob Frenzel: Yeah. Steve, it's Bob. Let's just I'll add on to what Brian said. Is, you know, look. We're gonna expect some modest sales this decade. We'll have to update our plan accordingly. We'd expect to start investing probably capital to build the generation to serve those sales? In the later part of this decade as well. We'll update our capital plan accordingly in the third quarter. And I'd just say, give us a little bit of time with the NextEra partnership to figure out how fast we can get our feet underneath us, how fast we can run, and how fast can bring this stuff to the table. So give us a little bit of time, and we'll keep this group informed as we go through the year and certainly a fulsome update in the third quarter. Brian Van Abel: Yes. And I think about it, you know, we have that 10 plus billion dollar pipeline slide. When you look at our current base capital plan in terms of we have very strong growth in investing for our customers in the front three years but then it's how do we fill in and strengthen that pipeline in year '29 and '30 and beyond. So that's a really good way to think about it deepening our pipeline of opportunities, and extending that pipeline of opportunities post-2030. Steven D’Ambrisi: Great. That's super helpful. And then just one one other one quickly. Just you had mentioned that maybe the Colorado near-term RFPs were going to get bifurcated or trenched out, I guess. And so you just talk about you know, I think it was the proposal was 2.1 gigs company-owned across a portfolio of 4.9 gigawatts. And so what does that look like in the you know, in the this tranching out looks like the timeline around some of these trench updates, I guess? Thanks. Brian Van Abel: Yeah. And the commission is working through the deliberation. So kind of what what at least as we understand is here today, they approved about one gigawatt of projects including our gas plant in the last set of And then they asked for some additional analysis over the next call, one or two months that we're working on expeditiously. And so they're gonna look at a new portfolio, which could potentially include up to one gigawatt of our company-owned solar plus storage in that next tranche. And then potentially a tranche three the timing is unclear, but likely in the first half. So we'll work with our stakeholders. Obviously, we brought forward this near-term procurement. With a number of our key stakeholders in the state to really drive projects, ensure they come online before the tax credits expire. We will continue to work with the stakeholders about the importance of that from a customer affordability perspective. But if anything doesn't get picked up in the near-term procurement, it just shifts to overall resource plan, the just transition plan that is in flight. It's really this is a subset of what we expect to execute in the resource plan, which will be follow-on RFPs later this year. Steven D’Ambrisi: Understood. Thanks very much for the time, guys. A great update. Appreciate it. Operator: Your next question comes from the line of Nicholas Campanella from Barclays. Your line is live. Nicholas Campanella: Can you guys hear me? Brian Van Abel: Hey, Nick. We can hear you. Nicholas Campanella: Hello? Bob Frenzel: Hey. Hey. How's everything? I'm really sorry. I just I jumped on late. From another call, but just wanted to to kinda clarify you know, the six the six gigawatts now is pressured higher. On on the 5% long-term low growth factor. Is is that correct? Apologies if I'm repeating. Brian Van Abel: Yeah. Nick, that's correct. And we really think about it. In terms of, you know, our like we said, we doubled our data center expectations here from three to six when you peel back from Q3. Obviously, I have clear conviction because what we put on our slides, expect to execute on. And so that does provide sales growth opportunity, and that what I would expect more in the twenty-nine to thirty timeline when you look at kind of the schedule and what it takes from an executing ESA to the energization. So the way we look at that is really later in this sales force forecast, but really prolonged into 2030 when you think about the ramp schedules on some of these very large data centers, you know, multiple-year ramp schedules, which just means a multi-year generation build-out for us. As we think about it. So deepening the opportunity in late in this five-year and extending our opportunity into the 2030s. Nicholas Campanella: Alright. That's great. That's great. I'm sorry if I made you repeat yourself. And then maybe just, like, when we kinda look at the earned returns just for 2025 actuals, they are pretty significantly, you know, under authorized. So can you just kinda talk a little bit about just the past you authorized and what's embedded in the plan I'm specifically kinda thinking about, you know, Colorado, as well as SPS. And where you kinda see your earned ROEs trending as you get to you know, on the other side of these rate cases. Thanks. Brian Van Abel: Yeah. Yeah. Thanks, Nick. I think, you know, SPS is clear. We had pretty challenging weather in the Q4 in SPS and a couple other unique items in '25. So I expect that to get back closer to where it's been the last few years. As we get rider recovery, and we have a New Mexico rate case in flight that we filed last year. Colorado specifically, yeah, significant under earnings. But I think maybe refresh from that perspective. We really wanted to get through the Marshall trial and get a constructive settlement with that respect. And we get if you didn't catch the opening remarks, we only have three known plaintiffs left. To settle out of 4,000 plaintiffs. So we feel really good about where we are with that. We filed the Colorado Electric and the Colorado Gas case here late last year. So from an ROE improvement perspective, you know, those cases play out, and we expect a decision in revenue late Q3 of this year. So some revenue in the door this year, but you see the full impact of those rate cases in 2027. So I expect significant ROE improvement from where we landed in 2025 in Colorado. In '27 as we think about those rate cases. Nicholas Campanella: And then the last one, if I could, and I appreciate all those answers, Brian. Just maybe clarify what's kind of embedded in the low end of this $10 billion plus incremental bucket. It just seems like there's potential for this to be well above that figure. So is there any way that you could kinda bookend that if we're thinking about, at minimum, what could kinda be coming into the next full-year update when you could quickly do your refresh? In the third quarter? Brian Van Abel: Maybe I'll walk through a couple of the markers that we're watching, Nick, to help you think about how we're gonna roll forward this year into Q3. We have if I think through the significant RFPs that we have outstanding, we talked about the Colorado near-term plan, which the commission's looking at approving in tranches. But we should have visibility on that as we work through the next several months. The 1,500 to 3,000 megawatts of nameplate capacity. We already received the bids. And we're working through the analysis of those bids and the independent monitor will make a filing in Q2. So we'll have visibility on that opportunity. Then the significant opportunity in Minnesota with 4,100 megawatts of renewables all in service by 2030 to really capture the tax benefits. For the benefit of our customer. And so those were that's likely a filing later this year. You'll have visibility, but certainly not regulatory approval on. But that's a really important filing as we think about accelerating projects for our benefits of our customers in the Midwest. So that's kind of the generation side on the current outstanding RFPs. We just this earlier this week received approval of a 765 kV transmission line in SPP. In SPS, $1.5 billion for a 765 line. So, clearly, we'll roll that into our plan. That COD by the 2030 all within our five-year plan. And then we think about all the data center upside we have as we look at bringing on potential data centers and the generation that come with that. So there's a reason why we put a plus next to that $10 billion. We feel really good about these opportunities. And we think about filling in our 2029-2030 investment pipeline. And then extending it into 2030 beyond that. So don't I don't think there's an upside and a high-end number to put that beyond. We feel really good about these opportunities and the partnership that we talked about with GE Vernova, the data center joint development agreement that we're working on with NextEra, just kinda strengthens that pipeline and also when we think about these data centers, it's really about driving benefit for our current customers too. Really important as we think about when we bring forward some of these data center opportunities. Nicholas Campanella: Thank you very much. Appreciate you taking these questions. Operator: Your next question comes from the line of Travis Miller from Morningstar. Your line is live. Travis Miller: Good morning, everyone. Thank you. Bob Frenzel: Morning, Travis. Travis Miller: Wonder if you could quickly go over what's the regulatory process for some of these ESAs that either you're signing now or that you're negotiating in the Upper Midwest, understand the Colorado situation. But what about in the Upper Midwest? Brian Van Abel: Yeah. So, you know, we announced an additional data center deal just on this call as Bob spoke about in his remarks. There'll be a regulatory filing in the Upper Midwest associated with that. And then commission approval associated with that. It's still confidential, so we won't we can't speak much about it. But we look forward to bringing those details. And there'll just be a regulatory approval. Really important in terms of showing overall benefit. And so think about that. If we have a large load tariff filing in place, we'll align with that large load tariff filing. And that should help from a regulatory approval process. So that's the best way to think about it. Get the large load tariff filings in place and then move forward with specific ESAs that align with that. Bob Frenzel: And, Travis, those tariffs are in process in Minnesota, Wisconsin, Colorado, Texas. I may miss the state in there, but our goal is to get large load tariffs and then sign contracts underneath those tariffs that resemble those. And that should be the sort of regular path for data center contracting. Travis Miller: Okay. Can those data centers come online before those large tariffs? Or not? It's just under the timing here? Brian Van Abel: Yes. We would align, and I think it's to understand. We have one data center that's already energized. We have three data centers that are energizing in 2026. And we can well, do we just make sure we align those ESAs with the large load tariff. So, yes, they can. It's just important. You know? And then we've been very clear only with our stakeholders, but with our investors about the importance of those principles. And how we manage both benefit for our current customers and manage risk to our customers and the company for these large loads. Travis Miller: Okay. Got it. Thanks. And then higher level, obviously, hearing a lot around the country, etcetera, about bring your own generation. What's that look like in your area? Are you seeing data centers bringing their own generation, making proposals, and then if you're seeing that or even if you're anticipating that, what does that mean for your system and reliability? How does that all work together? Bob Frenzel: Yeah. Hey, Travis. It's Bob. I think the bring your own gen is maybe a mnemonic construct that is sort of if you're we don't want you to take existing supply out of the stack. It doesn't necessarily mean that data centers are gonna show up with their own generation per se. We think that as you think as you look across the country and the sort of different regulatory frameworks that are out there, you know, we think data centers by and large and our conversations with them have affirmed this they don't really wanna own and operate their own generation. They'd rather have someone own and operate for them. In a deregulated market, that may mean working with a developer to build that generation, leave it through a regulated utility, and sell it to the customer, that seems a normal path for a deregulated market. For our markets, it would be we want to bring in incremental generation to our networks to support these new large loads. And in doing so, when you bring that generation, you price protect your existing customer base from any incremental costs that may come from that new generation. And then the shared benefit comes from this big fixed asset, we call it the grid, and spreading that across more units of production. And that's where all customers will benefit by bringing large loads in. And if you can protect them from the price side of new generation, which we think we have the capability of in all of our states, I think that's how I think about bring your own generation in the country. There will be some people developers that will build their own generation over time, but we think that's a pretty small, small set of data center developers and hyperscalers. Travis Miller: Okay. That makes sense. And then one real quick one. The Colorado, if you get that large load tariff in place, is that upside to the six gigawatts? I think you had mentioned that you could see more projects or more interest come in. Once you got that or that embedded in the six gigawatt? Brian Van Abel: You know, when we think we have not specified where those well, we have two gigawatts under contract. We have not specified those remaining four where they will come from. We have significant interest across all of our service territories and operating companies. I think we're most focused in the Upper Midwest in the near term. As we move forward, but interest across all operating companies. And I think, you know, we put that six gigawatts up there, but that's through 2027. You don't stop there. You continue to look at how can we drive overall data center development. Beyond that. So I would you know, we'll continue to provide updates on that, but it's just we haven't specified we haven't given anyone the specificity. We have a large pipeline across all of our territories. Travis Miller: Sure. Okay. Got it. Thanks so much. Operator: Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is live. Paul Patterson: Hey. Good morning. Bob Frenzel: Morning. Paul Patterson: Just wanted to just had one question left on these PSPSs, these power shutoffs and sort of some of the news that's come out about them from the fire districts and from these lawmakers. Just to you elaborate a little bit? I know you guys are working hard on this issue, and, obviously, it's a safety issue that you guys are focused on. Just any thoughts on this that we've been seeing a bit of stuff coming out of Colorado on this? Bob Frenzel: Hey, Paul. It's Bob. Look. Let me start with we are 100% committed to protecting the communities and our customers from the risk of volatile weather and wildfires. And we absolutely don't take lightly the need to potentially turn the power off in selected locations for short periods of time to protect them. We have spent an enormous amount of time, energy, effort, and investment in making our system harder, making our operational intelligence better, and minimizing the scope and the impact and the number of these items. And we expect that to continue as we go forward in time. We continue to operate under a wildfire mitigation plan in Colorado and a system reliability plan in Texas. Gonna help us continue to further segment our system, continue to build out the operational intelligence, and the ability to continue to minimize the impact of these occurrences. I will share with you, though, that the December outcome in Colorado was some, you know, high winds, and it pertained to a dangerous situation in Colorado. So we stand by our decision. We took the right action. And all we're trying to do is minimize the impact on our vulnerable customers when we have to do that. And so we're working on a battery pilot for our durable medical good customers. We are increasing our collaboration and partnership with our local partners, and we had enormous amounts of support from the broad community, the OEMs, the counties, everybody in the fire districts, we feel good. It's not our preferred choice of action, but we are absolutely gonna protect our customers, our communities. From the risk that we cause a catastrophic wildfire. Paul Patterson: Absolutely. No. I guess my question is sort of, like, I guess, I'm a little bit surprised by sort of some of this reaction. Is it a communication issue, do you think? I mean, I just in terms of I mean, obviously, you guys are not you're not taking this lightly. So I just you know, in terms of you you're doing it to protect people. You know? So I guess what I guess what I'm a little surprised by is sort of this pushback or at least the coverage of it. Do you follow what I'm saying of is this an issue of communication? Do you think that people don't really understand that I apologize. That's what my question is. Bob Frenzel: Our year-over-year performance between, you know, 2024, 2025 was a remarkable improvement in terms of our coordination, our early warning, and our performance and our restoration times. Certainly room for improvement. We work hard on communication. We work hard on outage maps. We're investing in technology to do that. It's all part of our road map. I think one of the challenging things for people just to understand is sometimes you may be in the circuit that gets turned off proactively. Sometimes because of the weather, you might be in a circuit that gets knocked down that we didn't proactively turn off. So some people are on, some people are off, they don't know why they're on, and they don't know why they're off. And so we're trying to work through sort of real information sharing with our customers, to make sure that we give them the best recovery times, the best reasons for why they may be out in a certain situation and, again, trying to minimize all of those as they happen. Paul Patterson: Okay. Great. Awesome. Thanks so much. Bob Frenzel: Thank you. Operator: There are no further questions. And with that, I'd like to turn the call over to CFO, Brian Van Abel, for closing remarks. Brian Van Abel: Thank you all for participating in our earnings call this morning. Please contact our Investor Relations team with any follow-up questions. Operator: That concludes today's meeting. You may disconnect.